Marico’s management did not pass on the benefits during this period, underestimating the extent of the consumption slowdown.
After the requisite (albeit admittedly delayed) price action in its largest brand, Parachute (~30% of sales), Marico’s (MRCO) overall volume growth outlook appears relatively better than peers, barring HUVR and Nestle.
1. Further, demand for brands like Parachute, Saffola, VAHO and youth products are unlikely to be significantly affected by the Coronavirus. 2. While raw material costs are not declining as they were 6 months ago, near-term y-o-y outlook is highly attractive for all its key raw materials, (copra, LLP, HDPE and Safflower) due to benign costs. MRCO will also be an incremental beneficiary of lower packaging costs owing to the ongoing crude cost decline. 3. The stock has corrected ~35% since we downgraded MRCO to ‘neutral’ at the end of Q2FY20 results due to the company reporting a sharp deceleration in volume growth, a trend that has well continued in Q3FY20 results as well. 4. Trailing FY20 valuations of 32.2x FY20E EPS and FY21/FY22 valuations of 33.4x/27.5x FY22E, respectively, (much lower than 3-year/5-year/10-year average of 44.8x/42.7x/ 35.2x) offer potential for an upside. CMP of `261 is at a four-year low. We upgrade the stock to ‘buy’ with TP of Rs 315.
Given the uncertain environment, we have attributed a target multiple of 35x, close to its 10-year average; yet, we have obtained 21% upside on the stock. If we value the company on its 5-year average, the upside could be ~47%. Despite the sharp reduction in copra costs in H1FY20, Marico’s management did not pass on the benefits during this period, underestimating the extent of the consumption slowdown.
The company also did not take a sharp price decrease in Parachute as it wanted to utilise the product’s sharp gross margin gains to funnel ad-spends, which in turn would boost overall sales and help in scaling up new products.