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MOSL: MARICO (Neutral)-Results better than expectations, earnings outlook unclear

Marico: Results better than expectations, earnings outlook unclear

(MRCO IN, Mkt Cap USD5.7b, CMP INR315, TP INR332, 5% Upside, Neutral)

 

Brief view on results and stock

• Marico’s 3QFY20 results, particularly in terms of profitability, were better than the low guidance given in the company’s end of quarter press release.
• However, commentary has significantly worsened in recent months on all three erstwhile bastions of our investment case viz. (a) better volume visibility v/s peers, (b) sharp decline in material costs which is being utilized to fund much higher ad-spends, and (c) new product development, which is being scaled up at a significantly slower pace relative to expectations (according to management in the earnings call).
• Despite the stock declining 20% since our downgrade to Neutral, we maintain the stance owing to fair valuations. 

Positive surprise on gross margins leads to EBITDA beat

• 3QFY20 consol. net sales declined 2% YoY to INR18.2b (v/s est. INR18.4b). Overall volume growth stood at 2% YoY. EBITDA grew 6.9% YoY to INR3.7b (v/s est. INR3.5b). PBT grew 4.3% to INR3.6b (v/s est. INR3.3b). Adj. PAT rose 10% YoY to INR2.7b due to the lower tax rate (v/s est. INR2.4b). 9MFY20 consol. sales/EBITDA/PAT growth stood at 1.6%/16.4%/18.6% YoY.
• gross margin expanded 280bp YoY to 49.1%. EBITDA margin expanded 170bp YoY to 20.4% (v/s est. 19.2%) during the quarter.
• Domestic segmental performance: Parachute Rigid/ Saffola (Refined Edible Oil)/ VAHO volume growth stood at -2%/ 11%/ -7% and value growth stood at -5%/ 13%/ -17% YoY.