Equity Analysis /

Marico Bangladesh: Q1 19/20: Substantial margin expansion beats expectation

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    IDLC Securities
    26 July 2019
    Published by

    Earnings grew by 53%: Marico reported earnings of BDT848.8mn (EPS BDT26.95) in Q1 19/20 (Apr-Jun), beating our expectation by 23% yoy. Hefty margin expansion (1,551bps) from falling copra prices as well as c11% revenue growth steered this earnings growth. NPAT margin improved by 844 bps rising to 30.9% this quarter from 22.3% in the same period of the previous year. Provided NPAT growth has exceeded our expectation, we are revising our yearly EPS forecast upward by c8% to BDT85.9, implying c33% yoy growth over FY 19.

    Reiterate Hold with an unchanged TP of BDT 1,602: (ETR 1.1%) MBL BD trades at 22.5x trailing PE, 5.8X EV/Sales. Our TP of BDT 1,608 implies 1.1% ETR (with 4.2% dividend yield). We reiterate our Hold recommendation.

    A downward trend in copra price combined with a higher contribution of premium products in product portfolio and price growth led to gross profit margin expansion: Gross profit margin showed notable improvement, rising by 1,551bps yoy to 59.8% In Q1 19/20, exceeding our expectation by 580bps. We believe, this is largely attributable to the downward trend in copra price, which is the main raw material for Marico. Alongside, an increasing contribution of premium products (mainly VAHO) in their product portfolio and price growth in recent times are likely to have contributed to GPM expansion. Since the gross profit margin has beat our expectation, we are revising our gross profit margin upward from 53% to 56% for full-year 19/20.

    Topline growth is in line with our expectation; Focus on Non-PCNO drives growth: Marico reported revenue of BDT 2,746.1mn for Q1 2019-20, growing by c11% yoy. More focus on Non-Parachute Coconut Hair Oil segment has likely driven the growth provided Marico's flagship brand 'Parachute coconut hair oil' has approached saturation level in its market. Value-Added Hair oil segment (VAHO), offering a range of 9 brands, which contributed c24% to Marico's total business turnover in 18/19 has occupied the highest value market share in VAHO category by the end of 18/19. Management is aggressively promoting the brands and we expect VAHO segment to be a crucial growth driver for the next few years among other non-PCNO segments. Our expectation for full-year revenue growth is 12.6%. We expect PCNO segment and Non-PCNO segment to grow by c5% and c29% respectively in 19/20. In addition, we expect the contribution of Non-PCNO portfolio to reach c50% by 22/23 from c31% in 18/19.

    Declared BDT25/share interim cash dividend: Marico has declared BDT25/share cash dividend based on Q1 19/20 financials. Dividend payout ratio for this quarter stood at c93% compared to c85% for the same period of the prior year. For the full year, we expect Marico to pay BDT70/share cash dividend, with dividend payout ratio being c82%.