Marico's shares rise as core portfolio, international business grow

Company reported one of the highest volume growth among consumer staples players in the September quarter

Continued recovery in Marico’s core portfolio, the scaling up of its foods segment, and improvement in international business have driven shares of the maker of the Parachute and Nihar hair oil brands to an all-time high. The stock touched Rs 420.50 this month, and is currently around Rs 401.

Marico surprised the Street after reporting one of the highest volume growth rates of 9 per cent among consumer staples players in the September quarter (Q2). This demand momentum, which comes after three consecutive quarters of negative volume growth, is seen continuing in the quarters ahead as consumer spending on discretionary items regains at the expense of health and hygiene products. 

“Parachute volumes are seen steady in the range of mid/high single digits. Value added hair oils (VAHO) are recovering faster with strong traction in the mid and bottom end of the pyramid,” says Varun Singh, research analyst, IDBI Capital. As compared to a mere 4 per cent volume growth rate expected in FY21, Nomura estimates the figure to increase to 9 per cent each for FY22 and FY23.

Consumer preference for trusted, quality brands is seen driving volumes higher for the edible oils business, in which the company is the market leader, led by its Saffola brand. Marico is also scaling up its foods business with a focus on launches and increasing penetration. 

The company is confident of generating Rs 350 crore in revenue from this business in this financial year, increasing it to Rs 500 crore in 2021-22.

Additionally, analysts are confident of improving demand abroad. “International business, which is roughly 20 per cent of its overall top line, is largely concentrated in countries such as Bangladesh and Vietnam, which have very similar demographics as India. The company has undertaken steps to diversify its product portfolio, offer better pricing, etc, which we believe should translate into better performance in the medium term,” said Himanshu Nayyar, research analyst, YES Securities.

Stock valuation, too, is reasonable, say experts. At 42x on a 12-month forward basis, the stock trades at a discount of 12 per cent to its five-year average price-to-earnings multiple of 48x. 

According to Bloomberg, all the six analysts polled in December have a “buy” on the stock with an average target price of Rs 437.

Increase in prices of key raw materials such as copra, sunflower, and rice bran as compared to modest price hikes is seen affecting the company’s gross margins, according to analysts at Sharekhan. 

However, cost optimisation efforts undertaken could restrict any severe contraction in margins. Demand slowdown and increased competition in highly penetrated categories are the other typical key risks.