Marico: on a slippery slope?
Phrases such as continuous compounders, evergreen stocks and multibagger companies often catch investors’ attention. However, what really matters is how long you manage to hold the bluest of bluechips in your portfolio, especially when their stock market performance isn’t encouraging.
Take the example of Marcio. The stock is down 15% over the last 3 months and despite a strong recovery in the broader markets lately, Marico has remained lacklustre.
What could be the possible reasons?
Of late, the company has been witnessing a flat volume growth and its valuations aren’t cheap. The stock trades at a Price-to-Earnings (P/E) multiple of 48, based on its half-yearly FY22 annualized EPS.
In its Q3FY22 business update, the company has stated that a high base effect and sluggish demand in the rural markets affected the volume growth in the quarter gone by.
The Coconut oil segment has seen muted growth while Saffola edible oils segment saw a drop in volumes as the in-home and out-of-home consumption trends started normalizing, with the opening up of the economy.
In-home consumption during lockdowns had offered tailwinds to volumes in the past.
While the MRP of Parachute coconut hair oil remained absolutely flat, the company had hiked the prices of edible oils by approximately 30% on a cumulative basis in the second-half of FY21.
Have these price hikes contributed to the drop in Saffola volumes? The management should clarify in its Q3FY22 review.
As Marico reports, its domestic premium personal care business has done well and has managed to post a double digit growth in Q3FY22. The international business has done even better with the growth in constant currency clocking high-teens.
Marico launched two new products in the hair-oil segment in the quarter gone by—Parachute Advansed Onion Hair Oil and Marico Jatta. These are premium value-added products.
The company has given a stable outlook on the prices of copra, which is a key ingredient for its portfolio. Q3FY22 updates mention that copra prices along with edible oil prices have softened towards the end of the quarter after remaining range bound for a while.
The company has guided for improved gross margins on a sequential basis.
Is Marico progressing according to its medium term growth plan?
Marico ranks either 1st or 2nd in product categories it caters to—coconut oil, super premium edible oil, post-wash serums, hair gels, waxes and creams, amongst others.
As you may have noticed, irrespective of changes in the prices of copra, the selling price of parachute has remained extremely stable over the last 18-20 months. In other words, that market is price sensitive.
Thus, Marico’s medium term growth strategy looks fairly simple. It aims to lower its dependence on the coconut oil and edible oil portfolios by focusing on the food business and increasing the share of exports.
In FY21, exports accounted for 23% of Marico’s consolidated revenue. The Food division, which is a relatively recent initiative in Marico’s history, constituted 4% of its FY21 top line.
Marico has set a target of 8%-10% volume growth over the medium term in its domestic business along with 13%-15% revenue growth. It aspires to clock a double-digit growth in the international business in constant currency terms.
Marico’s strategy to achieve its medium term growth is:
- Product premiumization
- Expansion of the food portfolio
- Digital transformation
- Prudent cost management
Between FY12 and FY21, Marico’s reliance on coconut oil and refined edible oil has dropped from 72% to 62% in the domestic business.
Digital investments, acquisitions and new launches are yet to pay off
The company is expected to reap the benefits of its digital investments and new product launches over time. Further, the company is perhaps yet to realize the gains of its investment in Beardo—a men’s grooming brand—to its true potential.
The foods business is expected to grow faster. At the start of FY22, the company had guided for 40%-50% growth in the foods revenue, which is expected to touch ~Rs 400-450 crore by the end of this fiscal.
Under Saffola brand, the company offers products such as pure honey, soya chunks, noodles, oats, green coffee, virgin oils, and immunity, beauty and hygiene products, to name a few.
Depending on the product category and its role in the medium term business plan, the company appears to be tweaking its channel, promotion and pricing preferences intelligently.
On the digital initiative, the company not only sells on third-party e-commerce websites but has its own platform—saffola.marico.in. The company has grown the share of e-commerce revenue in the domestic market from 5% in FY20 to 8% in FY21.
In the times of aggressive raw-material cost increases, the company walked a tight rope on cost management without diluting the product effectiveness.
Now it remains to be seen how well it can integrate new products in its core product portfolio for them to become growth engines in a true sense.
Marico is scheduled to declare Q3FY22 results on January 28, 2022. Keep an eye on margins and management guidance on volumes.
Should you take some cues from Budget 2022 as well?
Companies such as Marico might benefit if India’s per capita GDP grows as it may translate into higher discretionary income for Indian consumers.
Any announcements that might incentivize rural spending and support rural incomes might be a positive for FMCG companies.
Will FMCGs be back in action soon?
It’s amusing that some loss-making start-ups and some highly profitable FMCG companies rely on the same demographics of India. One set is mature and growing slow; while the other is growing fast but staring at scant profits that too at some future date.
For now, the market seems to be perfectly okay with astronomical valuations of new-age start ups. Well, drying liquidity might test their patience now.
Will FMCG companies get their lost aura back? Do let us know what you think.
And here’s some food for thought
As you might know, some e-commerce companies have been promising instant delivery of everything you order online. If this segment of e-commerce has a bright future, you should ask yourself which consumer goods segments are likely to benefit?
In all likelihood, instant delivery companies might make you cut down your number of visits to grocery stores for casual buying.
From this viewpoint, where do products such as oats, noodles, coffee, chyawanprash, chocolates and personal care products like after-wash serum and hair oil stand?
You may also like to read: Will midcap cement stocks shine post Budget 2022?
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