Marico rating ‘buy’: Earnings trajectory is bound upwards

By: | Published: December 8, 2018 1:06 AM

Fall in copra price to drive healthy Ebitda growth in H2FY19; EPS raised by 2-3% for FY20-21e; TP up to Rs 410 from Rs 360

Marico’s H1FY19 margin has remained under pressure (down 130 bps y-o-y at 16.8%) due to high cost copra consumption.

Post an operationally weak H1FY19 (due to high cost copra consumption drag), we expect 30%+ drop in copra prices from peak to start reflecting in GM/Ebitda gains. This would drive healthy 20%+ Ebitda growth in H2FY19 and FY20 (highest within our consumer staples coverage); this is despite higher brand investments (model 80 bps rise y-o-y in FY20; 20% in absolute terms) to support new growth engines (health foods, hair nourishment and male grooming) – a step in right direction which will help de-risk dependence on hair oils.

We have raised our EPS estimates for FY20-21 by 2-3% due to benign RM environment; we are 3-5% ahead of consensus. Retain Buy with revised TP of Rs 410 (from Rs 360) as we roll-over to Dec-20 EPS and raise our target multiple a tad to 40x P/E on better earnings visibility.

Copra deflation cycle to boost earnings While Marico’s H1FY19 margin has remained under pressure (down 130 bps y-o-y at 16.8%) due to high cost copra consumption, we expect gains from copra deflation (down 30%+ from peak over past 10 months to Rs 90/Kg) to start reflecting in H2FY19 (model 140 bps margin expansion to 19.2%) driving robust 23% Ebitda growth. In past copra cycles, Marico’s margins have expanded structurally when copra corrects as Marico tends to retain hikes in larger SKUs; taking cues from past cycles, 30% drop in copra prices usually drives 500-700 bps expansion in GM and 150-250 bps expansion in Ebitda margin – we bake in 19% drop in copra prices in FY20 (assuming current prices drop gradually by another 10%), driving 380 bps expansion in consolidated GM and 240 bps expansion in Ebitda margin equating to robust 24% Ebitda growth (part of GM gains to be reinvested in higher A&SP – model 80 bps rise in FY20 to 9.9% of sales, in line with management guidance).

Other positives
Healthy growth in core brands (ex-Saffola), pickup in international business, recent crude correction, robust performance of hair nourishment/male grooming portfolio and fresh aggression on new launches (portfolio de-risking efforts to help reduce dependence on hair oils and develop strong MT/ecommerce-led youth-focused portfolio) lends additional comfort.

 

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition