Marico Ltd reported a lacklustre 0.9% increase in consolidated operating profit for the quarter ended 31 December, despite a 22% increase in revenue to Rs817.7 crore. In the first nine months of the current fiscal, operating profit has risen by 4.9% on the back of a 15.7% growth in revenue. This is quite unlike Marico’s track record of reporting steady earnings growth.
Things have been different this year owing to a sharp rise in copra prices, the main raw material used by the company. Copra prices had reached relatively low levels a year ago, thanks to which Marico had reported strong margins in the last fiscal. But prices of the commodity have risen by 62% year-on-year (y-o-y), much of the rise happening in the past few months.
While Marico has increased retail prices of its coconut oil products by around 24%, this wasn’t enough to offset the much larger increase in material costs. The impact is much more on the company’s stand-alone financials, since the consolidated financials include the performance of the skincare businesses and its international forays.
Based on the stand-alone numbers, operating profit fell by as much as 17.4% last quarter on a y-o-y basis, despite a 20.8% increase in revenue. Operating margin fell by more than 500 basis points, as raw material costs rose by 650 basis points as a percentage of sales. One basis point is one-hundredth of a percentage point.
The rise in copra prices in recent months has been unusual and it would be challenging for any company to maintain margins in such a situation. Even so, it reflects the quasi-commodity nature of the company’s business. If Marico were to pass on the entire cost increase to customers, at least some of them would migrate to loose oils or cheaper alternatives in the unbranded market.
The good news is volume growth has sustained at 15% despite the 24% rise in prices in the current fiscal. The company plans to increase prices by another 8-9% soon, which should help profitability. And copra prices are likely to correct once the flush season starts in February. These factors seem to have given investors some hope.
This perhaps explains the stock’s 2.5% rise on Thursday, even while the Bombay Stock Exchange’s FMCG index fell by more than 1%.
We welcome your comments at email@example.com