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Improving growth trajectory; margins to come-off

Marico Ltd. (MRCO) 1QFY25 domestic volume growth of 4% was supported by price hikes in the Coconut Oil portfolio, which more than offset the residual base impact of price cuts in the Saffola Oils portfolio. International business sustained its doubledigit constant currency growth (CCG) momentum with each of the key markets delivering broad based growth. Gross margins were higher than our expectation (+230bps YoY & +70bps QoQ) led by benign input costs, favorable portfolio mix and strategic pricing gains in Copra & Edible oil. Improving trajectory in domestic core, fresh price hikes in Parachute, base normalization for Saffola edible oils, shrinkflation anniversarization in VAHO, continued momentum on domestic diversification and healthy growth in International business should help improve revenue growth trajectory for rest of FY25 while maintaining margins at FY24 level. Maintain ADD rating with a revised target price (TP) of Rs745 (Rs620 earlier).

1QFY25 Result Highlights (Consolidated)

* Headline performance: Revenue was up by 6.7% YoY to Rs26.4bn (vs est. Rs26.3bn). EBITDA grew by 9.1% YoY to Rs6.3bn (vs est. Rs6.0bn). Adjusted PAT (APAT) after MI was up 11.5% YoY to Rs4.6bn (vs est. Rs4.5bn).

* Domestic revenues were up 7.4%YoY with underlying volume growth of 4% YoY. Domestic EBIT margin was down by ~80bps YoY to 22.6%. International business was up ~4.8% YoY (up 10% CCG) with EBIT margins up ~110bps YoY to 28.9%.

* Gross margin came in at 52.3% (+230bps YoY & +70bps QoQ; vs our est. 51%) driven by benign input costs and favorable portfolio mix. Higher overheads: Employee cost up 40bps YoY, advertisement and sales promotion (A&SP) up 50bps YoY and other overheads up 90bps YoY meant that EBITDA margin came in at 23.7% (up 50bps YoY; vs our est. 22.8%). Near term outlook (1) Expect double digit consolidated revenue growth in FY25 on the back of improving domestic volume growth trajectory, favorable pricing cycle in key domestic portfolio going forward and healthy growth momentum in the International business. (2) Margin to come down over the next few quarters and hence the company aims to maintain margins at FY24 levels in FY25.

View & Valuation

There is 0.7%/2.2% upwards revision in our FY25E/FY26E largely due to revision in tax rate in our model. We are now building ~10.3% revenue CAGR over FY24-FY26E led by (a) Improvement in volume growth for the core portfolio along with favorable pricing cycle. (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) Healthy momentum in international business. (d) Distribution expansion through Project SETU. We expect 11.2% EBITDA CAGR over FY24-FY26E (~30bps EBITDA margin expansion as we expect gross margin to expand by just ~60bps over FY24-FY26E on high base). While A&SP cost is being upped to build demand in core and support innovations, operating leverage, savings and favorable mix, will provide some additional support to operating margin. Marico is currently trading at ~52x/46x on FY25E/FY26E EPS as we build in ~13.4% EPS CAGR over FY24-26E. Dividend payout remains high and return ratios are also expected to improve. With margins at peak levels, volume improvement becomes extremely crucial for earnings growth in FY25. We continue to maintain our rating ADD with a revised TP of Rs745 (Rs620 earlier), valuing it at ~48x Sep’2026E EPS (3yr/5yr avg fwd. multiple: ~47x/45x).

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