Marico's Q3FY18 results (Neutral) - Overhead cost control drives earnings

Q3FY18 result highlights

• Marico’s consolidated revenue increased by 15.1% yoy at Rs16.2bn (est Rs16.5bn), EBITDA increased by 10.7% yoy at Rs3.02bn (est Rs2.7bn) and PAT increased by 16.5% yoy at Rs2.2bn (est Rs1.9bn).
• Overall volumes increased by 7% yoy led by domestic volume growth of 9.4%.
• Parachute/VAHO volumes grew 15%/8%, while Saffola volumes were flat for the quarter.
• International business revenues declined by 1% yoy. Constant currency revenues increased by 9% yoy.
• Consolidated gross margins declined 540bps yoy, due to sharp copra price inflation. Staff costs were up 7% yoy, other expenses were down by 4.1% yoy on account of savings due to input tax credits, forex loss of Rs100m in 3QFY17 and lower expenses in Egypt in INR terms. Comparable A&P spends were down 70bps at 8.9%. Resultant EBITDA margins declined by 70bps yoy to 18.6%.
• The ETR declined 490bp due to benefit of tax deduction in the new Guwahati unit , resulting in PAT growth being higher at 16.5% yoy

Key positives: Healthy Parachute CNO performance

Key negatives: Weakness in gross margins. Muted international business performance

Impact on financials: We reduce our FY18/19/20E earnings estimates by 4%/4%/2%.

Valuations & view

Though earnings growth has been healthy, quality of earnings has been comparatively weaker for Marico in Q3FY18. Over the medium term, maintaining 8-10% volume growth will be a function of how Marico can grow in the non-Parachute hair oil portfolio. Given the growth challenges in Saffola and in a portion of the youth portfolio, we believe Marico needs to display a stronger visibility of new products success to continue achieving its medium term targets. Further, the input cost challenge on copra price remains a near term margin headwind for the company. The stock trades at 34.5xFY20E earnings. Maintain Neutral.