Marico rating – Buy: Margins are getting better for company

Marico’s Q1FY23 pre-quarterly update indicated subdued demand trends (similar to Q4FY22), mirroring overall FMCG industry demand, which was impacted by high retail inflation exerting pressure on consumers’ wallets. Consolidated Q1FY23F revenue should grow c.1% y-o-y. While India volumes declined in mid-single digits y-o-y (2yr/3yr CAGRs of 7%/flat), we note this was largely due to lower volumes in the edible oil category (on a high base, lower in-home consumption and downtrading owing to high inflation). Excluding edible oils, India business experienced a marginal volume growth.

Margins expand and getting better: Copra prices remained soft in Q1, leading to GPMs remaining flat q-o-q and improving y-o-y. Edible oil prices started to soften in end-Q1FY23 as global supplies began to ease, and should aid margin expansion in coming quarters. We estimate consolidated Q1FY23F revenue growth of c.1% y-o-y (vs Q1FY22: +31% y-o-y; Q4FY22: +7% y-o-y) and EBITDA/PAT growth of c.10%/6% y-o-y.

MRCO to stand out vs peers: We believe MRCO stands out relative to peers as its key raw materials (copra, edible oils) are experiencing soft/deflationary trends. Based on our assumptions, we believe MRCO’s margins will improve faster than expected vs peers. MRCO is likely to be one of the few FMCG companies to expand GPMs, while peers are likely to continue to see GPM contraction in the near term.

We believe Marico will continue to invest in brand-building for its new launches, especially in digital-first/D2C portfolios and in core franchises. We expect A&P spending to increase y-o-y. Management expects operating margin (OPM) to improve y-o-y (Q4FY22 OPM: 16.0%, Q1FY22 OPM: 19.0%).

Demand trends tepid
Consolidated revenue: To grow marginally y-o-y. India business: Volume declined in mid-single digits y-o-y on a high Q1FY22 base of +21% y-o-y, mainly due to a sharp drop in Saffola edible oils, implying 2yr/3yr volume CAGR of c.7%/flat. Our Q1FY23F value growth:
-4% y-o-y (2yr/3yr CAGR of 14%/3%; Q1FY22: +35% y-o-y).

Our view
Despite near-term softness in rural consumption, we view Marico as a strong beneficiary of a resilient core, and significant future growth vectors in new/recovering categories. We expect it to gain from: 1) a resilient core Parachute coconut oil portfolio that benefits across input cost trends; 2) new future growth engines: digital-first portfolio (Beardo, Just Herbs, Coco Soul, Pure Sense – targeting c.Rs 5 bn sales by FY24) and foods (oats, noodles, honey, Chyawan Amrut, soya chunks, peanut butter, mayonnaise – targeting c.Rs 8.5-10 bn sales by FY24) that we expect to scale up, and 3) a gradual turnaround in personal care/ VAHO categories aided by a price correction at the bottom of the pyramid and supported by economic recovery.

We maintain our Buy rating and TP of `625 with a FY22-24F EPS CAGR of 20%. The stock currently trades at a P/E of 36x Mar-24F EPS of Rs 13.8.