Q1FY24 Review: Marico: Significant margin expansion

31 Jul 2023 , 10:57 AM

Marico reported a revenue decline of 3% YoY (volume growth of 3%), led by significant price cuts taken in the Saffola edible oils portfolio. Trade scheme rationalisation led to volumes declining 2% in Parachute and a flat value growth in VAHO. Gross margin expanded YoY and sequentially, on account of decline in raw material prices and favourable portfolio mix. With input cost being benign, analysts of IIFL Capital Services expect 220bps margin expansion in FY24. Analysts of IIFL Capital Services upgrade their EPS estimates by 3%/5% for FY24/25 and maintain ADD rating with a target price of Rs615. 

Subdued volume growth: 

Overall revenue growth for Marico declined 3%, with volume growth remaining subdued at 3% (vs 5% in Q4) in the domestic business led by: a) Destocking by trade in Saffola oils, owing to a sharp fall (~30%YoY) in vegetable oil prices. b) Trade scheme rationalisation in Parachute and VAHO to correct the historical Q1 revenue skew. Parachute revenues decreased 5%YoY (2% volume decline), while VAHO revenues remained flat YoY. In terms of value, Saffola franchisee declined by 13% with edible oil volumes falling in low-double digits on a negative base. 

Gross margins expand:

In Q1, gross margin for Marico expanded 494bpsYoY and 257bps sequentially. Mgmt has revised its gross-margin expansion guidance upwards to ~250-300bps in FY24 (vs 200-250bps earlier), with input cost tailwinds and a favourable portfolio mix. Foods portfolio saw a growth of 24% YoY. Share of revenue of Foods, premium personal care and digital first brands has increased to 15% in FY23 (11% in FY22); the company is targeting to move it closer to 20% of domestic business by FY24. To achieve this, it has forayed into plant-based nutraceuticals through strategic investment of Rs3.7bn for 58% stake in ‘Plix’ that has an annual revenue rate of Rs1.5bn. 

EPS upgrades: 

Analysts of IIFL Capital Services expect top-line growth to be in mid-single digits in the near term, due to the price corrections taken by the company in the past quarters. However, margins are expected to show significant expansion. They upgrade their EPS for FY24/FY25/FY26 by 3%/5%/6% and forecast an EPS Cagr of 14% over FY23-26, with improvement in Ebitda margins to 21%+ by FY25 (Vs. 18.7% in FY23). The stock trades at 43x FY25 EPS and analysts of IIFL Capital Services maintain their ADD rating with a TP of Rs. 615.