Marico is the latest consumer company to post robust growth in its business, even if it did not meet the market’s expectations on profit after tax. The company’s fourth quarter revenues were up 22.8 per cent year-on-year (y-o-y) to Rs 921 crore and adjusted net profit grew 226 per cent y-o-y to Rs 71 crore. Despite this growth, the stock didn’t move up as the company failed to meet profitability estimates of the Street. The stock currently trades at 28 times FY13 earnings, which analysts believe is expensive.
On the face of it, there is nothing significantly negative about the performance. Like most FMCG companies, Marico has reported a volume growth of 10 per cent y-o-y in the domestic market and six to seven per cent in international business. International revenues grew a healthy 37 per cent while domestic revenues were up 20 per cent y-o-y. Also, in the last few months, the stock has moved up rather sharply. Therefore, there is little room for a sharp rise without any major trigger.
A key lever of improvement in profitability has been the fall in raw materials costs, which has helped the company expand gross margins by 650 basis points to 53.7 per cent in Q4 FY12 from the year-ago period. However, higher advertising and promotion spends and other expenditure partially offset gains from gross margin expansion, explains Anish Damania, head of institutional equities at Emkay Global. This makes Marico’s Q4 numbers a mixed bag. The sharp improvement in gross margins had caused operating profit margins to move up. Marico’s Ebitda margins have expanded by 130 basis points y-o-y to 12.3 in the fourth quarter. Analysts believe operating margins are below estimates because advertising and promotion spends and employee costs have increased ahead of estimates.
Apart from the missing margin trigger, the performance of certain key brands has also come in below expectations. Flagship brand Parachute’s volumes have grown 11 per cent and value-added hair oils 17 per cent. But analysts are concerned about the sluggish 3.3 per cent volume growth reported by Saffola, which is at the premium end of the market and therefore, enjoys higher margins. However, overall consumer trends seem to be positive.