Marico rating – Buy: Margins are getting better for company Marico’s Q1FY23 pre-quarterly update indicated subdued demand trends (similar to Q4FY22), mirroring overall FMCG industry demand, which was impacted by high retail inflation exerting pressure on consumers’ wallets. Consolidated Q1FY23F revenue should grow c.1% y-o-y. While India volumes declined in mid-single digits y-o-y (2yr/3yr CAGRs of 7%/flat), we note this was largely due to lower volumes in the edible oil category (on a high base, lower in-home consumption and downtrading owing to high inflation). Excluding edible oils, India business experienced a marginal volume growth. Margins expand and getting better: Copra prices remained soft in Q1, leading to GPMs remaining flat q-o-q and improving y-o-y. Edible oil prices started to soften in end-Q1FY23 as global supplies began to ease, and should aid margin expansion in coming quarters. We estimate consolidated Q1FY23F revenue growth of c.1% y-o-y (vs Q1FY22: +31% y-o-y; Q4FY22: +7% y-o-y) and EBITDA/PAT growth of c.10%/6% y-o-y. We believe Marico will continue to invest in brand-building for its new launches, especially in digital-first/D2C portfolios and in core franchises. We expect A&P spending to increase y-o-y. Management expects operating margin (OPM) to improve y-o-y (Q4FY22 OPM: 16.0%, Q1FY22 OPM: 19.0%). Demand trends tepidConsolidated revenue: To grow marginally y-o-y. India business: Volume declined in mid-single digits y-o-y on a high Q1FY22 base of +21% y-o-y, mainly due to a sharp drop in Saffola edible oils, implying 2yr/3yr volume CAGR of c.7%/flat. Our Q1FY23F value growth:-4% y-o-y (2yr/3yr CAGR of 14%/3%; Q1FY22: +35% y-o-y). Our viewDespite near-term softness in rural consumption, we view Marico as a strong beneficiary of a resilient core, and significant future growth vectors in new/recovering categories. We expect it to gain from: 1) a resilient core Parachute coconut oil portfolio that benefits across input cost trends; 2) new future growth engines: digital-first portfolio (Beardo, Just Herbs, Coco Soul, Pure Sense – targeting c.Rs 5 bn sales by FY24) and foods (oats, noodles, honey, Chyawan Amrut, soya chunks, peanut butter, mayonnaise – targeting c.Rs 8.5-10 bn sales by FY24) that we expect to scale up, and 3) a gradual turnaround in personal care/ VAHO categories aided by a price correction at the bottom of the pyramid and supported by economic recovery.We maintain our Buy rating and TP of `625 with a FY22-24F EPS CAGR of 20%. The stock currently trades at a P/E of 36x Mar-24F EPS of Rs 13.8.
Retail inflation in milk was reported at 8.85% in May 2023. The milk inflation has remained elevated at over 6% since August 2022. Despite India being the largest milk producer since 1998, the commodity has been the second biggest factor after cereals such as rice and wheat in driving up retail inflation in the last fiscal.
Milk has the second highest weight in the food and beverages basket of the consumer price index at 6.61%, a notch lower than cereals and products with a 9.67% weight. Organised players, including Mother Dairy and Amul, hiked prices multiple times in the last one year citing higher fodder cost, robust demand and some impact due to reports of lumpy skin disease.
Industry sources said feed cost, which has a share of more than 65% in the cost of production of milk, has increased to Rs 20/kg from Rs 8 a year ago. The finance ministry in April had attributed the elevated milk inflation to a demand supply mismatch and said it could be one of the factors apart from volatile international crude oil prices and constrained supplies of milk would influence the country’s inflation trajectory.
“Milk production has been impacted by a lumpy skin disease infecting millions of cattle in late 2022,” the ministry said in the monthly economic review, adding that the vaccination drive against the disease is expected to curb the spread and immune the cattle against the skin disease.
According to official data, currently India is the world’s largest milk producer, and has a share of 23% in global milk production. For the first time in decades, the country’s milk production is likely to have stagnated in 2022-23 due to Lumpy Skin Disease in cattle across several states and the lagged effect of Covid-19 in the form of stunting of the animals, a senior official with department of animal husbandry and dairying recently had stated. The milk production was estimated at 221 million tonne in 2021-22.