Marico Ltd has been in a sweet spot with volumes growing at a brisk pace and raw material costs declining sharply. Sales during the quarter jumped 21.7% on the back of a 14% growth in overall volumes. Its flagship brand, Parachute, registered a volume growth of 18%. In the year ago June quarter, the hair oil brand’s volumes had grown 10%.

With copra prices, the key ingredient for hair oil, easing by 38%, raw material costs as a percentage of net sales came down from 50.7% in the first quarter of last fiscal to just 44% in the three months ended 30 June. Even though the company ploughed back some of the savings into advertising spend (up 3 percentage points as a percentage of sales), profit margins rose 2.6 percentage points to 14.8%. Thanks to the sharp improvement in margins, Marico reported a 45.4% jump in net profit.

photoThe strong results, however, did not impress investors. The stock lost 2.9% to 188 on Friday after the company released the earnings on a day the BSE-200 index lost just 0.3%.

Evidently, the investors were expecting more, especially with the stock already having risen by more than 30% since January, and having outperformed peers in the past month. Additionally, the results showed the company continues to face pressure in the international markets. The global businesses, which contributed 24% of the company’s turnover last fiscal, registered a meagre 3% organic growth in April-June this year.

The sluggish growth is attributed to a high base and the adverse business environment in Bangladesh, and the Middle East and North Africa (MENA) region. The Bangladesh business reported a 2% decline in revenue as high inflation and a weak currency pushed up prices, thereby affecting consumer spending. The business environment in MENA continues to be influenced by the volatile political environment in Egypt. Although the business is steadily returning to normalcy, post the presidential elections, inventory de-stocking resulted in a mere 5% growth in MENA business.

While the management expects the international business to pick up in the second half of the current fiscal, they are not expecting the domestic business to repeat the first quarter performance. Over the next few quarters, it expects the volume growth in key brands such as Parachute to retreat to a long-term average of around 8%. The company is increasingly getting wary of the effect of a slowing economy and the pressure of disposable incomes on sales.

Besides, to sustain volume growth and ward off down-trading by customers, the firm is looking to pass on the input cost benefit to customers. It has already reduced the prices of Parachute coconut oil (45ml and 100ml) by 2. Also, though the input prices of the edible oils are on the rise, the firm is willing to hold back the price hikes for some time for volume growth. As a result, gross margins may not expand as much in coming quarters. But then, that’s a price the company is willing to pay for volume growth.

R. Sree Ram