Result Update: Marico Ltd - ACCUMULATE - TP Rs.375 - Kotak

Marico has delivered strong quarterly performance in the backdrop of the extremely challenging input cost environment, with healthy volume growth across key segments including Parachute Rigids (+9% YoY), Value Added Hair Oils (VAHO) (+15% YoY) and Saffola (+15% YoY). YoY comparison is not possible as Q1FY18 was a pre-GST quarter. The company continue to face Gross margin pressure due to steep increase in copra prices, which Marico countered with price hikes in the Coconut Oil portfolio. While near-term earnings shall continue to face pressure on weaker margins (higher copra prices), we believe that Marico's longer-term prospects remain strong, as the company continues to maintain / gain market share in most of its categories. We maintain ACCUMULATE with a revised price target of Rs 375(Rs 334 earlier).

Key Highlights

- Revenues was reported at Rs20.27 bn (+20.5% YoY), marginally ahead of expectations. Outperformance was driven by the domestic business with volumes growing by 12.4% (YoY), while the International business posted a volume growth of 3% YoY. Also rural growth (+28% YoY) outpaced urban growth (+16% YoY) for the fourth straight quarter.

- Gross profit was reported at Rs 8.57 bn with gross margins of 42.3% (down 550 bps YoY). Gross Margins continued to remain under pressure owing to inflationary cost environment. Marico has taken price hikes in the Coconut Oil portfolio to counter the steep increase in copra prices. During the quarter, the average market price of copra was up 42% YoY, but down 6% sequentially. The downward trend in Copra prices is healthy for Marico.

- During the quarter, other key inputs - Rice Bran Oil, Safflower Oil, Liquid Paraffin (LLP) and HDPE (a key ingredient in packaging material) were up 18%, 26%, 12% and 22%, respectively, on a YoY basis in sync with prices of edible oils and crude oil. However, Marico has the pricing power to pass on the raw material inflation gradually to customers.

- Promotion expenses, employee cost, miscellaneous expenditure, depreciation and taxation remained stable for the company.

- The company would continue to exercise a bias for franchise expansion as long as margins remain within a band and do not fall below a threshold at the overall business level.

- Consequently company reported PAT of Rs 2.6 bn, marginally below our expectation

Valuation & outlook

- Marico had a satisfactory quarter with healthy topline growth and a resilient margin performance in a tough business environment. The management has indicated that the quarter's growth can be read as a trend and the worst is behind in terms of demand weakness and raw material inflation, and that rural growth is picking up. Management is not yet in a position to say rural growth has bounced back to historic levels, but on a low base, rural has started going faster than urban growth. Management expects the competitive intensity to increase going forward with Marico growing ahead of the industry and consistently delivering strong margins. The prospects for the rest of FY19 looks encouraging as sales growth (including market share) and operating margins trending favorably. The company is also looking to aggressively drive growth in core and new growth engines by investing behind brands and capability building. We remain positive on Marico and Maintain Accumulate at 42x FY20E (10% discount to HUL) earnings with a revised price target of Rs 375(Rs 334 earlier).

Shares of MARICO LTD. was last trading in BSE at Rs.364 as compared to the previous close of Rs. 363.8. The total number of shares traded during the day was 28028 in over 547 trades.

The stock hit an intraday high of Rs. 366.8 and intraday low of 359.65. The net turnover during the day was Rs. 10232002.

Source : Equity Bulls

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