Domestic growth to be steered by several catalysts; margin pressures are likely to ebb from H2FY19; ‘Buy’ retained with TP at Rs 373
We met saugata Gupta, MD & CEO of Marico. Key takeaways: (i) in medium term, Marico is confident of clocking 8-10% volume growth (albeit relatively soft Q4FY18), translating into 13-15% revenue growth; (ii) management believes the spike in copra prices has almost topped out at `130-140/kg levels; (iii) volume growth pressure in Saffola edible oil is temporary and course corrections are underway; and (iv) innovations and new launches in Saffola foods to continue. In our earlier visit note, “Making the right moves”, we had cautioned about near-term margin pressures, which has played out. Now, with two price hikes (22% YTD) in Parachute and copra prices not expected to inflate materially henceforth, we expect margin pressures to ebb from H2FY19. Maintain Buy.
Domestic growth to be steered by several catalysts
Management believes Marico will be able to record 8-10% y-o-y volume growth in the medium term (albeit relatively soft Q4FY18) – while Parachute Rigid is expected to clock 5-7% y-o-y volume growth, other portfolios (Saffola, VAHO, Premium Hair Nourishment & Male Grooming) are poised to post double digit volume growth over medium term and we echo that view. We remain confident of Marico’s ability to tackle the small hitch in Saffola edible oil portfolio.
Margin pressures to gradually recede from H2FY19
Against copra price spurt of 91% y-o-y and 21% q-o-q, Marico had deferred price hikes to garner MS which led to margin compression. Now with two price hikes (~22% YTD) and copra prices not expected to inflate materially henceforth, we expect margin pressures to ebb from H2FY19. This coupled with change in product mix, implementation of Project EDGE and distribution revamp should also aid margins.
Outlook and valuations: Bright prospects; maintain ‘BUY’
We expect Marico to sustain growth led by price hikes in Parachute, new product launches, market share gains and improvement in IB. Amid a challenging raw material scenario also (now largely behind it), Marico has commendably managed its margins. On these positives, we retain target multiple of 42x FY20e and arrive at target price of `373. At CMP, the stock is trading at 36.7x FY20e EPS. Maintain ‘BUY/SP’.
We like Marico’s strategy of focusing on improving volumes and market share gains. This has been amply displayed over the last few years. While gaining market share, Marico has not had to compromise a lot on margins. In an era of inflationary environment too, Marico has displayed strength in maintaining margins as well as improved market share.
On international business too, there are signs of revival in pockets like Bangladesh and Vietnam. Political turmoil, currency devaluation and overall macro-economic challenges hover in MENA region which should recede shortly (already in the base now).
We also like Marico’s focus on innovation, be it in Healthy Foods segment with the launch of Saffola Active Soups or Saffola Active Slimming Nutri-Shake, or within Male Grooming, through the launch of Set Wet Blast pocket perfume sprays at the disruptive `49 price point. While the company continues to gain market share in VAHO segment through competitive pricing, the premium value added offerings are also expected to aid in improving the value market share.
We like Marico’s focus on incubating ideas (preferred over inorganic growth) and expanding rural (enhanced rural reach by 25% to 53,000 villages during FY14-17) and urban distribution (initiated Project ONE to increase distribution in top-20 metros). Marico remains one of the key beneficiaries of revival in urban demand (urban is 65-70% of sales). Recovery in rural growth will further help Marico, as it has initiated steps to enhance penetration in rural areas through the launch of price-point packs in various product segments.
Marico remains confident of posting 8-10% volume growth in the medium term. Price hikes in Parachute portfolio should also aid in achieving the targeted 13-15% top-line growth. Even in an adverse raw material inflationary scenario, Marico has been able to maintain margins and now with the tide expected to change, we think the margin pressure problem should gradually recede from H2FY19. The company has also seen good time correction and we believe it should give good returns from current levels. On these positives, we continue to assign target multiple of 42x FY20e and arrive at a target price of `373.
Marico has evolved into one of the leading Indian FMCG companies from a coconut oil manufacturer over the past few years. It has positioned itself on the beauty and wellness platform and caters to hair care, health care, and skin care. Its brands include Parachute, Parachute Advanced, Nihar, Nihar Naturals, Hair & Care, etc in hair care, Saffola in health care, Set Wet, Hair Code, X-Men in Male Grooming. The company has been at the forefront of launching innovative products and services such as Saffola Savoury and Sweet Oats, Bio-fuel to provide Indian consumers premium personal care products. Marico has captured inorganic growth opportunities with acquisition of two hair care brands in Egypt, Fiancee and Haircode, which give it control of 50% of the hair care market in the country.