HDFC Securities’ research report on Marico
Maricos revenues grew by 13% YoY to Rs 14.8bn (in-line). EBITDA margin dip was more than expected due to higher gross margin pressure. EBITDA/PAT increased by (2)/4% vs. expectation of 4/10% respectively. Domestic business (78% of total) posted healthy 12% growth, volume was up by mere 1%. Consistent price hike on Parachute and high base (15% in 4QFY17) impacted volumes. International business posted healthy 16% cc growth led by strong 17% cc growth in Bangladesh and 61% in MENA. Copra inflation has been impacting gross margins (down 550/500bps YoY in 4QFY18/FY18) and we believe the worst is now behind. Softening in Copra prices would result in GM expansion, since Marico cuts Parachute prices judiciously to restore margins. Historically, this trend has been visible wherein GM has expanded by ~450bps between 2QFY16-3QFY17 vs. a decline of ~450bps between 2QFY14-3QFY15. In the current copra inflation cycle, GM has declined by ~450bps between 4QFY17-4QFY18. With a fall in copra prices, we model GM expansion of 300bps (conservative) during 2QFY19-4QFY20E.
We also bake in aggressive A&P spends of 20% growth in FY19-20 to support new launches. We anticipate EBITDA margin expansion of ~200bps in FY19-20E. With a recovery in margins, stabilizing trade channels and improving international biz we expect revenue/EBITDA/APAT CAGR of 15/27/30% over FY18-FY20E. We value Marico based on P/E of 35x Mar-20, and arrive at a TP of Rs 376. Maintain BUY.
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