Highlights:- Rural growth higher than urban but wholesale traction worrying
- Urban centric channels – e-commerce, modern trade in fine fettle
- India business gains from a deflationary raw material cycle
Marico’s Q4 FY19 result was ahead of expectations. A 9 percent growth in the sales was backed by an 8 percent domestic volume growth and 7 percent constant currency growth in the international business (22 percent of FY19 sales).
Gross margins (+242 bps YoY) improved on account of lower raw material cost. During the quarter, domestic copra price corrected by 19 percent compared to last year. The company said the onset of the flush season has softened prices on expected lines after the sharp spike in the aftermath of Cyclone Gaja in Tamil Nadu late last year.
The EBITDA margin improved 56 basis points (bps) YoY due to better gross margin but was partially offset by a spike in advertising costs.
Rural growth paces higher but overall general trade has moderated
In a quarter where rural-urban growth divide is much talked about and a key differentiator, it is interesting to note that rural general trade was 4 percent YoY in contrast to urban general trade growth (-2 percent YoY). The company had earlier pointed out to sluggish wholesale demand in March. Having said that, other urban channels - modern trade (28 percent YoY) and e-commerce (3 times in one year) grew quite fast.
Domestic volume growth
The company’s flagship brand Parachute (38 percent of domestic sales) witnessed 6 percent volume growth which seems good given the weak show by peer Dabur (2.5 percent YoY) in this category. Another peer Bajaj Consumer care posted a similar number of 5.5 percent volume growth. The company has witnessed market share gains in the quarter gone by.
Another noteworthy takeaway was the decline in the low margin brands of the coconut oil portfolio has reversed as per management’s commentary.
Also, as earlier guided by the company, Saffola edible oil (17 percent of sales) witnessed better sequential performance on account of marketing initiatives. Saffola edible oil registered 18 percent volume growth YoY.
However, value added hair oils (25 percent of sales), had a weak quarter with just 1 percent volume growth. We look forward to the management's commentary on this front.
The company’s Q4 volume growth commentary takes out any concern on any significant market share loss in the segments where there a heightened competition. Demand slackness in wholesale channel needs to be watched closely which comes close on the heels of similar commentary from the FMCG peers.
However, what keeps us invested in the Marico story is Copra cost deflation cycle. Management expects a substantial decline in copra prices (~20 percent YoY) in the new season from March’19. As Copra constitutes about 45 percent of the raw material cost, this should help the company’s earnings in a significant way. The company keeps an EBITDA margin guidance of more than 18 percent in FY20.
Secondly, management’s decision to invest raw material cost advantage for long term investments is a crucial strategic move, in our opinion, as it helps in reducing dependence on Parachute and Saffola and drive growth in the premium segment. In this context, 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.
After the recent consolidation, the stock trades at 38 times FY20 estimated earnings or about 20 percent discount to the market leader. Encouraged by the results, in our opinion, at current levels the stock provides an accumulation opportunity for an increasingly diversified consumption story.
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