Photo: Mint
Photo: Mint

Marico stock declines as volume growth misses Street expectation

  • The growth rate implies that the slowdown is acute for Marico, with its shares trading 6.6% down on Tuesday
  • One reason is the sharp decline in sales of its flagship brand, Parachute

It’s been a tough quarter for Marico Ltd with volumes declining across all its major categories. The growth rate implies that the slowdown is acute for Marico, with its shares trading 6.6% down on Tuesday.

The results also fell short of the Street’s expectations. Analysts had penciled in about 6% year-on-year growth in revenue in the September quarter, but it instead fell by 0.4%.

Graphic: Naveen Saini/Mint
Graphic: Naveen Saini/Mint

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One reason is the sharp decline in sales of its flagship brand, Parachute. This category declined 4% in value terms year-on-year. In fact, the price disparity between loose coconut oil and Parachute has widened, which is slowing down consumer upgrade to branded coconut oil.

Besides, this was among the slowest growth rates clocked by the company in the last three years. Competition has been increasing in categories such as edible oil. Value-added hair oils witnessed a decline in revenue, while volume growth was flat. However, Marico’s international business was a saving grace, ratcheting up 8% revenue growth.

Raw material prices, thankfully, came down sharply, aiding margin expansion. Marico’s second-quarter Ebitda margin stood at about 19.3%, an increase of 270 basis points from the year-ago period.

“Gross margins saw a massive 560 bps expansion y-o-y due to the tailwinds from low copra prices, and also low prices of crude derivatives. The company deployed part of the savings in higher ad spends to support innovations," said Credit Suisse India in a note to clients. Ebitda is earnings before interest, tax, depreciation and amortization.

In a post-earnings conference call, the management said it expects mid-single-digit growth in the second half of the current fiscal, and 8-10% growth in constant currency in its international business.

Still, analysts have pencilled in lower volume growth in the coming quarters, downgrading the stock. While lower raw material prices could keep profit growth buoyant in the short run, growth headwinds in FY21 will be a big concern.

“While the company will deliver good Ebitda growth in FY20 due to copra tailwinds, there are serious concerns on growth, which puts FY21 earnings at risk. We cut earnings by 4-5%," added Credit Suisse.

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