Marico - Rejuvenation (of core), redirection (newer Foods categories) and efficient working capital management to drive value creation - ICICI Securities

3Q volume growth of 15% was a strong performance driven by growth in 95% of the portfolio. Likely market share gains in Parachute, value-added hair oils (VAHO) and continued growth momentum in Saffola edible oils (more importantly, through increased penetration and retention) inspire confidence on sustained growth momentum. We like its focus on prioritising market share over margins in the near-term (some input cost inflation seen). We believe efficient working capital management with reduced inventory driven by comprehensive SKU rationalisation and reduced receivables driven by tight credit control (some mix benefits as well though that will reverse) will also lead to value creation. Further, we reiterate that, new launches in healthy foods portfolio is likely to provide another leg to growth (targeting ~Rs4.5-5bn revenue in FY22 (~Rs3.3-3.5bn in FY21)) and a potential stock re-rating trigger. A resilient international portfolio adds to potential outperformance. We stay believers. Reiterate ADD.

- Broad-based revenue growth: Consolidated revenue / EBITDA / recurring PAT grew 16% / 11% / 13%. Domestic revenue grew 18% driven by 15% volume growth with robust demand across 95% of product portfolio with improving consumer sentiment and amid declining covid cases. This performance was led by strong GT performance in rural (+24% volume growth) and improved urban performance (+10% volume growth). Modern Trade also recovered well with rising footfalls to pre-Covid levels and E-commerce witnessed exponential growth of 88% YoY.

- Segment performance: Parachute revenue grew 9% with 8% volume growth driven by likely market share gains (led by direct distribution). Value added hair oils (VAHO) continued its second consecutive quarter of volume growth (+21% volume and value both). Saffola edible oils continued its strong performance (+17% volume, +26% value), benefitting from increased penetration and higher retention which together contributed 65% to this growth. In other categories, healthy foods grew 74% in value terms (oats grew by 50% in value terms) while Premium personal care segment witnessed sequential recovery with modest volume decline. Saffola Honey is also performing well with double digit market share in MT and +20% market share in E-commerce where the category is over-indexed.

- International business: Revenue grew 8% in constant currency terms (+11% reported) driven by significant outperformance in Bangladesh (+15% in cc terms) and continued performance in South Africa (+7% in cc terms) while other international markets recovered well after a soft first half - South East Asia (-3% in cc terms), MENA (-1% in cc terms).

- Margin declined slightly - input cost headwinds mitigated by A&P spend rationalisation and cost controls: Consolidated gross margin declined 220bps to 46.9% driven by steep inflation in input cost inflation in copra and rice barn oil leading to implementation of price hikes of ~5% and ~15% in coconut hair oil and Saffola edible oils portfolio in 3Q. However, consolidated EBITDA margin declined lower by 100bps to 19.5% primarily driven by rationalisation in A&P spends (-110bps YoY) with cuts in spends on discretionary products while maintaining share of voice in core portfolio and decline in other expenses (-80bps YoY) due to cost saving initiatives. Management expects Copra prices to normalise from its peak in near term and expects flattish input cost in FY22.

- Valuation and risks: We increase our earnings estimates by ~1%; modelling revenue / EBITDA / PAT CAGR of 10 / 12 / 13 (%) over FY20-23E. Maintain ADD with DCF-based revised target price of Rs470 (earlier Rs450) as we roll forward to Mar'23. At our target price, the stock will trade at 40x P/E multiple Mar-23E. Key downside risk is higher-than-expected inflation in copra prices.

Shares of MARICO LTD. was last trading in BSE at Rs.411.9 as compared to the previous close of Rs. 412.5. The total number of shares traded during the day was 130168 in over 3710 trades.

The stock hit an intraday high of Rs. 415.6 and intraday low of 403.5. The net turnover during the day was Rs. 53282788.

Source : Equity Bulls

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