Momentum in market growth is picking up; Saffola only major area of concern; reason to remain constructive; ‘Add’
We hosted the Marico management for an NDR in Europe. The company intends to reinvest the likely gross margin (GM) gains to accelerate growth in its new growth engines (health foods and male grooming). Saffola’s performance remains the only major area of concern. Underlying market growth momentum, driven by rural demand acceleration, is healthy. Management expressed confidence in its ability to deliver 13-15% topline growth CAGR in the medium term. We remain constructive. Add
Market growth momentum picking up; likely to remain healthy
Resurgence in rural growth, led by a combination of recent stimulus as well as benefits of structural measures like direct benefit transfer and indirect tax rate cuts, is likely to sustain and drive overall market volume growth momentum, as per Marico’s management. Return to a 10%+ volume growth for the sector as a whole may be difficult; however, 6-8% volume growth for the sector and slightly better (8-10%) for players who execute well, looks likely. Share gains from the unorganised/unbranded players will be gradual as Goods and Services Tax compliance picks up.
Growth construct—low DD value growth for core; new engines to provide kicker
The management reiterated its target of 13-15% topline growth in the medium term, broken into (a) 8-10% volume growth, (b) 3-4% pricing growth and (c) 1-2% premiumisation uplift. From a portfolio perspective, the company expects (a) India CNO (parachute) to deliver 9-11% value growth (5-7% volumes), (b) India VAHO (value added hair oils) to grow in the mid-to-high-teens, (c) Saffola to grow in high single digits, (d) health foods, serums and male grooming to grow 20%+ and (e) international business to grow in low double digits (in constant currency terms). With this growth construct, the company expects the contribution of the CNO (Coconut Oil) portfolio to reduce to mid-20s (as % of India business) from the current mid-30s; this would reduce GM volatility.
Margin construct – India operating margins likely to be flat; expansion likely in international
Even as the management continues to expect gross margin improvement in the India business (starting Q3FY19) on the back of Copra price correction and mix improvement, it intends to plough back a good portion of GM expansion back into A&P (advertising and promotion). The idea is to invest heavily in the new engines of growth during times of favourable GM cycle in the core portfolio. On the international business front, however, the management is confident of further margin improvement led by scale efficiencies. Fixed overheads in the international business form nearly 15% of revenues versus 6.2% in India; this is a massive potential source of margin accretion.
Acquisitions – open to small, bolt-on opportunities, primarily in India
After a few years of deliberate restraint, the company is open to looking at small-sized acquisition opportunities —bolt-on or market consolidation or adjacency entry.