13-11-2024 11:51 AM | Source: Motilal Oswal Financial Services Ltd
Buy Marico Ltd For Target Rs.750 By Motilal Oswal Financial Services Ltd

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Operationally in line; commentary remains positive

* Marico (MRCO) reported consol. revenue growth of 8% YoY (in line) in 2QFY25. Domestic revenue growth was 8% YoY with 5% volume growth (4% in 1QFY25). International growth was 6% YoY (13% cc growth).

* Parachute coconut oil (PCNO) posted 10%/4% YoY growth in value/volume. The growth was driven by pricing adjustments at the year's start. A ~4% price increase was also implemented at the quarter's end. PCNO gained 110bp market share. VAHO revenue was down 8% YoY, affected by persistent weakness in the mass segment. Saffola oil clocked flattish volume growth, with revenue growing 2% YoY as the pricing cycle turned favorable after two years. Foods sustained strong growth of 28% YoY.

* Gross margin expanded by 30bp YoY to 50.8%. EBITDA margin contracted 50bp YoY to 19.6%. EBITDA grew 5% (in line). We model ~21% EBITDA margin for FY25 and FY26.

* With improving macro indicators, the company expects to sustain healthy growth in 2HFY25. Key initiatives include enhancing profitability for GT partners and expanding direct reach under Project SETU (targeting 1m in FY24 to 1.5m by FY27). The company intends to drive urban and premium portfolios through organized retail and e-commerce, supported by differentiated products, market penetration, and share gains.

Reiterate BUY with a TP of INR750 (based on 50x Sep’26E EPS). We believe that MRCO is an impressive play on volume recovery with price growth.

Broadly in-line performance; volume up 5% YoY

In-line revenue growth: Consolidated net sales grew 8% YoY at INR26.6b (est. INR26.6b) in 2QFY25. EBITDA/ PBT/Adj. PAT grew 5%/16%/20% YoY to INR5.2b/INR5.5b/INR4.2b/ (est. INR5.2b/5.0/INR3.7b). Domestic volumes grew 5% YoY (est. 4%).

Category performance: PCNO pack registered 4%/10% volume/value growth. VAHO declined 8% in value terms amid persistent sluggishness and competitive headwinds at the bottom of the pyramid segment. Saffola edible oils registered flat volume growth, with value growth of 2%. The pricing cycle for the brand turned slightly favorable after 8 quarters. Foods delivered 28% value growth, with Saffola Oats clocking mid-teen growth. Premium Personal Care sustained its healthy growth trajectory.

International up 13% in CC terms: International business delivered 13% CC growth led by Bangladesh/MENA/South Africa/Vietnam, which posted 8%/ 43%/20%/7% CC growth.

Stable margin: Consolidated GM up 30bp YoY to 50.8% (est. 50%, 1QFY25 52.3%). As a percentage of sales, staff costs up 45bp to 8%, A&P was flat at 10.9%, and other expenditure was up 30bp to 12.3%. EBITDA margin contracted 50bp YoY to 19.6% (est. 19.6%). EBITDA grew 5% YoY (est. 5%). Other income was higher than expected at INR420m due to gains from the sale of fixed assets. Excluding this one-off, it increased 10% YoY.

Highlights from the management commentary

* The quarter observed stable demand trends in India, with rural demand growing at 2x the urban growth. FMCG sector-wide seeing positive pricing YoY as brands raised prices in response to rising commodity costs.

* With encouraging demand trends from 1HFY25, MRCO anticipates a positive growth trajectory for 2HFY25, supported by strong monsoons, increased government rural spending, and the festive season. Despite this, food and retail inflation remains a factor to monitor. The company expects consolidated revenue growth in double digits during 2HFY25.

* MRCO remains focused on driving volume and revenue growth but may experience an EBITDA margin contraction of up to 40-50bp in FY25 due to rising raw material prices.

* MRCO aims to expand its Foods and Premium Personal Care segments aggressively, targeting a 20-25% CAGR for Foods to double FY24 revenues by FY27. The digital-first portfolio is expected to reach an ARR of ~INR6b by FY25 end, with ambitions to double this by FY27, resulting in these segments contributing ~25% of domestic revenue by FY27.

Valuation and view

* There are no material changes to our FY25/FY26 EPS estimates.

* The improvement in market share gain, accelerated growth in Foods and Premium Personal Care, healthy growth in international business, and the normalization of price should help MRCO deliver much better revenue print in FY25-26.

* To improve its distribution reach, MRCO has also started “Project SETU,” which helps to drive growth in GT through a transformative expansion of its direct reach.

* The company has been sustaining double-digit EBITDA growth, a better scorecard for MRCO (high commodity sensitive). We estimate a 11% EPS CAGR during FY24-27E.

*  We value the stock based on 50x Sep’26E EPS to arrive at our TP of INR750. We reiterate our BUY rating on the stock.

 

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