ICICI Direct’s research report on Marico
India business volumes witnessed muted growth of 5% YoY largely due to weakness in Saffola, non-core coconut oil and low end VAHO portfolio. Value growth of 12.8% for Q3FY19 was driven by price hike taken in Parachute portfolio to counter surge in copra prices over the last year. Parachute, VAHO and Saffola witnessed YoY volume growth of 9%, 7% and 2%, respectively While copra prices have corrected more than 23% YoY, inflation in crude derivatives and edible oil prices resulted in a 39 bps decline in gross margins. However, 20 bps & 55 bps saving in advertisement spend and overhead spend to sales, respectively, resulted in 20 bps improvement in operating margins to 18.8%.
Copra, which accounts for 40% of the company’s material costs, is a key raw material used to make coconut hair oil. Copra’s price declined ~39% in November 2018 (Rs 88/kg) from a peak of Rs 144/kg in January 2018. However, copra price rebounded to Rs 106/kg from lows due to cyclone in Tamil Nadu. Marico expects copra prices to fall once the ‘flush’ season begins in April-May resulting in margin improvement going forward. We expect Marico to report healthy Revenue and PAT CAGR of 15.1% and 15.7%, respectively, in FY18-21E. We estimate 9% & 7% volume CAGR for hair oil and edible oil categories, respectively. However, we change our rating to HOLD as domestic volume growth has been muted in the last few quarters in an environment where its FMCG peers are reporting double digit volume growth on the back of the government’s thrust on increasing farm incomes and higher election spend. We maintain our target price of Rs 400/share.
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