Near-term investor sentiment may not be high on Marico's slow Q2 growth

While the company may lower its FY20 volume growth guidance amid muted offtake in September quarter, benign copra prices should push up profit margins

As Marico, the maker of hair and edible oil brands like Parachute and Saffola, clocked a better volume growth of 6 per cent in the June 2019 quarter, it kept investors’ hopes high. Despite some recent underperformance post the cut in corporate tax rates, the company’s share price has outperformed (up nearly 7 per cent) the Nifty FMCG index (up 5.3 per cent) in the last three months. However, keeping investor sentiment elevated in the near term may not be easy for Marico because of slower growth in the September 2019 quarter (Q2).

“Product offtake, across categories, was softer throughout the September quarter. Factors, such as liquidity issue and lower wage growth, impacted the overall demand,” says Vivek Karve, chief financial officer, Marico. 

In fact, in the June quarter, Marico was one of the few FMCG companies to have witnessed relatively better product offtake. Now, with muted volume growth in Q2, it may have to lower its overall volume growth guidance of 6-8 per cent for FY20.

But there are some growth levers, which could push volumes and profits. One, a strong product push in the second half (October 2019 to March 2020) should support overall volumes. Karve says factors, such as good monsoon in large parts of the country, festive season, and the government’s efforts to revive liquidity, should propel overall demand, and so volume growth in the second half of FY20.

Further, earnings would get support from benign input costs. The average price of copra, a key raw material that accounts for 45-50 per cent of Marico’s total raw material costs, are down 18 per cent year-on-year in the September quarter. This should keep Marico’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin at higher levels, as compared to FY19’s 17.8 per cent. Marico could also invest some part of these gains for its new product launches.

Nitin Gupta, analyst at SBICAP Securities, believes that the near-term margin and earnings benefits expected from lower copra prices are factored in the current stock price. 

Marico’s current valuation of 39 times FY21 estimated earnings is at a 9 per cent premium to its own 1-year forward historical valuations. Thus, investors are recommended to wait until signs on volume uptick emerge, as any miss could weigh on the stock.