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MOSL: MARICO (Buy)-Copra costs trends better than expectations

Marico: Copra costs trends better than expectations

(MRCO IN, Mkt Cap USD7b, CMP INR373, TP INR435, 17% Upside, Buy)

 

Sales growth momentum, new launch trajectory and commodity cost trends are key determinants of earnings growth for FMCG companies like Marico (MRCO). Importantly, the company's commentary of late on these has been encouraging. We also looked at the key points in MRCO's pre-quarter update released on 3rd July. Overall, we believe that MRCO is much better placed than peers in the current uncertain environment. Key highlights of our analysis:

• Growth momentum in the key categories of the domestic business remains strong, with the demand outlook better than most peers.
• Unlike peers, majority of MRCO's international business comes from relatively stable economies like Bangladesh and Vietnam, where the outlook remains promising as well.
• We note that the fall in copra cost in the first few months of FY20 (~24% YoY) has been steeper than management’s guidance of 15-20% decline for the full year. This bodes well for MRCO as copra accounts for 40-50% of its RM costs.
• Management had stated in its previous quarterly results conference call that new products are likely to double as a percentage of sales over the next two years. From that standpoint, the pace of new launches, along with the early success in a few of them, provides huge comfort, particularly as this is crucial in terms of sustainability of longer-term top-line growth. Importantly, most of the new launches are urban/premium, and thus, gross margin accretive.
• The company's technological edge and superior analytics enable it take share from less nimble players, particularly in the rural market.
• We expect EPS CAGR of 21% over FY19-21, which is easily among the best of breed. RoCEs are also healthy in the early 30s and better than most Indian FMCG peers. Despite this, at 35.4x FY21E EPS, valuations are at a discount to peer average of 38x. Targeting 40x Jun'21E EPS, we derive a target price of INR435. Maintain Buy.