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| Marico: Squeezing out competition |
| Malini Bhupta / Mumbai Sep 20, 2011, 00:53 IST |
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Company sacrifices profitability to wrest market share from unorganised players.
 A company has got to do what it has got to do – too bad, if markets don’t like it. The stock market is known to reward companies for their quarterly performance and not for long-term strategy. That’s exactly what happened to Marico after it issued a note last week on its inability to meet lofty market expectations. Following this, a spate of research reports has hit the market, some downgrading and others reiterating their below-consensus estimates on earnings.
Amid all this noise, what has been given a miss is the strategic call the company took on growing its business. It is using the threat of rising input prices to squeeze out competition from unorganised players. Marico is planning to use the opportunity of spiralling input prices to do this. In the current inflationary environment, the biggest threat to a consumer company would be donwtrading. To prevent this, Marico plans to absorb a large part of the cost push, as it can afford to do so, unlike its competition in the hair oil segment.
The company is not planning any further price increases after the 32 per cent it undertook for the hair oil category between the third and fourth quarters of last year. Since the price of copra jumped nearly 80 per cent, the unbranded players, too, are suffering from cost push and working capital issues. According to Elara Capital, the sustained high copra price is challenging the viability of unorganised players, who are also forced to take price increases to sustain their businesses. As Marico holds its price points, the consumer has a choice to migrate to better options and brands. This has led to the sharp jump in volumes for Marico.
The hair oil category contributes 14 per cent to the company’s top line. However, this segment is growing at a fast clip of 32 per cent (Q1FY12) in terms of volume, compared to other business segments. Analysts expect the contribution of the hair oil segment in consolidated sales to go up to 18 per cent over the next couple of years, thanks to the company’s new strategy. But, this growth will come with some pain in the form of margin erosion. Goldman Sachs (GS) forecasts a decline in margins for FY12E and has further reduced Ebitda margin estimates to 11.8 per cent from 12.8 per cent, to reflect input costs. Earnings per share estimates for FY12E-FY14 have also been cut. However, GS believes the longer-term prospects of the company remain intact, with robust volume growth in its franchise brands and improving returns on international business.
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