Marico's Q1FY19 results (Neutral) - A challenging quarter… earnings growth trajectory to improve…

Q1FY19 result highlights

• Marico’s consolidated revenue increased by 20.5% yoy at Rs20.3bn (est Rs19.5bn), EBITDA increased by 9.2% yoy at Rs3.5bn (est Rs3.75bn) and PAT increased by 10% yoy at Rs2.6bn (est Rs2.7bn).
• Revenue growth was driven by overall volume growth of 10.4% yoy. India volumes increased by 12.4% yoy and International business volumes increased by 3% yoy.
• Consolidated gross margins declined 550bps yoy impacted by higher input costs. Staff costs were up 5.6% yoy, other expenses were up 7.4% yoy. A&P spends increased 1.1% yoy (comparable A&P was up 12% yoy). Resultant EBITDA margins declined by 180bps yoy to 17.5%.
• Depreciation expense increased by 6% yoy, other income was up 8% yoy and tax rate was lower by 90bps resulting in consolidated PAT growth of 10% yoy

Key positives: Healthy VAHO performance, Recovery in Saffola

Key negatives: Higher than estimated contraction in gross margins. Volume growth weaker than peers

Impact on financials: We reduce our FY19/20E earnings estimates by 3%/3%. Introduce FY21 earnings estimates.

Valuations & view

The volume growth trajectory for Marico has been weaker than peers like Dabur and GCPL in spite of a weak base. We expect volume growth for Marico to be slightly below its HPC peers in FY19 owing to gradual recovery in Saffola and an overall lower volume growth trajectory in Parachute. While the trajectory of gross margins is only likely to improve from here, lack of price increases and risk of copra prices rising again could alter this improvement. We believe in Marico’s strong execution track record and expect an improving earnings growth trajectory from Q1FY19 levels. However, we await a better visibility of a steady high single digit volume growth trend and benign raw material prices to change our rating. Till then, we maintain our Neutral rating on the stock. The stock trades at 41.5xFY20E and 36xFY21E earnings.