Marico

Recovery on cards, high volume growth ahead – Marico

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 9 points lower at 17,354. KOTAKBANK (+3.6%), POWERGRID (+1.8%), and GRASIM (+1.6%) were the top gainers on the index while DIVISLAB (-2.4%), NESTLEIND (-2.4%), and WIPRO (-1.7%) were the top losers for the day. Among the sectoral indices, BANK (+0.8%), PRIVATE BANK (+0.7%), and CONSUMER DURABLES (+0.7%) were the top gainers, while IT (-0.8%), MEDIA (-0.6%), and AUTO (-0.5%) were the laggards.

Excerpts of an interview with Mr. Saugata Gupta, MD, and CEO at Marico on CNBCTV18, dated 07th September 2021:

  • Marico’s portfolio is concentrated on items of daily use, which saw a faster recovery in June itself. The entire FMCG sector is witnessing volume recovery due to its inherent nature and the company expects 8-10% volume growth for H2FY22. 
  • The company expects a muted 3rd wave if it occurs on the back of rapid vaccinations and an adequate monsoon which will help demand to improve significantly.
  • The only issue that the company expects to face is rising inflation in its input costs. However, the company believes this won’t persist beyond Q3FY22 and that it will see an eventual softening in raw material prices.
  • The company expects that it’ll meet its revenue targets of Rs. 4.5-5 bn in FY22 and double them to Rs. 8.5-10 bn by FY24 on the back of strong growth drivers like diversification and premiumisation. 
  • The company is on track to meet its diversification targets, with the discretionary food segment demonstrating robust recovery. Now the company plans to focus on premiumisation in Personal Care and digital brand growth.
  • Digital Brands are an important segment for the company. Its recent acquisition of Beardo Brand is now fully integrated, and the company plans to expand into a couple of more digital brands either organically or inorganically.
  • The worst margin pressure for the company is over as Copra prices (a key raw material for the company) have settled down. The company expects vegetable and other oil prices to cool off towards Q3FY22 and EBITDA margins to reach a comfortable 19-20% level.

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With an expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio, brand awareness with consumers, and a focus-induced approach to premiumisation which it can leverage to expand volumes to grow further and deliver value to shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹563/- as of 08-September-2021.  It traded at 56x/47x/40x the EPS estimates of ₹10/ 12/ 14  for FY22E/23E/24E.
  • The consensus price target is ₹ 600/- which trades at 43x the EPS estimate for FY24E of ₹ 14/-

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.”

 

Volume recovery on cards, Margins to improve in H2FY22: Marico

Update on Indian Equity Market:

On Tuesday, markets ended higher with Nifty closing 246 points to close at 16,130. TITAN (+4.0%), HDFC (+3.8%), and INDUSINDBK (+3.5%) were the top gainers on the index while JSWSTEEL (-0.8%), SHREECEM (-0.3%), and BAJAJ-AUTO (-0.3%) were the top losers for the day. Among the sectoral indices,  FMCG (1.7%), FINANCIAL SERVICES (1.7%), and AUTO (1.6%) were the top gainers, while MEDIA (-0.8%), METAL (-0.1%) were the only losers.

Excerpts of an interview with Mr. Saugata Gupta, MD & CEO, Marico on CNBCTV18 dated 2nd August 2021:

  • 1QFY22 began with the momentum that was handed over from the last quarter of FY21. May sales were affected due to the 2nd wave of lockdown. Recovery was seen in June, and supply-side issues are slowly improving.
  • Growth rates are improving drastically in the South, which is the company’s stronghold. Barring major disruptions, the company expects to deliver 8-10% volume growth.
  • Gross margins declined both sequentially and YoY. This was due to raw material costs pressure, both in copra and vegetable oil-based products. The company took price hikes which resulted in less pressure on margins.
  • The company expects Copra prices to come down and some deflationary easing on margins and hopes to record 19%+ margins for the rest of the year. 
  • The company makes lower gross margins in the food business and expects margins to improve with scale. The company expects volumes to grow in soya, honey and oodles, and add around 100 crores to the top line.
  • The company’s focus is to add volume growth and expects margins to grow with scale. However, the company expects more product diversification over the next 4-5 years.

 

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio and brand awareness with consumers which it can leverage to expand volumes to grow further and deliver value to shareholders.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹544/- as of 03-August-2021.  It traded at 54x/45x the EPS estimate of ₹10/₹ 12 for FY22E/23E.
  • The consensus price target is ₹ 560/- which trades at 47x the EPS estimate for FY23E of ₹ 12/-

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.”

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 28th 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.”