Photo: Mint
Photo: Mint

Marico’s quarterly update sounds note of caution on consumption

  • Marico’s domestic volume growth has deteriorated in the quarter ended December
  • It will be interesting to note how other consumer firms performed in the December quarter

Marico Ltd’s shares have fallen about 14% since it announced poor results for the September quarter. The company’s December quarterly update released on 2 January suggests the gloom will continue for some more time.

“The India business as a whole posted a marginal decline in volume growth," said Marico. In FY19, the India business had accounted for 78% of its revenue. Note, in the September quarter, domestic volume growth was a mere 1%, the slowest in the past six quarters. Things have worsened.

Graphic: Satish Kumar/Mint
Graphic: Satish Kumar/Mint

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“It was expected that better monsoons this season would help improve volume growth in consumer categories," analysts from Dolat Capital Market Pvt. Ltd said in a note to clients. However, the uneven monsoon across various parts of the country appears to have impacted performance, the analysts added.

For the December quarter, the Saffola oils and foods portfolio delivered healthy double-digit volume growth, but coconut oil, hair oils and other products declined, weighing on overall growth. Coconut oil and hair oils contribute about 65% to the domestic business, and a decline in volumes in the largest segment is likely to pull down revenue. Marico said the international business posted high single-digit constant currency growth.

“Overall consumption trends during the quarter belied expectations of the beginning of a revival in sentiment. Category growths across personal care remained under pressure, while foods and allied categories fared relatively better," said the company.

In this backdrop, it will be interesting to note how other consumer companies performed in the December quarter. Of course, while Marico had struggled in Q2, some other consumer companies had done relatively better.

On the brighter side, Marico’s earnings before interest, tax, depreciation and amortization (Ebitda) margin in the December quarter is expected to improve on a year-on-year basis thanks to benign input costs.

But given investor focus on the demand environment, the Marico stock closed 2.4% lower on Thursday, on a day when the Nifty 50 index increased by 0.8%. To be sure, investors already seem to be factoring in a good share of pessimism. After the 14% correction since the Q2 results’ announcement, valuations are reasonable, said analysts. But note that the shares trade close to 40 times estimated earnings for this financial year, based on Bloomberg data. The stock may be reasonably priced vis-a-vis other consumer stocks, but is pricey in relation to the poor growth at the firm.

Marico expects some green shoots of recovery in the March quarter. “In December, Marico had implemented three offers (pricing discounts) for its flagship product, Parachute. Given the late reaction, benefits of these price reductions are likely to be visible in Q4," said Nitin Gupta, an analyst at SBICAP Securities Ltd. But as Dolat Capital’s analysts said: “As demand in rural areas depends on liquidity and better agriculture income, we believe that the revival in the demand would take a few quarters."

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