Marico's Q2FY20 results (Downgrade to Neutral) - Big miss on volumes; recovery could be more gradual

Q2FY20 result highlights

• Marico’s cons. revenue fell 0.4% yoy at Rs18.3bn (est: Rs19.5bn), EBITDA grew by 15.8% yoy to Rs3.5bn (est: Rs3.7bn), PBT grew by 16% yoy to Rs3.4bn (est: Rs3.5bn) and Adj PAT grew by 17% yoy at Rs2.5bn (est: Rs2.6bn).
• Overall volumes grew 3% yoy. India volumes grew by just 1% yoy (est: 5%). Parachute sales declined by 4% (volume decline of 1% yoy), VAHO sales declined by 6% (flat volumes), Saffola sales were up by 5% (volume growth of 1% yoy).
• International business posted a cc growth of 9% led by healthy performance in Bangladesh (15% cc growth).
• Consolidated gross margins improved by 560bps yoy (standalone gross margins up 490bps yoy) aided by lower input costs (copra prices) & healthy gross margin improvement in international business. Staff costs were up 11% yoy, other expenses were up 8.5% yoy. A&P spends increased 12% yoy (standalone A&P up 5.3% yoy). Resultant EBITDA margins improved by 270bps yoy to 19.3% (standalone margins up 250bps yoy to 18%).

Key positives: Healthy gross margin expansion.

Key negatives: Weak volume growth.

Impact on financials: Cut FY20/21E EPS by 6% each.

Valuations & view

Marico’s 2QFY20 results were weak at the rev front though it managed it well on the margin front aided by benign input costs. The hair oil category has been severely impacted by the ongoing slowdown with marginal consumers shifting back to loose oil from branded products given sharp deflationary trend. We believe Marico could have been more proactive in passing on benefits to consumers and investing behind A&P (standalone A&P increase at just 5% yoy in Q2) as that could have mitigated the impact to some extent, in our view. It will now take these steps and expects H2 growth to be around mid-single digits. Even as we bake this in our estimates, the confidence in our earnings projections has dwindled and coupled with sharp slowdown in its core categories, we downgrade Marico to a Neutral. We like Marico’s intent to create categories of the future but given their limited contribution, revival in core categories continues to be a key monitorable. We continue to value Marico at 40x FY21E EPS and arrive at a revised price target of Rs381.