Margin concerns for Marico

Marico - maker of Parachute and Saffola range of products could face margin headwinds in the March 2013 quarter. While the company has witnessed sluggish volume growth in the recent quarters, rising prices of its key raw materials - Copra, Kardi oil and Rice bran oil will only add to its worries going forward. Consequently, the company is likely to take a hit on margins in the March 2012 quarter, believe analysts.

"The significant increase in the kardi oil prices along with the sustenance of the upward movement in the copra prices would affect the gross profit margin of Marico (by 200 basis points) in Q4FY13 (if the company does not take any price increase in its product portfolio). However, if Marico keeps its prices stable the company would be able to focus more on improving the sales volume of Parachute in the coming quarter", leading brokerage Sharekhan writes in a recent note.

Copra (40 per cent of Marico's input costs) prices have risen 10 per cent to Rs 4,425 per quintal since November 2012 and have remained flattish compared to the last year. Going forward as well, copra prices are expected to remain firm due to expectations of a better crop in the new season and strong demand. Kardi oil prices (13 per cent of Marico's input costs) have also risen by 42 per cent last year while Rice bran oil (12 per cent of input costs) has remained firm. Both these products are key inputs for Saffola edible oil which forms 15 per cent of the company's revenues.    

Notably, volume growth across both Parachute and Saffola brands has fallen since the June 2012 quarter due to weakening demand scenario. From 12-18 per cent volume growth in the first quarter of this fiscal, both Parachute and Saffola witnessed single digit volume growth of 4-6 per cent in the December 2012 quarter.

Abneesh Roy, FMCG analyst at Edelweiss Securities, says, "We believe Saffola could benefit from lower base in the March 2012 quarter with just 3 per cent volume growth but it is clearly witnessing challenges. However, interest rate cuts could drive discretionary spends and improve sentiments." Thus, the company's ability to raise prices is very limited in the near term.

V Srinivasan, analyst at Angel Broking says, "Marico's management was expecting copra prices to go up. Given the weakening demand, we believe they can do only marginal price hikes to combat higher input costs."

The management though remains confident. Milind Sarwate, Group CFO, Marico says, "There is no immediate plan to take any price increases in Parachute and Saffola brands. On the contrary, the company has already initiated some downward price adjustments in select packs very recently." The company is hopeful of improving volume growth following the marginal price cuts of Rs 2 and Rs 5 respectively on select packs of Parachute and Saffola. In sync with the trend witnessed in the last four quarters, Marico plans to keep its advertisement, sales and promotional expense stable at about 12 per cent of sales over the medium term which could provide some support to the margins.