Recovery drives topline performance for Marico, stock up 11% from Aug lows

Margins to come under pressure as input costs remain higher

The stock of consumer major Marico rose about 1.2 per cent in a weak market after its quarterly update highlighted pick-up in demand and improving consumer sentiment across categories. While the ongoing vaccination and lower Covid infections have led to healthy overall demand, improved mobility has rubbed off on growth in the discretionary and out-of-home categories.

For its domestic business — which accounts for three-fourths of its revenues — revenue growth came in at low twenties, in line with analyst estimates. After an 11 per cent decline in Q1FY21, Marico’s revenue growth has been trending up over the past three quarters on a lower base and gradual recovery. The company had ended the June quarter with growth of 26 per cent.

Though the sharp 14 per cent decline in domestic volumes dragged down the two-year average quarterly growth to 3.5 per cent in the June quarter, the company indicated that the metric was now closer to double digits.

Within product categories, Saffola edible oil was an underperformer. The segment was hit by volatility in edible oil prices and that led to destocking by distribution channels and lower in-home consumption. In the hair oil segment, the company indicated that Parachute delivered volume growth in line with the medium-term aspirations of 5-7 per cent, while value added hair oil (VAHO) posted double-digit growth. Volume growth for the VAHO segment has been in the 21-35 per cent range over the last three quarters.

In the smaller segments, the company indicated the foods segment is on course to hit the revenue target of Rs 500 crore by the end of FY22. The premium personal care and digital first launches, too, saw good growth.

In the international business, barring Vietnam which was hit by rising Covid cases and a stringent lockdown, the company indicated it recorded double-digit constant currency growth across markets.

While volume and value growth are robust, the Street will keep an eye on the margin performance, given the rising input costs. Though crude oil and edible oil prices are higher or have held firm in the September quarter, copra prices have seen a 12 per cent correction on a sequential basis. Given that all commodities are up over the past year, the gross and operating profit margins will be under pressure. As a consequence, the firm expects modest bottom-line growth in the quarter. CLSA expects the gross margin in the September quarter to fall 500 basis points YoY to 53 per cent, while the operating profit margin to slide 195 basis points to 17.6 per cent.

Some pressure has, however, been offset due to price hikes across categories. According to Vishal Punmiya and Videesha Sheth of Nirmal Bang Research, “Pricing interventions at the start of FY22, cost-reduction programmes, and operating leverage should support the operating margin in FY22.”

The stock that has gained 11 per cent since its lows towards the end of August is currently trading at 47.5 times its FY23 earnings estimates. CLSA has an underperform rating with a price target of Rs 500 (11 per cent downside). Investors should await the growth trend and stability in margins before considering the stock.