Marico's recurring net profit of ₹213 crore is marginally lower than ₹216.70 crore estimated by a Bloomberg poll of analysts
Marico improved its gross margin by 242 basis points
Shares of Marico Ltd, known for its Parachute coconut hair oil brand, rose over 7% intraday on Tuesday. At first, it looked surprising given that its reported financial results lagged Street expectations. What’s the excitement about then?
One part of it is to do with the reason profits fell below estimates. The company increased advertising spend to support its new launches and boost volume growth, which some analysts are seeing as the right move.
The other is Marico’s relatively positive commentary vis-à-vis other fast-moving consumer goods (FMCG) firms that have announced results so far. The management’s commentary was far more sanguine on demand outlook than peers. “The Marico management, while acknowledging some softness in the month of March, sounded a lot more positive on short-term volume growth prognosis than peers," said analysts from Kotak Institutional Equities in a report on Monday.
It’s also worth noting that shares of Marico fell 4.6% on Monday, possibly in anticipation of muted March quarter (Q4) results. Moreover, the stock has underperformed the Nifty 100 index so far this calendar year. Since the results didn’t contain big negative surprises, it isn’t surprising that the stock has recovered a bit.
As far as the Q4 results are concerned, the company did well to improve its gross margin by about 240 basis points. However, higher advertising spends ate into Ebitda (earnings before interest, taxes, depreciation and amortization) margin, which expanded by 56 basis points to 17.6%.
Investors can expect gross margin improvement to continue given expectations of a muted price environment for copra, a key raw material for Marico. Additionally, volume performance is crucial as well. For the March quarter, domestic volumes grew 8%, helped by a favourable base. In the March 2018 quarter, the measure had risen by 1%.
Performance of the value-added hair oil portfolio was discouraging, with a volume growth of just 1%. On the other hand, Parachute coconut oil brand saw 6% volume growth, helped by a favourable base. Given the thrust on innovations and new launches, the company is targeting volume growth of 8-10% in FY20. But scaling up volumes on new products hasn’t always been an easy affair.
Besides, valuations are far from comfortable, in keeping with other FMCG stocks. Currently, the Marico stock trades at around 41 times estimated earnings for FY20, indicating upsides are limited. Notwithstanding the management’s commentary, investors would do well to wait and watch.