We are dipping our toes into the health and hygiene segment: Marico CEO

Update on the Indian Equity Market:

On Thursday, Nifty ended April higher at 9,860 (+3.2%). The top gainers for Nifty 50 were Tata Motors (+19.9%), UPL (+14.5%) and ONGC (+13.1%) while the losing stocks for the day were Sun Pharma (-2.4%), HUL (-1.2%) and Cipla (-1.0%). Sectoral gainers were Metal (+7.9%), Auto (+6.4%) and IT (+5.1%). The worst performing sectors were Pharma (-0.6%) and Media (-0.5%).

Edited excerpts of an interview with Mr Saugata Gupta, MD & CEO of Marico Ltd.; dated 28^th April 2020. The interview was published in Retail ET.com.

• Significant changes in terms of shopping and consumption habits expected in next financial year according to Mr Saugata Gupta.
• He said things have started improving. With a lot of permissions, advisories and clarifications from the Central Government and Ministry of Home Affairs, things have started to streamline.
• Most of the factories are operational for the Company but with the reduction in labour force, the supply chain is still to be settled.
• In sum of the parts (SOTP) breakdown, there is enough demand for the food part as per the Company but there are supply-chain issues.
• The premium category of the portfolio, which is discretionary in nature, forms a significantly smaller part of Marico’s portfolio which hardly makes a difference to the Company in terms of demand and supply.
• The Company has started to explore opportunities in the health and hygiene products. Recently the Company has launched sanitizers in this category. They might also look for opportunities in some new areas in foods as well.
• In a post Crisis world, Mr Gupta sees a significant change in the consumption basket. A certain part of the Company’s portfolio will be challenged; at the same time there are opportunities to be tapped in some other part of the portfolio.
• Post crisis, there will be a significant movement into staples, health and hygiene, immunity and items of daily consumption. There will also be a shift to safety into known brands. Therefore leader brands will have to take pole position and gain market share, especially those with strong distribution and equity.
• There will be a significant shift from out-of-home consumption to in-home consumption. Therefore, even things like ready-to-eat, ready-to-cook products are likely to be consumed far more. One of the things that happened during the crisis outbreak was that people with comorbidities or conditions like diabetes were more affected by the infection. So, people are likely to take health and hygiene far more seriously, as per Mr. Gupta.
• Consumption is likely to get impacted in sectors like eating out, entertainment, travel, home improvement and autos as people will spend less on them.
• There will be a significant opportunity at the bottom of the pyramid and down trading will be more prevalent as people could have less disposable income in the immediate quarters post the crisis. So, pricing and providing value to the consumer will be extremely important for the Companies.
• Marico have been extremely aggressive in terms of cutting extra cost like travel. Company has cut down on out-of-home advertising and some part of A&P. The Company has enough opportunities for cost rationalisation. There will be no loss of jobs and will support the third party ecosystem in terms of payment on time to protect their cash situation and working capital.
• To get back into a 100% business, it will take some time after the lockdown gets relaxed. So, the ramp up will be gradual because it is not just raw material, it is a question of supply chain trucks as well. Raw materials and logistics availability both go hand in hand. In any case, the Company will continue to maintain social distancing and strict controls in their factory and therefore will have to work with a lower percentage of people and rotating those people as and when things open up fully.
• FMCG is the category which is based on economic growth. It is based on increasing penetration and there could be some short term hiccups. But he doesn’t think there is anything to concern in this industry. Market leaders with distribution networks, strong brands and who have shown fragility and resilience in these times will emerge stronger.
• The fringe players who have immediate working capital concerns, weaker brand equity, inability to invest in automation and digital and new ways of doing work, might suffer in the short term.
• There are huge opportunities and therefore in a lot of categories, one will see a V-shape recovery.

Consensus Estimate: (Source: market screener website)

• The closing price of Marico Ltd was ₹ 287/- as of 30-April-2020. It traded at 35.0x/ 32.3x/ 28.8x the consensus EPS estimate of ₹ 8.2/ 8.9/ 9.9 for FY20E/ FY21E/ FY22E respectively.
• The consensus target price of ₹ 342/- implies a PE multiple of 34.3x on FY22E EPS of ₹ 9.9/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”