RESULTS REVIEW 1QFY19 04 AUG 2018 Marico BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Last quarter of pain Marico reported an in-line quarter, marked with the end of margin pressure in this copra cycle. Net revenues grew by 20% YoY to Rs 20.3bn (exp. 17%). We anticipated margin pressure owing to copra inflation, partially offset by rationalization of ASP and other expenses. EBITDA/PAT grew by 9/10% (exp. 6/8%). India business (78% of total) grew by 23/12% value/volume driven by a favourable base (-4/-9%) and price hike in Parachute oil (PCNO). It is encouraging to note that PCNO volumes grew by 9% despite 29% price hike, which highlights the strength of the brand. We are cognizant of our ‘aggressive’ estimates (no change in estimates) vs. consensus and believe that with management’s positive commentary, copra deflation and macro recovery, the street will revise their estimates. Our bullishness on Marico is driven by (1) Judicious price cuts during a copra deflationary scenario to revive margins, (2) Aggressive product launches, (3) Opportunity for higher adv. spend during copra deflation to boost volumes, (4) Recovery in trade channels, (5) Corrective action for Saffola portfolio (gradual recovery), (6) VAHO to gain momentum (launch of Rs 10 LUP), (7) Improving consumption dynamics and (8) Recovery in international business. We model full margin benefit from 3QFY19 onwards (price cuts will follow) and bake in EBITDA margin expansion of 180bps in FY19E. We model revenue/EBITDA/APAT CAGR of 15/24/25% over FY18-FY21E. We value Marico based on P/E of 35x Jun-20, and arrive at a TP of Rs 388 (earlier Rs 388). Maintain BUY. Highlights for the quarter Favourable base drove growth: Parachute Value/Vol grew by 38/9%, VAHO 12/15% and Saffola 9/10%. Rural/urban grew by 28/16% in value term. International grew by 9% (-1% in 1QFY18). Marico launched variants in their foods portfolio (~Rs 1.5bn) and is guiding for gaining scale (Rs 2bn in FY20) and more launches in the near term. Last quarter of pain: Gradual price hike for PCNO vs. copra inflation led to 554bps GM decline to 42.3%. ASP and other expenses (% of sales) declined by 157bps and 134bps. Hence, EBITDA margin was down by 182bps YoY to 17.5% (exp. 17.5%). Lower taxes (85bps) led to PAT growth of 10% to Rs 2,557mn (exp. Rs 2,496mn) Near-term outlook: Softening copra prices would result in healthy earnings in the coming quarters and a possible re-rating in the stock. Financial Summary (Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) FY17 FY18 FY19E FY20E FY21E Net Sales 20,268 16,815 20.5 14,801 36.9 59,178 63,222 73,967 84,682 96,274 EBITDA 3,549 3,251 9.2 2,523 40.7 11,593 11,378 14,674 18,524 21,514 PAT 2,557 2,320 10.2 1,806 41.6 7,986 8,145 10,571 13,710 15,986 Diluted EPS (Rs) 1.98 1.80 10.2 1.40 41.6 6.19 6.31 8.19 10.62 12.38 P/E (x) 56.9 55.8 43.0 33.1 28.4 EV / EBITDA (x) 39.1 40.0 31.0 24.5 21.1 Core RoCE (%) 49.3 40.6 46.2 56.7 62.5 Source: Company, HDFC sec Inst Research INDUSTRY FMCG CMP (as on 03 Aug 2018) Rs 352 Target Price Rs 388 Nifty 11,361 Sensex 37,556 KEY STOCK DATA Bloomberg MRCO IN No. of Shares (mn) 1,290 MCap (Rs bn)/(US$ mn) 454/6,605 6m avg traded value (Rs mn) 559 STOCK PERFORMANCE (%) 52 Week high / low Rs 375 / 284 3M 6M 12M Absolute (%) 10.8 15.4 7.8 Relative (%) 5.1 9.4 (6.7) SHAREHOLDING PATTERN (%) Promoters 59.71 FIs & Local MFs 5.86 FPIs 27.76 Public & Others 6.67 Source : BSE Naveen Trivedi [email protected]+91-22-6171-7324 Siddhant Chhabria [email protected]+91-22-6171-7336
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BUY Last quarter of pain - HDFC securities - 1QFY19 - HDFC...Last quarter of pain Marico reported an in-line quarter, marked with the end of margin pressure in this copra cycle. Net
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RESULTS REVIEW 1QFY19 04 AUG 2018
Marico BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Last quarter of pain Marico reported an in-line quarter, marked with the end of margin pressure in this copra cycle. Net revenues grew by 20% YoY to Rs 20.3bn (exp. 17%). We anticipated margin pressure owing to copra inflation, partially offset by rationalization of ASP and other expenses. EBITDA/PAT grew by 9/10% (exp. 6/8%). India business (78% of total) grew by 23/12% value/volume driven by a favourable base (-4/-9%) and price hike in Parachute oil (PCNO). It is encouraging to note that PCNO volumes grew by 9% despite 29% price hike, which highlights the strength of the brand. We are cognizant of our ‘aggressive’ estimates (no change in estimates) vs. consensus and believe that with management’s positive commentary, copra deflation and macro recovery, the street will revise their estimates. Our bullishness on Marico is driven by (1) Judicious price cuts during a copra deflationary scenario to revive margins, (2) Aggressive product launches, (3) Opportunity for higher adv. spend during copra deflation to boost volumes, (4) Recovery in trade channels, (5) Corrective action for Saffola portfolio (gradual recovery), (6) VAHO to gain momentum (launch of Rs 10 LUP), (7) Improving consumption dynamics and (8) Recovery in international business.
