Marico: Lockdown hits business in India & abroad

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Published: April 10, 2020 7:26:26 AM

In view of the nationwide lockdown, all offices have been shut down an production at units that manufacture essential food and grocery products continues at a much reduced scale.

Marico has released its pre-quarterly update for Q4FY20..

Marico has released its pre-quarterly update for Q4FY20. In view of the nationwide lockdown, all offices have been shut down an production at units that manufacture essential food and grocery products continues at a much reduced scale. The distribution network has also been significantly impacted. Marico is currently focusing on movement of essential food and grocery items subject to necessary approvals from the local authorities.

In the India business, early signs of improvement across categories seen until early Mar’20 were more than offset by disruptions due to the lockdown. During the impacted period, it managed to register sales largely in the edible oils and foods portfolio. Overall, the India business posted a low single-digit volume decline, with skewed high growth in the Saffola portfolio. But overall secondary growth was in low single digits, as primary movement of goods was relatively more impacted.

With Covid-19 being declared a pandemic, Marico’s international businesses were also affected. With many of the territories experiencing partial/complete lockdown in Mar’20, international business recorded mid single-digit drop on constant currency basis. Margin likely to be impacted, revenue decline (both in India/international) coupled with an unfavourable mix in the India business, should translate into a modest Ebitda fall this quarter.

Marico has started an aggressive cost management exercise to mitigate the impact of reduced sales. It will continue to drive sustained profitable volume-led growth over the medium term through its focus on strengthening the franchise in its core categories and driving the new growth engines.

Two factors underpinning our investment case on Marico are FY21/FY22E valuations of 37.1x FY21 EPS and 32.4x FY22E lower than 3- year/5-year/10-year average of 44.8x/42.9x/35.4x, and benign raw material costs year-on-year. Our forecasts are conservative as we have assumed copra price inflation in H2FY21E; due to this, Ebitda margin would be lower in FY21E. If copra inflation does not come through, upside risk to our forecasts is significant. Given the uncertain environment, we are attributing a target multiple of 35x, close to its 10-year average.

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