Muted Q1 may cap upsides in Marico stock as leading brands underperform

Volumes for consumer major's India business below estimates

The stock of consumer major Marico has been a major underperformer in June, registering a fall of 18 per cent. While its peer index, the S&P BSE Fast Moving Consumer Goods, was down about 3 per cent, the BSE 100 was down 6 per cent over the same period. Near-term margin worries, increased competitive pressures, and higher valuations have weighed on the stock.

While the stock has recovered somewhat this month, the underperformance for the owner of Parachute and Saffola brands could persist since the June quarter operational performance for the India market was below expectations.

There was a mid-single digit (about 5 per cent) decline in volumes for the Indian market on a high base of 21 per cent growth. From a high of 25 per cent in the fourth quarter of 2020-21, volume growth has been on the decline over the past six quarters, with the December and March quarters registering flat showing.

The food segment also had a tepid quarter on account of a higher base, triggered by in-home consumption of oats and a sharp decline in immunity-related categories due to the waning impact of Covid.  

Abhijeet Kundu, vice-president (research), Antique Stock Broking, says on a three-year annual growth basis, Marico’s India volume growth of 2 per cent appears below peer performance. The India decline was led by a double-digit fall in Saffola oils and marginal drop in Parachute coconut oil category. The company highlighted that the decline was due to high in-home use in the base quarter and significant downtrading visible from super premium to mass segment in edible oils.

The brand, according to a pre-quarterly update, chose to maintain threshold margins over volumes in the face of unprecedented raw material inflation, supply-chain issues, and the undesirable effect of price hikes on the absolute outlay for the consumer. Excluding Saffola oils, the India business volumes were marginally higher.

The segments that did well were premium personal care and international operations. While the premium segment did better, given the lower impact on the upper-income consumers and a lower base, all global markets delivered growth in the high teens on a constant currency basis. Despite strong international business performance, the overall revenue growth for the quarter was flat.

On the operating front, the company is expected to benefit from lower prices of key raw material — copra. It should also get the benefit of lower edible and crude oil prices, although this will be offset by a higher cost inventory. While gross margins could expand year-on-year, they will remain at similar levels as the March quarter due to a higher inventory cost. Operating profit growth is expected to be in high single digits, dragged down by lower revenue. Although the food business and digital-first are doing well, one area the Street will monitor is increased competition in its core categories, as well as newer segments.

Says Abneesh Roy, executive vice-president, institutional equities, Edelweiss Securities, “Rising competitive intensity from Dabur in hair oils, and from Adani Wilmar and Emami in healthy edible oils, and a high base are the key near-term challenges for Marico.”

There could be downward revision in earnings, given that the effective tax rate would rise 250-300 basis points in 2022-23. A higher tax outgo is due to expired tax benefits at one of its manufacturing units.

While falling raw material prices will support margins, the Street will keep an eye on the pace of rural recovery and volume/revenue growth in India business. At the current price, the stock is trading at about 40x its 2023-24 earnings estimates.

Motilal Oswal Research, however, believes that the diversification into other categories could lead to higher multiples. Analysts believe valuations are inexpensive, given the potential of a strong earnings growth and healthy return on equity of over 30 per cent. Investors should await consumption and volume growth trends before considering the stock.