Strong margin outlook key driver for consumer major Marico's gains

There could be a gradual uptick in volume and value growth in the current year

The stock of consumer major Marico was up 7 per cent in trade on Monday. The company posted better-than-expected March quarter (Q4FY23) results, which coupled with an improving margin outlook led to the gains. A few brokerages have revised their earnings estimates upwards post the results, both on account of better outlook as well as attractive valuations.

Revenue growth for the owner of the Parachute and Saffola brands came in at 3.7 per cent over the year-ago quarter. Domestic growth was muted at 1.9 per cent with urban markets reporting flat growth while there were some green shoots in the rural segment. Volume growth in the Indian market was at 5 per cent. Overall revenues were driven by international operations which grew 9.9 per cent. Marico’s international business accounted for a quarter of the company’s overall revenues.

Stability in consumer prices on the back of lower volatility in copra (input for hair oil) prices helped Parachute volumes to grow in high single digits. The value-added hair oil segment grew by 13 per cent in value terms (low volumes) and 60 basis points market share gain due to strong performance in the mid and premium segments. A lower base and improved operating environment should help sustain the momentum in the current year. While the food business grew 18 per cent in the March quarter it is expected to grow by 40 per cent in FY24 led by innovation and distribution expansion.

Premium personal care posted a growth of 20 per cent in the quarter, which is expected to sustain. The Saffola franchise fell by 9 per cent in value terms, due to a low teen decline in the oil segment due to price cuts on the back of falling copra prices. The trend going ahead is expected to reverse with the segment expected to post a single-digit volume growth going ahead. The company expects digital brands to hit the Rs 400 crore mark by the end of the current year. Overall, a gradual pick-up in volume and revenue growth could play out in FY24.

While the steady growth outlook is positive, major gains are expected to come on the margin front. Gross margins in Q4 were up 294 basis points y-o-y to 47.4 per cent while operating profit margins were up by 153 basis points y-o-y to 17.5 per cent. The expansion was on the back of softer copra prices and a better mix. The lower margin expansion at the operating level was on account of higher employee costs.

The company expects to improve the gross margin by 200-250 basis points while the operating profit margins could improve by 100 basis points on the back of easing input prices, better cost management, and better product mix in FY24. However, advertising spends as a percentage of sales could increase going ahead.

Commenting on the outlook for the company, Himanshu Nayyar and Rajesh Mudaliar of Systematix Shares and Stocks believe that the worst of commodity inflation and rural weakness seem to be over, which should help in improving the volume growth trajectory for the business. Margin situation remains comfortable despite aggressive spends in the foods/digital-first brands where revenue is scaling up as per expectations. The brokerage has a buy rating stating that the stock is trading at a discount to peers despite comparable growth and a better return profile.

At the current price, the stock is trading at 46 times its FY24 earnings estimates.