Shares of FMCG major Marico Ltd lost more than 6.5 percent in early trade on November 7 after the company reported a 3 percent on-year decline in its consolidated net. The stock was trading at the day’s low of Rs 503 at 11:50 am.
Though the results were in line with the expectations of most of the market experts, the company on November 4 highlighted that the macro environment continues to be tough with a starker divergence between urban and rural growths.
In its earnings call, the company had also highlighted that “it is not looking to gain near-term market share at the cost of gross margin contraction” which reflect the tough operating environment at least in the near term.
According to the analysts at Sharekhan by BNP Paribas, the fact that the company moderated the volume growth guidance to 5 percent from high single-digit volume growth earlier could have played on the minds of investors which resulted in such a sharp reaction today.
The company had reported a consolidated net profit of Rs 301 crore in the second quarter of FY23 as against Rs 309 crore recorded a year ago. On a sequential basis, the profit has declined 19 percent from Rs 371 crore earned during the April–June period.
Consolidated revenue for the maker of Parachute and Saffola rose 3 percent on-year to Rs 2,496 crore as against Rs 2,419 crore registered in the year-ago quarter. On a sequential basis, the revenue was marginally lower by 2 percent from Rs 2,558 crore recorded in the previous quarter.
Its consolidated gross margin expanded 120 basis points on-year to 43.6 percent, while the sequential contraction was due to consumption of higher cost inventories and currency depreciation. The consolidated earnings before interest, tax depreciation and amortisation (EBITDA) margins at 17.3 were down marginally.
“The current weak macro, tough operating conditions (for edible oil) and a not-so-supportive macro for both the pure coconut and value added hair oils are near-term concerns,” said a report from the brokerage firm ICICI Securities Ltd.
Parachute volumes were down 3 percent YoY. “With the softening in copra prices (down further 4 percent QoQ and 20 percent YoY), it is driving pricing actions and soft copra also slowed down share gains from the loose segment,” said the analysts at ICICI Securities.
Value added hair oils reported a weak quarter (+2 percent YoY) due to down trading and weak consumer sentiment. It, however, highlighted better performance in the premium sub-segment.
The consumer pricing interventions drove the high-single digit growth in Saffola edible oils. The Saffola foods franchise grew 26 percent on-year driven by strong performance in the oats business and healthy traction in its new product launches. The company aims to achieve revenues of Rs 850 – Rs 1,000 crore from the foods business by FY24.
However, despite the strong immediate reaction witnessed at the counter, the brokerage are confident about the future prospects of the company and have recommended a ‘buy’ or ‘add’ on the stock.
ICICI Securities has cut its earnings estimates by 3-2 percent for FY23-24 and forecasts a CAGR of 9 percent for the revenue and 15 percent for PAT over FY22-24 period.
It maintains an ‘add’ with a discounted cash flow (DCF)-based revised target price of Rs 570 (was Rs 550 earlier). “At our target price, the stock will trade at 46x P/E multiple Mar-24,” the brokerage said while highlighting that the key downside risk is higher-than-expected inflation in copra prices.
HDFC Securities also has an ‘add’ on the stock even though it has cut its FY23 EPS estimate by 2 percent. The brokerage builds in 11 percent revenue CAGR over FY21-25 and an EBITDA margin of 20-21 percent for FY24-25.
“We prefer Marico, given its thrust to drive growth in its core brands, initiatives to drive D2C/foods, and the margin upcycle,” HDFC Securities said in its note. “We value the stock at 42x on Sep-24E EPS to derive a target price of Rs 565.”
Brokerage firm Motilal Oswal Financial Services reiterated its ‘buy’ rating on the stock as it maintains its target multiple of 45x September 2024 EPS to arrive at its target price of Rs 620.
“The much-needed diversification is gathering momentum in the Foods and Digital-first brands, which, If sustained, can lead to higher multiples for Marico as compared to the past,” the brokerage said in its results update.
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