Project SETU's Expansion Will Improve Distribution And Boost Future Prospects

Key Takeaways

• Expansion into rural and urban markets and premium products aims to boost revenue growth through improved distribution and market reach.
  
• Strong international growth in regions like MENA and Vietnam and focus on premium segments enhance margin potential and overall earnings.
  
• Inflationary pressures, competition, and shifts in consumer behavior could impact Marico's margins, revenue growth, and market share across domestic and international markets.

Catalysts

Manufactures and sells consumer products in India.

• Project SETU's expansion into rural and urban markets aims to enhance distribution channels and market share, which will support revenue growth through improved reach and premiumization of product offerings.
  
• Increased pricing in the coconut oil and Saffola oil portfolio, in response to rising commodity prices, is expected to boost domestic revenue growth in the second half of the year.
  
• The launch of new products, such as Saffola Masala Millets and expansion of digital-first brands, aligns with the rising consumer demand for healthier options and premium personal care, supporting long-term revenue diversification and growth.
  
• The international business demonstrates strong growth, driven by market expansion in regions like MENA and Vietnam, which enhances medium-term margin potential and supports overall earnings.
  
• Strategic focus on premium segments and value-added brands, such as Beardo and Plix, aims to capture higher-margin opportunities, which should contribute towards improving net margins and earnings in the medium term.

Marico Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marico's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 16.0% in 3 years time.
• Analysts expect earnings to reach ₹21.7 billion (and earnings per share of ₹16.77) by about December 2027, up from ₹15.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹18.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 59.4x on those 2027 earnings, up from 52.3x today. This future PE is greater than the current PE for the IN Food industry at 20.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Marico Future Earnings Per Share Growth

Risks

• The inflationary pressures, particularly in food and retail, as well as rising commodity prices like copra and imported vegetable oil, could negatively impact operating margins, leading to potential compression of up to 50 basis points. This could affect profitability and hinder earnings growth.
  
• The slowdown and muted sentiment in middle and lower-middle urban classes, alongside challenges in critical consumption categories due to food inflation, could limit revenue growth from key urban markets if these trends persist.
  
• The irrational competition and increased price sensitivity in the value-added hair oil (VAHO) segment may continue to create headwinds, as aggressive trade-driven promotions by competitors undermine market share gains and impede revenue growth in this category.
  
• The challenges in the international market, particularly in Bangladesh with operational concerns, could impact the profitability and revenue growth of Marico's international business, which remains a significant part of its overall growth strategy.
  
• Increased channel differentiation and shifts in consumer behavior, such as higher growth in quick commerce over traditional channels, could destabilize existing distributor ROI models and require operational changes that could strain resources and impact net margins.

Valuation

• The analysts have a consensus price target of ₹706.55 for Marico based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹823.0, and the most bearish reporting a price target of just ₹482.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹135.4 billion, earnings will come to ₹21.7 billion, and it would be trading on a PE ratio of 59.4x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹641.6, the analyst's price target of ₹706.55 is 9.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.