Marico: Protected by lower input costs

The momentum in the top line has slowed down considerably.

Falling prices of key inputs will help stabilise operating profit margins at a time when volumes could be under pressure.

While falling input prices will help consumer goods firm Marico in the coming months what might offset some of those benefits is a slower momentum in sales. Already, volumes in the December 2008 quarter haven’t been as robust as they were earlier in the year—at 7 per cent, the growth is almost half of what was seen in the June 2008 quarter. Premium products such as Saffola edible oil appear to be seeing some consumer resistance in a weakening economy and same store sales at the skin clinics actually fell 13 per cent indicating that discretionary spend are being curtailed.

Nevertheless, led by a 15 per cent increase in prices the company posted a 23 per cent increase in sales for the quarter and it should end 2008-09 with a growth in the top line of close to 26 per cent.

However, despite its strong portfolio of brands -- Parachute is the market leader in the pure coconut oil category with a share of 27 per cent -- the outlook for 2009-10 is less promising and analysts are pencilling in a sales growth of just 14-15 per cent with consumer spends likely to fall at least in the first half of the year.

In the December quarter Marico managed to sustain its operating profit margin (opm) at 12.7 per cent by spending less on advertising and other overheads. But margins remain below those of Dabur which turned in an opm of 16.6 per cent.

That could change with prices of copra, the key ingredient for its coconut hair oils, coming off sharply, as also prices of safflower used to make Saffola. Therefore, the growth in net profits should be somewhat better than the rise in the top line. Over the longer term, the company’s entry into health foods as also the introduction of variants in the hair care segment, should drive profits. At the current price of Rs 61, Marico trades at around 17 times its estimated 2009-10 earnings, with valuations similar to those of Dabur.