Marico stock down 10% following depressed outlook

The stock of Marico slipped 10 per cent today on the Bombay Stock Exchange, following a lower outlook the consumer products major presented ahead of its second-quarter results to be announced next month.

City-based Marico had said in an information update that it expected its profit after tax “falling short of current expectations in the next couple of quarters”. It said this would happen on account of multiple factors, including high commodity prices, and the instability in markets such Libya, Syria and Yemen, where Marico has a significant presence.

The West Asia and North Africa region contributes about five per cent to Marico’s international revenues. But the firm said the conditions there were uncertain. “There has been a virtual standstill in business in some countries in the region.”

The maker of Parachute and Saffola did, however, indicate that it expected long-term growth to be intact. “The purpose of the update,” said Milind Sarwate, the group’s chief financial officer, “was to help the financial community, shareholders and all those interested in the company to view the numbers that will be released in the next few quarters against the current backdrop. This is not an earnings guidance, since we do not provide one.”

But investors seemed to be in no mood to listen, with the stock tumbling from an opening price of Rs 152 to Rs 143 at the end of trade today.

The intra-day low registered today was Rs 141.05. While brokerages such as Goldman Sachs cut the target price of Marico from Rs 174 to Rs 163, it has continued to maintain a ‘Buy’ rating on the stock.

In a note issued today, Goldman Sachs said it expected Marico’s medium to long-term prospects to remain intact on robust domestic volume growth, improved returns for its international operations, and service brand Kaya's ability to generate profits after restructuring its business.

For the quarter ended June, Marico had reported a 15 per cent jump in consolidated net profit to Rs 85 crore. Its net sales grew to Rs 1,050 crore from Rs 787 crore last year.

This was a 33 per cent jump in net sales, which was led primarily by volumes at 21 per cent and price at 12 per cent respectively.

Marico, in fact, has not increased the price of its Parachute portfolio of products for the last two months in keeping with its policy of taking a measured approach to price hikes. This despite the fact that commodity inflation has been severe in copra -- a key input which constitutes 40 per cent of the company’s total material cost. In the last one year, copra prices are up 80 per cent, while the Parachute basket of products have risen by just 32 per cent in the same time frame.

Analysts say this calculated approach to price hikes is because the the 1987-founded firm is keen to protect volumes.

Marico in its information update has hinted as much: “We have recorded healthy volume growth despite price hikes. This is a positive sign indicating sustained demand and the underlying strength of our brands. Against this backdrop, we may not take any further increase in retail prices as it may impact the volume growth numbers.”

The firm also said that advertising and sales promotion expenditure would not be reduced in the coming quarters since it expected to sustain the momentum on in its key categories. “Such support for new products across businesses is crucial to the long term sustenance of Marico’s growth plans,” the note added.