Marico has said key input costs have started cooling off after peaking at the start of the quarter, although gross margins will remain under pressure due to consumption of higher cost inventory
Shares of Marico Ltd touched a new 52-week high on 30 June on the National Stock Exchange. So far this calendar year, the stock has appreciated by over 30%, outperforming the broader Nifty 100 index. As such, valuations are not cheap. Currently, the shares trade at around 46 times estimated earnings for financial year 2023, based on Bloomberg data, suggesting investors are capturing a good portion of the optimism into the share price.
The company has released its pre-results update for the three-month ended June, highlighting the important trends seen last quarter. Marico has said key input costs have started cooling off after peaking at the start of the quarter, although gross margins will remain under pressure due to consumption of higher cost inventory. This should improve from September quarter onwards.
On the other hand, operating margins should meaningfully improve in the June quarter sequentially due to better operating leverage and trend towards medium term expectations. Recall that Ebitda margin in the March quarter stood at 15.9% and was the lowest Marico had seen in the previous many quarters. Ebitda is earnings before interest, tax, depreciation and amortisation; a key measure of profitability.
To be sure, June quarter operating margin is expected to be lower on a year-on-year basis given that June 2020 margins were exceptionally high at 24.3% primarily helped by rationalization of A&P spends and other overheads in the base quarter. As a result, Marico expects muted net profit growth in the June quarter.
Further, Marico’s Indian business has delivered more than 30% revenue growth, backed by strong double-digit volume growth in 1QFY22. Of course, a favourable base has helped here. Note that India volume growth stood at 25% in the March quarter, also partly aided by a favourable base quarter.
Commenting on the update, Varun Singh, analyst at IDBI Capital Markets and Securities Ltd said, “Volume growth rate in Parachute coconut oil and Saffola has now normalized to 5-7% and 10-11% respectively. High growth in the Food portfolio looks exciting (on low base high growth is always easy). We are overall positive on Marico."
Marico has said, “Value Added Hair Oils (VAHO) recovered smartly across the entire franchise, albeit on a low base, which was due to billing constraints during most of April last year."
“Continued rebound in VAHO is positive, and further commentary needs to be watched out for," said analysts from Motilal Oswal Financial Services Ltd in a report on 4 July. The broker added, “The stock trades at a premium to historical valuations, but better earnings visibility versus peers over FY22 will result in sustained premium multiples."