Marico fails to maintain volume growth in Q2 on poor offtake; stock down 6%

Stock tanks on flat top line in the September quarter, even as benign copra prices save the day, leading to a 16 per cent rise in pre-tax profit

In an otherwise bullish market environment, the stock of Marico fell by 6.5 per cent to Rs 366.40 on Tuesday. Disappointing volumes in September 2019 quarter (Q2) weighed on the company's top line and higher advertising spends confined earnings growth, hurting investor sentiment. After the dismal Q2 results, 9 out of 24 analysts polled by Bloomberg have downgraded the stock so far.
 
Analysts at Phillip Capital, for instance, downgraded the stock from ‘buy’ to ‘neutral’ due to growth challenges in core categories and likely higher copra prices, a key raw material, as observed in September. Marico announced its Q2 results on Friday post trading hours and markets were shut on Monday due to Diwali and Hindu new year.
 

The maker of popular hair care and edible oil brands like Parachute, Saffola, etc, clocked a 16 per cent rise in profit before tax while consolidated net profit grew 17 per cent year-on-year to Rs 253 crore in Q2, a tad better than analysts’ expectations of Rs 251 crore. However, topline at Rs 1,829 crore was almost flat at the year-ago-level and below estimates of Rs 1,945 crore.
 
After a good six per cent volume growth in June quarter, Marico's domestic volumes grew just one per cent in Q2. Weak consumer demand and liquidity crunch impacting traditional trade channels marred volume growth across the portfolio.
 
Offtake of Marico’s flagship product, Parachute rigids (oil packs in blue bottles), was down one per cent year-on-year largely due to customer preference shifting to cheaper, unbranded hair oils. This becomes more concerning given Parachute rigids’ one-third share in Marico’s overall business. Notably, unlike unbranded players, Marico did not change price points sharply, but increased advertising spends during Q2 (up 10.8 per cent, or by 119 basis points year-on-year) to push new launches.
 

While volumes disappointed, benign key input cost (mainly copra) aided Marico’s operating profitability and earnings. With a sharp 561 basis point year-on-year expansion in gross profit margin in Q2, Marico’s operating profit margin improved by 270 basis points year-on-year to 19.3 per cent.
 
Going ahead, with Marico having booked raw materials for a couple of quarters, such costs are likely to remain supportive for now. But further margin gains could be limited as benefits from lower costs are invested to drive growth.
 
While analysts believe Marico’s medium-term growth levers remain intact and the stock currently trades at 37 times FY21 estimated earnings, near its long-term historical average valuation, investors should await signs of a pickup in growth.