Marico: Q3 was a blip

Company should sustain healthy top line and earnings growth

A weak show by Saffola edible oils and revamp of distribution in Egypt led to lower-than-estimated sales growth for Marico in the quarter ended December. Consolidated net sales were Rs 1,452 crore, up 21 per cent over a year, short of the Bloomberg consensus estimates of Rs 1,485 crore. More,  it was fuelled largely by price rises, given that overall volumes grew only two per cent over a year versus five to seven per cent in recent quarters.

Domestic volume growth at five per cent was lower than the six-eight per cent in recent quarters. Saffola volumes played spoilsport, rising only three per cent in the quarter, taking off some sheen of the volume gains of eight per cent and 10 per cent recording by Parachute and value-added hair oils, respectively. Higher pricing premium with respect to peers hit Saffola’s volumes in the quarter. Notably, Agrotech Foods (maker of Sundrop oils) posted a volume growth of seven per cent.

The bad news ends there. First, Marico posted resilient earnings before interest, tax, depreciation and amortisation (Ebitda) margins , which along with lower tax rate aided net profit, which stood at  Rs 160 crore, up 18.1 per cent over a year and ahead of the estimates of  Rs 156 crore. The management has taken corrective steps and expects the benefits to fructify from the March quarter itself. First, it has stepped up promotions and taken pricing correction in January in Saffola and also plans to increase advertising activity. These should help prop volume growth.

While prices of copra (key ingredient in Parachute hair oils) appear to be peaking out, the management plans to pass on/reinvest large part of these gains in innovation and brand building. Second, the weakness in Egypt is likely to be short-lived. Marico had replaced an existing single distributor in Egypt with four new distributors during the quarter, leading to loss of two months’ sales and 46 per cent year-on-year fall in Egypt revenues. With distribution issues ironed out, Egypt’s performance should improve. Likely improvement in Vietnam's gross domestic product growth should also boost international business (20 per cent of consolidated top line) prospects.

Most analysts, thus, remain positive and believe it is the most levered to a recovery in urban markets, about 70 per cent of the company’s domestic revenues. They estimate earnings to grow at 18-20 per cent annually over FY15-17. Consistent market share gains in Parachute, healthy double-digit growth in value-added oils and focus on new growth drivers such as food, youth segments (hair gel, leave-in serums and deos) and skin care are key catalysts for future growth.