Marico’s third-quarter 2016 revenue grew 7% as India (78% of total sales) grew 7% (volume growth of 11%) and international business 9%. Despite single-digit top-line growth, earnings moved up 24% on the back of a 633-basis-point improvement in gross margins in a deflationary environment. Management said that lower input costs would continue to benefit the firm in fiscal 2017, as gross margins and in turn EBIT margins will remain heightened despite passing on adequate price discounts to maintain volumes. Based on these results, we reduce our average five-year revenue forecast to 16% from 18% and enhance our gross margin forecast to average at 50% from 48%, thereby maintaining our five-year average earnings growth estimate at 21%. However, given that the company has been able to expand its EBITDA margins to 19% during the quarter beyond our expected 17% EBITDA, and this streak is likely to continue, we are raising our fair value estimate for Marico by 11% to INR 211 per share, after bonus adjustments. The stock has gone up by 60% since we highlighted its margin expansion potential in September 2014. Over the same period, EBIT margins have expanded by over 300 basis points to 17% plus from 14% in fiscal 2014. We continue to remain optimistic about the fundamentals of this narrow-moat stock and believe the stock is fairly valued at current levels.
Management continues to be open to acquisitions and equity deals at the right price, as they have found it hard to reap the full benefits of its Paras acquisition due to integration issues. We continue to watch deal-development carefully for this standard allocator of capital, as new entrants like Patanjali, Kesh King, and Indulekha begin to gain prominence in small pockets of hair-care solutions. Marico’s Parachute and Nihar brands, however, continue to dominate the pan-India market across formats and solutions with nearly 57% value market share as of December 2015 (as shared in the company update).
