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From the Fast Moving Consumer Goods (FMCG) sector, the brokerage company HDFC Securities picked CCL Products and Marico Ltd, and it has given the stocks a buy call rating. The brokerage has recommended buying CCL Products shares in the range of Rs. 377–386 and adding to positions on falls in the range of Rs. 348–356 with a target price of Rs. 449. For the shares of Marico, HDFC Securities has advised buying on dips in the range of Rs. 437–446 and adding further on dips in the range of Rs. 396-405 for a target price of Rs. 526. The firm has given both of these stocks a two-quarter window to reach the target price.

CCL Products

HDFC Securities has highlighted the management commentary by saying that “the Russia-Ukraine issue is not likely to have any significant impact on the company’s business. While there might be some volume deferment in near term due to logistical disruptions, long-term fundamentals of the company remain intact. The management is confident of delivering volume growth of >15% YoY. However, given the increase in coffee prices, revenue growth is expected to be 20-25% YoY. We expect earnings CAGR of ~26% over FY22-24E on the account of a) doubling of Vietnam Capacity (company enjoys tax break here), b) higher share of small packs & packing capacity ramp-up, and c) increasing share of India branded business in the overall revenue mix."

“On the back of strong operating performance coupled with better working capital cycle, we expect superior FCF generation and gradual expansion in RoCE by 500 bps over FY22-24E. With enhanced revenue growth visibility, the stock is likely to re-rate if the company continues to maintain a strong margin profile. We think the base case fair value of the stock is 413 (17x FY24E EPS) and the bull case fair value is 449 (18.5x FY24E EPS). Investors can buy the in stock 377-386 band (15.8x FY24E EPS) and add more on dips in 348- 356 band (14.5x FY24E EPS)," the brokerage has said.

Given the geopolitical challenges brought on by the war in Russia and Ukraine, CCL maintained solid performance thanks to a 7 per cent increase in volume, and revenue increased by 13 per cent year over year. The company's gross margins severely decreased by 7% YoY and the company reported a negative EBIDTA growth as EBIDTA margins dropped by 329 bps year over year but the PAT rose 7% year over year to 53 Cr.

The brokerage has also highlighted that “The newly commissioned 3,500 MT capacity in Vietnam is already running at optimal levels given the strong order book. The implementation of an additional ~14,000 MTPA capacity in Vietnam (which will double the Vietnam capacity to ~28,000 MTPA) is on track and is expected to be completed in Q4FY23. CCL is also contemplating to add Spray Dried Coffee capacity in India for which the process would start by end of CY22."

Marico

According to HDFC Securities, Marico posted steady revenue growth, with marginal expansion in EBITDA margin (unlike contraction for other companies). Revenue grew 7% YoY (+35% in Q4FY21 and +13% in Q3FY22). Domestic volume was up 1% YoY (+25% in Q4FY21 and flat in Q3FY22). Volume growth on a three-year CAGR was 7%. Parachute Rigids volume declined by 1% YoY, while Value Added Hair Oil saw 3% YoY value growth. Saffola franchise grew 17% YoY, while foods portfolio grew 17% YoY. Overall FMCG market volume declined 4% in Q4, while FY22 volume grew 3% YoY.

The brokerage has further highlighted that, the company’s gross margins expanded 33bps YoY (-513bps in Q4FY21 and -318bps in Q3FY22). While Rice bran/LLP/HDPE were up 26/9/19% YoY, Copra prices were down 31% YoY and 9% QoQ. Employee/adv/other expenses grew by -7/18/11% YoY. EBITDA margin expanded by 16bps YoY to 16%. EBITDA grew 8% YoY. Domestic/international EBIT margin expanded 7bps/-21bps YoY (-463bps/+266bps in Q4FY21). In Q4FY22, the company recognized a one-off provision of 8 Cr towards bad and doubtful debts pertaining to earlier years under ‘Other Expenses’. Whereas in FY22, revenue grew by 18% YoY to Rs9,512 Cr with both the domestic and international business growing in high teens. EBITDA margin stood at 17.8%, down 201 bps YoY, solely due to gross margin compression of 409 bps. A&P spends (at 8.4% of Sales) was up 14% YoY. Both EBITDA and PAT were up 6% YoY, said HDFC Securities.

HDFC Securities has claimed that “In India, rising inflation levels, exacerbated by geo-political tensions, continued to weigh down the overall consumption sentiment, and even more so in rural. As companies resorted to taking price hikes to counter the persistent input cost push, consumers continued to feel the pinch. As a result, FMCG market continued to decline in Q4 in volume terms. Against this backdrop, Marico’s domestic business delivered a resilient 5% revenue growth, with 1% underlying volume growth on high base of 25%. Volume growth on a 2-year CAGR basis remained strong at 12%. The inherent strength of its brands, focused execution and brand building investments translated into 97% of the portfolio either consolidating or gaining market share and 94% of the portfolio gaining penetration, both on a MAT basis."

“Marico could be an outlier within the FMCG companies space to sustain margins in such a challenging time, in our opinion. However, volume growth in the near term could be a challenge given the inflationary conditions. We think the base case fair value of the stock is 491 (35x FY24E EPS) and the bull case fair value of is 526 (38x FY24E EPS). Investors can buy the stock on dips in 437-446 band (32x FY24E EPS) and add further on dips in 396-405 (29x FY24E EPS) band," said HDFC Securities in its note.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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