We initiate coverage on Marico with a Buy rating and a DCF-based PO of Rs360. We expect a resilient EPS CAGR of 18% over FY17-19E led by healthy volume growth and pricing inflation. Marico’s core portfolio of edible/hair oil will be the key driver of this growth helped by industry consolidation. It has also stepped up its innovation profile with launches in premium edible oil, packaged food and in the male grooming segment. While the stock at 40x one-year forward P/E is not cheap, robust EPS CAGR of 18% in the medium term is likely to back premium valuations. Core portfolio to continue to see consolidation-led gains: Marico’s core portfolio of Parachute Coconut oil and Saffola edible oil has a stable growth profile with a volume CAGR of 6%/8% over the past five years. The coconut oil segment is likely to post a robust show in the medium term on consolidation-led opportunities under the GST (Goods & Services Tax) regime — unbranded forms 30%-35% of the market. Rising preference for brands by consumers will help as well. Further, the scale up in Value-Added Hair Oil (VAHO) is likely to remain healthy, led by market development. These factors along with premiumisation will offer stability to growth in the core portfolio, in our view.
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Innovation pipeline to focus on growing future strategies: Marico’s innovations outside of its core portfolio have met with mixed results in the past. While new launches like Saffola Oats have done well, its personal care range under the Parachute brand & portfolio acquired from Paras continues to struggle. It has stepped up the innovation profile in male grooming products, is scaling up in packaged food and in premium olive oil. We believe these segments will create future growth segments given relatively less competition. Stock valuation not cheap; resilient EPS CAGR to support: Marico’s one-year fwd. estimated P/E at 40x bakes in a resilient growth and a sharp rise in ROE over time. A healthy 18% EPS CAGR over FY17-19E, similar to that seen in the past five years, and the benefits from GST should continue to back premium multiples. Key risks: (1) seasonality; (2) reliance on select raw materials; (3) M&A.
— BofA Merrill Lynch