Lower input costs, tactical promotions likely to drive Marico stock

Company unlikely to take up price cuts for flagship Parachute brand

After reacting negatively on Thursday to slower growth in the June quarter (Q1) and cautious commentary on near-term demand, the Marico stock gained over 3 per cent to Rs 374 apiece on Friday, while the Nifty FMCG index was flat.

The Street is positive about the earnings outlook in the near term, thanks to lower input cost. This, coupled with valuations, is in favour of the stock, say analysts.

Marico is trading at 37 times its FY21 estimated earnings, which is at an 18 per cent discount to Hindustan Unilever. 

Lower prices of copra, a key raw material accounting for 40-45 per cent of the firm’s raw material costs, are likely to trend down after plunging 25 per cent year-on-year (YoY) in Q1.

Not only in domestic markets (India accounts for 78 per cent of overall business), input prices are also supportive in Bangladesh (46 per cent of international business).

This should offer margin gains in the short term, though copra prices are expected to bounce back from the December quarter onwards. The company is unlikely to take sharp price cuts in its flagship Parachute rigid (blue coconut hair oil bottle/pack); the brand has around one-third share in overall volumes of the company, clearly indicating margin benefits on the overall business.

The company revised its medium-term operating profit margin guidance to over 19 per cent from 18 per cent earlier. According to JM Financial analysts, this drives the Street’s confidence in the near-term earnings trajectory.

Marico is confident that selective tactical promotions will be sufficient to continue driving volumes, in spite of  no major price cuts in the Parachute rigid brand.

The company has kept medium-term volume growth guidance unchanged at 8-10 per cent, despite challenging demand situation, providing further support to the stock.

Even in the quarter, benign input costs led to a sharp 523-basis-point YoY expansion in gross profit margin to 47.5 per cent and 323 bps rise in Ebitda margin to 21.3 per cent.

Though the latter was impacted by higher advertising spends, it was the highest in the last 12 quarters. 

The firm clocked 7 per cent YoY rise in net sales to Rs 2,166 crore in Q1, driven by 6 per cent volume growth and its net profit grew 21.6 per cent YoY to Rs 315 crore.