MENU

Published on 3/08/2019 9:53:22 AM | Source: Motilal Oswal Services Ltd

Buy Marico Ltd For The Target Rs.435 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #FMCG #Broking Firm Views Report #Marico Ltd #Motilal Oswal #Quarterly Result

Now Get InvestmentGuruIndia.com news on WhatsApp. Click Here To Know More

Commodity costs continue to ease even further

According to latest data released by Marico (MRCO), we have prepared a report giving an update on Copra and other key commodities utilized by the company for the month and quarter ended Jun’19.

 

Copra Calicut average prices down 25.3% YoY in Jun’19 quarter

* Copra’s deflationary cycle is a key factor that underpins our confidence on the company’s earnings prospects, along with strong Parachute volume growth, VAHO sales growth and healthy momentum in new products.

* The raw material basket for Marico continued to see deflation for the fifth consecutive month. In Jun’19, Copra Calicut price was down 1.6% on MoM basis and Cochin Coconut oil was down 3.8% MoM.

* On an average basis for 1QFY20, Copra Calicut prices were down 25.3% YoY to INR96.6/kg and Cochin Coconut oil prices were down 23.6% YoY. Copra accounts for 40-50% of the raw material costs for Marico. Importantly, even other key commodities were down YoY during the quarter (LLP down 0.5% YoY and HDPE down 21.3% YoY).

* The decline in prices continued and was ahead of management’s expectation of 15-20% drop in copra costs for FY20 v/s FY19. We are already building in 400bp/240bp expansion in gross margin for 1QFY20/full-year FY20.

* During the quarter, company passed on some benefits of the deflation in raw material prices through a few minor price cuts and promotions in some part of the portfolio. For example: Parachute Coconut Oil pouch of 100ml saw a price cut of 5.9% to INR32, Parachute Jasmine price was reduced to INR42/90ml (- 4.5%), 9.1% cut in Nihar Naturals (from INR44 for 98ml to INR40 for 98ml), and Parachute Ayurvedic oil saw 14.8% cut (from INR135 per 190ml to INR115).

* Along with a benign raw material environment over the next two-three quarters, two other factors also underpin our confidence on Marico’s earnings prospects:

* Strong performance of Parachute volumes in recent quarters and healthy growth prospects in the VAHO segment,

* Good traction being witnessed on new product development.

* Moreover, with over 30% of sales coming from rural (management is targeting 40%), and particularly with its technological edge over peers, Marico is also becoming an interesting play on rural growth.

* Targeting 40x June’21 EPS, we get a target price of INR435, 20% upside to the CMP. From a medium-term perspective, particularly if the targeted 7-8% sales come in from new products, we believe that Marico is one of the few companies, which can give 50-60% returns over the next 2-3 years. Maintain Buy.

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

 

Above views are of the author and not of the website kindly read disclaimer