While guidance on drop in Ebitda margins is too conservative, valuations leave little room for upside
Marico guided for 8-10% volume growth and 15% revenue growth in FY18. We believe the revenue growth is achievable given the high price increases likely in coconut oil; there has already been 8% price hike and another hike is likely in three months. These, coupled with price hikes also in value added hair, could imply high single digit price growth in FY18.
Parachute coconut oil volumes should grow 5-7% despite the high price increase, as loose oil prices have moved up over 60% and the gap with Parachute prices has narrowed. Marico tends to gain 150-200 bps market share in years of high copra inflation. Management guided for a drop in Ebitda margins by 150-200 bp as gross margins will be lower and ad spend will be increased. We build in 100 bp drop in Ebitda margins as there will be leverage gains from the 15% top-line growth.
While Marico continues to demonstrate resilience, valuations at 43x FY18E leave little room for upside. Maintain Neutral. Target price changes to `300 as we roll forward to March 2019 and increase multiples to 35x, in-line with its 3-year average P/E.
FY18 guidance of 15% revenue growth very achievable given the high pricing growth
Management guided for 8-10% volume growth and 15% revenue growth for FY18. The revenue growth is very achievable, in our view, given the high levels of price growth that should be there in FY18. In coconut oils Marico has already taken an 8% price hike in March and is likely to take another major price hike in 3 months. Also, there was a 5% price hike in August which will have a half year impact in FY18. The value added oils portfolio is also likely to see price hikes. Bangladesh business has taken ~10% price hike in coconut oils in March as well. Overall, we expect high single-digit price growth for FY18 at the consolidated level.
Management guides for 150-200 bps Ebitda margin drop, which is too conservative, in our view
As is normal for Marico, in years of high input cost inflation in copra, the gross margin dips as the price hike does not fully pass on the input cost inflation. However, normally the Ebitda margins decline only marginally as the operating leverage from the high revenue growth offsets some of the gross margin loss at the Ebitda level. However for FY18 the management has guided for a substantial 150-200 bp drop in Ebitda margins. The main reason is that ad spends are likely to increase, as new product launches planned for 2H FY17 were pushed back due to the demonetisation related issues. We however feel that the Ebitda margin drop will be contained within 100 bp as there will be operating leverage on other overhead costs.
Core coconut oil portfolio again shows its resilience and ability to gain market share
The 15% volume growth in Parachute again demonstrates the resilience of the brand. In high copra inflation years the brand tends to gain 150-200 bps market share from local players as the premium of the brand shrinks versus commoditised players. This is again playing out now.
Saffola’s super premium edible oil launch holds good promise
Saffola recently launched ‘Saffola Aura’, a blend of olive oil and flaxseeds oils, to enter the super-premium edible oils market of Olive oil. Olive oil is now a ~`8 bn market and growing rapidly in metro cities. Saffola did not have a presence here and this is a unique differentiated product which holds good promise for the company.
Some future growth drivers lost momentum in FY17
One of the concern areas for Marico is that some of the growth drivers for the future have seen a slowdown in momentum in FY17. This is possibly the reason the management plans to increase ad spends in FY18. Oats as a category has slowed down after growing 30-35% for a few years. Management thinks more innovation is needed here to drive the next leg of growth. Hair fall oils have also slowed down in growth and Marico has had to push back its target for `1 bn of revenues by one year. One reason is that Parachute Gold has not been meeting action standards in the non-south markets. Youth portfolio of hair gels, serums and deodorants has slowed down sharply in 2HFY17 as they have been more impacted by demonetisation, being discretionary in nature.
Marico remains a solid business, but valuations leave no room for upside
We continue to fundamentally like Marico’s business which has a solid core portfolio of coconut oils and is expanding market share in other value added oils. The company is also developing future growth drivers outside of hair oils, which hold good potential over five years. However valuations at ~43x FY18 leave no room for upside. Marico is now trading at 10-30% premium to other mid-cap Indian consumer stocks.