Stock corner: Doubts over volume growth; downgrade Marico to ‘neutral’

Consolidated gross margin expanded 560 bps y-o-y to 49.6%.

Marico’s Q2FY20 consolidated net sales declined 0.4% year-on-year to Rs 1,830 crore (v/s est Rs 2,000 crore). Domestic revenue decreased ~3% y-o-y with volume growth of only 1%. Consolidated Ebitda grew 15.7% y-o-y to Rs 350 crore (v/s est Rs 350 crore). PBT grew 16% to Rs 340 crore (v/s est Rs 340 crore). Adjusted PAT rose 17.1% y-o-y to Rs 250 crore (v/s est Rs 250 crore).

H1FY20 sales/Ebitda/PAT grew 3.4%/ 21.3%/ 23.1% y-o-y.

Consolidated gross margin expanded 560 bps y-o-y to 49.6%. Ebitda margin expanded 270 bps y-o-y to 19.3% (v/s est 17.7%) in the quarter as the company actively invested in brand building.

Volume growth was muted across all segments, with Parachute declining 1%, 1% growth in Saffola and flat volumes for VAHO. Constant currency growth internationally was 9%.

Some conference call highlights are as follows: Seeing slowdown in some pockets on upgrading from the unorganised to the organised sector; also, there has been down-trading in some pockets in the organised sector due to a weak operating environment; FITTIFY, Coco Soul, Kaya Youth, Parachute Advanced Aloe Vera Oil and Dry Fruit Oil are likely to attain critical mass by the year-end; immediate consumer sentiment continues to be weak.

Valuation & view: While the management had guided for sharp sequential demand deterioration in Q2FY20, the decline in volume growth momentum to 1% (with unclear outlook going forward) was a negative surprise.

Three factors underpinned our investment case on Marico, which include, better volume visibility compared with peers; strong pipeline of new products, which could potentially alter pace of medium-term growth; and decline in Copra costs, which will lead to a sharp pick-up in earnings.

However, after Q2FY20, volume visibility is not superior to peers and the best of Copra cost reduction is behind them. After the healthy stock performance over the past year, valuations are fair at 40.5xFY21 EPS, no longer at a material discount to peers.

While we are enthused by the critical mass likely to be attained by a few new brands, fair valuations lead to a downgrade in our recommendation to ‘neutral’.