Rising volumes, lower costs positive for Marico

Higher demand, falling input costs have led brokerages to raise their earnings estimates for the firm

Marico received ratings as well as earnings upgrades by leading brokerages in September, on the back of improving volume growth and easing copra prices. Expectations of a recovery in consumer demand, positive for both Saffola and Parachute portfolios, along with Marico’s efforts to diversify into and grow the mass skin-care, youth, value-added hair oils, and food categories will help the company clock higher sales.

After falling for three quarters in a row, Marico’s volume growth gathered pace and grew six per cent and 6.5 per cent in the March and June quarters, respectively. Although this is lower than the company’s average of 9-10 per cent prior to the March 2013 quarter, analysts believe volumes will see further uptick, as discretionary spends gather pace.

Notably, the volume growth trend was healthy in the June quarter across all key segments: Parachute coconut oil rigid packs (six per cent); value-added hair oil (11 per cent); Saffola (10 per cent); and international (9.6 per cent, forming a fourth of total revenues). The surge in hair oil comes at a time when overall domestic hair oil industry volume fell three to five per cent and, hence, is commendable. The management remains confident about maintaining the current volume growth.

Improving volume trends are likely to be accompanied by higher operating margins as well, given copra (a key raw material) prices have corrected 10-12 per cent from their peak levels of Rs 120 a kg, and are likely to remain weak. Factoring in the margin gains from weakening copra prices, brokerages such as Credit Suisse and Sharekhan have raised Marico’s FY16 earnings estimates by two to three per cent in the past few days.

Marico targets to double its revenues from Rs 4,687 crore in FY14 in four years as it grows new and existing product categories, adopts inorganic growth path and penetrates further into tier-II and tier-III cities. Analysts believe this target is achievable, given the company’s record. They expect net profit to grow 18 per cent in FY15 and 20 per cent in FY16.

The scrip has been on an uptrend in the past two months and touched an all-time high of Rs 300 on September 16. Even after this surge, the stock trades at 20.8 times its FY16 estimated earnings. While this is slightly higher than its own historical average one-year forward price-to-earnings (PE) of 19 times, it is way lower than the fast-moving consumer goods sector average one-year forward PE of 26 times. Given the improving prospects and reasonable valuations, analysts are positive on the stock and see an upside of 12-15 per cent from current levels.