Marico Ltd reported excellent volume growth across product categories in the December quarter, and price hikes allowed the company to post an improvement in gross margins. But sales growth was backed by a significant advertising and promotional push, which, along with sharply higher wages, affected profit margins.
Marico Ltd. health and beauty products are displayed on the shelf of a department store in Mumbai. Bloomberg
Consolidated sales rose by 29.4% year-on-year to Rs 1,058 crore, backed by a 20% underlying volume growth. In India, the consumer products business’ sales rose by 38%, with 16% volume growth, led by value-added hair oils growing by 20%, Saffola oil by 15%, and Parachute by 13%. In its international business, sales rose 16% in existing geographies, while the acquisition of a Vietnamese company in February 2011 contributed to the overall growth increase of 39%.
The low base effect will diminish from the March quarter onwards. Inflation has affected the company’s performance in some overseas markets, while the volatile situation in parts of West Asia and North Africa continues to be a concern.
The company’s Kaya business saw a 21% growth in sales (15% on a same store sale basis) and it incurred a loss of Rs 14.5 crore. The management is confident that this business will make sustainable profits by 2013-14, but may continue to incur losses in the coming quarters.
In the domestic business, Marico is confident that it will maintain healthy volume growth in the near to medium term, even if not at the same rates as seen in the December quarter.
Vegetable oil prices have been relatively stable from over a year ago. The company has said that copra prices have softened in the past few weeks. That has been seen in the past, too, only for a bounce-back later. But if prices continue to fall, Marico is likely to cut product prices to remain competitive against smaller firms.
While sales rose 29%, material costs increased 26.6%, even as advertising costs surged 48.6% and employee costs by 45.2%. As a result, operating profit margin fell by about 68 basis points, which should not be very worrying. One basis point is one-hundredth of a percentage point.
Net profit (after accounting for minority interests) rose 21%, and would have risen by 25%, according to Marico, but for certain one-off items. That is as good a growth as investors can hope for, at a time when commodity inflation is affecting the performance of consumer companies. Marico’s stock rose 2.5% on Thursday.