Marico's Q2FY19 results (Neutral) - Healthy earnings growth though volumes disappoint

Q2FY19 result highlights

• Marico’s consolidated revenue increased by 19.6% yoy at Rs18.4bn (est Rs17.7bn), EBITDA increased by 13.5% yoy at Rs2.9bn (est Rs2.7bn) and PAT increased by 18% yoy at Rs2.2bn (est Rs2bn).
• Revenue growth was driven by overall volume growth of 6% yoy. India volumes increased by 6% yoy (ex-CSD volume growth was 7% yoy) and International business volumes increased by 8% yoy.
• Parachute/Saffola/VAHO sales increased by 32%/9%/12% with volume growth of 8%/5%/5% yoy. Ex CSD volume growth for VAHO was 10% yoy.
• Consolidated gross margins declined 290bps yoy (standalone gross margins down 330bps yoy) impacted by higher input costs. Staff costs were up 6.5% yoy, other expenses were up 14% yoy. A&P spends increased 11% yoy Resultant EBITDA margins declined by 90bps yoy to 16%.
• Depreciation expense decreased by 5% yoy, other income was up 36% yoy and tax rate was lower by 60bps resulting in consolidated PAT growth of 18% yoy

Key positives: Recovery in International business

Key negatives: Contraction in gross margins. Volume growth weaker than peers

Impact on financials: We increase our FY19-21E estimates by 1-2%.

Valuations & view

Marico’s earnings growth has been better than expectation, largely driven by pricing while the domestic volume growth trajectory has been weaker compared to HPC peers like Dabur & HUL. We are factoring 13% revenue CAGR over FY19-21E led by improvement in domestic volumes and recovery in International business. With moderation in copra prices, gross margin pressures are expected to ease, however, given the competitive intensity in its core categories, a large part of this benefit will be reinvested in terms of price corrections & investment behind brands/innovations in order to drive volume growth, thereby restricting earnings growth (16% CAGR over FY19-21E). We like Marico’s execution skills, however, volume growth is likely to lag peers, hence would await better visibility on volume front as well as sustained moderation in copra prices to change our rating. Further stock trades at 37x FY20E, higher compared to midcap peers. Maintain Neutral.