Marico's Q3FY19 results (Neutral) - Volume growth continues to lag peers…

Q3FY19 result highlights

• Marico’s consolidated revenue increased by 14.6% yoy at Rs18.6bn (est Rs18.7bn), EBITDA increased by 16% yoy at Rs3.5bn (est Rs3.55bn) and PAT increased by 13% yoy at Rs2.5bn (est Rs2.55bn).
• Domestic volume growth was 5% yoy (est:7%). Parachute volumes increased by 9% yoy, VAHO & Saffola volumes increased by 7% and 2% respectively.  In value terms, Parachute/VAHO/Saffola grew by 19%/19%/8% respectively. International business grew by 11% yoy in constant currency terms.
• Consolidated gross margins declined 40bps yoy (standalone gross margins down 150bps yoy) impacted by higher input costs. Staff costs were up 17% yoy, other expenses were up 9.6% yoy. A&P spends increased 12.1% yoy (standalone A&P up 9.8% yoy). Resultant EBITDA margins increased by 30bps yoy to 18.8% (standalone EBITDA margins declined by 140bps yoy to 17.5%).
• Depreciation expense increased by 6% yoy, other income was up 19% yoy and tax rate was up 250bps resulting in consolidated PAT growth of 13% yoy

Key positives: Healthy International business performance

Key negatives: Weak domestic volume growth

Impact on financials: No material change in estimates

Valuations & view

Marico’s 3QFY19 earnings was largely inline with estimates.  While international business performance surprised positively, domestic volume growth continues to remain weaker compared to HPC peers like Dabur & HUL. Given the challenges in Saffola and lack of presence & high competitive intensity in bottom of pyramid in Hair oil, the recovery in domestic volume growth is likely to be more gradual. Further likely moderation in copra prices will drive gross margins, however, relatively lower pricing growth and investments behind brands will restrict the overall EBITDA/PAT growth. We are factoring 12% revenue CAGR over FY19-21E led by improvement in domestic volumes and recovery in International business, 100bps EBITDA margin expansion, translating into earnings growth CAGR of 16% over FY19-21E. While we like Marico’s brand franchise, given the relatively lower earnings visibility compared to peers, we find, valuations at 42x/36.5x FY20/21E prohibitive. Maintain Neutral.