Management Speak: Marico (Outperformer) - Not immune to slowdown but better placed…

We met the management of Marico, following are the key takeaways:

Progressive moderation to result in subdued volume growth in 2Q – In line with peers, Marico too has pointed out towards progressive slowdown seen across categories in 2QFY20E. Further, the weak consumer sentiment has also resulted in correction in inventory in the trade channel thereby affecting the primary sales for the company. Rural market has seen higher moderation in 2QFY20E and now growing at par with the urban market. However, with better monsoons & Govt. initiatives, company is hopeful of recovery in 2HFY20E and continues to maintain its 6-8% volume growth guidance.

Improving accessibility to revive growth in Saffola - In the edible oil segment, Saffola has been impacted by price premium to competition and weakness in urban GT channel. In order to drive accessibility of its super premium product and recruit new users, company has introduced new SKU of 750ml at attractive price point of Rs99 for ‘Saffola Active’. Further, it continues to invest behind effective communication of its blended oil proposition, in order to drive growth for the brand.

Copra prices inch up, full year margin guidance remains intact - Copra prices have moved up sequentially from ~Rs95/kg in 1QFY20 to ~Rs105/kg currently. Management earlier had highlighted that it expects copra prices to see some inflation from 3Q due to off-season, however, adverse rainfall in South has led to inflation bit earlier than its expectation. Overall, it expects, copra prices for FY20E to be ~15% lower than FY19 and as a result is confident of achieving 19% operating margin guidance for FY20E.

Our view

Marico will not be immune to the overall slowdown and as a result its growth is also expected to moderate in FY20E, along with the rest of the industry. However, Marico should be able to grow marginally ahead of the industry led by share gains in hair oils segment, continued traction in foods segment, traction in new launches in VAHO and some recovery in Saffola & lower end segment in VAHO. We also like its focus in creating categories of the future to lower its dependence on hair oil and believe its foods segment could be scalable. Further, International business visibility is amongst the best versus peers given stable macros in key geographies of Bangladesh & Vietnam. This coupled with benign input cost led gross margin expansion provides enough headroom to invest behind brands as well as drive EBITDA margins, thereby providing a relatively better earnings visibility compared to peers especially at reasonable valuations of 43x/38x FY20E/21E EPS. Maintain Outperformer.