Marico Ltd is one of the odd men out among consumer staple firms. At a time when shares of most peers are far ahead of their 52-week lows, the Marico stock is flirting with its lows. The demand slowdown is hurting it more than others. Marico’s domestic volume growth was a mere 1% for the September quarter. Apart from overall demand slowdown, competition from the unorganized market weighs on growth, too.
Signs that the December quarter will show a marked improvement are few and far between. To boost demand, Marico has taken price cuts. “For the 100ml Parachute packs, the company has rolled back 20% extra grammage (volume promotion implemented in October) and cut the price by 13% (in December), leading to overall 4% increase in prices in the last couple of months," said analysts at SBICAP Securities Ltd in a report on 9 December.
To pass the benefit of reduced copra cost, Marico is now offering ₹5 off on 100ml and 250ml Parachute products, added the broking firm. Copra is one of the company’s key raw material.
“It appears that demand did not revive as expected post the volume increase offers. As a result, a shift in strategy resulting in an optical price cut becomes a necessity to consumer wallets given the stress," said an analyst requesting anonymity.
Analysts at Emkay Global Financial Services Ltd wrote in a report on 12 December: “The price cuts are not negative and have been done historically in order to pass on lower copra prices, a move which has helped the company support volumes and market share in a deflationary cycle."
As of now, investors can just hope volume growth revives. But what about the impact on profit margins? Emkay Global estimates the margin impact to be limited to about 150 basis points, which can be partially offset by minimizing promotions and advertising spends. A basis point is 0.01%. Additionally, it is helpful that copra prices are not expected to rise meaningfully.
To be sure, consolidated Ebitda (earnings before interest, tax, depreciation and amortization) margin expansion of 270 basis points helped Marico report year-on-year growth in profit in the September quarter. Note that this was achieved despite flattish revenue.
From its annual high of ₹404 seen on 25 September, the Marico stock is down 17%, suggesting investors have factored in the pessimism on demand adequately. Currently, the stock trades at 39 times estimated earnings for FY20, based on Bloomberg data.
For the half-year ended September, net profit rose by 19%. If demand continues to rub the wrong way, there’s no reason why current valuations should sustain.