Weak Q3 may keep Marico's stock under pressure, muted consumption weighs

Brokerages are however positive on medium term growth outlook for core and new areas

Muted consumer sentiment and sluggish rural sales impacted the December quarter (Q3FY22) performance of Marico. The maker of Parachute hair oil in a sales update indicated that volumes in Q3 were flat due to weaker consumption sentiment and a strong base of 15 per cent in the year-ago quarter. The stock fell over 2.3 per cent in trade due to the lacklustre showing.

The company highlighted some of the trends that are affecting the consumer sector, besides inflation and its impact on disposable income. But rising mobility has led to pent-up demand for discretionary goods, services, and out-of-home consumption, according to the company.

Analysts led by Abneesh Roy of Edelweiss Securities expect Q3FY22 volume growth on a YoY basis for the entire consumer staples universe to be muted due to rural slowdown, grammage cuts, and the impact of inflation. The domestic market accounts for three-fourths of Marico’s revenues, while international accounts for the rest.

Within the product range, volumes of Parachute coconut oil and Saffola edible oil were weak on a high base. Weak trading sentiment due to fluctuating input prices for Saffola edible oil also impacted volumes. Foods and premium personal care posted double-digit growth, while digital-first brands (Beardo, Just Herbs) performed in line with expectations.

Despite muted volumes, the company indicated that consolidated revenue growth, including international operations, would be in the low teens. Brokerages expect this number to be in the 12-14 per cent range.

Part of the weakness in the domestic segment was offset by high-teen growth in international operations. Lower prices for key inputs — such as copra and edible oil — are positive, though higher crude oil prices can offset some gains in the margin.

The gross margin is expected to improve sequentially, even though it will be lower on a YoY basis. Despite the softness in Q3, Nomura Research believes the company will be a strong beneficiary of a resilient core (the Parachute coconut hair oil portfolio) and future growth vectors in the new and recovering categories (food and digital-first brands).

It expects the value-added hair oil and personal care segments to see a gradual turnaround, led by price correction in the bottom-of-the-pyramid segment and supported by the economic recovery. Investors should await the volume and margin trends in the December quarter before taking exposure to the stock.