New Delhi: Marico Ltd is expecting volumes to recover gradually, but it is the margin outlook that it is more confident about. The company expects Ebitda margin to expand by more than 150 basis points (bps) in FY24 to around 20%.
Sure, the company has had a good start. Consolidated Ebitda margin came in at a multi-quarter high in the June quarter (Q1FY24) at 23.2%. This was led by a fall in input costs. For example, key raw material—copra’s price was down by 8% sequentially. But it is also worth noting that the margin performance was partly aided by the denominator effect as Q1 revenue fell year-on-year (y-o-y). As this effect fades, the margin level may drop in the coming quarters.
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On the other hand, Marico’s intent to diversify its portfolio can aid in the upward trajectory of the margin. Revenue contribution from high margin foods and premium personal care segment (including digital-first brands) is likely to touch 20% in FY24 from 15% in FY23.
Marico expects the blended gross margin of these two categories to be equal to the gross margin of the remaining core portfolio.
Marico’s overall revenue growth is likely to be volume led and thus, a rebound in rural demand is key. It notes that there are no clear signs of green shoots in rural recovery on a sequential basis. In Q1, domestic business saw volume growth of 3% as it was impacted by one-off channel inventory adjustments.
However, a healthy offtake along with market share gains would support near-term volume growth. Retail inflation is on a downtrend and that helps. Revenue growth in Q2 is likely to be flat but is expected to move into positive territory in the second half of FY24.
In Q1, the weak show in its core portfolio—Parachute coconut oil, Saffola franchise and value added hair oils—led to a 3% y-o-y drop in revenue to ₹2,477 crore. Here, Saffola edible oil saw a sharp price cut of about 30% due to a drop in vegetable oil prices. The company believes that pricing deflation has bottomed out and the decline would taper off hereon. Meanwhile, the international business remains on a strong footing.
“Our FY24E/25E revenue estimates get trimmed by 2%/1% to factor price deflation in few categories (edible oil and parachute hair oil). However, building margin expansion, our earnings per share for FY24/25 increases by 2%/4%,” said Alok Shah, an analyst at Ambit Capital, in a report on 28 July.
On Friday, ahead of Q1 results, Marico’s shares closed 3.7% higher, also scaling a new 52-week high of ₹578.15 apiece.
Last week, Marico also said it plans to buy up to 58% stake in Satiya Nutraceuticals Pvt. Ltd for ₹369 crore or six times FY23 sales. Satiya Nutraceuticals owns the plant-based nutrition brand ‘The Plant Fix –Plix’. Nuvama Research reckons the consideration is quite reasonable given high growth.
This deal expands Marico’s footprint in the health and wellness category. Still, the transaction is too small to move the needle much for Marico. In FY23, Plix’s revenue formed only 1% of Marico’s consolidated revenue, though it bodes well that Plix’s gross margin is high.
To be sure, Marico’s shares have gained almost 13% so far in 2023, underperforming the 20% rise in the Nifty FMCG sectoral index. The optimism on margin trajectory would support the stock in the near term, says Shah. Investor hopes will be dashed if Marico falters on the margin front.
Shares of Marico trade at around 42 times their FY25 earnings, according to Bloomberg data.