We model full margin benefit from 3QFY19 onwards (price cuts will follow) and bake in EBITDA margin expansion of 180bps in FY19E. We model revenue/EBITDA/APAT CAGR of 15/24/25% over FY18-FY21E. We value Marico based on P/E of 35x Jun-20, and arrive at a TP of Rs 388 (earlier Rs 388). Maintain BUY.
Highlights for the quarter Favourable base drove growth: Parachute Value/Vol
grew by 38/9%, VAHO 12/15% and Saffola 9/10%. Rural/urban grew by 28/16% in value term. International grew by 9% (-1% in 1QFY18). Marico launched variants in their foods portfolio (~Rs 1.5bn) and is guiding for gaining scale (Rs 2bn in FY20) and more launches in the near term.
Last quarter of pain: Gradual price hike for PCNO vs. copra inflation led to 554bps GM decline to 42.3%. ASP and other expenses (% of sales) declined by 157bps and 134bps. Hence, EBITDA margin was down by 182bps YoY to 17.5% (exp. 17.5%). Lower taxes (85bps) led to PAT growth of 10% to Rs 2,557mn (exp. Rs 2,496mn)
Near-term outlook: Softening copra prices would result in healthy earnings in the coming quarters and a possible re-rating in the stock.
As % Of Net Revenue 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) FY18 FY17 YoY (bps) Material Expenses (% of Net Sales) 57.7 52.2 554 53.4 436 53.0 47.8 521 Employee Expenses (% of Net Sales) 5.7 6.5 (80) 7.0 (133) 6.7 6.8 (15) A&P Expenses (% of Net Sales) 8.2 9.7 (157) 7.9 24 9.3 11.0 (174) Other Expenses (% of Net Sales) 10.9 12.3 (134) 14.7 (373) 13.1 14.8 (172) EBITDA Margin (%) 17.5 19.3 (182) 17.0 47 18.0 19.6 (159) Tax Rate (%) 26.0 26.8 (85) 26.0 (2) 25.9 29.4 (345) APAT Margin (%) 12.6 13.8 (118) 12.2 41 12.9 13.5 (61) Source: Company, HDFC sec Inst Research
Consol. revenues in 1QFY19 grew by 20% supported by a favourable base (-4% in 1QFY18) Overall volumes grew by 10% (-7% in 1QFY18) India/International business grew by 23/9% aided by a favourable base (-4/-1%) Copra inflation during 1QFY19 was up 42% YoY and -6% QoQ. The mgt has taken insufficient price hikes as a result gross margins were down 554bps Lower A&P spend and other expenses resulted in 182bps EBITDA margin contraction
MARICO : RESULTS REVIEW 1QFY19
Page | 3
Quarterly Segmental Year to March (Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) FY18 FY17 YoY (%) Segmental Revenues Domestic 16,280 13,280 22.6 11,569 40.7 49,695 45,796 8.5 International 3,990 3,650 9.3 3,232 23.4 13,642 13,493 1.1 Total 20,270 16,930 19.7 14,801 37.0 63,337 59,289 6.8 Segmental EBIT Domestic 2,980 2,750 8.4 2,398 24.3 10,036 10,590 (5.2) International 790 740 6.8 340 132.6 2,104 1,987 5.9 Total 3,770 3,490 8.0 2,738 37.7 12,140 12,577 (3.5) Capital Employed Domestic 13,110 10,280 27.5 13,013 0.7 13,110 10,280 27.5 International 7,170 6,290 14.0 7,475 (4.1) 7,170 6,290 14.0 Total 20,280 16,570 22.4 20,488 (1.0) 20,280 16,570 22.4 Source: Company, HDFC sec Inst Research EBIT Margin Year to March (Rs mn) 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) FY18 FY17 YoY (bps) EBIT Margin (%) Domestic 18.3 20.7 (240) 20.7 (242) 20.2 23.1 (293) International 19.8 20.3 (47) 10.5 929 15.4 14.7 70 Total 18.6 20.6 (202) 18.5 10 19.2 21.2 (205) RoCE (%) Domestic 90.9 107.0 (16) 73.7 17 306.2 412.1 (106) International 44.1 47.1 (3) 18.2 26 117.4 126.4 (9) Total 74.4 84.2 (10) 53.4 21 239.4 303.6 (64) Source: Company, HDFC sec Inst Research Business Performance Value Growth (%) 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Total 7 7 0 (1) (7) 2 (4) 6 15 12 20 India 7 4 (1) (3) (9) 6 (4) 12 19 12 23 International 9 16 6 5 - (8) (1) (8) 1 13 9 Source: Company, HDFC sec Inst Research
Domestic growth was primarily driven by PCNO value growth (copra inflation) International business continued to recover with 7% cc growth on a modest base of 6% International margins were under pressure due to input cost pressures in Bangladesh
