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MOSL: MARICO (Buy)-Good offtake led by stable demand growth

Marico: Good offtake led by stable demand growth; New product development velocity remains strong

(MRCO IN, Mkt Cap USD6.5b, CMP INR346, TP INR460, 33% Upside, Buy)

 

Marico (MRCO) released its pre-quarterly update for the quarter ended Mar’19. Key highlights:

• The demand environment remained stable in 4QFY19 with good offtake growth. Rural traction remained intact, exceeding urban growth in the traditional channel. Newer channels (modern trade and e-commerce) are growing robustly. Even CSD has now stabilized, but some slowdown was observed in the wholesale channel, specifically in the month of Mar’18, the reason for which was not mentioned.
• Domestic volume trend in 4QFY19 was in line with the near-term outlook. Parachute (36% of India business) continues performing well, while VAHO (26% of India business) has had a weak quarter. As guided by management in the 3QFY19 earnings call, Saffola edible oils (18% of India business) exhibited signs of a recovery led by marketing initiatives during the quarter, but the company remains cautiously optimistic in the near term.
• Key international regions Bangladesh (45% of international business) and Vietnam performed well. Thus, despite the subdued performance of other markets, the international business witnessed decent growth.
• There were no comments on growth in MRCO’s relatively new portfolios (Premium Hair Nourishment, Male Grooming and Healthy Foods).
• Operating margins in 4QFY19 are likely to improve moderately, led by easing input costs pressures and operating leverage. Notably, latest data on copra price (Feb’19) indicate some easing from a bit of a move up in Jan’19. Management had earlier highlighted that it expects a 15-20% cost decline in copra costs from the flush season, starting Mar’19.