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Margin guidance for FY24E upped one more time

Marico’s 3Q revenue was inline but gross margin progression again turned out much better than expected. Volume trajectory remained soft (+2%) - a function of rural weakness, and stock-corrections taken in general trade (c.2% impact). The company has upped its FY24E margin guidance again - now looking at a potential gross margin gain of 450-500bps (vs 200-250bps back in May) and EBITDA margin expansion of c.250bps (vs >100bps in May). With inventory corrections done and price-cuts getting into the base, management is hopeful of value growth turning positive from 4Q, and is targeting double-digit sales growth and at least low-teens growth in profits for FY25E – the maths being a function of pick-up in core brands’ volume growth, possible price-hikes (Parachute) due to anticipated uptick in copra prices, improved mix, and improved strength in international business. We believe the stock, and indeed the sector, could stay subdued in the near-term given a way slower-than-desired demand trajectory; valuation of c.42x NTM EPS, however, places it better on a relative basis.

Operating profitability tad above expectations: Marico’s 3QFY24 consolidated revenue fell 1.9% to INR24.2bn, but EBITDA and net profit grew well by 12.5% and 16.8% to INR5.1bn and INR3.8bn. Revenue performance was inline with what management stated in its pre-result operational update. Domestic volumes grew 2% after cognizing for the channel-inventory corrections taken in the core categories (possible impact of c.2%) given persistent demand weakness. Operating profit was c.2% better than our estimates helped by a sharper-than-expected expansion in GPM (+634bps vs JMFe +516bps), which along with lower tax rate (22% vs 24.8% LY) drove a c.7% beat in bottomline forecast.

Domestic volumes remained soft; some moderation in international growth too: 1) Parachute volumes grew 3% - an improvement vs recent quarters helped by loose-tobranded conversion picking up pace with copra prices slowly firming up. However, pricecuts in the segment resulted in flat value-sales for the quarter. Management expects trajectory to turn +ve from 4Q. 2) Saffola edible-oils’ volumes declined in mid-single digit - high base plus lower primary offtake due to weak trade sentiments. Value-sales fell 26% including the impact of the steep price-corrections taken in recent past. 3) VAHO grew 3% with premium-portfolio growth in mid-to-high single-digit but bottom-ofpyramid range continued to be impacted by weak rural demand and high competitive intensity. 4) Newer businesses’ performance is seeing some moderation as well - Foods grew in mid-single-digit like-to-like (18% including M&A) - some moderation seen in urban demand plus the business took a decision to trade off some growth for improved profitability. The Premium Personal Care portfolio was also weak and declined vs LY. 5) International growth moderated to 6% CC – mainly due to macro headwinds in the key market of Bangladesh (-6% CC) and slower HPC demand in Vietnam. MENA and South Africa delivered strong growth.

Gross margin progression surprised positively once again: Gross margin expanded 634bps yoy (+80bps qoq) to 51.3% (vs JMFe: 50.1%), aided by continued benefits from lower input costs. Staff costs grew 18% but Other Expenses were just 7% higher. A&P spends grew 11.8% overall but standalone A&P was 11.7% lower (cut-down in spends on Saffola, rationalised ATL on VAHO and spends in alternate channels). Resultant scaledeleverage, however, led to lower flowthrough to operating margin (+272bps to 21.2%).

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