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Buy Marico Ltd For Target Rs.490

Impressive topline growth, likely to sustain

Brief overview of 3QFY21 result and stock

* Led by domestic volume growth of 15% (its highest in 34 quarters), MRCO exceeded expectations on the sales front, a trend that is likely to continue for the next few quarters, with all key segments doing well and a weak base in the next couple of quarters.

* Strong momentum in key segments, increased confidence, and new launches in foods led us to forecast ~12% revenue CAGR between FY21- FY23E, much higher than the 5% CAGR witnessed over FY15-20. At the same time, judicious price increases and expected reduction in commodity costs from current elevated levels would result in an improvement in operating margin, which were below expectations in 3QFY21, going forward.

* While the stock has appreciated nearly 60% since our upgrade to Buy in Mar’20, valuations of 42x/36.2x FY22E/FY23E are inexpensive. The stock will re-rate further, if the company can elevate its EPS CAGR to 15-20% over the next few years. Maintain BUY.

Significant beat on estimates

* MRCO’s 3QFY21 consolidated net sales grew 16.3% YoY to INR21.2b (v/s our estimate of INR20b). The domestic business grew 16.2% YoY. Consolidated EBITDA grew 10.7% YoY to INR4.1b (in line). PBT grew 10.1% YoY to INR3.9b (in line). Adjusted PAT grew 12.9% YoY to INR3.1b (v/s our estimate of INR2.7b).

* Consolidated gross margin contracted 220bp YoY to 46.9% (v/s our estimate of 48.5%). As a percentage of sales, A&P expenses fell 100bp YoY to 9.1% (absolute A&P spends up 4.3% YoY). Other expenses too declined 80bp to 11.4%. Staff cost marginally increased (60bp) to 7%. EBITDA margin contracted 90bp YoY to 19.5%.

* Standalone business: Net sales grew 16.2% YoY. EBITDA/adjusted PAT grew 5.9%/8.5% YoY. EBITDA margin contracted 180bp YoY to 18.2%. The domestic business reported volume growth of 15% (v/s our estimate of 10%). This was the highest quarterly domestic volume growth in the last 34 quarters.

* 9MFY21 sales/EBITDA/PAT grew 3.7%/6.9%/11.4% YoY.

Highlights from the management commentary

* In 3QFY21, rural grew 24% YoY, well ahead of the 10% growth in urban. The management expects rural outperformance to sustain.

* Aided by strong momentum and weak base, the company is targeting ~20% sales growth, with mid-teen volume growth, over the next two quarters.

* MRCO has taken ~15% price increase in VAHO owing to higher material costs, which the management believes is transient.

* The management expects copra costs to be flat YoY in FY22. By Apr-May’21, it expects segmental margin to return to Oct-Nov’20 levels.

Valuation and view

* There is no material change in our EPS forecasts. Ongoing volume growth momentum in each of its core segments and significantly high growth targets in the Foods portfolio is encouraging. As highlighted in our management meet note in Jun’20, traction in both topline and margin growth is encouraging v/s earlier fears of an EPS decline in FY21.

* While the jury is still out on the likely success of new product development, which would elevate MRCO’s medium-to-longer term earnings trajectory and valuation multiples, the stock at 42x/36.2x FY22E/FY23E EPS appears to still provide healthy upside over next year, with superior outlook than most peers and a far less volatile international business. We target 43x FY23E EPS, which gives us a TP of INR490/share, implying a 19% upside. Maintain Buy.

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