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With margins at peak levels, volume recovery becomes crucial hereon

Marico Ltd. (Marico’s) 2QFY24 consolidated revenue saw a drop of 0.8% YoY owing to price cuts implemented across categories over last few quarters, stable demand vs 1Q, lower trade inventory, and currency devaluation. Domestic volumes grew by 3% YoY as demand trends in the domestic FMCG sector stayed largely in-line with 1QFY24. While urban sentiment improved sequentially, higher food inflation and patchy rainfall distribution led to a slower than expected pace of recovery in rural demand. Margins surprised us positively led by gross margin improvement (+50bps/+690bps QoQ/YoY) reaching highest level in 26 quarters, owing to softer input costs. Management has upped its FY24 margin expansion target by 100bps. With FY24 margins expected to end at peak levels, volume recovery becomes extremely crucial for earnings growth beyond FY24, signs of which are still not clearly visible. We continue to maintain our ADD rating with a revised target price (TP) of Rs625.

2QFY24 Result Highlights (Consolidated)

* Headline performance: Revenue was down by 0.8% YoY to Rs24.8bn (vs est. Rs24.8bn). Overall EBITDA grew by 14.8% YoY to Rs4.97bn (vs est. Rs4.8bn). Adjusted PAT (APAT) after MI was up 17.3% YoY to Rs3.5bn (vs est. Rs3.4bn).

* Domestic revenues were down 3.4% YoY (with 3% volume growth). Domestic EBITDA margin up by ~320bps YoY to 21.6%. International business posted growth of 7.3% YoY (constant currency [CC] growth of 13%) with EBITDA margin up 270bps YoY to 25.1%.

* Gross margin surprised us positively and came in at 50.5% (+690bps YoY & +50bps QoQ). Higher operating overheads: Employee cost up 90bps YoY, advertisement and sales promotion (A&SP) up 230bps YoY and other operating expense up 90bps YoY meant that EBITDA margin came in at 20.1% (up 270bps YoY; vs our est. 19.5%).

* 1HFY24 revenue down 2% YoY while EBITDA and APAT have grown by 11.4% and 14.4% YoY, respectively. Gross/EBITDA margin up 590bps/260bps YoY to 50.2%/21.6%, respectively.

Near term outlook

(1) Gradual uptick expected in domestic volume growth starting 2HFY24.

(2) International business double-digit CCG momentum to continue.

(3) EBITDA margin now expected to expand by ~200bps in FY24 led by ~350-400bps expansion in gross margin.

View & Valuation

We are currently building ~8.1% revenue CAGR over FY23-FY26E led by (a) Recovery in volume growth for the core portfolio. This along with pricing interventions coming into the base in 1HFY24 should translate in better revenue growth. (b) Consistent uptick in revenue share of Foods, Premium Personal Care (including the Digital-first portfolio) driven by innovations, step-up in market development, brand building spends and focused GTM initiatives. (c) International business to continue to maintain double-digit CCG momentum in FY24. At operating level, we expect ~11.7% EBITDA CAGR over FY23-FY26E (~190bps EBITDA margin expansion as we expect gross margin to expand by 370bps over FY23- FY26E led by easing input cost and mix improvement). While A&SP cost is being upped to build demand in core and support innovations, operating leverage & savings will provide some additional support to operating margin. Marico is currently trading at ~46x/42x/38x on FY24E/FY25E/FY26E EPS as we build in ~11.3% EPS CAGR over FY23-26E. Dividend payout remains high and return ratios are also expected to improve over the next few years. With FY24 margins expected to end at peak levels, volume recovery becomes extremely crucial for earnings growth beyond FY24, signs of which are still not clearly visible. We continue to maintain our ADD rating with a revised TP of Rs625 (Rs635 earlier), valuing it at ~47x Sept’2025E EPS (3yr/5yr avg fwd. multiple: 47.6x/44.8x).

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