Earnings grew by 19.5% yoy: Marico reported Q3 19/20 NPAT of BDT619.8 mn (EPS 19.68) against BDT674.6mn, implying c19% yoy growth. The Q3 result is commendable and yet lagged our expectations by c9%. Key deviation came from qoq contraction in gross margin and high marketing expenses, which slightly offset the effect of c14% yoy growth in top line.
In the first nine months of FY20, earnings grew by c37% yoy to BDT2,137.6mn against BDT1,555.7, underperforming our expectations by c2%. We have slightly cut our EPS forecast for FY20 from BDT90 to BDT88.
We have a Hold recommendation: Marico trades at 20.4x trailing PE, 5.9X EV/Sales. Our TP of BDT 1,920 implies 16.5% ETR (with 2.4% dividend yield). We reiterate our Hold recommendation.
Revenue grew by 14.3% yoy, beating our expectations: Marico maintained strong growth in top line for six quarters in a row, posting revenue of BDT2,452.8mn in Q3 19/20. The non-Parachute Coconut hair oil segment (non-PCNO) likely led this growth with Value-Added Hair oil (VAHO) being the main accelerator. Alongside, revenue stream coming from relatively new products gave an edge.
In first nine months of FY20, revenue grew by 13.3% yoy to BDT7,690mn against BDT6,787mn.
Gross margin expansion sustained but slowed down: Marico’s gross profit margin stood at 56.2% in Q3 19/20, up by c390bps yoy but down by c190bps qoq. From the second half of FY19 through 9 months into FY20, Marico has benefited from the downtrend in the price of copra by having significant gross margin expansion. However, copra price has started rising since November 2019, which is likely going to put pressure on gross margin in the coming quarters. Nonetheless, the rising contribution of VAHO will likely offset the effect to some extent. Besides, Marico has always retained gross margin partially in similar situations, which makes us believe that gross margin will not be squeezed substantially.
Marketing expense remains high: Marketing expense as a percentage of sales escalated by c222ps yoy to 11.4% from 9.2% confirming that Marico is strongly promoting their new products to create brand equity. The trend is likely going to continue for the coming few quarters.
Declared BDT30/share interim cash dividend: Marico has declared BDT30/share cash dividend based on Q3 19/20 financials. For the first nine months of FY20, the dividend declared stood at BDT75/share with a dividend payout ratio of c110%. We expect Marico to pay BDT85/share cash dividend for full-year 2019/20, with dividend payout ratio being c97%.