Marico Ltd had issued a note in mid-September, stating investor and analyst expectations of its results may be running ahead of the ground reality. The company cautioned that profits for the next few quarters would fall short of expectations. Unusual volatility in copra prices—which affects Parachute coconut oil, its flagship product—was the chief reason for the advisory. Marico’s consolidated net profit (after deducting minority interest) rose by just 9.4% year-on-year (y-o-y) to Rs 78.3 crore, much lower than the 15.3% growth seen in the June quarter.
Photo: Bloomberg
Its results show how the company has pulled out all stops to limit the damage to profitability from soaring input costs. Operating profit for the quarter rose by 17.7%, despite material costs rising by a sharp 37.4%.
Marico achieved this by keeping advertising and sales promotion expenses unchanged and limiting growth in other expenditure. Employee costs rose by 24.6%. Its operating profit margins (OPM) fell by 6.3 percentage points to 12%, which appears drastic, but mirrors the June quarter’s OPM.
The company has, thus, managed to hold on to margins sequentially. So, the target of its advisory appears to be investors who may have hoped margins may improve from the June quarter levels. Marico’s interest costs rose sharply, cancelling out growth in other income, while depreciation and income tax, too, rose sharply. That was the chief reason for the slower growth in net profit. The firm also said, adjusting for changes to provisions and accounting methods, profit growth would have been around 5%.
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Also See
• Cost barrier (PDF)
• Quarterly performance (PDF)
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Marico’s sales growth is healthy. Its Indian business saw sales rise by 44% y-o-y, while volumes rose by 14%. Prices have contributed a major share to growth, chiefly due to the rise in copra prices being passed on. Overseas sales rose by 14%, and by 19% including the impact of its acquisition in Vietnam. Key categories—coconut oil, safflower oil, and hair oils—all benefited from good volume growth. Inflation in underlying commodities is the key concern for the company, not just from the viewpoint of margins, but also considering the impact of a continued increase in product prices on consumer demand. Another concern is if advertising expenses rise, margins may get hit.
The firm’s prediction that its profits may belie expectations may come true, but investors are likely to take heart from robust business growth. Focusing on volume growth makes for a more sustainable business model rather than hiking prices enough to grow margins, and losing customers in the process.
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PDF by Yogesh Kumar/Mint
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