Marico’s September quarter business update makes for disappointing reading, coming as it does after a muted June quarter. The company said that its domestic volumes grew in “low single digit” as rural demand recovery remained subdued due to rising food prices and scanty rains. Small wonder, Marico’s shares fell by nearly 5% on Thursday on NSE.
Volumes in Parachute coconut oil and Saffola edible oils—the company’s two workhorse brands— grew in low single digits. In the June quarter, Parachute coconut oil’s volume fell by 2% whereas Saffola edible oils clocked a low double digit growth.
Despite price cuts, demand for Saffola edible oils did not pick up. The price cuts, perversely, led to wholesalers reducing their stocks of edible oils affecting volumes, pointed out a Nomura Financial Advisory and Securities (India) report dated 5 October. Besides, currency depreciation in some overseas market dented its international business, hurting overall revenue.
The double whammy of lower volume and price cuts means the consolidated revenue in Q2 would drop slightly from a year ago. This comes after a 3% growth in domestic volume and a 3% drop in the consolidated revenue in the June quarter.
However, there is some respite on the margin front. Favourable copra and edible oil prices should fuel a strong expansion in Marico’s gross margin. Nomura has estimated the gross margin to be 48.7% in the September quarter. In Q2FY23, gross margin stood at 43.6%. Yet, a ramp-up in advertisement expenses may not lead to a commensurate Ebitda margin expansion. For FY24, Marico has maintained its Ebitda margin guidance of more than 20%.
To be sure, investors should brace for earnings downgrades once Marico’s Q2 earnings are out, although the company is guiding for the second half of FY24 to be better. Marico expects rural consumption trends to improve in H2 driven by factors such as retail inflation levels staying within RBI’s tolerance range of 2-6%, healthy sowing season, and the hike in minimum support prices. But if demand does not pick up, then Marico may have to resort to further price cuts which, in turn, would weigh on the margin.
After Thursday’s drop, Marico’s shares are up by about 6% in 2023 so far versus a 16% gain in the Nifty FMCG index. The Marico stock trades at 41 times its FY25 estimated earnings, showed Bloomberg data. Valuations are lower versus some other consumer companies, but much depends on how the second half of FY24 pans out now.
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Updated: 05 Oct 2023, 09:42 PM IST