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Marico:  Margin in better shape than its volumes

Marico Ltd is better placed amid the prevailing inflationary environment compared to many of its fast-moving consumer goods (FMCG) peers on the margin front. About 50% of its raw material basket is seeing deflation in prices, the company said in the June quarter (Q1 FY23) earnings call. The price of copra, a key raw material for Marico, fell by 26% year-on-year (y-o-y) and 6% sequentially in Q1. This aided the much-awaited gross margin improvement for Marico, taking it up 401 basis points (bps) y-o-y to 45%. The drop in copra prices more than offset the inflation in other inputs such as rice bran oil and crude derivatives.

Even so, in Q2, gross margin is unlikely to improve significantly, said the company. There are many reasons for this. First, copra prices are expected to be range-bound in the near term. Further, in the Saffola oil category, while the price of vegetable oil is beginning to soften, its benefit will come with a lag as Marico has higher cost inventory, but has already reduced prices of its products

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Troubled waters

Nevertheless, the expected correction in vegetable oil prices along with lower copra prices would mean that Marico will benefit comparatively more on the margin front for FY23. The company aims to deliver Ebitda (earnings before interest, tax, depreciation and amortization) margin of 18-19% in FY23 versus 17.7% in FY22. In Q1, though, higher advertising costs and other expenses restricted the y-o-y increase in Ebitda margin to 159bps.

The margin guidance is encouraging, but the same cannot be said about volumes, which were subdued in Q1 as there was downtrading across products because of high inflation levels. Plus, last year’s base was high in certain categories, such as oats and Saffola oil, because of increased in-home consumption, which forms 30% of Marico’s portfolio.

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In the India business, Saffola oil volumes declined by around 20% y-o-y, sharply dragging overall volumes down by 6% y-o-y. Excluding Saffola oil, Marico’s volume growth was 1%.

The performance on a three-year compound annual growth rate basis was also not impressive at -1%, lower than its peers, according to Jefferies India analysts. This compares to a growth of 8% for Dabur India, 7% for Nestle India, 6% for Britannia Industries, 4% for Godrej Consumer Products, and 2% for Hindustan Unilever, said Jefferies.

The upshot: Marico’s Q1 consolidated revenue growth stood at a mere 1.3%. Its international business performed well with constant currency growth of 18%. This momentum is expected to continue, but international revenues account for a relatively small share of Marico’s total revenues.

The company’s move to reduce the prices of Parachute coconut oil and Saffola oil would drive volume growth. Hence, Marico is confident of improvement in volume trends in Q2, and this is likely to accelerate in H2FY23 helped by a soft base. However, due to a more gradual than expected recovery in volumes and some price corrections taken to boost growth, analysts at Motilal Oswal Financial Services have cut their earnings per share estimates for FY23 and FY24 by 4-5%.

Volume growth is a key trigger for the stock, which is nearly 14% down from the 52-week high seen in mid-October. Besides, Marico’s expanding presence in foods is a key monitorable. “The much-needed diversification is gathering momentum in the foods and digital-first brands. If it is sustained, it can lead to higher multiples for Marico than in the past. For now, its earnings growth provides a safe haven versus its staples peers in an uncertain environment,” said the Motilal Oswal report. Marico’s stock trades at almost 41 times its FY24 estimated earnings, according to Bloomberg.

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