Marico: Margin pressures ahead

While prospects in new categories such as soups are high, the company faces well-entrenched competition

Marico is expanding its food product portfolio by entering the Rs 450-crore soups segment under the Saffola brand. Saffola soups will be the latest addition to its health foods business and follows the recent launch of meal-replacement slimming shakes, also under the Saffola brand.

While the prospects are strong in the soup category, analysts say it will be an uphill task for the company to make inroads into a category dominated by HUL’s Knorr and Nestlé’s Maggi. An analyst at a domestic brokerage says there is scope for growth in this category but a lot will depend on the company’s ability to position its soups as a healthier alternative to the existing brands. 
 

The company’s overall portfolio strategy and entry into new categories and extensions revolves around hair and skin nourishment, male grooming and health foods. In addition to its foray into soups, the company had also recently taken a 45 per cent stake in Beardo, a male grooming start-up.

For the overall portfolio, the company is hoping to hit domestic volume growth of 10 per cent. Its domestic volumes in the September quarter (Q2) recovered to eight per cent year-on-year (y-o-y) after a nine per cent dip in the June quarter as the trade channel stabilised after the implementation of the goods and services tax (GST). Though Parachute and the value-added hair oil segment reported 12 per cent volume growth in Q2, Saffola Edible volumes grew a muted three per cent y-o-y due to de-stocking in the Canteen Stores Department (CSD) channel. 

In the near term, the company, which hit peak margins of 19.6 per cent in FY17, will face commodity cost inflation given the sharp rise in cost of copra, which acts as an input to its coconut oil-based products. Given that copra prices have increased 84 per cent y-o-y, the 10 per cent hike that the company has taken in Parachute may not be enough to pass on the rise in costs to customers. But the low-cost inventory and sourcing should help it to keep the impact lower than the cost increase. Marico has indicated it will seek to maintain a minimum operating profit margin of 17-18 per cent in the near term. 
 

Going ahead, the company is looking at growing its revenues upwards of 13 per cent driven by 8-10 per cent volume growth while the rest is expected to come from pricing and mix improvement. Domestic market growth is expected to come from an uptick in rural consumption and restocking in the CSD channel. Constant currency growth in the international market is expected to be in the mid-single digits on the back of a consumption uptick in the West Asia and North Africa region, stable growth in Bangladesh and strong growth in the Southeast Asian markets, according to analysts at Spark Capital.