Dear Friends,
We are recommending Buy on our Actionable Ideas "Marico" as per following:-
CMP: Rs 333 Target: Rs 385 (15% Upside)
Key Points:
Marico: Stock update - Drop in copra prices to drive profitability (Reco. – Buy; TP – Rs385)
· Copra prices corrected by 30% from their high; OPM to improve substantially in H2FY2019: Copra prices have corrected by ~30% from their high and are currently trading at ~Rs. 100 per kg. The drop in copra prices can be attributed to subdued demand in domestic markets and better supplies in the new season (starts in April). Hence, despite risk on production due to Kerala floods, copra prices are expected to remain subdued in FY2019. Average copra prices for Marico are expected to remain flat in Q2FY2019, while they will substantially be lower in H2FY2019 due to high base of H2FY2018. Thus, we expect OPM to improve by 400-500 BPS in H2FY2019 in the backdrop of subdued copra prices.
· Kerala floods will have some impact on sales volumes; Dropping copra prices to aid profitability and strong PAT growth in Q2: Torrential rains followed by the flood will affect sales of consumer goods products in Kerala for some months, as distribution was affected by floods. We believe Marico's sales volume will have some impact of the same in Q2FY2019. Thus, we believe domestic sales volume growth would be in low-to-mid single digit in Q2FY2019. The price hike undertaken in Parachute rigid packs and dropping copra prices would aid OPM to improve by over 200 BPS in Q2FY2019. Operating profit and PAT are expected to grow upwards of 30% in Q2FY2019.
· Upgraded estimates and PT to Rs. 385: We have factored in a stark drop in copra prices in our earnings estimates. Hence, we expect FY2019 and FY2020 earnings estimates to grow by 3.7% and 2.5%, respectively. The gradual improvement in domestic volume growth and correction in copra prices would aid Marico to achieve strong earnings growth (22% CAGR) over the next two years. Marico is currently trading at 35x its FY2020 earnings, which is at a discount to some of the large FMCG stocks. Moreover, rupee depreciation against USD will have less impact on Marico's earnings as the company has natural hedge with foreign currency earnings being higher than expenses. Thus, stable valuations and correcting copra prices make Marico as one of our top picks in the FMCG space. We maintain our Buy recommendation on the stock with an upgraded price target (PT) of Rs. 385 (in-line with increased earnings estimates).
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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