Marico: Management's positive commentary offers some comfort, say analysts

Hair oil volumes return to pre-Covid levels, but staying there won't be easy

Marico’s performance for the quarter ended June 30, 2020 (Q1), announced during market hours on Monday, came in as a surprise. Besides beating the Street’s expectations, the hair-to-edible oil major's Ebitda margin was the highest in nearly 12 years, led by aggressive cost control.

Yet, the Street wasn't convinced, given the negative stock reaction to the results amid worries over growth in the hair oil category and deceleration in Saffola edible oil's volume growth. However, analysts say,  positive management commentary offers comfort.

According to Marico's management, though Q2 will be volatile amid localised lockdowns, the hair oil category is now above pre-Covid-19 levels. It also expects the high-margin Saffola portfolio to scale to new highs over the next two years, with new launches like Saffola Honey. The gains shall accrue, aided by the expansion of direct reach in rural areas.

According to Shirish Pardeshi, analyst at Centrum Broking, “While there are some worries over hair oil category growth, positive commentary from Marico’s management offers good comfort. However, one needs to see the impact of the competitive intensity once the smaller players are back."

 

 

A key reason for 3 per cent volume growth in May and June was the absence of smaller players, who have been severely affected due to the pandemic, the management eluded. In Q1, overall volumes were down 14 per cent, with its Parachute rigid (Parachute hair oil in the blue pack) and value-added hair oils declining 11 per cent and 30 per cent, respectively. While volumes of Saffola edible oil were up 16 per cent, this figure was lower than 25 per cent growth witnessed in Q4FY20.

Marico’s consolidated revenue declined 11.1 per cent year-on-year (YoY) to Rs 1,925 crore, versus consensus estimate of Rs 1,847 crore. Its profit before tax and exceptional items of Rs 441 crore, however, was almost flat at the year-ago level, but higher than the Street’s expectations of Rs 410 crore. Softer raw material costs and a sharp cut in advertising and promotional spends protected the bottom line.

Advertising and sales promotion expenses as a percentage of revenue were down almost 300 basis point YoY in Q1. The Ebitda margin expanded by 298 basis points YoY to 24.3 per cent, which is also Marico's highest at least since the September 2008 quarter. Going ahead, however, the Ebitda margin is likely to come down, given the company aims to maintain it at 20 per cent levels. So, it remains to be seen whether Marico can continue staying ahead of Street expectations.