Margin, demand concerns may hurt Marico in near term

Q4 performance is expected to be strong on low base, price hikes

With double-digit volume growth for the third consecutive quarter and aided by price hikes, demand trends continue to be robust for Marico. In a recent fourth quarter (Q4) update, the company indicated a “very strong double-digit volume growth” on a low base for the Indian business, which accounts for threefourths of its overall revenues. Price hikes announced to offset the rise in input costs are expected to keep revenue growth elevated.

Mihir P Shah and Abhishek Mathur of Nomura Research expect the company to report a consolidated revenue growth of 20 per cent in the March quarter. This is better than the Q3 performance of 16 per cent growth. The year-ago quarter was weak with revenue falling 7 per cent.

Within its product mix, while Parachute and the value-added hair oils segments have witnessed double-digit growth since the September quarter, the performance of refined edible oil stood out. The Saffola brand has now delivered double-digit growth in the 11-25 per cent band for the sixth quarter in a row, outperforming overall domestic volume growth since the December 2019 quarter.

Portfolio diversification with multiple new launches has helped the company double its sales in the foods category, which accounts for 4 per cent of sales. Growth here is led by oats and recent introductions, including noodles, honey, Chyawan Amrut, and soya chunks. The international business, accounting for 23 per cent of revenue, too, posted double-digit growth in constant currency terms in the March quarter, the company said.

The Street, however, is watchful given the concerns on account of a spike in raw material prices and the surge in Covid cases. Analysts at Nirmal Bang Research indicate that the input cost environment has turned challenging with key input prices of copra, edible oils and packaging material rising sequentially as well as over the base quarter. In its largest segment (coconut oil), copra prices have risen by 25 per cent year-onyear (YOY) and 6 per cent quarter-onquarter. Given the sharp rise, price hikes may not be enough to offset the costs, with operating profit margins expected to dip over 120 basis points YOY. On the demand front, the restrictions imposed by various state governments could slow sales momentum.

While the stock is up about 6 per cent since its lows in March, given the margin and demand worries, investors should await a meaningful correction and nearterm growth trends before considering an investment.