Marico (MARLIM) CMP: | 546 Target: | 630 (15%) Target Period: 12 months BUY August 1, 2021 Saffola growth momentum continues… About the stock: Marico is one of the major FMCG companies present in hair oil, edible oil, foods & personal care segment. Major brands include Parachute, Saffola, Nihar, Hair & Care, Set Wet, Livon and Beardo. Particulars The company has an overall distribution network of more than 5 million Particulars (| crore) Amount outlets and direct reach of ~1 million outlets. Through its stockist network, Market Capitalization 70,503.0 it reaches 58000 villages Total Debt (FY21) 340.0 Cash and Investments (FY21) 1,572.0 Update Result With the high gross margins of ~47%, Marico is able to spend 10% of its EV 69,271.0 sales for advertisements to support new categories & products 52 week H/L (|) 552 / 333 Equity capital 129.0 Face value (|) 1.0 Q1FY22 Results: Marico reported robust revenue growth in Q1FY22 results. Shareholding pattern Sales were up 31.2% YoY with strong volume recovery and price hikes (in %) Sep-20 Dec-20 Mar-21 Jun-21 EBITDA was at | 481 crore, up 3.1% YoY, with margins at 19% Promoter 59.6 59.6 59.6 59.6 FII 23.7 24.2 24.0 25.0 Consequent PAT was at | 365 crore (down 5.3% YoY) DII 10.4 10.2 10.2 9.7 Others 6.3 6.0 6.2 5.7 What should investors do? Marico’s share price has given 84% return in the last five years (from | 297 in July 2016 to | 547 in July 2021). Price Chart We roll over FY24 numbers with expectations of a full recovery in all 600 20000 segments and stabilisation of commodity prices 15000 400 We continue to maintain our BUY rating on the stock 10000 200 5000 Target Price and Valuation: We value the stock at | 630 on ascribing 50x FY24 earnings multiple 0 0 Jul-19 Jul-17 Jul-18 Jul-20 Jul-21 Jan-18 Jan-21 Jan-20 Key triggers for future price performance: Jan-19 Marico NIFTY Retail Equity Research Equity Retail Robust growth in foods & edible oil portfolio led by tailwinds of healthy Recent event & key risks – eating habits & home cooking. Foods portfolio to clock | 500 crore in FY22 Acquired brand ‘Just Herbs’ in Market share gains in parachute given smaller, regional brands find it July 2021. This is one of the difficult to pass on sharp commodity price increase digital first brand Likely margin improvement given commodity prices are expected to cool- Key Risk: (i) Incessant off in H2FY22 commodity inflation to Investment in digital only brands. Aims to achieve | 450 crore sales by FY24 pressurise margins (ii) dismal ICICI Securities Securities ICICI growth in highly penetrated hair Alternate Stock Idea: Besides Marico, we like HUL in our FMCG coverage. oil category With synergistic benefits of acquired nutrition business, strong Research Analyst premiumisation trend & strong distribution, HUL would continue to grow the revenues at a sustainable pace Sanjay Manyal Value the business at 55x FY24 earnings. BUY with a TP of | 2,750 [email protected] Key Financial Summary 5 Year CAGR Key Financials FY20 FY21 (FY16 to FY21) FY22E FY23E FY24E CAGR (FY21-24E) Net Sales 7315.0 8048.0 6.0 9313.3 10000.5 10688.7 9.9% EBITDA 1469.0 1591.0 8.6 1795.2 2059.9 2245.0 12.2% EBITDA Margin % 20.1 19.8 19.3 20.6 21.0 Net Profit 1043.0 1199.0 10.6 1336.7 1486.2 1617.5 10.5% Adjusted Net Profit 1043.0 1199.0 10.6 1336.7 1486.2 1617.5 10.5% EPS (|) 8.08 9.29 10.36 11.52 12.54 P/E 67.6 58.8 52.7 47.4 43.6 RoNW % 34.5 36.3 38.4 40.4 41.7 RoCE (%) 41.0 39.6 42.8 46.6 48.3 Source: Company, ICICI Direct Research Result Update | Marico ICICI Direct Research Key takeaways of recent quarter Q1FY22 Results: Strong volume recovery; margin pressure temporary Revenue witnessed growth of 31.2% to | 2525 crore on the back of domestic sales growth of 34.8% & International sales growth of 17.8%. Domestic volume growth was 21% led by continued strong growth in Saffola despite high base & strong recovery in parachute & VAHO portfolio from low base Parachute segment witnessed sales growth of 20% led by 12% volume growth. The brand gained 80 bps market share in rigid pack. VAHO segment saw 35% sales growth backed by 34% volume growth. Saffola segment witnessed a growth of 60% on the back of volume growth of 24% Saffola edible oil growth was led by penetration (60%) and increase in consumption (40%). Foods portfolio saw 100% growth in Q1FY22 led by newly launched brands in honey, soya chunks and noodles