Choosing volume over short-term margins – Marico
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Choosing volume over short-term margins – Marico
Edited Excerpts of an interview with Mr. Saugata Gupta, Chief Executive Officer and Managing Director, Marico with ETNOW on 29th Oct, 2021:
- There was a pipeline filling as the opening up happened last year and this year. Slight moderation of growth in rural areas was witnessed. Exponential growth was witnessed in e-commerce earlier. As things have opened up, modern trade is recovering as some of the demand is getting transferred to organised modern trade.
- Inflation is a cause of concern because of two factors:
- It leads to price increases and impacts the total share of wallet for an FMCG.
- It affects demand. There has been a slight moderation in demand which was seen towards the second half of 2QFY22.
- The company has already experienced significant inflation in FY21 as a large portion of input cost was copra led. Now that has moderated.
- Marico had significant pressure even in the 1QFY22 but now from 2QFY22 onwards, gross margins are improving QoQ.
- Company will continue to see gross margins improving in 2HFY22E. Marico is expecting moderation from both vegetable oils and crude based raw materials which is more likely to happen in 4QFY22E.
- Once the input costs normalize, EBITDA margins are expected to start improving from 4QFY22E.
- Company should be able to get back to medium term aspirations from 1QFY23E.
- Considering continued inflation and price increases, company will choose volume over short-term margins. Continued inflation could have some impact on the consumption situation. But some moderation is expected to start happening in the 4QFY22E.
- In India business, 24% value growth and 8% volume growth was seen in 2QFY22. So, 16% was inflation. Company is in wait and watch mode. The biggest uncertainty for the company is crude as crude impacts raw material and packaging costs. The only reason there could be further price hikes could be because of crude.
- In the immediate term, company has taken some price increases. So, another round of price increases is not expected at least in 3QFY22E. 15% price increase has already been taken in Saffola because of the significant increase in vegetable oil prices.
- In 2QFY22 rural growth was slightly higher than urban but currently company is witnessing moderation of rural growth. It could be because of inflation or pent-up demand of other non FMCG categories as the economy is now opened up.
- Marico is looking for organic and inorganic growth both. Beardo is expected to touch Rs 1000 mn by Dec-21. If Just Herbs continued its momentum of growth, it will be a potential Rs 1,000 mn core brand. Company aims to grow more from organic stable.
- Marico is a supportive and strong strategic partner in the growth of these brands in terms of supporting capabilities and other things. But it still will continue to look at inorganic opportunities in this sector.
Asset Multiplier Comments
- We think the new engines of growth i.e. food portfolio and digital first brands are tracking well. As the prices of copra is normalizing, we expect margins improvement going forward.
- Management’s guidance of double-digit topline growth and improvement in gross margins going forward will help company to earn good returns.
Consensus Estimate (Source: market screener websites)
- The closing price of Marico was ₹ 574/- as of 01-Nov-21. It traded at 56.5x/47.9x/42.1x the consensus EPS estimate of ₹ 10.1/11.9/13.5 for FY22E/ FY23E/FY24E respectively.
- The consensus target price of ₹ 601/- implies a PE multiple of 44.5x on FY24E EPS of ₹ 13.5/-.
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