Marico – Improving working capital can accelerate value creation; reiterate privileged selection status – ICICI Securities

While the story of Indian FMCG’s value creation over the period 2010-2020 has been primarily driven by good earnings growth, we note cases (Emami and GSK Consumer) where accelerated value creation has been driven by improving working capital (WC) (and therefore a higher OCF / FCF). In this report, we highlight Marico’s story: she improved the WC from 30 days to 17 days in FY 21 through (1) rationalization of SKUs, (2) a new manufacturing footprint and automated systems, (3) lower debts and (4) tighter credit controls in general commerce. We believe this improvement is largely sustainable and model the 24-day and 23-day WC days in FY22e and FY23e. TO BUY; TP Rs550.

– Balance sheet induced value creation case studies: Emami and GSK-Consumer (now acquired by HUL) are two FMCG companies where improvement in OCF / FCF has resulted in value creation in the past. In fiscal 2004-fiscal 2015, Emami’s profit and market capitalization CAGR were 33% and 46% with a big jump in FCF. Likewise, GSK’s profit, FCF and market capitalization CAGR (for fiscal years 2004 to 2014) were 24%, 14% and 37%. See Figures 3-6. In addition, Emami and GSK’s RoCE improved to 44% and 50%, compared to 7% and 15% in fiscal year 2004-fiscal year 2014. We note that the improvement in working capital of GSK is assigned to new policies under the leadership of then CFO Ramakrishnan Subramanian (Subu).

– Marico’s value creation must be driven by both the improvement of the balance sheet and the income statement: we underline the improvement of the balance sheet at Marico thanks to the emphasis placed by management on the effectiveness of the fund. rollover – inventory (reduced inventory days from 18 days to 51 days in FY 21) focused on SKU rationalization, new manufacturing footprint and automated systems, reduced receivables (reduced receivables days from 9 days to 18 days in fiscal year 21) thanks to an order management system without manual intervention and stricter credit control in general trade. That said, part of the reduction in working capital was due to (1) a lower share of modern commerce and the canteen store department (have higher receivables than general commerce) and (2) a decrease stocks of raw materials (especially copra) given the expectation of (some) correction in the price of inputs.

– Lighter system to help drive the NPD agenda. We believe that a lean distribution system (perhaps also improving the distributor’s return on investment) will give Marico the leeway to push its new products into GT. Some of the initial pull can potentially be seen in healthy foods (honey, chyawanprash, and soy chunks). Marico has already increased (1) direct distribution in rural and urban areas and (2) e-commerce share (8% contribution – among the highest of our coverage) to help new product development and premiumization .

– Marico also has P&L drivers – We model 12% and 21% profit growth in FY22e and FY23e through (1) continued market share gains in Parachute Coconut Oil, ( 2) a sustained recovery in value-added hair oils (VAHO) with all brands likely to grow in double digits, (3) continued growth momentum in saffola edible oils (increased penetration), (4) new launches in the healthy food portfolio (entry into broader categories like honey, chyawanprash, noodles etc – targeting Rs4 0.5 to 5 billion in sales in FY22 and 8 , 5 to 10 billion rupees by FY24) and (5) probably the most resilient international activities (compared to Dabur and GCPL) with low exposure to the Middle East (12%).

– Valuation and risks: Our profit estimates are unchanged; revenue modeling / EBITDA / CAGR PAT of 13/13/16 (%) on FY21-23E. Hold the BUY with a DCF based target price of Rs550 (Rs500 earlier). At our target price, the stock will trade at 45x the P / E multiple Mar-23E. The main downside risk is higher than expected copra price inflation and slowing demand.

Shares of MARICO LTD. was last trading on BSE at Rs.475.1 from the previous close of Rs. 470.95. The total number of shares traded during the day was 64,076 out of more than 2,098 trades.

The share hit an intraday high of Rs. 479.95 and an intraday low of 471.4. The net turnover during the day was Rs. 30,459,575.

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