Gliding in Parachute gets rough for Marico

Sales grew by 4.7 per cent to Rs 1,118 crore - lower than Street expectations of 10 per cent growth

 weak show by Parachute coconut oil (23 per cent of total revenues) is among factors that have pulled down Marico’s performance for the quarter ended September, wherein sales grew 4.7 per cent to Rs 1,118 crore, lower than Street expectations of 10 per cent growth. The overall volume growth of four per cent was also the lowest in eight quarters as the company aimed to correct higher inventory with its distributors. While the margins expanded strongly, analysts expect those to see some pressure as copra prices are likely to rise. The company expects demand to remain subdued, specially in urban areas, and is focusing on increasing its distribution in rural areas (30 per cent of its domestic fast-moving consumer goods, or FMCG, business). In the medium term, though, it expects volume growth at 8-10 per cent and consolidated revenue growth of 15-20 per cent.

The scrip trades at 28.1 times FY14 estimated earnings, close to its peak one-year forward price/earnings ratio of 30 times. Sustained pick-up in Parachute and global operations could act as catalysts.

Marico saw lower primary (sales to distributor) volume growth of four per cent, though secondary (sales to retailers) volume growth remained higher at nine per cent in the September 2013 quarter versus a year ago. Weaker demand, too, impacted volumes.

V Srinivasan, FMCG analyst, Angel Broking, says, "Volume growth is a disappointment compared to good performance by Dabur and HUL. Overall, results were not good."

Analysts say the poor volume growth could also be due to a high base effect seen in the September 2012 quarter. "We believe the only issue in the primary segment could be lower sales in Parachute hair oil, given the high divergence in primary and secondary volume growth for the brand. Last year, hair oil growth was very high and there could be some high base effect creeping into this quarter," says Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities.

Domestic revenues (72 per cent of total sales) grew at a muted 1.4 per cent to Rs 804 crore. Parachute recorded just a per cent volume growth in the quarter (secondary sales up seven per cent). While it has initiated a second round of price rises of five per cent in Parachute, taking total rises to nine per cent, Marico continues to focus on converting unbranded oil users to branded ones and rural markets.

Positively, Saffola edible oils posted primary volume growth of seven per cent and secondary volume growth of nine per cent, better than the four-six per cent over Q2'FY13-Q4FY13.

Marico's value-added oils (Parachute Advansed, Nihar Naturals and Hair & Care) posted strong volume growth of 15 per cent and expanded market share 260 basis points to 28 per cent. Global business reported 14.2 per cent revenue growth to Rs 314 crore and earnings before interest and taxes margin was 16.7 per cent. Marico expects margin to normalise at 13-14 per cent in the medium term. While Vietnam is doing well, Bangladesh and Egypt are likely to be under pressure, given the unfavourable eco-political environment.

While topline growth was muted, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expanded 210 basis points to 15.1 per cent, driven by the fall in advertising and sales promotion expenses as well as raw material cost. High copra prices were more than offset by benign prices of rice bran oil and Safflower oil, as well as price rises in the quarter. Other income grew 85.7 per cent to Rs 13 crore, further boosting the net profit to Rs 106 crore, up 24.7 per cent year-on-year. Marico expects Ebitda margins to be between 14 and 15 per cent.