Marico: Volume risk

The strategy of targeting volume growth is at risk due to price rise

Marico’s annual sales growth of 22 per cent at Rs 818 crore was mainly supported by price rise in the domestic consumer products business (about 70 per cent of overall sales) translating to revenue growth of 19 per cent. International business also clocked a healthy growth of 33 per cent (28 per cent adjusted for the exchange rate).

Volume growth, the company’s key focus and growth strategy, however, remained steady at 15 per cent. Domestic volumes grew at a lower rate of 10 per cent (compared to 11.5 per cent in the September 2010 quarter) as business was impacted by price rise — 24 per cent and 13 per cent in Parachute and Saffola (more than 50 per cent of domestic sales), respectively. However, international business clocked a higher volume growth of 25 per cent.

Operating profit margin tanked around 260 basis points (bps) to 12.2 per cent primarily due to a 742 bps jump in raw materials and packaging costs. Prices of copra (40 per cent of total raw material costs) witnessed a jump of 62 per cent. Plus, rises in prices of sunflower oil (3 per cent), rice bran oil (25 per cent) and HDPE (4 per cent). However, net profit margin declined only 80 bps to 8.5 per cent due to higher income, lower depreciation and taxation.

The outlook for the domestic business is cautious as volume growth is at downside risk in case of further price rise (8-9 per cent planned in Parachute) on account of rising raw material prices. Analysts expect continued pressure on margins though the company expects these to come to normal levels soon as input prices, mainly copra, are expected to ease in the next financial year.

Meanwhile, performance of the international business and skincare business segment (Kaya) is encouraging and likely to support overall business growth. Key geographies namely Bangladesh, West Asia, North and South Africa in a addition to new acquisitions (Code 10 and Ingwe), are doing well.

Kaya is showing signs of recovery and there has been sequential improvement in performance.

It recorded better annual sales growth of 11 per cent (excluding Derma Rx acquisition), same clinic growth of 10 per cent (helped by Indian operations despite closure of six clinics) after a decline for past few quarters and significant decline in losses at Rs 0.9 crore (sequentially down for a consecutive quarter).

Analysts have a neutral rating on the stock and prefer to see the impact of price rises on volumes.