2 April 2019
Good offtake led by stable demand growth
New product development velocity remains strong
Marico (MRCO) released its pre-quarterly update for the quarter ended
Mar’19. Key highlights:
446.3 / 6.5
397 / 286
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
Financials Snapshot (INR b)
Shareholding pattern (%)
Dec-18 Sep-18 Dec-17
FII Includes depository receipts
Stock Performance (1-year)
The demand environment remained stable in 4QFY19 with good offtake
growth. Rural traction remained intact, exceeding urban growth in the
traditional channel. Newer channels (modern trade and e-commerce) are
growing robustly. Even CSD has now stabilized, but some slowdown was
observed in the wholesale channel, specifically in the month of Mar’18, the
reason for which was not mentioned.
Domestic volume trend in 4QFY19 was in line with the near-term outlook.
(36% of India business) continues performing well, while VAHO (26%
of India business) has had a weak quarter. As guided by management in the
3QFY19 earnings call,
edible oils (18% of India business) exhibited signs
of a recovery led by marketing initiatives during the quarter, but the company
remains cautiously optimistic in the near term.
Key international regions Bangladesh (45% of international business) and
Vietnam performed well. Thus, despite the subdued performance of other
markets, the international business witnessed decent growth.
There were no comments on growth in MRCO’s relatively new portfolios
(Premium Hair Nourishment, Male Grooming and Healthy Foods).
Operating margins in 4QFY19 are likely to improve moderately, led by easing
input costs pressures and operating leverage. Notably, latest data on copra
price (Feb’19) indicate some easing from a bit of a move up in Jan’19.
Management had earlier highlighted that it expects a 15-20% cost decline in
copra costs from the flush season, starting Mar’19.
Velocity of new launches remained strong during this quarter.
Valuation and view:
Three factors underpin our confidence on MRCO’s
earnings prospects: (i) the likely benign RM cost environment over the next 18
months (copra accounts for 40-50% of RM cost), (ii) the strong performance of
Parachute volumes in recent quarters and healthy growth prospects in the
VAHO segment and (c) good traction in new product development. Moreover,
with over 30% of sales coming from rural (management is targeting 40%), and
particularly with its technological edge over peers, MRCO is also becoming an
interesting play on rural growth. Targeting 43x Mar’21E EPS (in line with three-
year average), we derive a target price of INR460, a 33% upside to the CMP.
From a medium-term (2-3 years) perspective – particularly if the targeted 7-8%
of sales come from new products, MRCO is one of the few companies that can
deliver 60-70% returns. Maintain
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya – Research Analyst
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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