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Another upgrade to FY24E margin guidance

Marico’s Sep-Q earnings were c.2-3% better vs what we were expecting. Topline performance was mostly inline. GPM recovery was again much better, and drove the beat in earnings. Volume trajectory remained soft, though – a sector-wide issue at present, and was due to rural weakness given erratic rainfall patterns in the country, increased competitive activities from smaller players, and inventories being lowered in the general trade channel. Management sounded hopeful of a gradual improvement from H2 and given a benign costs outlook, has also upped its FY24 margin guidance once again - now looking at a potential gross margin gain of 350-400bps in FY24E (vs 250-300bps in July, 200-250bps in May) and EBITDA margin expansion of >200bps (vs >100bps at the start of the year). Newer businesses are growing well and there is a sharp focus on profitability here. We expect the stock to do better hereonwards - price-corrections-led drag on topline would be lower going forward, which, along with continued RM-cost benefits, provides some comfort on earnings visibility. Maintain BUY.

* Profitability better than expectations driven by strong beat on gross margin: Marico’s 2QFY24 revenue fell 0.8% to INR24.8bn, but EBITDA and net profit grew well by 14.8% and 19.6% to INR4.97bn and INR3.6bn. Revenue performance was inline with what management stated in its pre-result operational update. Domestic volumes grew 3% overall (mostly helped by strong growth in the newer businesses) but was offset by pricing-softness (Saffola edible oils prices down by >20% yoy) in the core categories. On profitability front, gross margin expanded 685bps yoy (also 50bps higher qoq) to settle at a rare >50% threshold – this is much better than what we had forecasted. However, overall scale-deleverage, given lower topline vs year-ago level, plus higher A&P (+25.8% - to support strategic brand-building of core and new businesses) led to lower flowthrough to operating margin (+272bps); EBITDA still grew in mid-teens - c.2% better than our expectation, and also better vs ‘low double-digit operating profit growth’ guided by the company.

* Domestic volumes muted, International business held well: 1) Saffola edible-oils’ volumes grew in low single-digit which along with continued impact of steep price-corrections in the past quarters led to value-sales declining in low-20s. 2) Parachute rigids’ volumes grew 1%, impacted by overall weak consumer sentiments, slower loose-to-branded conversion and channel-stock reduction - price-cuts in the segment led to a 1% decline in Parachute’s revenue. Management is looking at improvement in H2 due to expectation of uptick in loose-to-branded conversions as copra prices are expected to move up during off-season, and price-cuts taken earlier would be anniversarizing. 3) VAHO sales grew 1% - issues pertaining to more muted consumption and competitive activities at mass-end continued to persist. 4) Newer businesses continued to do well, given the higher urbansalience therein. Foods grew 25% and the Premium Personal-care segment is also growing well. The Digital-First brands clocked an ARR of INR 3.5bn. Profitability is a key priority here, viz. improve Foods GPM and accelerate growth to >30% thereafter, further reduce cash-burn in the D2C brands. 5) International business continues to outperform and grew 13% CC despite macro headwinds in the key market of Bangladesh – Vietnam and MENA helped in this regard.

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