Marico Share price: Firing on all cylinders II IDBI Capital says accumulate with target of Rs 435

Marico’s Q3 FY21 result was in line with estimates. Strong recovery is witnessed across all categories (essential and discretionary). Food portfolio grew fastest (+74%YoY) followed by VAHO (+21%YoY) and Saffola (+17%YoY). Parachute reported volume growth of 8% YoY, ahead of the company’s medium term aspiration of 5-7%. Traditional trade and e-com continued to outperform while modern trade reached pre-Covid level.

Revenue from rural India grew faster than urban India. Input cost remained largely inflationary. Marico’s new launches of Honey and Arogyam Chyawan Amrut are tracking well. Management expects near term demand to remain favourable. Marico broadly maintains their estimates. Due to rally in stock price, IDBI Capital revised rating stands at accumulate with target price of Rs 435. IDBI Capital value Marico at 40x FY23E EPS.

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Key Highlights and Investment Rationale:

Strong demand and price hikes aid double-digit topline growth:

Consolidated revenue grew 16%YoY driven by domestic volume growth of 15%yoY and constant currency growth of 8%YoY in international business (led by 15%YoY CC growth in Bangladesh). Parachute rigid grew 8%YoY by volume while VAHO grew 21% YoY driven by market share gains. Saffola Edible oil grew 17% YoY volume led by increased penetration (new users and increased retention).
Food portfolio grew 74% value led by 50% YoY value growth in Oats. Marico took a 15% price hike in Saffola and 5% in Parachute portfolio. Saffola Honey now commands 20% market share at ecommerce channel post 6 months of launch. Marico ventured into the plant based protein category by launching Saffola Mealmaker soya chunks.

GT and e-com outperforms; rural grew faster than urban:

In general trade (GT); urban and rural sales were up by 10% and 24% YoY respectively. Modern trade returned to pre-covid levels while e-commerce grew 88%YoY (now contributes 8% to total revenue). Revenue from CSD recovered sequentially, however declined 10%YoY.

Strict control over cost aids operating profit margin expansion:

Gross margin contracted 223bp to 46.9% led by inflationary trend in key raw materials like copra (+26% YoY), LLP (+12% YoY), HDPE (+18% YoY). Strict control over cost aided in arresting EBITDA margin contraction to 99bps to 19.5%.

Marico’s Conference Call Highlights:

Marico’s Business Performance:

Revenue grew by 16% YoY due to robust domestic volume growth of 15% and constant currency growth of 8% in international business. Government support and less impact of pandemic led to rural outperforming urban areas. Rural grew by 24% YoY while urban grew by 10%. 95% of the company portfolio grew ahead of its medium term aspiration. In the medium term, Marico expects domestic volumes to be in the range of 8-10% while international businesses clock double digit growth.

In near term, due to favourable demand conditions, Marico is expected to outperform medium term expectations. General trade continued its growth momentum with double-digit growth during the quarter. Modern trade returned to pre-Covid levels with rising footfalls. Ecommerce grew by 88% in Q3 and now contributes to 8% of the total turnover. CSD recovered sequentially but declined by 10% YoY. Marico has grown rural stockists by 33% since FY19 and aims to grow the network by 20% in the next few years. Chemist distributors have increased by 6x.