Marico Ltd’s September quarter results (Q2FY22) were not bad, but they weren’t particularly impressive either. Some analysts have said the performance was in line with their estimates.
Marico’s consolidated revenues in Q2 rose almost 22 percent year-on-year to Rs 2,419 crore, though cost pressures meant EBITDA (earnings before, interest, tax, depreciation and amortization) increased at a slower pace of 8.7 percent to Rs 423 crore. EBITDA margins have contracted by 207 basis points (bps) to 17.5 percent. One basis point is one-hundredth of a percentage point. EBITDA margin is down sequentially as well.
Margin outlook
What is more, analysts are not particularly upbeat on the margin outlook. “Marico’s earnings progression for the balance part of FY22E is likely to disappoint versus initial expectations,” said JM Financial Institutional Securities Ltd analysts. At the time of announcing its Q2 results, Marico said, “We expect gross margin to improve sequentially in Q3 and Q4. However, we expect an improvement in operating margins to play out only in Q4, given that ad spends will rise from Q3 itself and a large part of the benefits of a second round of cost rationalization measures will start accruing in Q4.”
Marico’s gross margin in Q2 declined as much as 556bps. Note that this is the fifth consecutive quarter of year-on-year gross margin decline for the company.
JM Financial’s analysts point out, “Our reading of the extent of deflation in copra prices, however, suggests that QoQ (quarter-on-quarter) gross margin improvement should actually be good enough to take care of additional A&P (advertising and promotional) spends, if required, and still have something left on the table. Be that as it may, margin progression for FY22E is likely to be weaker than what one originally envisaged, but the shortfall or part thereof could be made in FY23E.”
Copra is a key raw material for Marico’s coconut oil brand Parachute. In Q2, copra prices were 11 percent lower sequentially and 5 percent lower on an annualised basis. Analysts at Prabhudas Lilladher cut the company’s FY22 earnings per share (EPS) by 4.1 percent on input cost pressures and higher ad spends post 2Q22. “FY23/24 EPS is expected to increase by 0.1 percent/1.9 percent as margins normalize to about 19 percent range,” said the analysts in a report on 28 October.
In general, the recent slowdown in the rural market remains a key monitorable for investors in shares of consumer staples companies. Marico said, “Since pace of rural growth has moderated despite normal monsoons and continued government stimulus, some degree of caution in the near-term growth outlook is warranted.” Prabhudas Lilladher expects volume growth in both Parachute and cooking oil brand Saffola to moderate to its long-term trajectory. In Q2, Marico’s overall domestic volume growth stood at 8 percent.
Over the medium term, Marico aims to deliver 13-15 percent revenue growth on the back of 8-10 percent domestic volume growth and double-digit constant currency growth in the international business.
Marico’s shares hit a new 52-week high of Rs 607.70 each on the National Stock Exchange on 18 October. Since then, they have declined by around 6 percent. It is possible that the above-mentioned factors keep a check on significant upsides in the share price in the near future.
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