Post Q3 results, Marico shares feeling low while some others are on a high

Shares of Marico Ltd fell by nearly 10% through 30-31 January, after the disappointing December quarter results became public. The consumption demand slowdown is biting hard.

The stock saw a small recovery on Monday, which hardly moves the needle. True, valuations are relatively appealing with the stock trading at 33 times its estimated earnings for FY21, according to Bloomberg data.

However, investors are not willing to shower their love on the Marico stock just because valuations are cheaper. This is evident from Monday’s performance of some fast-moving consumer goods (FMCG) firms, wherein shares of Hindustan Unilever Ltd (HUL), Nestlé India Ltd and Britannia Industries Ltd gained more than 4%.

What’s more, HUL and Nestlé India stocks touched 52-week highs during trading hours, eventually making valuations more pricey.

“This is not due to the optimism on the Union budget proposals for consumption demand, but mostly because investors are shifting from ITC Ltd to companies that can deliver in tough times,” said two analysts requesting anonymity.

The ITC stock touched a new 52-week trading low on Monday, as tax hikes on cigarettes announced in the budget were negative for the company.

Coming back to Marico, why aren’t investors encouraged by its lower valuations? Simply put, its outlook isn’t bright. Post-December quarter results, analysts at JM Financial Institutional Securities Ltd wrote in a note: “To be fair, outlook appears weak across the board (similar views expressed by Dabur India’s management as well) but one of our other fears here has more to do with the fact that copra is possibly now facing a scenario of stagnating prices, which may preclude any pricing action or further margin-gains in the Parachute business; in a tepid demand scenario, this could translate into a lower-than-trend level profit growth.”

Copra is one of the key inputs for Marico, whose products include hair oils.

In the December quarter, the company’s domestic sales volume declined by 1%, compared to 1% growth in the previous quarter. The performance in Q3 was adversely affected by 2% and 7% volume fall in Parachute Rigids (available in blue bottles) and value-added hair oils, respectively.

Overall, consolidated revenue declined by 2% year-on-year. True, Ebitda (earnings before interest, tax, depreciation and amortization) margin expanded by 116 basis points to 20.45%, and the trend is encouraging. A basis point is ).01%. However, with copra tailwinds diminishing, investors will keep a close eye on further expansion in profit margins.

With persistent demand weakness, and with Marico underperforming the overall FMCG sector, SBICAP Securities Ltd has cut its revenue expectation by 3-4% over FY20-FY22 (estimates).