Recent interaction with Marico management indicates (i) good growth expectations from international businesses, (ii) GST preparedness, both from the company and channel partners, (iii) input cost inflation, (iv) little risk from Patanjali, and (v) intention to champion the digital channel through the recent buy of brand Beardo. We maintain Hold. Global business: Marico believes that the worst is over in the Middle East, growth in Egypt would happen in H2, Africa growth would be slower while non-Parachute portfolio would contribute 30% of sales in Bangladesh in the next couple of years.
Double digit constant currency growth rate is feasible, especially in South East Asia and Bangladesh. Margins potential of the international business is better than the India business, according to the management. Domestic business: Marico is targeting 8-10% volume growth following 5-7% volume growth in Parachute Rigids, 10% in Saffola and double digit growth in VAHO portfolio. The company will implement 8% price increases in FY18 as inflation in coconut oil is resurfacing (delayed pricing helped volumes).
Channel destocking an industry phenomenon: FMCG wholesalers are destocking and Marico is not immune as c.35% of sales is through wholesalers. June quarter volumes would be impacted and Marico expects the trade to take a couple of months’ time for adjustments. Valuation/Risks: We value Marico using a DCF-based methodology, with a WACC of 10.2%, earnings CAGR of 15.5% in FY17-19E and 12.2% from FY19-29E.