Margin pressures are up; so why is Marico stock soaring?

In the June quarter (Q1FY22), gross profit margin contracted as much as 759 basis points (bps) year-on-year to 41%. One basis point is 0.01%. Note that gross margin had declined by 520bps in the March quarter (Q4FY21).

However, the worst is perhaps over on this front. According to analysts, the company’s management feels that gross margin has bottomed out in Q1 and should improve hereon. Prices of copra, a key raw material, have been softening, which helps.

Having said that, Marico’s Q1 domestic volume performance appears unexciting with growth at 21%, despite a favourable base, given that volume had declined by 14% in Q1FY21. In fact, volume growth has tapered from 25% seen in Q4.

“Domestic volume CAGR on a two-year basis fell to 2% versus 10% in the March quarter, 6-7% for two quarters prior to that," said analysts from JM Financial Institutional Securities Ltd in a report on 30 July. CAGR is compounded annual growth rate.

“This is likely a result of lockdown-related disruptions, especially in May; plus, there was also some phasing between quarters as the historical skew in sales in favour of June quarters has now been smoothened out," said JM Financial’s analysts.

“Parachute volumes were somewhat flattish versus the two-year ago level, whilst Saffola edible oils sustained double-digit volume growth despite the tough comparables," they added.

It is heartening that Marico was able to curtail the drop in its Ebitda (earnings before interest, tax, depreciation and amortization) margin to 521bps in Q1 to 19%. This also marks a substantial improvement in Ebitda margin from 15.9% in Q4 when the metric had dropped to a multi-quarter low.

Moving ahead, the outlook is decent. “Ongoing topline growth momentum in each of its core segments, significantly higher growth rates as well as targets in the foods portfolio, and ₹450-500 crore now targeted from its ‘digital-first’ range of products are highly encouraging developments for a business that had only about 6% sales CAGR over FY15-20, before reporting double-digit growth in FY21," said analysts from Motilal Oswal Financial Services Ltd in a report on 31 July.

Even so, the Marico stock has appreciated around 35% so far in 2021, suggesting investors are capturing a good share of the optimism. The stock now trades at nearly 47 times estimated earnings for financial year 2023, showed Bloomberg data.