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MOSL: MARICO (Buy)-Strong earnings performance, favorable outlook reinforces positive view

MARICO: Strong earnings performance, favorable outlook reinforces positive view

(MRCO IN, Mkt Cap USD6.8b, CMP INR363, TP INR430, 19% Upside, Buy)

 

• Marico's 1QFY20 consol. net sales grew 6.9% YoY to INR21.7b (est. INR22.5b). Domestic revenue grew ~5.5% YoY led by volume growth of 6%. Cons. EBITDA grew 26% YoY to INR4.6b (est. INR4.6b). Adj. PAT surged 28.2% YoY to INR3.3b (est. INR3.4b).
• gross margin expanded 520bp YoY to 47.5%. Higher A&P expenses as % of sales (+190bp YoY to 10.1%; absolute A&P spends up 31.9% YoY), increase in employee expenses as % of sales (+20bp YoY to 5.9%) and lower other expenses as % of sales (down 10bp YoY) meant that EBITDA margin expanded 320bp YoY to 21.3% (est. 20.5%).
• Standalone Sales/EBITDA/adj. PAT grew 5.5%/23.8%/26.2%. EBITDA margin expanded 290bp YoY to 19.6%. Volume growth was 9%/ 7%/3% and value growth 8%/6%/11% respectively for Parachute (rigid), Saffola and VAHO respectively.  International business reported 7% CC growth (9% adjusted).
• Concall highlights: (1) High single-digits domestic volume growth is expected for the rest of the year; (2) Copra deflation may be closer to 20% in FY20 compared to 15-20% guided earlier;
• Valuation & View: Outlook remains strong with EPS growth prospects of ~20% CAGR over the next two years. Three factors provide high visibility, thus underpinning our confidence on earnings prospects, these include: (a) continued benign raw material environment over the next 12-15 months (Copra accounts for 40-50% of material costs; (b) Healthy domestic volume growth outlook in key segments; and with it the international business (unlike other FMCG peers) continuing healthy momentum; (c) Noteworthy traction is being witnessed on new product development. Targeting 40x Jun'21 EPS, we get a target price of INR430, 19% upside to the CMP. Maintain Buy.