Double digit growth and rural revival positive for Marico's stock

Concerns have been raised over Marico’s exposure to Bangladesh in the wake of turmoil in that country. However, the management reiterated expectations of growing domestic business at double digits and maintaining international growth. Marico scaled up its food business by 4 times between FY20-24 and aims to double it again in the next three financial years.

The Q1 earnings met expectations. Volume trajectory (up 4 per cent Y-o-Y) was better than expected. New businesses reported good performance. The gross margin was up due to benign raw material costs. Management pointed to market share gains in Parachute, improvement in Saffola volumes, and gradual recovery in value-added hair oil (VAHO). Pricing is expected to turn positive with a 6 per cent hike in Parachute, which should aid revenue growth. Higher copra prices could hit gross margin but operating profit margins may be sustained.

Marico’s Q1FY25 consolidated revenue grew 6.7 per cent Y-o-Y to Rs 2,640 crore, while operating profit rose 9.1 per cent Y-o-Y to Rs 630 crore. Adjusted net profit grew by 11.5 per cent to Rs 460 crore slightly above expectations. The international business was stable on a constant currency basis.

Parachute sales grew by 6 per cent with volumes up 2 per cent while pricing hikes contributed 4 per cent. A 6 per cent price hike in April could be followed by more hikes in H2FY25.  Saffola edible oils volume growth was mid-single digits with pricing steady. From next quarter, revenue growth is likely to match volume growth. VAHO sales declined 5 per cent due to competitive intensity. Improving domestic rural sentiment should aid recovery.

Among new businesses, food grew by 37 per cent Y-o-Y versus 24 per cent in Q4FY24. Premium personal care (PPC) saw momentum via the digital-first portfolio. International growth was 10 per cent in constant currency terms with growth across key markets including Bangladesh (up 10 per cent), Middle East and North Africa (MENA), and South Africa.

In Q1FY25, gross margins rose 227 basis points Y-o-Y (up 67 basis points Q-o-Q) to 52.3 per cent due to benign input costs. Consolidated advertising and promotion (A&P) spends grew 13.2 per cent (standalone A&P dipped 10.9 per cent). The operating profit margin was up 51 basis points Y-o-Y.

Management expects revenue growth to improve to double digits in H2FY25 with volume growth up and international business expected to sustain growth. Share of foods and PPC in domestic business revenues will rise to 25 per cent by FY27 from 20 per cent in FY24 with over 20 per cent growth in both segments. PPC, food, and Digital First are running ahead of FY25 expectations. The Digital First annual sales run rate target at FY25 end is Rs 550-600 crore.

Operating profit margins will be flat in FY25, rising gradually over the next five financial years. Revenue growth should be low double-digits in H2FY25. Growth will largely be driven by volume. Marico will continue to aggressively diversify the portfolio by scaling up foods and PPC.

In international business, the focus is on reducing dependence on Bangladesh, aiming for double-digit constant currency revenue growth across the world. There has been a strong ramp-up in the MENA region by expansion of the hair oils portfolio. In Vietnam, expansion into female personal care has created new revenue streams. Marico is also looking at small M&As in India.

Key risks would include a rise in input prices, geopolitical risks such as in Bangladesh, or higher competition. It’s prudent to factor in high exposure to Bangladesh due to potential risks for cash repatriation. Given the optimism about domestic rural sentiment in H2FY25, most analysts are positive.