Heartening to see Parachute volumes grew by 9% despite ~28% price hike. Reflects the strength of the brand Premiumisation journey for VAHO continues Saffola is expected to recover to historical levels by the end of FY19 More than 90% of the portfolio gained market share
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Domestic EBIT Margin Change International EBIT Margin Change
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Parachute (Rigid pack),
28
VAHO, 20Saffola , 14
International , 22
Others, 16(%)
Bangladesh, 45
MENA, 14
South Africa, 9
South East Asia, 26
Others, 6(%)
Bangladesh non-coconut portfolio (26% mix) grew by 50% in cc terms while PCNO witnessed a flattish quarter (mature market) South East Asia remained muted owing to flattish growth in Vietnam (foods biz declined). Mgt. maintains positive near term outlook MENA region (14% Int. mix) has rebounded strongly in the recent quarters. However, macros continue to be tough. Mgt maintains cautiously optimistic outlook
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MARICO : RESULTS REVIEW 1QFY19
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Urban Growth (YoY) Rural Growth (YoY)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Modern Trade Growth (YoY) CSD Growth (YoY)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Rural demand was the bright spark in Marico’s performance Modern trade is now 11% of domestic turnover, and continues to grow in high double digits CSD (7% of domestic turnover) rebounded with 15% growth
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MARICO : RESULTS REVIEW 1QFY19
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Change in Raw Material Prices Change in Product MRP
Note: Jun-18 prices are indexed to 100 Source: Company, HDFC sec Inst Research
Note: Jun-18 prices are indexed to 100 Source: Company, HDFC sec Inst Research
Copra Inflation (YoY %) Gross Margin Change
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Price hikes for Parachute have been steep owing to copra inflation Saffola price cuts are owing to benefits passed on from input tax credit and GST Copra prices are down 19% from their peak in Jan-18. We expect copra deflation to gain pace in 2HFY19
140 142
126 118
112 122
80
100
120
140
160
180
Cochin Coconut
OIL
Copra Calicut
Kardi Oil Jalna
Rice Bran Liquid Paraffin
HDPE
Jun-17 Jun-18
100
122 127
102 96 98 98
80
90
100
110
120
130
PCNO -50 ml
PCNO -100 ml
PCNO -250 ml
Saffola Total
Saffola Tasty
Blend -1ltr
Saffola Gold -
1ltr
Saffola Active -
1ltr
Jun-17 Jun-18
-60%-40%-20%
0%20%40%60%80%
100%120%140%
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MARICO : RESULTS REVIEW 1QFY19
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Assumptions Year to March (Rs mn) FY17 FY18 FY19E FY20E FY21E Revenue Growth (%) Domestic Business (2.1) 9.3 17.5 14.6 13.6
IBD (0.5) (0.5) 15.0 14.0 14.0 Gross Margin (%) 52.2 47.0 48.7 49.7 50.4 ASP (% of sales) 11.0 9.3 9.0 9.4 9.5 Distribution (% of sales) 4.0 3.8 4.0 4.0 4.0 EBITDA Margin (%) 19.6 18.0 19.8 21.9 22.3 Tax Rate (%) 29.4 25.9 27.1 26.5 26.5 Source: Company, HDFC sec Inst Research Change in Estimates
FY19E FY20E FY21E
New Old Chg (%) New Old Chg (%) New Old Chg (%) Sales 73,967 73,734 0.3 84,682 84,525 0.2 96,274 95,942 0.3 EBITDA 14,674 14,658 0.1 18,524 18,617 (0.5) 21,514 21,692 (0.8) PAT 10,571 10,677 (1.0) 13,710 13,793 (0.6) 15,986 16,133 (0.9) EPS 8.2 8.3 (1.0) 10.6 10.7 (0.6) 12.4 12.5 (0.9) Source: HDFC sec Inst Research
Management guided for 8-10% volume growth for the domestic business in the medium term and 10-12% cc growth for international business Margin pressure to reduce in 2HFY19 We bake in higher ASP spend in the medium-long term to support new product launches
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target 3-Aug-17 326 NEU 340 10-Oct-17 314 NEU 343 1-Nov-17 315 NEU 343
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