Recovery in core portfolio, international biz boost Marico's share price

Continued recovery in Marico’s core portfolio, scaling up of its foods business and improvement in international business have driven shares of the Parachute and Nihar hair oil maker to all time high. The stock touched Rs 420.50 this month, and is currently around Rs 405 levels.

Marico positively surprised the Street after reporting one of the highest volume growth 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 the 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 digit. Value added hair oils (VAHO) is 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 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 where the company is the market leader led by its Saffola brand. Marico is also aggressively scaling up its foods business with a focus on new launches and increasing penetration. The company is confident of generating Rs 350 crore in revenue from this business in the ongoing fiscal, and the same increasing to Rs 500 crore in 2021-22.

Additionally, analysts are confident of improving demand in the international business. “The international business, which is roughly 20 per cent of its overall topline, is largely concentrated in countries such as Bangladesh and Vietnam who have very similar demographic 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.

Moreover, stock valuation is reasonable too, say experts. At 42.5 times on 12-month forward basis, the stock trades at a discount of 11 per cent to its 5-year average price-to earnings multiple of 48.1 times, according to data from Bloomberg.

Increase in prices of key raw materials such as copra, sunflower and rice bran as compared to modest price hike is seen negatively impacting the company’s gross margins, according to analysts at Sharekhan. However, cost optimisation efforts undertaken by the company could restrict any severe contraction in margins. Demand slowdown and increased competition in highly penetrated categories are the other typical key risks.