category. Oats product grew 59%. The opportunity size in the existing category is ~| 5000 crore The company aims to grow its foods business to | 500 crore in current year. Newly launched Saffola Honey gained 25% market share on e-commerce channel & double digit market share in modern trade. Saffola Soya Chunks garnered the market share of 14% in modern trade. The company is expanding the products reach to East & North India With the sharp increase in copra, vegetable & crude derivative prices, the company took aggressive price hikes in the last six months. Saffola edible oil saw low double digit growth whereas foods business clocked 100% growth Marico aims to generate | 450-500 crore of sales by FY24 through digital first brand only. The company has invested in digital brands like Beardo, Pure Sense, Just Herbs & Coco Soul in Male grooming & Skin care products In the international business, Bangladesh business grew 9% in constant currency (CC). Vietnam business grew 16% in CC whereas South Africa & MENA regions saw growth of 52% & 74%, respectively, on a low base. Bangladesh & Vietnam started witnessing surge in Covid-19 cases. These countries were not impacted earlier Copra & rice bran oil prices remained elevated for most of the quarter. This resulted in gross margin contraction of 783 bps. However, copra prices have stared cooling off with the expected arrival of new crop. Moreover, the company took price hikes and withdrew promotions to partially pass on the commodity price increase With saving of 138 bps in overhead spends, 107 bps in employee spends & 19 bps in marketing spend, the company was partially offset the contraction of gross margins. Nonetheless operating profit grew at a slower pace of 3.1% to | 481 crore with operating margins contraction of 518 bps to 19%. Net profit dipped 5.3% to | 365 crore Marico expects gross margins to improve in the next few quarters given copra prices are down 13% sequentially and expected to remain at low levels in the near term. However, rice bran oil prices have remained elevated and are expected to remain volatile in near term. Crude derivatives like liquid paraffin & HDPE are likely to remain firm E-commerce channels witnessed 61% growth and are now contributing 9% to domestic sales. General trade channel grew 17% in both urban & rural regions The company aims to grow volume in the range of 8-10% with sustainable gains in market shares. In international business, Marico aims to grow in double digits ICICI Securities | Retail Research 2 Result Update | Marico ICICI Direct Research Exhibit 1: Peer Comparison CMP TP M Cap Sales growth (%) EBITDA Margins (%) P/E(x) RoE (%) RoCE (%) Sector / Company (|) (|) Rating (| Cr) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E Hindustan Unilever (HINLEV) 2334 2750 Buy 558687 18.4 16.0 7.8 25.0 25.6 26.2 70.2 58.7 52.8 17.1 20.0 21.6 18.9 25.6 27.7 Dabur India (DABIND) 601 620 Buy 94540 9.9 13.3 10.1 20.9 21.6 21.8 55.8 48.9 43.8 22.1 22.9 23.2 24.5 26.5 27.1 Tata Consumer (TATGLO) 756 725 Buy 60728 20.4 13.3 8.6 13.3 13.7 14.2 65.3 53.1 45.5 6.4 7.6 8.5 8.0 9.1 10.0 Marico (MARLIM) 546 630 Buy 70503 10.0 15.7 7.4 19.8 19.3 20.6 58.8 52.7 47.4 36.3 38.4 40.4 39.6 42.8 46.6 Source: Company, ICICI Direct Research Marico witnessed a strong sales recovery during the quarter with 21% domestic volume growth with slight impact of Covid-19 second wave. Moreover, price hikes to pass on sharp rise in commodity costs also supported sales growth. Though gross margins and subsequently operating margins were adversely impacted by high commodity costs, we believe copra prices have peaked in Q1FY22. We believe the company would be able to regain its operating margins by H2FY22. Moreover, the company has been able to garner market share from the unorganised players in parachute & VAHO category given high commodity prices have made it difficult for smaller & regional brands to pass on such commodity inflation. The newly launched products are gaining strong traction under Saffola brand. The company is leveraging its existing brands & tailwind in healthy foods habits to grow the category. We believe newer sub categories within foods, digital only brands would be driving the growth for the company in future. We remain positive on the company. We value the stock 50x FY24 earnings with the target price of | 630/share & BUY recommendation.