Why Marico is a good bet

Domestic consumption has been on a rough patch over the past few months and, like most FMCG players, Marico has seen a slowdown in offtake. But the worst may be over for the company.

A 10 per cent fall in price last year makes this a good entry point for investors. The stock currently trades at 37 times its trailing 12-month earnings, at a reasonable discount to Hindustan Unilever ( 67 times) and Dabur (57 times).

Spurring domestic volumes

Marico derives 75-80 per cent of its revenue from its domestic FMCG business. In line with the consumption slowdown seen in the Indian economy, Marico’s domestic volume growth has been on a steady decline in the last four quarters. Domestic volumes, which grew at 8 per cent in the quarter-ended March 2019, slowed to 6 per cent in the June quarter and 1 per cent in the September quarter. It has further weakened, moving marginally into the negative territory, in the three-months-ended December 2019 quarter, according to management commentary ahead of the third quarter results.

However, domestic volumes are likely to bounce back beginning the fourth quarter of FY20.

For one, consumption in the overall economy is expected to pick up. After recording a 4.1 per cent growth in the first half of this fiscal, the private final consumption expenditure component of the GDP (in real terms) is expected to end the year with a 5.8 per cent rise. Thus, growth in the second half is anticipated to be better than the first half.

Good monsoons and higher prices of agricultural produce are likely to aid a recovery in rural demand. Marico will benefit from this recovery.

Secondly, actions taken by the company to improve volumes in its key segments will bear fruit.

It has primarily been impacted in the last few months by a cooling off of demand in both the coconut oil (Parachute rigid packs) and value-added hair oil segments, which together bring in close to two-thirds of the domestic revenue. A disruption in the distribution channel and a delay in passing on the benefits of the fall in copra prices — the key raw material for coconut oil — led to customers downtrading to unorganised players.

The company cut prices in the latter part of the third quarter, and expects to see better demand in the months to come. It is addressing the slowdown in the value- added hair oils portfolio through ₹10 packs to nudge the lower end of the market, as well as through scaling up of launches such as Hair & Care’s dry-fruit hair oil and Parachute’s Advansed aloe vera oil, at the premium end.

Premium focus

Marico’s focus on the premium and under-penetrated categories such as hair nourishment (Livon), male grooming (Set Wet) and skin care (Kaya) will also be a key driver for growth.

While Set Wet hair waxes have gained good traction, the company has expanded its portfolio with the introduction of hair serums for men. It has also extended its skincare products with the launch of face masks and face scrubs.

Considering that the offtake in premium categories is more through modern trade and e-commerce routes, the company is also strengthening these channels. In the first half of the year, modern trade and e-commerce contributed 15 per cent and 5 per cent, respective;y, to its India business.

Financials

In the quarter ended September 2019, revenue growth stood flat at ₹1,829 crore compared with the September 2018 quarter.

Though Marico’s international revenues grew 8 per cent, the muted domestic volumes pulled down the overall revenue growth. Net profits moved up by 17 per cent to ₹247 crore.

Despite the weak performance on the top line, benign prices of raw materials such as copra, rice bran oil, liquid paraffin and HDPE (high-density polyethylene) helped.

Operating margins expanded by 270 basis points over a year ago to touch 19.3 per cent in the quarter, driving profit growth. The company expects input prices to remain favourable in the near future, giving it enough elbow room to push up advertising spends, while at the same time, maintaining margins at 19-20 per cent.

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