Marico’s inflationary tale
If Marico can deliver on volume growth, then higher realizations and stable margins should deliver healthy profit growth and put it among the top performers in the sector
The very thing that consumers hate is something that FMCG (fast-moving consumer goods) companies don’t mind—inflation. In small doses, it has beneficial effects. Copra prices and therefore loose coconut oil prices have been rising since December, but Marico Ltd hiked prices only in March. That gave it an edge over the unorganized firms in the March quarter and Parachute coconut oil sales rose by 15% in volume terms over a year ago. Some part of this growth is also due to sales picking up post-demonetization.
While volume sales grew by 15%, Parachute’s value sales grew by 11% as average realizations were lower. The full effect of higher prices will be visible in the current quarter. Marico expects copra prices to increase further in the first half of fiscal year 2018 (FY18). The company will be slow to hike prices as it wants to increase share and volume growth. Its ability to forecast and secure raw material supplies, unlike smaller firms who buy at spot rates, gives it an edge. Of course, when the situation reverses, it loses this edge but that is for another day. For now, it is in a good place.
Parachute coconut oil (in bottles) contributed to 25% of consolidated turnover. In Saffola edible oil, input costs are stable but volume sales growth was relatively low at 6%. A premium product, the cutback on consumer spending on discretionary items may have affected growth. In value-added hair oils, Marico held on to prices, although input costs rose. Volumes grew by 10%, ahead of the market and again, remonetization helped. The company’s international business disappointed (23% of sales), with volume declining by 5% and value sales by 5% in constant currency terms.
Marico’s consolidated sales rose by 2.4% over a year ago in the March quarter, lower due to the international business. India sales rose by 6%. Input costs grew by 6.2% but Ebitda (earnings before interest, tax, depreciation and amortization) margin still rose by 3 percentage points, due to lower advertising spends and other expenditure. Since raw materials have become expensive, companies will spend more on advertising and less on sales promotion.
Marico’s Ebitda rose by 21% and its net profit increased by 25.5%, in the March quarter. In the near-to-medium term, which can be taken to mean FY18, the company is targeting an 8-10% volume growth in India, against 4% in FY17. A fair bit of this growth depends on its value-added hair oil business and any setback here can affect its estimate. At the consolidated level, it is guiding for 8-10% volume growth and 12-15% value growth. However, margins may trend lower due to higher costs, the focus on volume growth and an increase in advertising costs.
The current quarter’s net profit growth will certainly cheer investors as it is much higher than the Street’s estimate of about 10-12%. This level of profit growth does not seem to be sustainable as it will come up against a high base in the first half of FY18. If Marico can deliver on volume growth, then higher realizations and stable margins should deliver healthy profit growth and put it among the top performers in the sector. Any significant disruption in sales due to the goods and services tax roll-out in July is a risk. The market already seems to know that, as its stock trades at 51 times its FY17 earnings per share.