Sagging volumes place Marico on slippery slope

Stock tanks over 6% on flat top line in Q2; benign copra prices save the day

In an otherwise bullish market environment, the stock of Marico fell by 6.7 per cent to ~365.50 on Tuesday. Disappointing volumes in the JulySeptember 2019 quarter (second quarter, or Q2) weighed on the company’s top line. Higher advertising spending confined earnings growth — hurting investor sentiment. After the dismal Q2 results, nine out of 24 analysts polled by Bloomberg have downgraded the stock so far.

Analysts at Phillip Capital, for instance, downgraded the stock from ‘buy’ to ‘neutral’ due to growth challenges in core categories and likely higher copra prices — a key raw material — as observed in September.

Marico announced its Q2 results on Friday after trading hours and the markets were shut on Monday due to Diwali and Hindu New Year.

The maker of popular hair care and edible oil brands like Parachute and Saffola clocked 16 per cent rise in profit before tax, while the consolidated net profit grew 17 per cent year-on-year (YOY) to ~253 crore in Q2, a tad better than analysts’ expectations of ~251 crore. However, the top line at ~1,829 crore was almost flat at the year-ago-level and below estimates of ~1,945 crore.

After a robust 6 per cent volume growth in the June quarter, Marico’s domestic volumes grew just 1 per cent in Q2. Weak consumer demand and liquidity crunch impacting traditional trade channels marred volume growth across the portfolio.

Offtake of Marico’s flagship product, Parachute Rigids (oil packs in blue bottles), was down 1 per cent YOY, largely due to customer preference shifting to cheaper, unbranded hair oils. This becomes more worrying, given Parachute Rigids’ one-third share in Marico’s overall business. Unlike unbranded players, Marico did not change price points sharply, but increased advertising spending during Q2 (up 12 per cent, or by 119 basis points [bps] YOY) to push new launches.

While volumes disappointed, benign key input cost (mainly copra) aided Marico’s operating profitability and earnings. With a sharp 561-bps YOY expansion in gross profit margin in Q2, Marico’s operating profit margin improved by 270 bps YOY to 19.3 per cent.

With strategic sourcing and lower average copra prices, input costs are likely to remain supportive. But further margin gains could be limited, as benefits from lower costs are invested to drive growth.

While analysts believe Marico’s mediumterm growth levers will remain intact and the stock currently trades at 37x its 2020-21 estimated earnings — near its long-term historical average valuation — investors should await signs of pick-up in growth.