A continuously challenging consumption scenario has only added to scepticism over the fast moving consumer goods (FMCG) sector’s volume and margin performance. The Street has also started factoring in the same, with the Nifty FMCG index shedding around 3 per cent in the last three months versus a 6 per cent rise in the Nifty50.
Amongst key FMCG players, however, the bearish trend is more severe for stocks like Marico, which is down 13 per cent in the last three months. Factors such as lower-than-expected volume growth in the September quarter, stiff competitive pressures from players such as Dabur, among others, have hurt investor sentiments.
However, this could be an opportunity for long-term investors as the correction has made stock valuations reasonable, while the company’s recent pricing actions should also help lift its performance going ahead. According to analysts at Emkay Research, which has trimmed its FY21-FY22 earnings forecast for Marico
by 3-5 per cent, a sharp correction in the stock factors in the near-term concerns of weak demand.
More importantly, the recent pricing action by Marico
has improved its volume outlook. In December, the company cut the price of its Parachute hair oil 100 ml pack by 13 per cent, while the average price cuts across Parachute coconut oil portfolio is 5 per cent. Marico’s management expects this pricing decision to help gain market share from unorganised players as well as competitors, and hence should propel volumes in March 2020 quarter. The move is significant given that Parachute coconut oil accounts for one-third of the company’s overall volumes.
Big players like Dabur are also aggressively pushing their hair oil products, which could make the task tougher for Marico.
However, Marico, which leads the coconut oils category with over 59 per cent volume market share as of March 2019, has an edge, say analysts. Moreover, price cuts could help organised players curb down-trading (shift to low priced products) by customers. Here, given the 30-35 per cent hair oil market share of unorganised players (according to Spark Capital), a combination of low prices and high quality could help Marico gain share from unorganised players.
What is giving the company a leeway in terms of price cuts is benign prices of key raw material, such as copra. Average price of copra, which accounts for 45-50 per cent of Marico’s overall raw material cost, in December quarter is down 14 per cent year-on-year and about a per cent sequentially. Some analysts expect the deflationary trend in copra prices to persist even in 2020 on the back of good monsoon in key states. In fact, Marico’s copra procurement strategy could give it an edge over Dabur. While the latter buys coconut oil from various mills, Marico buys copra directly from trade and copra collection centres.
Even during April-September 2019 period, gross profit margin and EBITDA (earnings before interest, tax, depreciation and amortisation) margin of Marico had expanded sharply by 537 basis points and 301 basis points, respectively, year-on-year, despite higher advertising and promotional activities.
What’s more? Analysts at JM Financial believe that Marico’s earnings growth momentum will bounce back going forward supported by its international business. While the jury is out on this, the performance other portfolios like Saffola would also be crucial. Saffola’s performance, in the past quarters, has remained volatile.
While more clarity would emerge from December quarter earnings, with the sharp correction the stock is currently trading at a reasonable 35 times its FY21 estimated earnings, which is a 10-12 per cent discount to many other FMCG players as well as Marico’s own historical 5-year average one-year forward valuation. In the above backdrop, medium to long term investors with some risk appetite can consider the stock.