Inflationary pressure weighs on Marico

Sales up by 21 per cent and net profit by 10 per cent; management expects volume to improve going ahead

Marico’s June quarter (Q1) numbers, announced on Thursday, were in line with analysts’ expectation. Sales and net profit grew 20.5 per cent over a year to ~20.3 billion and 10.3 per cent to ~2.6 billion, respectively.

However, operating profit was a disappointment, amid high inflationary pressure. As a result, the share price fell about five per cent to ~350.9.

With a 44 per cent year-onyear rise in the price of copra, a key input and 25-30 per cent of its raw material expense, plus a rise in other input and packaging prices, the gross profit margin contracted sharply for a sixth quarter in a row, by 553 basis points (bps) to 42.3 per cent. Gross margin is the difference between net sales and raw material expenses as a proportion of net sales.

Pain at the core-gross level also percolated to the earnings before interest, taxes, depreciation and amortisation (Ebitda). However, cost saving restricted the latter's margin contraction, which fell 182 bps from a year before to 17.5 per cent. The operating expenses – employee cost, advertisement and selling, and others – as a percentage of net sales fell by 80-157 bps.

Though cost-cutting helped, less of spending on advertising hurt its volumes and market share. Despite a favourable base in the yearbefore quarter, when volumes in its Indian business declined nine per cent, the company clocked no more than a 12.4 per cent rise. Its Parachute Rigid (hair oil sold in blue colour hard plastic bottles) portfolio reported a nine per cent volume growth, as against a nine per cent drop in the year-before quarter, and its Parachute market share remained 59 per cent, where it has been since September 2017.

“Marico is cutting its advertising spends to compensate for high inflation, which is a bit negative. Had the company spent higher on advertising, volume growth could have been better,” says Vishal Gutka, assistant vice-president at Phillip-Capital.

The other factor that might have impacted sales volume is its sharp raising of prices in its flagship products during 2017-18, to offset high input cost. Being a cost-sensitive market, this weighed on the volumes. “Parachute’s volume is flat on a two-year basis, which is not encouraging. Sharp price hikes to pass on inflation in copra costs widened the price gap with low-cost, value-added offerings, putting pressure on the business,” says Nitin Gupta, analyst at SBICAP Securities.

Gains ahead?

The bad news, however, could be behind. Volumes might see improvement, since spending on advertising is likely to go up to 9.5-10 per cent of sales; nor does the company plan any price hike in the near term. “The reported volume growth in Parachute Rigids was above our medium-term target of five to seven per cent, due to the lower base in the year-ago quarter. Also, Saffola oil and value-added hair oil are expected to clock double-digit growth,” says Vivek Karve, chief financial officer (CFO).

Moreover, improvement in the rural economy, with a good monsoon so far, rise in the minimum support price for kharif crops and overall infrastructure activity boosts should auger well for the company. Rural growth at 28 per cent has already outpaced urban growth at 16 per cent in the June quarter, the fourth straight one of outperformance.

How the company manages its profitability in the near term would interest analysts. Those positive on the stock expect Marico to face inflationary pressure for one more quarter. The CFO, however, believes after the fall in copra prices during the past month that a good monsoon should provide downward pressure to these in the second half of 2018-19.

If things go as expected, the stock price fall could be a good entry point for long-term investors.