Marico: Parachute volumes to recover?

Q2 was a disappointment, but falling competition amid rising input costs could raise market share

Weak show by flagship brand Parachute coconut oil (27 per cent of overall revenues) impacted Marico’s results for the second quarter (Q2) of FY17. This segment posted one of its poorest performances till date with volumes (down six per cent) and realisations (down 19 per cent) falling year-on-year. Pre-mature price hikes in July in anticipation of a surge in input (copra) costs impacted the brand’s growth in Q2. This is because input costs contracted in July giving a leg-up to peers and pruning Parachute’s market share by 70 basis points. Parachute’s weak volumes were also a function of high base given that this metric had grown 11 per cent in the same quarter of the last financial year. 

 

But with copra prices moving up after July, Marico’s peers, too, have started price hikes. Typically, smaller unorganised players are the worst-hit amid rising input costs, enabling brands such as Parachute to not only recover but also increase market share. Against this backdrop, the management remains confident of Parachute regaining five-six per cent volume growth in the second half of this year. 

Marico’s other brands namely Saffola (edible oil, oats) as well as value-added hair oil brands (Parachute Advansed, Nihar Naturals, and Hair & Care) posted good performance in Q2 (double-digit value growth). Both portfolios gained market share in the quarter. 
 

Pulled down by falling revenues in Bangladesh, Marico’s international business, which accounts for a fifth of consolidated revenues, grew four per cent in Q2. Price deflation in coconut oil business overshadowed healthy traction in the value-added hair oil segment in this market. The management believes Bangladesh growth should pick in the second half of this financial year. Benign input costs and flattish ad spends fuelled a 180-basis-point increase in operating profit margin to 17.5 per cent. With input costs firming up and limited bandwidth to increase prices without hurting volumes, Marico’s operating profit margin is likely to remain range-bound.

Continued innovations in hair oil as well as foods, along with focus on upgrading users from non-branded loose coconut oil (a third of overall coconut oil market) to Parachute, will drive Marico’s growth. 

Rich valuations of 42 times Maricos’s FY17 estimated net profit appear sustainable. Krishnan Sambamoorthy, consumer analyst at Motilal Oswal Securities, says premium valuations are justified.