Higher dependence on hair oil segment puts Marico on slippery slope

Saffola volume surges by a fourth, but 8-11% volume fall in hair oil pulls down top line by 7%

While there have been expectations of a change in consumers' buying behaviour amid the Covid-19 pandemic with a preference towards essential items, such as food and hygiene products, Marico’s higher dependence on its hair oil category (Parachute rigid and value-added hair oil or VAHO), which is relatively discretionary in nature, has taken a toll on its performance in the March 2020 quarter (Q4).

In fact, Marico’s management indicated a change in strategy, depending on the demand pattern. This includes lowering investments in most-discretionary personal care segments, such as male grooming, and increasing focus on essential items, such as food and hygiene and health care products. This should help cushion to an extent the company's sales, which came under pressure in Q4.

The owner of popular hair oil brands — Parachute and Nihar — clocked its fastest volume growth of 25 per cent in Saffola edible oil as customers stocked up food and essential items in light of the pandemic and the lockdown. However, its major hair oil category, which contributes over 55 per cent to Marico’s India business, witnessed an 8-11 per cent volume decline in Q4, resulting in a 3 per cent fall in the overall domestic volumes.

 

 

This, along with lower realisation amid price correction in Parachute rigid and a 5 per cent fall in international business sales (22-23 per cent of consolidated revenue), resulted in a 7 per cent year-on-year (YoY) fall in the top line to Rs 1,496 crore, lower than the Bloomberg Consensus estimate of Rs 1,538 crore.

Stable input costs and lower advertising spends, however, saved the day for Marico and protected its profitability. Marico’s earnings before interest, tax, depreciation, and amortisation (Ebitda) margin increased by 58 basis points YoY to 18.9 per cent in Q4. This also contained the impact on the top line, with Marico’s pre-tax profit declining 3 per cent YoY to Rs 262 crore versus analysts’ estimate of Rs 267 crore. 

The net profit decline of 50.6 per cent to Rs 199 crore was because of tax credit in the year-ago period and Rs 10 crore of exceptional items in Q4FY20, thus not strictly comparable.

What is also positive is the management’s confidence of maintaining FY21 operating margin at the FY20 level of around 20 per cent, led by robust cost-cutting, such as advertising spends. 
 

"Supply disruption in the domestic market and a likely slower recovery in hair oil would affect revenues in FY21; growth is expected only in FY22," says Kaustubh Pawaskar, analyst at Sharekhan.   But, without top-line growth, earnings may not grow, if not shrink.