 "Weak rural growth hurts Marico")
Slowing rural demand, a delayed festive season and falling Bangladesh revenues impacted Marico's performance in the September quarter.
Net sales grew barely four per cent over a year before, to Rs 1,484 crore, missing the Bloomberg consensus estimate of Rs 1,563 crore by five per cent. This is Marico’s lowest growth in the past 10-odd quarters, partly due to falling realisations.
Healthy expansion of Ebitda (earnings before interest, taxes, depreciation and amortisation) margin, higher other income and a lower tax rate (down 423 basis points, to 29 per cent) drove net profit in the quarter. Yet, despite growing 27.4 per cent over a year before to Rs 151 crore, it came below the expectation of Rs 159 crore.
Even so, Marico’s share price rose two per cent to Rs 399 (versus a flat Sensex rise) on Wednesday, partly boosted by announcement of a one-for-one bonus issue and its first interim dividend for FY16, of Rs 1.75 a share. Also attributable to the management’s confidence on better growth in the second half of this financial year. The management, for instance, expects to clock six to eight per cent volume growth this year, similar to that in FY15.
However, further rally in the stock will depend on sustained improvement in rural growth, as well as the Saffola and Youth brands, and in the international businesses. For now, given the weak results, there is a likelihood of analysts lowering their earnings estimate.
Parachute shines
In the September quarter, domestic volumes grew 5.5 per cent, fuelled by a rise in the Parachute brand's volume growth to 11 per cent. This is the highest since the September 2013 quarter, thanks to calibrated price cuts. The company will continue to try and expand its market share by upgrading users of loose coconut oil to Parachute and Nihar.
Saffola refined oil's volume growth, unexciting at four per cent, was aided by region-specific pricing cuts. Marico has also invested in variants, to expand the customer base. Despite some market share gains, the management believes a sustained recovery might be still a couple of quarters away.
Value added hair oil (Vaho) volume growth tapered to eight per cent and has been volatile in recent quarters. However, a higher base in the September 2014 quarter, which also had most of the festivals, partly explains the weaker volume growth. Going ahead, this segment will drive premiumisation at the company and remains key for its prospects.
Youth brands (Set wet gels, Livon and deos), however, fell 18 per cent in the quarter, due to intensified competition in deos and higher instances of counterfeits in the Livon hair gain portfolio.
International revenues account for 24 per cent of consolidated revenue. These fell two per cent in constant currency terms, due to decline in revenue in the Bangladesh (45 per cent of international business) market. Other core markets of Middle East/North Africa, Southeast Asia and South Africa grew by eight to 10 per cent in the quarter.
Outlook
Some gains from the government pay commission report and former soldiers' mounting demand for the same pension across the same retirement rank are expected to improve urban demand in the first half of FY17. For the second half of FY16, too, a low base effect, coupled with price cuts across categories, should help Marico report better volumes and profits.
What is a worry for most fast moving consumer goods companies like Marico is weakness in rural demand. For Marico, rural growth lessened to that in urban markets, due to a delayed festive season and a weak monsoon, impacting the September quarter performance. This and lower system liquidity saw India volume growth number at 5.5 per cent, lower than Marico’s target of seven to eight per cent. While there are hopes of some revival in 2016, rural demand is another parameter the Street will monitor.
Net sales grew barely four per cent over a year before, to Rs 1,484 crore, missing the Bloomberg consensus estimate of Rs 1,563 crore by five per cent. This is Marico’s lowest growth in the past 10-odd quarters, partly due to falling realisations.
Healthy expansion of Ebitda (earnings before interest, taxes, depreciation and amortisation) margin, higher other income and a lower tax rate (down 423 basis points, to 29 per cent) drove net profit in the quarter. Yet, despite growing 27.4 per cent over a year before to Rs 151 crore, it came below the expectation of Rs 159 crore.
Even so, Marico’s share price rose two per cent to Rs 399 (versus a flat Sensex rise) on Wednesday, partly boosted by announcement of a one-for-one bonus issue and its first interim dividend for FY16, of Rs 1.75 a share. Also attributable to the management’s confidence on better growth in the second half of this financial year. The management, for instance, expects to clock six to eight per cent volume growth this year, similar to that in FY15.
However, further rally in the stock will depend on sustained improvement in rural growth, as well as the Saffola and Youth brands, and in the international businesses. For now, given the weak results, there is a likelihood of analysts lowering their earnings estimate.
Parachute shines
In the September quarter, domestic volumes grew 5.5 per cent, fuelled by a rise in the Parachute brand's volume growth to 11 per cent. This is the highest since the September 2013 quarter, thanks to calibrated price cuts. The company will continue to try and expand its market share by upgrading users of loose coconut oil to Parachute and Nihar.
Saffola refined oil's volume growth, unexciting at four per cent, was aided by region-specific pricing cuts. Marico has also invested in variants, to expand the customer base. Despite some market share gains, the management believes a sustained recovery might be still a couple of quarters away.
Value added hair oil (Vaho) volume growth tapered to eight per cent and has been volatile in recent quarters. However, a higher base in the September 2014 quarter, which also had most of the festivals, partly explains the weaker volume growth. Going ahead, this segment will drive premiumisation at the company and remains key for its prospects.
Youth brands (Set wet gels, Livon and deos), however, fell 18 per cent in the quarter, due to intensified competition in deos and higher instances of counterfeits in the Livon hair gain portfolio.
International revenues account for 24 per cent of consolidated revenue. These fell two per cent in constant currency terms, due to decline in revenue in the Bangladesh (45 per cent of international business) market. Other core markets of Middle East/North Africa, Southeast Asia and South Africa grew by eight to 10 per cent in the quarter.
Outlook
Some gains from the government pay commission report and former soldiers' mounting demand for the same pension across the same retirement rank are expected to improve urban demand in the first half of FY17. For the second half of FY16, too, a low base effect, coupled with price cuts across categories, should help Marico report better volumes and profits.
What is a worry for most fast moving consumer goods companies like Marico is weakness in rural demand. For Marico, rural growth lessened to that in urban markets, due to a delayed festive season and a weak monsoon, impacting the September quarter performance. This and lower system liquidity saw India volume growth number at 5.5 per cent, lower than Marico’s target of seven to eight per cent. While there are hopes of some revival in 2016, rural demand is another parameter the Street will monitor.