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Maintain ADD on Marico - Food remains a showstopper; expect margin recovery - HDFC Securities

Posted On: 2021-08-02 16:20:08 (Time Zone: UTC)

Marico posted in-line revenue growth, however margin was a miss. Revenue/EBITDA grew by 31/3% (HSIE 31/7%). Domestic revenue and volume grew 31/21%, 7/2% 2-year CAGR, a good show despite the COVID pressure. PCNO saw volume growth of 12% YoY, albeit on a low base (-11%), impacted by extended lockdowns in its core south and west markets. VAHO registered 35% YoY value growth (-32% in the base year) and saw 70bps share gain. Saffola remained a torchbearer (clocked 60/24% value/volume growth), aided by improved penetration and +450bps volume share gain. International continued its momentum (up 20% YoY, +2% base), but Vietnam /Bangladesh struggled on a resurgence in COVID cases. The steep RM inflation continued to impact the margins (GM down 759/311bps YoY/QoQ), but copra prices have been softening. Marico continued its investment in core brands and innovation in food segment. We expect the growth momentum to sustain and margin pressure to ease in FY22. We raise our EPS estimates for FY23/FY24 by 3/4%, led by enhanced focus on volume growth. We value Marico at 42x P/E on Jun-23E EPS to derive a target price of INR 545. Maintain ADD.

In-line revenue: Revenue grew by 31% YoY (-11% in Q1FY21 and +34% in Q4FY21), in line out estimates. Domestic volume grew by a strong 21% YoY (-14% in Q1FY21 and +25% in Q4FY21). PCNO saw 20/12% YoY val/vol growth while VAHO saw 35/34% YoY val/vol growth. Saffola continued its strong momentum and clocked val/vol growth of 60/24% YoY. Rural and urban GT saw 17% each. E-commerce grew 61% YoY (37% in Q1FY21 and 81% in Q4FY21) and is now contributing towards 61% of domestic sales. CSD grew 56% YoY in Q1FY22 on a low base.

International revenue up by 20%: The international business clocked 20% YoY growth (21% cc). Bangladesh grew 9% cc in Q1, with the non-coconut portfolio seeing 26% growth. MENA/South Africa reported cc growth of 74/52% YoY on a low base while South East Asia saw 16% cc growth.

RM inflation pressure continued, in-line EBITDA: GM dipped by 759bps YoY (+112bps in Q1FY21 and -513bps in Q4FY21), vs the HSIE estimate of 442bps YoY decline. LLP/HDPE were up 50/44% YoY, but copra price were down 13% QoQ. Employee/adv/other expenses grew by 6/7/9% YoY. EBITDA margin contracted by 521bps YoY to 19% (+298bps in Q1FY21 and - 300bps in Q4FY21). EBITDA grew by 3% YoY (HSIE 7%). Domestic EBIT margin dipped 642bps YoY (+310bps in Q1FY21) while international margin dipped 201bps YoY (+372bps in Q1FY21).

Con call takeaways: (1) The company maintains its revenue growth guidance of 13-15% in the medium term. (2) It aims to build a digital portfolio of more than three brands (Beardo, Just Herbs) with an aim to contribute INR 4.5-5bn to the revenue by FY24. (3) Beardo is at a run-rate to reach INR 1bn revenue in FY22 unless discretionary spends remain impacted. (4) Rural consumption will continue to be buoyant.

Shares of Marico Limited was last trading in BSE at Rs. 536.5 as compared to the previous close of Rs. 546.35. The total number of shares traded during the day was 82185 in over 3326 trades.

The stock hit an intraday high of Rs. 552.2 and intraday low of 533. The net turnover during the day was Rs. 44467183.

Source: Equity Bulls

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