Uncertain growth outlook may be a drag on Marico in the near term

Stable price outlook for inputs such as copra, however, is a positive

Cuts in earnings estimates and near-term volume outlook worries have weighed on the stock of Marico, which has slipped about 6 per cent from its weekly highs. Of this, about 3.5 per cent decline has happened after the March quarter results were announced last Thursday evening. While March quarter results were in line with expectations and market share gains were positives, weak volume growth across key categories and sluggish rural sales are the key concerns in the near term.

Marico, the home-grown FMCG major, is the leader in hair oil and has strong presence in edible oil, through its Parachute and Nihar, and Saffola brands respectively. It sells its products through a vast distribution network of over 5 million, including direct reach of 1 million outlets.

For the quarter ending March 2022 (Q4’ FY22), while the overall Saffola franchise grew 17 per cent led by a similar growth in its foods business, Saffola edible oil segment reported flat volume growth. Parachute rigid hair oil volumes too were impacted falling 1 per cent on weak rural demand. The company indicated that rural demand is lagging urban growth and a recovery is expected in the second half of the current fiscal year led by good monsoons and government measures. While near term outlook is uncertain, the company is expected to sustain market share gains as was the case in the hair oil category though overall sector volumes are witnessing a decline.

The positive among the weak growth trends is that Copra prices, the key input in its raw material basket, are down 31 per cent over the year ago period and 9 per cent sequentially. The company indicated that prices are expected to be stable and the price cuts taken in the March quarter will be visible on volume growth in the current quarter.

In addition to growth in its core categories, stock triggers, according to ICICI Securities, are robust growth in foods led by tailwinds of healthy eating habits. Foods portfolio reported Rs 450+ crore sales in FY22, and the target is to achieve Rs 850-1,000 crore sales in two years. Scaling up the digital only brands segment with the aim of achieving sales of Rs 500 crore by FY24 could also turn out to be another positive for the stock.

Similarly, the international business reported double-digit growth in constant currency for the fifth consecutive quarter, said analysts at Motilal Oswal Securities. And, the management expects the healthy growth to continue in this business going forward.

The much-needed diversification is picking up momentum in Foods and Digital first brands. If sustained, this could lead to higher multiples for Marico compared to the past. For now, Marico’s earnings growth provides a safe haven in an uncertain environment for staples peers, the brokerage said. MOSL has a buy rating on the stock with a target price of Rs 600.

However, a few brokerages are cautious about growth trends though the company is better placed than peers on the raw material front. Say analysts led by Anand Shah of Axis Securities, “While benign copra prices are likely to buffer downside to Marico’s margin delivery, challenges on Saffola with waning in-home consumption trend, volatility in pricing and value added hair oil or VAHO on weak rural off-take to remain a drag for category. Further, near-term margin headwinds due to crude-linked raw material to particularly impact VAHO portfolio keep us on the sidelines.”

Sanjay Manyal of ICICI Securities, too, sees margin headwinds. “We cut our margin estimates due to high inflation in edible oils, crude derivatives.” Manyal has also changed his rating on the stock from Buy to Hold and values the stock at Rs 530 per share.

Overall, given the near-term headwinds, investors should await revival in demand and volume growth before considering the stock which is trading at around 35 times its FY24 earnings estimates.