Marico Share Price: Growth momentum to sustain, VAHO, Parachute, Saffola in spotlight | Highlights by Sharekhan

Sharekhan maintains Buy recommendation on Marico with a target price of Rs 477 per share (rolling it over to FY2023E earnings). Marico’s volume growth is likely to be steady at high single digits to low double digits in Q3 FY2021 on improved volume growth of the value-added hair oil (VAHO) portfolio, 6-8% to volume growth in Parachute rigid pack sales and mid-teen volume growth in Saffola edible oil franchisee.

Domestic volumes grew by 11% in Q2FY2021. The VAHO segment clocked a 4% volume growth in Q2 with strong in mid & bottom of the pyramid products. In September-October, the top-end of the portfolio also saw good recovery in sales.

Saffola edible oil franchisee has also retained its leadership position in the premium edible oil space and would maintain mid-teen volume growth momentum. In the Foods business, new products such as Saffola Immuniveda and Saffola Honey are gaining good traction in the domestic market (foods business expected to be at Rs 300-350 crore in FY2021.

Gross margin to be stressed as copra prices have risen 11-13% YTD while those of other edible oils are up by over 20%; Lower promotional spends and cost savings would ease pressure on profitability. Scaling up of foods and male grooming product segments, expansion of product portfolio, improving penetration of existing products and wider offerings in Bangladesh and South East Asia remain key focus to improve growth in the medium term.

Raw material headwinds will be mitigated with judicious cost saving measures and careful price hikes in the near future. With better cash flows, the company’s dividend payout has improved to 98% in FY2020 from 67% in FY2017. The stock is currently trading at 34x its FY2023E EPS, which is at a discount to its historical average of 41x. Thus with better growth prospects, improving return ratios and discounted valuation.

Further, through various initiatives, the company has maintained its cost savings target of Rs 150 cr in FY2021 and some benefits of the measures would continue in FY2022/23 as well.

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Key risks:

Any significant increase in prices of key inputs or heightened competition in core product categories would act as a key risk to our earnings estimates