Marico’s Sep quarter update offers comfort on margin front2 min read . Updated: 06 Oct 2020, 10:34 PM IST
Ebitda margin expansion of nearly 300 basis points to 24% in Q1FY21 was impressive to say the least. Of course, those high margins were not sustainable, as they followed a meaningful decline in advertisement and sales promotion expenses
Shares of Marico Ltd fell by about 2% on Tuesday. However, the stock had gained 4% on Monday when the company declared its September quarter (Q2FY21) update on demand trends and operating performance.
The insights into how the last quarter panned out are encouraging, especially on the margin front. Marico said: “Although the key raw materials have seen an inflationary trend towards the end of the quarter, we expect to deliver healthy earnings growth on the back of a robust volume growth and a host of cost saving initiatives."
An analyst with a domestic institutional brokerage said, requesting anonymity, “It appears that Ebitda margin in Q2FY21 is likely to expand whereas we were building in flattish margins."
For perspective, Marico’s Ebitda margin in Q2FY20 stood at 19.3%. Dolat Capital Pvt. Ltd said in a note, “While we expect slight erosion in gross margin due to inflationary environment, we believe Marico will register about 150-160 basis points (bps) improvement in Ebitda margins with healthy revenue growth and cost saving initiatives."
During the June quarter (Q1FY21), revenues were hit owing to the covid-19 lockdown. But Ebitda margin expansion of nearly 300bps to 24% in Q1FY21 was impressive. True, those high margins were not sustainable as it was helped by a decline in advertisement and sales promotion expenses.
Even so, advertising expenses were bound to increase eventually as operations move towards normalcy. Marico has said, “During the quarter (Q2FY21), the company upped the investments behind brand building and advertisement spends were back to pre-covid levels."
Further, Marico said there was a partial revival of consumer sentiment, reflecting in performance across portfolio and channels. The rural market continued to perform better than urban. It said the distribution network has rebounded back to near pre-covid levels.
The India business saw signs of revival in consumer demand with the core categories, which contribute more than 90% of the business, posting robust volume growth in the quarter. The value-added hair oil segment returned to a growth trajectory in Q2FY21 after a sharp decline in Q1FY21.
Additionally, the international business posted mid-single digit constant currency growth, which is nothing to complain about. Based on the September quarter update, Emkay Global Financial Services Ltd expects Marico to deliver close to 10% sales growth with both domestic and international (favourable currency) recording 10% growth.
Meanwhile, shares of Marico are up 5% from their pre-covid highs in January. Based on Bloomberg data, the stock trades at about 38 times estimated earnings for FY22, suggesting a good portion of the near-term positives are factored in.