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Marico sounds a wake-up call

Marico sounds a wake-up call
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First Published: Thu, Sep 15 2011. 01 15 AM IST
Updated: Thu, Sep 15 2011. 08 33 AM IST
Marico Ltd has sought to temper short-term investor expectations. In an unusual investor update, the company said: “On balance, we sense that the numbers expected from us by financial community members, especially stock market participants, are somewhat excessive.”
It leaves no room for any doubts, adding that the reported net profit in the next couple of quarters may fall short of current expectations.
Marico’s earnings per share are expected to rise by around 18% from a year ago in the September quarter and by 35% in the December quarter, according to consensus estimates compiled by Reuters. The company itself does not issue a forecast for earnings growth, and neither does the current update indicate by how much current estimates are off the mark.
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In support of its observation, Marico has cited a general deterioration in the macroeconomic climate, before stating specific factors. It said advertising and sales promotion expenses may rise in the forthcoming quarters to support new products and on maintaining the growth momentum. A way in which companies tackled rising costs was to restrain advertising expenditure. In a consumer business, that can only be a temporary solution.
Another big concern is copra prices, a key input for Parachute coconut oil and related hair oil variants. Copra prices have increased by around 80% year-to-date. Marico thinks prices may fall, but is not confident. A closerlinkage of copra prices to vegetable oil prices (which have risen) and fund-based buying in commodities have made predictions difficult. If the rise holds for a few more quarters, Marico may conclude the copra market has undergone a structural change. Its pricing strategy will then undergo a revamp.
That brings us to its next concern: margins. The company’s price hikes have only partly covered the input cost hikes, not wanting to hurt consumer demand. Its long-term focus is on volume growth. A sharp hike in prices could turn consumers to try cheaper alternatives. Higher margins will become meaningless if volume growth declines.
Marico’s volume growth has been healthy in recent quarters,vindicating its price strategy, and was 14% in the June quarter. If retail prices are held in check, while input costs keep rising, margins may fall further. Add to that higher operating expenditure in areas such as advertising, salaries and freight, and the pressure on margins could be telling.
There are also smaller factors, such as the turmoil in the Middle East and North Africa, which contributes 5% to Marico’s revenue, and accounting policy changes. All the factors stated are known to investors already. But analysts appear to have jumped the gun in expecting things to improve, especially on the margin front.
Marico ends its note stating that the long-term potential of its business is strong, and that it will not choose profit growth over volume growth. It seeks to disassociate itself from quarterly targets, and take a more medium-to long-term view of its business.
The cautionary note should prompt investors to evaluate their projections for other consumer firms as well. After all, they operate in the same market, and like Marico, most consumer companies have volume growth as their stated objective.
We welcome your comments at marktomarket@livemint.com
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First Published: Thu, Sep 15 2011. 01 15 AM IST