Marico has said the input cost environment has turned challenging in the short term, but it expects these trends to be transient and correct from Q2FY22
Shares of Marico Ltd are about 2% away from their annual closing highs seen in January on the National Stock Exchange. The company is expected to see profit margin pressure in the near-term due to rising input costs. In its pre-quarterly update for the March quarter (Q4FY21) released last week, Marico said, “Operating margin is likely to dip significantly owing to the severe input cost pressure." This will also take a toll on net profit growth.
But investors don’t seem to be perturbed by this. Shares of the company are up 3.5% since the update is out. According to an analyst requesting anonymity, “One reason for the resilient stock performance is that copra inflation is good for market share gains, especially given their aggressive pricing strategy this time."
Marico has said the input cost environment has turned challenging in the short term, but it expects these trends to be transient and correct from Q2FY22.
To be sure, it appears investors are focusing more on the revenue outlook. Analysts from J.P. Morgan India Pvt. Ltd (JPM) wrote in a report on 31 March, “Prioritization of revenue growth over margin holds the key for rerating." The analysts added, “Marico saw around 500 basis points expansion in Ebitda margin over FY15-20 when revenue growth moderated to around 5% compound annual growth rate (CAGR)."
Ebitda is earnings before interest, tax, depreciation and amortisation. One basis point is one-hundredth of a percentage point.
JPM analysts now see more focus to push up revenue growth (the brokerage estimates FY20-23 CAGR: 10%). “We expect Marico to invest disproportionately behind the scale-up of new segment forays and improve competitiveness in economy value added hair oils (VAHO) and edible oil sub-segments," pointed out the analysts.
As such, for the March quarter, revenue growth rates of most consumer firms should look robust due to last year’s favourable base quarter (Q4FY20) when performance was impacted owing to covid-19 related disruptions and lockdown. Marico is not an exception here. In its pre-quarterly update, the company has said its India business delivered a very strong double-digit volume growth. Of course, a low base helps here. For perspective: Marico’s India volume had declined by 3% in Q4FY20.
For financial year 2020, Marico’s domestic business accounted for 77% of the group's turnover while the remaining came from the international business.
Meanwhile, analysts reckon Marico stock’s valuations aren’t as expensive as some other consumer firms. Based on Tuesday’s closing price of Rs421.30 per share, Marico’s shares trade at around 42 times estimated earnings for financial year 2022, based on Bloomberg data.
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