- Mid-single digit volume growth on subdued performance by Saffola
- India business gains from deflationary raw material cycle
- Gains from hair oil business to be deployed for new categories
- FY20 guidance: 10 percent volume and over 18 percent margin growth
Marico witnessed a 15 percent sales growth in Q3 FY19 on the back of performance of its international business and pricing-led growth in the India business.Key positives
Margin for the India business (78 percent of sales) continues to benefit from price hikes taken earlier in 2018 and a deflationary copra price cycle. Gross margin improved 230 basis points (100 bps=1 percentage point) quarter-on-quarter as copra prices fell 18 percent. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin expanded 274 bps sequentially and 20 bps year-on-year to 18.8 percent. While management has retained its FY19 EBITDA margin guidance at 17-18 percent, it’s hopeful of over 18 percent margin growth in FY20.
Sales of the company’s flagship product - Parachute (in rigids packs, 36 percent of sales) - grew nine percent and 19 percent in volume and value terms, respectively.
International business (22 percent of sales) saw 11 percent constant currency growth, aided by Bangladesh and Vietnam sales. For FY19, the management is hopeful of clocking double-digit constant currency growth in the international business.Key negatives
Overall volume growth for the India business was five percent, lower-than-expected, but comes on a high base. Subdued performance by Saffola edible oil (two percent YoY), which constitute 18 percent of turnover, was one of the key reasons. The management is hopeful of re-staging mid-single digit growth going forward. However, lack of significant success in this category, amid competitive pressures from Emami
and Adani Wilmar, remains a business strategy challenge. Nevertheless, the management guided for eight percent volume growth in FY19.
Low margin non-focused brands (Nihar Naturals and Oil of Malabar) from its coconut oil portfolio declined due to increased competitive intensity in select markets. This also partially explains the stellar showing by Dabur’s haircare category in Q3. However, its market share in the coconut franchise remains at 59 percent and guides for 5-7 percent volume CAGR (compounded annual growth rate) over the medium term.Key observations
Copra price has seen a moderate uptick in the last couple of months (12 percent from October 2018 prices). However, the management sees this as an aberration and said the copra deflation cycle is intact. In fact in FY20 it is hopeful of a price de-growth of around 15-20 percent YoY.
The company doesn’t plan to initiate price cuts for the Parachute brand, though trade promotions may continue. On account of this, the management plans to invest gross profit gains for brand-building, new category developments and defend market share decline in low margin products. However, it qualified that it doesn’t want to invest in the low margin category over the longer term.
Also read: Higher MSP prices are not detrimental for MaricoMarket prices for the Calicut copra (per quintal)
While we take note of the disappointment in volume growth, triggers for earnings growth accrue from the management’s decision to invest raw material cost advantage for long-term investments. Marico wants to reduce dependence on Parachute and Saffola and drive new initiatives in the premium segment. We acknowledge that categories like male grooming, serums, hair nourishment and foods are expected to have a significantly higher share in the next five years.
Additional lever for growth comes from rural exposure, which is expected to scale up to 40 percent in the medium term from 30 percent at present.
Overall, improved business fundamentals have kept us constructive on the stock. For FY20, the management has guided for 10 percent volume growth for its India business and over 18 percent EBITDA margin. Constant currency growth in the international business should continue in double-digits.
The stock had sharply rallied (25 percent) from the lows of October 2018. However, it has been consolidating for the last two months and trades at 40 times FY20 estimated earnings. In our view, investors can participate in this increasingly diversified consumption story by buying on dips.
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