Higher sales growth for Marico contingent on rural demand recovery

Brokerages have a mixed view on the stock; scale up of foods segment key for further gains

Pegged back by sluggish show in the rural segment, Marico’s December quarter performance for the 2022-23 financial year (Q3FY23) undershot Street expectations.

In a pre-quarterly results update, the company reported a low single digit consolidated sales growth while analysts expected mid-single digit growth and an improvement in the demand environment.

While the international business grew in high single digits despite a tough macro environment, the India business was the laggard as volume growth disappointed. While the urban market and premium range posted strong growth, inflationary trends dented rural demand.

The company believes that easing of commodity inflation, higher crop realisations, ongoing government interventions and likely stimulus from the upcoming Union Budget augur well for the sector in the forthcoming calendar year.  

Among the core products, Parachute hair oil, its single largest brand, witnessed some recovery after price cuts in Q2FY23. Volume growth for the Parachute rigid packs (though lower than estimates) have come back to positive growth territory in Q3FY23 after three consecutive quarters of fall. With copra (key raw material) prices firming up, consumer pricing is expected to stabilise as competitive intensity from the unorganised segment moderates.  

The Saffola franchise grew in double digits in value terms. Within this, volumes of Saffola oils registered low teens growth, aided by price cuts over the last two quarters. Saffola foods which includes oats, instant noodles, honey, spreads, soya nuggets continue to post good growth and is in line with the company’s revenue target of Rs 650 crore in FY23 and Rs 850 crore to Rs 1,000 crore in FY24.

The company recently expanded its food portfolio with the launch of Saffola Munchiez range of roasted makhana and ragi chips.

Nuvama Research, however, says that healthy snacks space is a crowded segment with entrenched players like Too Yumm apart from ITC and Pepsi. The company has sharply stepped up new launches under the Saffola brand over the last two years. It may need to invest heavily in advertising and promotions and its ability to scale up the brands will be keenly tracked.

In fact, success of the new brands could be the key for further rerating of the stock, believe brokerages.

Motilal Oswal Research expects the company to post double-digit sales growth over the next two years. Over the long term this would be led by momentum in each of its core segments, significantly higher growth rates in the foods portfolio, and the Rs 450 crore to Rs 500 crore targeted from its 'digital first' range of products, it adds.

The brokerage has a ‘buy’ rating, given inexpensive valuations of 43.5 times FY24 earnings, potential for strong earnings growth versus earlier and healthy return on equity.

Nomura Research, however, has a ‘neutral’ rating as they expect core portfolio volumes to be lacklustre with low visibility of meaningful improvement. Further, the deflationary raw material environment may not yield meaningful benefits on margins, says the brokerage.