Marico’s (MRCO) management appears optimistic about growth prospects from H2FY18 onward. Following GST rollout, the company expects to gain market share from unorganised players over the longer term. Key pillars of 15% sales CAGR are rural opportunities, premiumisation, underpenetrated male grooming segment, products enabling hair fall control, and other such problem -solving products involving hair and horizon 2 projects like ‘Beardo,’ which cater to the new -age customer. The 15% sales CAGR is expected to be driven by volumes, 8 -10% in India, double-digit constant currency growth in the overseas business, commodity-led inflation, 3 -4%, and premiumisation and new products. We remain positive on MRCO’s longer-term earnings growth prospects. Its investments in distribution technology earlier and on analytics now are far ahead of peers, and should serve it in good stead over the long term. However, valuations at 38.7x FY19E EPS do not leave much room for upside, in our view. We thus maintain our Neutral rating with a target price of Rs 355, 41x June 2019E EPS, 10% premium to three-year average, led by likely return to ~20% EPS CAGR post the GST hit in Q1FY18.
Recovery has commenced in Canteen Stores Department, CSD; accounts for ~7% of MRCO’s sales in July, with things likely to be largely normal by end of Q2FY18. Post that, only product categories that witnessed significant leakage from the CSD channel are likely to suffer, as huge price arbitrage offered by CSD earlier no longer exists. Wholesale-dependent channels, particularly in the eastern part of the country, are still affected. Wholesalers have the willingness to comply with the new GST regulations, but many challenges remain on this front , route for compliance, history of non-compliance, among others).
Nevertheless, Mr Saugata Gupta (MD & CEO) believes that a large part of wholesalers will survive as they gradually become compliant. However, a small but considerable section of wholesalers may close down operations, particularly those surviving because of the higher margins that they were able to offer to retail trade due to non-compliance. For MRCO, 35% of general trade (GT) sales come from wholesale trade, which is lower than many peers, 45- 50%.Organized players are still doing far better and gaining share from unorganized players, for whom the effect has been far more severe.