Marico's Q4FY18 results (Neutral) - Weak volumes & higher input costs drag earnings

Q4FY18 result highlights

• Marico’s consolidated revenue increased by 12.6% yoy at Rs14.8bn (est Rs15.4bn), EBITDA declined by 2.5% yoy at Rs2.5bn (est Rs2.66bn) and PAT increased by 7.2% yoy at Rs1.8bn (est Rs1.9bn).
• Domestic volumes increased by 1% yoy while international business volumes increased by 5% yoy. Parachute/Saffola volumes declined by 5%/1% while VAHO volumes increased by 11% for the quarter.
• International business revenues increased by 13% yoy. Constant currency revenues increased by 16% yoy.
• Consolidated gross margins declined 560bps yoy (standalone gross margins down 510bps yoy), due to sharp copra price inflation. Staff costs were up 5.4% yoy, other expenses were flat yoy. A&P spends increased 5.3% yoy however on LTL basis spends were up 14% yoy. Resultant EBITDA margins declined by 270bps yoy to 17%.
• Depreciation expense declined by 13% yoy (on account of higher impairment provision in the base quarter) and tax rate was lower by 540bps (due to tax exemption in the new Guwahati manufacturing unit) resulting in PAT growth of 7.2% yoy

Key positives: Healthy VAHO & international business performance

Key negatives: Volume decline in Parachute & Saffola.

Impact on financials: We reduce our FY19/20E earnings estimates by 3%/3%.

Valuations & view

FY18 has been a challenging year for Marico impacted by a weak volume growth and steep copra price inflation. Management remains confident of its volume growth guidance of 8-10% for FY19. However, the lower than expected volume growth trend in Parachute and Saffola will need to be corrected and remain a key monitorable Further, the continued inflationary pressures will keep near term earnings growth under check. We remain positive on Marico’s longer term execution capability. However, with the stock trading at 36xFY20E earnings, we believe a buy case would be a function of a) a better entry price point b) improved earnings visibility. Maintain Neutral.