Marico Rating: ‘Buy’, risk-reward attractive

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Published: May 6, 2020 12:10:03 AM

Marico's Q4FY20 was expectedly weak on topline but margin beat (lower RM & A&P) drove a positive earning surprise.

The management highlighted its preference for share gains in no uncertain terms.

Marico’s Q4FY20 was expectedly weak on topline but margin beat (lower RM & A&P) drove a positive earning surprise. Current utilisation at c. 75% signals a gradual stabilisation. It now expects copra price deflation which improves FY21 margin visibility. The management highlighted its preference for share gains in no uncertain terms. We slightly raise FY21 estimate and retain ‘buy’ — the stock offers attractive risk-reward and remains in our top picks.

Q4 volumes fell 4% with India down 3%. A sharp drop in VAHO (-11%) and Parachute (-8%) was partially offset by a strong growth in Saffola (+25%). Lower prices in most segments weighed on revenue growth which fell 7%. GM expanded slightly; a 110 bps drop in ad spends helped it expand Ebitda margins. Pre-ex earnings fell 5% y-o-y to Rs 200 crore, a slight beat to our estimates.

Ex-Covid, India growth rate was low to mid to low single digit. Saffola benefited due to stock-up by consumers while other portfolios saw a negative impact. Secondary sales were higher. Q4 growth was at 5-6% on reported/CC basis. While Bangladesh and Vietnam did well on macro challenges, MENA & South Africa fell sharply.

The ongoing crisis has caused a change in management stance on copra (coconut) pricing. Against its earlier expectation of moderate inflation, it now expects a moderate deflation, which improves margin visibility.
Marico intends to stay competitive and would pass on the benefits of lower input prices to consumers. This, along with a strong distribution network and likely issues faced by unorganised, would reflect in market share gains.

The management expects flat Ebitda margins in FY21 led by a tight cost control and expects c.100 bps cut in A&P spends. We expect a similar trend, noting there may be upside to margins as Marico looks to calibrate its A&P spends and launch activity takes a backseat.

The crisis would have a long-lasting impact on distribution network. Traditional channel will gain importance and e-commerce will also see sharp gains. Wholesalers will be negatively impacted. We slightly revise up our FY21 EPS forecast as we factor in higher margins and largely retain FY22 forecasts. We continue to find risk-reward attractive as the stock trades at 36xFY21 earnings.

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