Marico's high volume growth, margins may not sustain

Q4 strong, but GST, ad spends, price hikes could affect near-term prospects

In March quarter (Q4), double-digit sales volume growth in flagship coconut oil (rigid-pack Parachute) as well as in enriched hair oils helped Marico grow volumes 10 per cent on domestic front, higher than expectations of six-seven per cent, and helped it  bounce back from a decline of four per cent in Q3. A key factor driving sales volumes was late price hikes that fuelled market share for Marico in hair oils. Edible oil business under Saffola brand continued to post healthy sales volumes growth of six per cent on a high base of 10 per cent a year ago.
 
The strong show in India was offset partly by weak global revenues, which fell eight per cent on headwinds in the Middle East (West Asia) and North Africa. As a result, Marico's consolidated revenue grew only two per cent from a year ago to Rs 1,315 crore, lagging behind Bloomberg consensus estimate of Rs 1,369 crore.
 
Given uncertainty around domestic demand, the company had rolled back some ad spends and even pushed out new launches to the first half of this financial year. This helped in a strong expansion of more than 300 basis points in operating margin to 19.1 per cent in Q4. This, coupled with savings in interest costs as well as tax rate, fuelled a 26 per cent year-on-year growth in net profit at Rs 169 crore, ahead of Bloomberg consensus estimate of Rs 157 crore.
 

The strategy of chasing growth over near-term margin has helped maintain its No 1 and No 2 positions in most categories. Growth in rural markets (one-third of domestic revenues) lagged urban markets in the quarter.
 
Importantly, strong show on volumes and margin is likely short-lived, because price hikes of eight per cent in March could lead to Parachute rigid-packs’ volume growth of five to seven per cent, say analysts. Given rising costs of inputs, more price hikes may have some bearing on volumes. Implementation of goods and services tax would also have some bearing.
 
While its key market Bangladesh is likely to post healthy growth this financial year, recovery in West Asia and North Africa will be gradual.
 
On the other hand, the company plans ad spends at 11-12 per cent of sales for new launches as against eight per cent in Q4. This could lead to some margin correction.
 
After 22 per cent rise in 2017, the Marico stock trades at premium valuations of 45 times the company's FY18 estimated earnings. Await better entry.