Near-term growth concerns, further price cuts to cap returns for Marico

Further price cuts, higher advertising costs to weigh on margins

The Marico stock slipped 6.4 per cent in trade on weak September quarter results for the 2022-23 financial year (Q2FY23), impact of further price cuts on trade and muted near-term growth prospects. Though brokerages are expecting some softness in performance, there have not been aggressive downward revisions in earnings after the results.

The sub-par performance in the quarter was on account of lower demand and downtrading in hair and personal care category in the rural segment. Even as overall revenues were up 3.2 per cent, domestic business growth was limited to one per cent while the international business saw an 11 per cent growth on a constant currency basis.

The Parachute business witnessed an 11 per cent fall in sales due to price cuts following lower input costs (copra) for the last few quarters. Parachute volumes fell 3 per cent due to trade uncertainty on frequent price cuts and slower conversion from unbranded to branded segment.

Even as the company cut prices of coconut oil, the unorganised segment did better as it dropped prices by a higher quantum due to favourable copra prices. Value-added hair oil business too reported flattish volumes with a 2 per cent value growth and was impacted by a weak rural sentiment.

The company expects to deliver a mid-single-digit volume growth in the second half of FY23 on the back of a low base of rural growth and on gains from the price cuts (another round of price cuts are expected) in Parachute and Saffola. This is, however, lower than earlier expectations of high single-digit growth due to muted consumption trends.

While gross margins expanded over the year ago quarter, they declined sequentially, given high cost inventory and currency impact in international operations. Gross margin was 141 basis points lower, sequentially, in part also due to weaker mix given that the entire growth in domestic volumes in Q2 was driven by Saffola which has a weaker gross margin profile, point out analysts at JM Financial.

Operating profit margins were down slightly due to increased operating expenses and higher marketing costs.

Nomura Research has cut its FY23/24 earnings per share estimates by 12-14 per cent to factor in for a weak second quarter, lacklustre volumes despite price cuts and range bound operating profit margins.

Marico could not reap benefits of deflationary trend in raw materials in improving margins or volumes despite price cuts due to prolonged weakness in rural demand. Now, sharp price cuts (to maintain market share) and low volumes are impacting overall revenue growth, says Mihir P Shah of the brokerage. Any benefits on account of lower input prices will be offset by higher advertising costs, he adds.

At the current price, the stock is trading at 42 times its FY24 earnings estimates. Given the uncertainty on demand and margin trajectory, investors should await clarity and consistent trends before considering the stock.