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Performance in line; volume recovery sluggish

* Marico (MRCO) reported an in-line revenue growth with a marginal beat on EBITDA. Domestic revenue was flat owing to the impact of price cuts and an unchanged volume trend. A sequential improvement was noted in urban areas, while the rural recovery was slow. However, the demand environment remained muted during the quarter.

* Domestic revenue is likely to improve in the ensuing quarters owing to a gradual volume recovery and a low price cut impact. We model an 8% revenue CAGR during FY24-26 for the domestic business.

* Gross margin hit a 23-quarter high of 51.3% in 3QFY24, driven by softer input costs. Consequently, management raised its EBITDA margin guidance by ~250bp to 21% for FY24. We model a 21-22% EBITDA margin during FY24-26, as we build a similar GM of 51% while assuming normalization in Ad spending.

* We value the stock based on 45x Dec’25E EPS to arrive at our TP of INR625. We reiterate our BUY rating on MRCO. It remains a play on rural recovery.

In-line show; volume to recover gradually

Consolidated

* MRCO’s consolidated net sales declined marginally by 1.9% YoY to INR24.2b (est. INR24.2b) in 3QFY24.

* EBITDA/PBT/Adj. PAT grew 12.5%/11.7%/16.8% YoY to INR5.1b/INR5.0b/ INR3.8b (est. INR5.1b/INR4.8b/INR3.6b) during the quarter.

* Domestic volumes grew 2% YoY (est. +3%).

* Consolidated gross margin expanded 630bp YoY/80bp QoQ to 51% (est. 50%) in 3QFY24.

* As a percentage of sales, higher staff costs (up 130bp to 7.8%), A&P expenses (up 125bp to 10.2%) and other expenditure (up 100bp to 12.1%), led EBITDA margin expansion of 270bp YoY to 21.2% in 3QFY24 (est. 20.9%).

* In 9MFY24, net sales declined 2% YoY, while EBITDA/adj. PAT grew 11.8%/ 16.3% YoY.

Highlights from the management commentary

* During the quarter, demand trends remained steady, and there was no apparent improvement from the previous quarter. FMCG volume growth, on a four-year CAGR basis, remained in low single digits.

* The mass home and personal care categories closely followed the subdued rural demand, while packaged foods led due to higher urban salience and penetration-driven growth.

* Rural demand remained subdued, while urban demand maintained its modest growth path.

* GT faced low growth, rising costs, and challenges in profitability and liquidity. ? Despite an increased brand-building investments in both core and new businesses, the gross margin is likely to expand by 450-500bp in FY24.

* Management expects an EBITDA margin expansion of ~250bp YoY in FY24.

Valuation and view

* We keep our FY24/FY25 EPS estimates unchanged.

* MRCO’s core portfolio has seen pressure from weak demand and price cuts. The company has initiated several steps to recover the volume, but the overall demand environment is not conducive. We believe once rural demand picks up, the traditional categories will bounce back to their normalized growth rate.

* The company has been consistent in delivering double-digit EBITDA growth and a better scorecard for MRCO. We model a 10% EPS CAGR during FY24-26E.

* The stock has been under pressure due to a consistent delay in demand recovery. We value the stock based on 45x Dec’25E EPS to arrive at our TP of INR625. We reiterate our BUY rating on the stock.

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