Input costs and demand concerns may impact Marico in the near term

March quarter performance is expected to be strong on low base, price hikes

With a double-digit volume growth for the third consecutive quarter as well as price hikes, demand trends continue to be robust for Marico. In a recent update, the company indicated a ‘very strong double-digit volume growth’ on a low base for the India business which accounts for three fourths of its overall revenues. Price hikes taken to offset the rise in input costs is expected to keep the revenue growth at elevated levels.

Mihir P Shah and Abhishek Mathur of Nomura Research expect the company to report a consolidated revenue growth of 20 per cent. This is better than the Q3 performance of 16 per cent growth; year ago quarter was a weak one with revenue fall of 7 per cent.

Within its product mix, while Parachute and the value-added hair oils segments have grown in double digits since the September quarter, the performance of the refined edible oil stood out. The Saffola brand has now delivered double-digit growth in the 11-25 per cent band for the sixth quarter in a row, bettering overall domestic volume growth since the December 2019 quarter.

Portfolio diversification with several new launches has helped the firm double its sales in the foods category which makes up 4 per cent of sales. Growth here is led by oats and new products such as noodles, honey, Chyawan Amrut and soya chunks. The international business which accounts for 23 per cent of revenues too posted double-digit growth in constant currency in the March quarter.

The street, however, is watchful given concerns on account of a spike in raw material prices and surge in Covid cases. Analysts at Nirmal Bang Research indicate that the input cost environment has turned challenging with prices of copra, edible oils and packaging material rising sequentially as well as over the base quarter. In its largest segment (coconut oil), copra prices have risen by 25 per cent y-o-y and 6 per cent q-o-q. Given the sharp rise, price hikes may not be enough to offset the costs, with operating profit margins expected to dip over 120 basis points y-o-y. On the demand front, the restrictions imposed by various state governments could slow the sales momentum.

While the stock is up about 6 per cent since its lows in March, given the margin and demand worries, investors should await a meaningful correction and near term growth trends before considering an investment.