Revival in volumes places Marico in a sweet spot; margins may see pressure

Despite a subdued performance by Marico in the March 2018 quarter (Q4) owing to high copra prices (a key input) and dismal volume growth, the stock is up 8 per cent since May 2, 2018.

What’s mainly making investors confident is an expected recovery in volumes.

Due to a 5 per cent fall in the flagship product, Parachute, and 1 per cent in Saffola, Marico had posted a meagre one per cent rise domestic volumes in Q4 (overall volume growth in FY18 was 1.3 per cent).

However, volumes are likely to ramp up going ahead.

“The company aims to deliver double-digit volume growth in the India business in FY19 and in the medium term, through expansion of core portfolio and new products,” Marico’s management said in an email.

Even analysts expect improvement in rural demand, volume recovery in coconut oil segment, and goods and services tax implementation to push up Marico’s growth numbers.

Moreover, volumes of Saffola, which were under pressure, are also likely to improve, albeit slowly, supporting overall volumes.

The management, however, also says, “The company continues to focus on protecting and growing our franchise at the cost of short-term profitability.”

With input cost pressure (average copra prices up 44 per cent year-on-year in June 2018 quarter (Q1), so far) along with the indication to not fully pass on this pressure to consumers may keep near-term margins under pressure.  

Analysts, though, see some leeway to protect profitability.

“Gross margin will continue to remain under pressure over near term. But, Marico may cut its other operating expenses such as advertising to lower the impact of gross margin compression,” says Abneesh Roy, senior VP, institutional equities, Edelweiss Securities.

Notably, copra prices have come down marginally on a sequential basis in the last couple of weeks, providing some relief.

Besides, if management’s expectation of copra prices softening from October 2018 onward comes true, gross as well as overall margins should improve.

Given the volume recovery and hopes on the margin front, analysts expect Marico’s overall performance to improve faster in the second half of FY19.

And this should help the Marico stock, which after lagging key indices in the past year, has started outperforming.