Comments
Motilal Oswal
Marico (Buy)
CMP: ₹255.45
Target: ₹315
After the requisite (albeit admittedly delayed) price action in its largest brand, Parachute (about 30 per cent of sales), Marico's overall volume growth outlook appears relatively better than peers, barring HUVR and Nestle.
Further, demand for brands like Parachute, Saffola, VAHO and youth products are unlikely to be significantly affected by the Coronavirus.
While raw material costs are not declining as they were six months ago, near-term y-o-y outlook is highly attractive for all its key raw materials, (Copra, LLP, HDPE and Safflower) due to benign costs. Marico will also be an incremental beneficiary of lower packaging costs owing to the ongoing crude cost decline.
The stock has corrected about 35 per cent since we downgraded Marico to ‘Neutral’ at the end of 2QFY20 results due to the company reporting a sharp deceleration in volume growth, a trend that has well continued in 3QFY20 results as well.
Trailing FY20 valuations of 32.2x FY20E EPS and FY21/FY22 valuations of 33.4x/27.5x FY22E respectively (much lower than 3-year/5-year/10-year average of 44.8x/42.7x/ 35.2x) offer potential for an upside. CMP is at a four-year low. We upgrade the stock to ‘Buy’ with TP of INR315.
Given the uncertain environment, we have attributed a target multiple of 35x, close to its 10-year average; yet, we have obtained 21 per cent upside on the stock. If we value the company on its five-year average, the upside could be about 47 per cent.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.