On the margin front, Marico Ltd is better positioned than many of its fast-moving consumer goods (FMCG) peers amid the current inflationary environment. The company in its June quarter (Q1 FY23) earnings call said that around 50% of its raw material basket is witnessing deflation in prices. The price of copra, a key raw material for Marico, declined 26% year-over-year (y-o-y) and 6% sequentially in Q1. This helped drive much-anticipated gross margin improvement for Marico, taking it 401 basis points (bps) annually to 45%. The fall in copra prices more than offset inflation in other inputs such as rice bran oil and crude oil derivatives.
Still, in the second quarter, gross margins are unlikely to improve significantly, the company said. There are many reasons for this. First, copra prices are expected to remain in a narrow range in the near future. Also, in the Saffola oil category, while the price of vegetable oil has started to come down, its gains will come with a lag as Marico has a higher cost inventory, but has already lowered the prices of its products.
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Nevertheless, the expected correction in vegetable oil prices coupled with lower copra prices would mean Marico would have comparatively higher margins for FY13. The company is targeting an EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 18-19% in FY23, up from 17.7% in FY22. In Q1, however, higher advertising costs and other expenses limited the year-on-year growth in EBITDA margin to 159bps.
Margin guidance is encouraging, but the same cannot be said about volumes, which were subdued in Q1 as higher inflation levels led to a decline in products. In addition, last year’s base was higher in some categories, such as oats and saffola oil, due to growth in domestic consumption, which accounts for 30% of Marico’s portfolio.
In India business, Saffola oil volume declined by about 20%, leading to a 6% decline in overall volume. Excluding Saffola oil, Marico’s volume growth was 1%.
According to analysts at Jefferies India, the performance was also not impressive at -1% on a three-year compound annual growth rate, which was lower than its peers. Jefferies said this compares to growth of 8% for Dabur India, 7% for Nestle India, 6% for Britannia Industries, 4% for Godrej Consumer Products and 2% for Hindustan Unilever.
The result: Marico’s first-quarter consolidated revenue growth was just 1.3%. Its international business performed well with constant currency growth of 18%. This momentum is expected to continue, but the share of international revenue in Marico’s total revenue is relatively small.
The company’s move to reduce the prices of Parachute Coconut Oil and Saffola Oil will boost volume growth. Therefore, Marico is confident of an improvement in volume trends in Q2, and is likely to accelerate in H2FY23, helped by a softer base. However, due to a slower-than-expected recovery in volumes and some corrections in prices to boost growth, analysts at Motilal Oswal Financial Services are reporting 4-5 earnings per share for FY23 and FY24. % has been cut.
Volume growth is a key trigger for the stock, which is down about 14% from the 52-week high seen in mid-October. In addition, Marico’s growing presence in foods deserves a major watch. “The much needed diversification is gaining momentum in food items and digital-first brands. If this is sustained, it could lead to more multiples for Mariko than before. For now, its earnings growth provides a safe haven compared to its major peers in an uncertain environment,” said the Motilal Oswal report. According to Bloomberg, Marico’s stock stood at nearly 41 times FY24 estimated earnings. does business on.
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