Marico Limited (NSE: MARICO)

[zygo23554]

@zygo23554

Marico is unlikely to grow revenues in healthy double digit range, the base case needs to be 9-11% over the medium term with PAT growing in the range of 13-15%. While the company has been working hard on beefing up the product portfolio and broadening the distribution footprint, their largest businesses - Parachute, VAHO and Saffola put together are unlikely to grow in healthy double digits. They are either the market leader or #2 in a category that is growing in single digits.
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Valuations matter for this very reason, most high quality businesses will go through a 2-3 year period where business momentum slows down below historical averages. In such a period one is hit with lower PAT growth and a lower PE multiple at the same time. If this can happen to a business like Marico which ticks all the right boxes, this can happen to most businesses. Which is why not overpaying is one way of doing things in investing.

The fundamental structure of the business hasn’t really changed too much over the past 2 years. Saffola foods category was expected to grow at a good pace even 1.5 years ago when the market for some strange reason decided to price this business much lower.

Even if Saffola foods and the newer categories grow faster than expected, it does not yet materially change the growth trajectory for the overall business. Coconut and VAHO categories are unlikely to grow fast while Saffola should do a double digit growth.

The only thing that appears to have changed is the market perception, that too not drastically. If one had bought this in Q4 of 2020 (before the COVID crash) one would have bought this at the lower bound of the 5 year PE multiple, today this is trading at the higher bound of the 5 year PE range. See it for yourself

I find it fascinating that we have people going around saying entry valuation does not matter. The difference in buying the same Marico at 55 PE and 35 PE is considerable.

This is a perfect example of why the entry valuation matters, even over the medium term. And Marico should meet the BQ/MQ criteria of most professional investors.

Disclosure: Invested