Marico’s Q3FY20 results, particularly in terms of profitability, were better than the low guidance given in the company’s end of quarter press release. However, commentary has significantly worsened in recent months on all three erstwhile bastions of our investment case, viz. (a) better volume visibility v/s peers; (b) sharp decline in material costs which is being utilised to fund much higher ad-spends; and (c) new product development, which is being scaled up at a significantly slower pace relative to expectations. Despite the stock declining 20% since our downgrade to Neutral, we maintain the stance owing to fair valuations.

Positive surprise on gross margins leads to Ebitda beat: Q3FY20 consolidated net sales declined 2% y-o-y to Rs 18.2 bn (v/s est. Rs 18.4 bn). Overall volume growth stood at 2% y-o-y. Ebitda grew 6.9% y-o-y to Rs 3.7 bn (v/s est. Rs 3.5 bn). PBT grew 4.3% to Rs 3.6 bn (v/s est. Rs 3.3 bn). Adj. PAT rose 10% y-o-y to Rs 2.7 bn due to the lower tax rate (v/s est. Rs 2.4 bn). 9MFY20 consolidated sales/Ebitda/PAT growth stood at 1.6%/16.4%/18.6% y-o-y. Consolidated gross margin expanded 280bp y-o-y to 49.1%. Ebitda margin expanded 170bp y-o-y to 20.4% (v/s est. 19.2%) during the quarter.

Highlights from management commentary: The demand environment in Q3FY20 was weak, leading to a sharp q-o-q and y-o-y dip in sentiment. Company continued to gain market share across most categories; thus, lack of growth is largely a category-specific issue. Witnessing inflation in edible oils, will take a price increase in Saffola.

Valuation and view: Despite the stock price coming off 20% since our downgrade, we are still cautious due to worsening top line visibility. Furthermore, new product development has also disappointed. Current valuations at 38.3x FY21 and 33.2x FY22 EPS are fair and leave little room for an upside at our target valuation of 35x FY22 EPS. Maintain Neutral.