Marico’s Q2  update fails  to lift  spirits

Marico shares are up 15.5% from their 52-week low seen in January. Meaningful volume growth is a key trigger and so is diversification into the foods segment. 
Marico shares are up 15.5% from their 52-week low seen in January. Meaningful volume growth is a key trigger and so is diversification into the foods segment. 


  • To boost volumes, Marico passed on the benefit of falling input prices despite high-cost inventory.

Marico Ltd’s quarterly update for the three months ended September (Q2FY23) is a bit underwhelming. That is because investors were expecting margins to be better due to softening trends in the price of copra, a key raw material.

The company has said operating (Ebitda) margin in Q2 is expected to near the levels seen in the same quarter last year. Ebitda is earnings before interest, tax, depreciation and amortization. In the September 2021 quarter, Marico’s consolidated Ebitda margin stood at 17.5%. This also means that the company’s margins would fall sequentially in Q2 by around 310 basis points (bps).

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However, the company expects gross margin in Q2 to be higher year-on-year (y-o-y) and drop sequentially from 45% in Q1. Note that copra prices were softer than expected in Q2, while edible and crude oil prices also fell sequentially.

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Against this backdrop, the primary reason for flattish y-o-y operating margins is the double-digit rise in advertisement and promotion expenses. Moreover, to increase volumes and capture market share, Marico has passed on the benefit of falling input costs to consumers even as it absorbed high-cost inventory. Saffola Oils’ volume performance reflects this, clocking high single digit growth. This follows a cut in retail prices in line with the correction and reduced volatility in vegetable oil prices. In Q1, Saffola Oils’ volume had dropped by around 20% y-o-y.

However, other categories such as Parachute Coconut Oil saw a decline in Q2 volume. Overall, the India business saw low-single digit y-o-y volume growth in Q2. In the rural market, downtrading was still prevalent because of high retail inflation. Marico’s value added hair oils (VAHO) category was hurt by subdued rural sentiment. On the other hand, the urban and premium discretionary segments were on a better footing.

Meanwhile, even as global macro-outlook remains uncertain, Marico’s international business saw double-digit constant currency growth in Q2. However, international business forms a smaller portion of Marico’s overall revenues (23% in FY22) and, hence, does not move the needle in a big way.

Investors would do well to closely track the management’s commentary. Edible oil prices are expected to drop further, which would bode well for margins. Given cooling inflationary pressures, consumption trends are expected to improve in H2FY23. Further, the likelihood of healthy crop realizations helps rural sentiments.

Marico shares are up 15.5% from their 52-week low seen in January. Meaningful volume growth is a key trigger for the stock and so is the progress of the company’s diversification into the foods segment. Marico intends to scale foods’ revenues to 850-1,000 crore by FY24 helped by innovation and distribution.

The drivers for growth in Marico’s VAHO portfolio are aggressive participation in the bottom-of-the-pyramid segment, accelerated growth in the mid-segment and share gains in the premium segment, according to Nirmal Bang Institutional Equities.

As such, Marico’s valuations are undemanding with the stock trading at 41 times FY24 estimated earnings, shows Bloomberg data. Analysts at Motilal Oswal Financial Services pointed out that the valuations appear inexpensive given the potential of strong earnings growth versus earlier and a healthy return on equity in the late 30s.

“After achieving a sales compound annual growth rate (CAGR) of about 6% over FY15-20, the sales momentum has been better now than that in the past, with double-digit sales CAGR expected over FY20-24," said the analysts in a report on 3 October.

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