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Broadly in-line earnings; sales likely to recover in 2H

* Marico (MRCO) reported subdued revenue growth in 2QFY24, attributed to domestic price cuts and currency headwinds in the overseas business. A sequential improvement was noted in urban areas, while the rural recovery was slow. The management was optimistic about 2HFY24, citing the festive season, controlled food inflation, and upcoming elections.

* Gross margin hit a 26-quarter high of 50.5%, driven by softer input costs. Accordingly, the management has raised its margin expansion guidance to 350-400bp for FY24.

* The domestic business is expected to grow as deflation eases, supported by growth in the food and premium personal care portfolios. Additionally, the international business is anticipated to maintain strong performance.

* It expects operating margin to surpass 20% in FY24, driven by effective cost management and strategic brand-building investments, enhancing MRCO's earnings growth outlook. We reiterate our BUY rating on the stock.

Results broadly in line with estimates; volume up 3%

Consolidated

* Consolidated net sales were flat YoY at INR24.8b (est. INR24.3b) in 2QFY24.

* EBITDA/PBT/Adj. PAT grew 14.8%/19%/17.3% YoY to INR5.0b/INR4.8b/ INR3.5b (est. INR4.9b/INR4.5b/INR3.4b).

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

* Consolidated gross margin expanded by 690bp YoY/50bp QoQ to 50.5% (est. 48.9%).

* As a percentage of sales, higher staff costs (up 90bp to 7.6%), A&P expenses (up 230bp to 10.8%) and other expenditure (up 90bp to 12%) led to EBITDA margin expansion of 270bp YoY to 20.1% in 2QFY24 (est. 20.1%).

* In 1HFY24, net sales declined 2% YoY, whereas EBITDA/adj. PAT grew 11.4%/16.1% YoY.

* The board has declared an interim dividend of INR3 per share.

Standalone

* Sales declined 6.2% YoY to INR17.9b. EBITDA grew 11% YoY to INR3.4b, while Adj. PAT declined 22.8% YoY to INR2.6b.

* EBITDA margin expanded 300bp YoY to 19.1%.

* In 1HFY24, net sales declined 6.5% YoY. EBITDA grew 8% YoY, whereas adj. PAT declined 21.6% YoY.

Highlights from the management commentary

* The management expects a better performance in 2HFY24 with the onset of the festive season, controlled retail and food inflation, and increased government spending ahead of elections.

* The management has increased its gross margin expansion expectation to 350- 400bp in FY24.

* MRCO is on course to achieve its FY24 revenue targets, with Food and Premium Personal Care contributing 20% to the domestic business in 2Q.

* The management expects to maintain a dividend payout ratio of 80-90%.

* MT and e-commerce grew in high-double digits (20%+), while GT declined in low-single digit

Valuation and view

* There is no material change to our FY24E EPS, but we cut FY25E EPS by 7.2% owing to the management’s commentary on volatility and its expectation of lower EBITDA in FY25 vs. FY24.

* MRCO’s core portfolio has performed well, and the company is working hard to accomplish its medium-term growth objectives. Its earnings growth prospects are healthy, with expectations of a ~10-11% CAGR over FY 23-25 and RoE of over 35%.

* The much-needed diversification is gathering momentum in the Foods and digital-first brands.

* If sustained, this can lead to higher multiples for MRCO compared to the past. We reiterate our BUY rating on the stock with a TP of INR640 (based on 52xFY25E EPS).

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