Margin pressures may ease in Q3 as Marico puts up steady show in Sept qtr

Valuations, however, cap upsides in the near term

Powered by steady growth across most of its key segments, Marico's September quarter performance met street expectations. The company reported a 21.6 per cent y-o-y rise in consolidated revenues for the September quarter (Q2FY22). The domestic business, which accounts for 77 per cent of company’s revenues, posted a robust 24 per cent growth; though volume growth for the domestic segment was lower at 8 per cent.

In the hair oil segment, while Parachute saw 18 per cent growth most of which was value growth with volumes moving up 7 per cent, in the value added hair oils segment (VAHO), however, the 16 per cent growth was almost entirely led by higher volumes. Higher penetration across markets aided a 180 basis point increase in market share in Parachute. The 40 basis points gain in the VAHO segment was on account of traction in mid and premium segments.

The performance of the Saffola edible oil segment was muted as it was impacted by volatility in edible oil prices which led to destocking by the trade channel and lower in-home consumption. Saffola Foods, however, posted a 70 per cent growth on the back of higher penetration with oats rising 36 per cent. The company highlighted that 90 per cent of its portfolio registered market share gains. While share gains are positive and rural has outpaced urban growth, the company highlighted that there has been a moderation in rural growth.

Even as sales were steady, higher raw material prices weighed on margins. Gross profitability was down 560 basis points YoY to 42.5 per cent due to higher input cost inflation especially rice bran and packaging materials. The positive, however, is that copra (input for hair oil segment) prices are down 5 per cent over the year ago period and 11 per cent on a sequential basis.

The company indicated that reduction in import duty on vegetable oil should lead to lower prices going ahead. This should help improve the gross margins in the December quarter (Q3FY22). Operating profit margins are expected to look up in the March quarter as Q3 would see higher advertising expenses. Given the margin stress in the near term, CLSA has cut earnings estimates for FY22 by 6 per cent.

Analysts at Prabhudas Lilladher led by Amnish Aggarwal are positive on the medium term prospects of Marico and expect sales to grow by 14.6 per cent annually over the FY21-24 period. They have a hold rating on the stock as valuations at over 46 times FY23 earnings estimates factor in the positives. Investors should await improvement in the operating profit front and clarity on the rural demand front before considering the stock on dips.