Maintain REDUCE on Marico - Domestic remains weak; beat on margins - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

Marico posted a mixed set of numbers as revenue declined 11% YoY due to weak domestic performance. Domestic revenue/EBIT declined by 15/2% YoY, while International revenue/EBIT grew by 2/18% YoY. The domestic performance was impacted by weak demand in VAHO (-32% YoY) and PCNO (-12% YoY). Saffola continued its strong trajectory with 16% YoY growth. The company has witnessed a sequential recovery in demand in May and June, recording a 3% YoY growth. In international, Bangladesh posted healthy 10% YoY cc growth while the lockdowns in MENA (-27% YoY cc) and South Africa (-25% YoY cc) impacted international revenue (-4% YoY cc). There is a beat at the EBITDA level, led by lower A&P. Benign copra prices and A&P rationalisation will maintain operating margins at a healthy level in FY21. While we expect the discretionary portfolio to remain muted, PCNO and Saffola are expected to drive recovery. We maintain our EPS for FY21/FY22/FY23. We value Marico at 35x P/E on Jun-22E EPS and derive a target price of Rs 351. Maintain REDUCE.

Saffola continues to drive revenue: Revenue declined by 11% YoY (+7% in 1QFY20 and -7% in 4QFY20). The decline was due to a dip in domestic business of 15% YoY (+6% in 1QFY20 and +8% in 4QFY20). The International business, on the other hand, grew 2% YoY, driven by forex gains. CC revenue declined by 4% YoY for the company as lockdowns severely impacted some markets. PCNO clocked value/volume decline of 12/11% YoY, while VAHO clocked value/volume decline of 32/30% YoY. Marico achieved 111/94% of the average monthly run rate of FY20 in PCNO/VAHO. Saffola value/volume grew by 16% YoY, although the loss of sales in CSD (-48% YoY) and MT (-17% YoY) stunted its growth.

Margins resilient: Gross margin expanded by 138bps YoY to 48.9% (+522bps in 1QFY20 and +23bps in 4QFY20) vs. our expectation of 19bps YoY expansion. ASP/other expenses declined by 37/9% YoY while employee expenses grew by 6% YoY, leading to an EBITDAM expansion of 298bps YoY to 24.3% (+377bps in 1QFY20 and +58bps in 4QFY20). EBITDA grew by 1% YoY vs our expectation of 8% YoY decline. APAT grew by 3% YoY.

Call takeaways: (1) Consumer offtake in June has returned to pre-COVID levels, with some parts of the portfolio witnessing growth, and the trend continued in July; (2) the company saw market share gains in 90% of its portfolio; (3) management is optimistic of achieving 20% operating margin in the rest of the year; (4) the company is now able to service 75% of its total outlets; (5) its foods business is expected to grow to Rs 3-3.5bn in FY21; (6) rural revenue was 120% of the average monthly run rate of FY20 while urban revenue was flat.

Shares of MARICO LTD. was last trading in BSE at Rs.362.05 as compared to the previous close of Rs. 350.45. The total number of shares traded during the day was 247618 in over 5527 trades.

The stock hit an intraday high of Rs. 368.75 and intraday low of 355.6. The net turnover during the day was Rs. 89889306.

Source : Equity Bulls

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