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
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).
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.