Before Marico Ltd released its June quarterly update on Friday evening, its shares reached their highest in 2020. On Monday though, the stock lost about 2% on a day when the Nifty 50 index increased by 1.5%.
The company’s update offers a peek into how the June quarter shaped up amidst the unprecedented covid-19 crisis. Of course, volumes were expected to take a beating due to the lockdown during the quarter. It said domestic volumes would decline in low teens on a year-on-year basis.
For perspective, India business accounted for as much as 77% of turnover in FY20. Note that during the March quarter, domestic volumes had declined by 3%. In the June quarter, performance of Parachute coconut oil was reasonable while that of value added hair oils was impacted adversely. The foods portfolio did well helped by the higher in-home consumption to an extent.
Marico’s remaining revenues come from the international markets, which also faced disruptions either due to total or partial lockdowns. The international business saw a mid-single digit decline in constant currency terms in Q1.
The company expects overall revenue to decline in double digits. Jefferies India Pvt. Ltd forecasts June quarter revenues to decline by about 15%. "Ebitda decline is estimated at 8% year-on-year with a similar decline in earnings," wrote Jefferies analysts in a report on 5 July. Ebitda is earnings before interest, tax, depreciation and amortisation.
Ebitda margin expansion is expected to curtail the decline in profits versus the decline in revenue. Cost control and rationalisation of advertising & promotion spends in a few discretionary portfolios are expected to facilitate Ebitda margin expansion for the June quarter. Ebitda margin for last year’s June quarter were at 21.3%.
"Marico has a more resilient portfolio of products than peers to withstand the covid-19 led sales and earnings decline in financial year 2021," wrote analysts from Motilal Oswal Financial Services Ltd in a report on 4 July. They added, “This is possible on account of recovery seen in Parachute volumes prior to the covid-19 outbreak, successful turnaround and strong growth in Saffola edible oils and foods, and better outlook for the international business versus peers."
Marico has said it has been able to steadily scale up operations to near-normal levels in the month of June, after facing considerable disruptions in the first fortnight of April. This should gradually boost revenues in the coming months. Plus, it helps that margin outlook is relatively encouraging.
On the flip side, valuations leave little room for meaningful upsides. Currently, the Marico stock trades at nearly 38 times estimated earnings for financial year 2022, based on Bloomberg data.