Marico: flat sales growth but healthy margins
Marico Ltd did well in the June quarter despite weak demand conditions, especially in its rural markets.
Domestic sales volume grew 8% on the back of good growth in its main products—coconut oils, value-added hair oils and refined edible oils. However, this growth came with a price: the company had to pass on the savings on input costs to consumers. Therefore, domestic sales revenue declined by 1% over a year ago.
Parachute’s price was cut by about 6% as a fall in copra prices gave it the leeway to do so and grow volumes despite a weak environment. Although copra prices fell in June also, Marico has taken a call that copra prices may increase in the first half, and has, in anticipation, hiked prices by 5% since July. How that turns out, only time will tell.
While it expects the increase in copra prices to reverse the deflationary trend, it also expects demand to revive due to good monsoon rains. The full effect of these hikes will be visible by the end of the fiscal as the anniversary effect of the price cuts will get over by then.
In Saffola, volumes grew by 11%, which matched value growth, as the company did not cut prices here. It expects double-digit growth to continue in the edible oils segment. The foods sub-segment of Saffola is also doing well.
The international business, however, is seeing low growth rates, with sales growing by 4%, chiefly due to the price cuts of Parachute in Bangladesh as well. If Marico’s prediction of a pick-up in copra prices plays out, it may raise prices in Bangladesh as well, which should allow value growth to recover.
Overall, Marico’s consolidated sales rose by a mere 0.1% over a year ago as deflation ate into sales growth. However, the decline in input costs more than made up for it. Operating profit rose by 17.5%, chiefly due to the lower input costs, and gained sequentially, too. Now, Marico expects the cycle to turn in FY17, with deflation giving way to price hikes as input costs trend up. It is also forecasting that consumer demand should recover in FY17.
Its earnings rose 17.2% over a year ago. Although this increase is mainly due to the lower input costs, healthy volume growth is a positive. The risk is if its decision to increase Parachute prices has a larger-than-expected effect on demand. If rural demand takes longer to revive, despite a good monsoon, that is another risk.