Strong food business prospects likely to drive growth for Marico

Execution and competitive intensity remain key, say analysts

Shares of Marico, the maker of Parachute hair oil, have risen about 11 per cent in the last three months as compared to 4.5 per cent gain for the underlying BSE FMCG Index. High growth prospects from the scaling up of its food business, positive management commentary, and strong December quarter (Q3) performance have raised hopes of better-than-expected earnings growth, say analysts.

Marico has continued its push into the immunity and healthy foods segment, where it has launched several new products and entered into the mid-sized mass categories such as honey, chyawanprash, soya chunks, and noodles more recently. This has helped this business grow at a robust pace over the past year and it recorded 74 per cent revenue growth in Q3.

Analysts, thus, remain optimistic about the company’s growth. “The management is tapping the healthy food trend. It is entering the mid-size segment (Rs 600-1,500 crore category sales), with just one large incumbent in most cases. The category also offers significant scale advantages,” said analysts at Motilal Oswal Securities. 

The company is confident of generating Rs 350 crore in revenue from this business in the current fiscal, and expects it to increase to Rs 500 crore in FY22.

“While the significantly high growth targets in the foods portfolio are encouraging, execution and competitive intensity remain key,” said an analyst at a domestic brokerage.

Notably, Marico’s Q3 results also exceeded Street expectation by a fair margin. Revenues increased 16 per cent over the corresponding quarter to Rs 2,122 crore, higher than expectation of Rs 2,031 crore, driven by broad-based growth across key segments. Domestic volumes came in at a 34-quarter high of 15 per cent. Higher raw material cost, however, restricted operating profit growth and resulted in margin contraction of 100 basis points. Net profit grew 13 per cent to Rs 312 crore, but again was higher than consensus estimate of Rs 303 crore.

With healthy rural dema­nd, revival in urban growth, and stable input cost situation, ICICI Securities expects the company’s overall revenue to clock compounded annual growth rate of 9.5 per cent during FY20-23 with sustainable margins above 20 per cent.

Most analysts are bullish on the stock — 31 out of 42 analysts tracking Marico have a buy recommendation with a 12-month consensus target price of Rs 459.2, indicating a potential upside of 8 per cent from current market price, according to data from Bloomberg.