Investors in consumer companies have come to value volume growth over everything else. That may explain why Marico Ltd’s share price rose by 6.4% on Wednesday compared with the flat FMCG Index on BSE.

Marico’s adjusted net profit grew by just 10% year-on-year (y-o-y), but its reported volume sales rose by 21%, and by 14% after adjusting for an overseas acquisition.

The results came a day after the Reserve Bank of India stunned investors with an aggressive rate hike. Marico’s performance is an indication of what could cheer up gloomy investors: companies that can grow, even when rising inflation and interest rates threaten growth elsewhere.

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Indian packaged consumer goods have battled the inflation genie quite well, focusing on volume growth, being stingy with price hikes, and using scale benefits to drive profit growth. Fierce competition has also helped keep prices in check.

During the June quarter, Marico’s operating profit margin fell by 150 basis points y-o-y. One basis point is one-hundredth of a percentage point.

The price of copra has nearly doubled in a year, while safflower oil is up by 27%, rice bran by 45% and liquid paraffin by 59%. These are key inputs for Marico’s brands. Not passing on all the cost increases meant margins fell, but consumers bought its brands.

Marico’s hair oil brands grew by 32% y-o-y in volume terms, Parachute by 10%, and Saffola by 15%. Apart from pricing, other drivers such as distribution, especially in rural markets, and launching product variants have also helped drive growth.

Its international business, which contributes about a fourth to sales, benefited from inorganic growth, and good growth in Bangladesh. But other regions did not do as well, partly due to the crisis in the Middle East and Africa, and a relaunch being planned in some countries, which affected sales growth.

Inflation continues to be a risk for Marico, though not as big as it was in 2010-11. With volumes growing at a healthy pace, a moderation in input cost inflation will eventually see margins and earnings growth improve.

At a time when rising interest rates may pull down growth, packaged consumer goods firms are in a good place, and their stocks may be prized by investors for their so-called defensive nature. Companies can hike prices a little, and with volumes growing as they are, they should do just fine.

Their key fear will be if economic growth slows, the likely impact it will have on disposable income, and hence, on discretionary spending. If consumer demand gets winged, the sector will lose a key defence.

Graphic by Sandeep Bhatnagar/Mint

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