The management mentioned that the feedback from its sales team suggests that there are initial signs of pressure on sales volumes in the north. The northern region has been the most affected by the below-normal monsoon and Marico derives 18% of its sales from the region.
However, the management also pointed out that it is very difficult to make any judgement on the quantum of the slowdown in the sales and one needs to wait and watch.
Thus, Marico’s sales volumes could see the impact of a below par kharif in the second and third quarters of FY2010. However, with expectations of a better rabi crop the impact, if any, is likely to be restricted for a few months.
The reduction in the prices of the key variants of Saffola by 10% (in Q4FY2009) and promotional offerings helped the company to regain its double-digit volume growth in Q1FY2010 and we expect the growth to sustain in the coming quarters.
Outlook and valuation
With the management indicating that there are signs of pressure on the volume growth in the north, the company may witness a slowdown in its volume growth in the region in Q3FY2010 (October-December 2009).
Thus, while this increases the risk to the overall growth for Marico in FY2010, we expect this to be a short-term phenomenon as the rabi crop is likely to be good with the late revival in the monsoon.
While we maintain our estimates for FY2010 and FY2011, we shall revisit them after the Q2FY2010 results. At the current market price the stock trades at 22.2x its FY2010E of Rs3.9 and 19.3x its FY2011E of Rs4.5. We maintain our HOLD recommendation on the stock with a price target of Rs90.