Maintain ‘buy’ on Marico with target price at Rs 440

Marico’s (MRCO) 2QFY21 earnings were largely in line, barring the 11% volume growth (v/s estimated 7.3%). Over the past year, MRCO has witnessed remarkable recovery in its key segments — Parachute, Saffola and more recently in case of VAHO. Importantly, the outlook remains strong with guidance of 8-10% volume growth in 2HFY21 as well. While the stock is up 40% since our upgrade in March 2020, robust sales outlook and inexpensive valuations (37x FY22E, 20% discount to peer average), results in us maintaining ‘buy’ rating.

MRCO’s 2QFY21 consolidated net sales grew 8.7% y-o-y to Rs 19.9billion (in-line). Consol. Ebitda grew 10.2% y-o-y to Rs 3.9 billion (in-line). PBT grew 10.3% y-o-y to Rs 3.8 billion (in-line). Adjusted PAT grew 20.2% y-o-y to Rs 3 billion (v/s estimated Rs 2.6 billion).

Consolidated gross margin contracted by 160 bps y-o-y to 48% (v/s estimated 48.8%). The company had lower A&P expenses as % of sales (down 130 bps y-o-y to 9.5%; absolute A&P spends -4.1% y-o-y) as well as lower other expenses (down 60 bps y-o-y to 12.1%). Staff cost remained flat y-o-y at 6.9%. This led to Ebitda margin expansion of 30 bps y-o-y to 19.6%.

Domestic revenue/volumes grew 8%/11% y-o-y (v/s estimated 7.3% domestic volume growth). Within the domestic business, Parachute Rigids’ volume grew 10% y-o-y, VAHO volumes grew 4% and Saffola’s (Refined Edible Oils) volumes were up 20%.

1HFY21 sales declined 2% y-o-y whereas Ebitda/PAT grew 5.2%/10.8%. MRCO’s secondary growth tracked ahead of robust primary volume growth of 11% y-o-y in 2QFY21. Within the coconut oil segment, MRCO enjoys market share of over 60%/ 46% in urban/rural. It continues to gain market share in both segments, especially rural. Management expects 5-7% volume growth over the next 8- 10 years, before tapering off as is the case in Bangladesh. MRCO is targeting 8-10% volume growth in 2HFY21.  Ad spends at 9.5% of sales is almost back to pre-Covid levels.