Input costs help Marico's earnings, will help company meet growth target

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A supportive input cost environment has put consumer products company Marico in a sweet spot, and that too at a time when the Street is still waiting for a revival in consumption demand.

The stock of Marico has gained about 9 per cent in the last three months, outperforming the S&P BSE FMCG (fast moving consumer goods) index, which is down one per cent during the same period. 

Copra is a key raw material accounting for 40-50 per cent of Marico’s raw material cost. The price of copra is down 10 per cent from the March-2019 levels and also 18 per cent lower year-on-year. Lower input cost is also allowing the company to push its volumes without much comprise on profitability. This, at a time when the demand environment is subdued, means that the company’s earnings prospects remain healthy. 

“Our monthly price checks suggest that Marico has started passing the benefits from low copra prices for the large units either through price offs or extra grammage. Given the lower copra prices, this is unlikely to hurt Marico’s profitability,” said Nitin Gupta, analyst at SBICAP Securities.

Yet, the higher base in the year-ago quarter would limit the volume growth, he said. 

Nevertheless, analysts expect that it should help achieve the management's volume growth target of 8-10 per cent over a medium term along with over 18 per cent EBITDA (earnings before interest, tax, depreciation and amortisation) margin at the consolidated level. For FY20, analysts estimate the company's topline to grow by 9-10 per cent and EBITDA by over 15 per cent.

The volume push would also get support from the new-age distribution channels such as e-commerce (4 per cent of domestic business) and modern trade (13 per cent of India business) besides expansion of rural reach. Though Marico’s other portfolios such as Saffola showed good performance in the March quarter, the Street would be keeping an eye out on whether the trend persist in the ongoing quarter. After two quarters of dismal growth, the company had clocked 18 per cent growth in Saffola in the March 2019 quarter.

The Street, however has started factoring in these improvements given the recent outperformance, which has pushed up stock valuations to 44 times FY20 estimated earnings. Also, given the overall demand weakness, mainly in rural pockets (30-32 per cent of Marico’s revenue), long-term investors could await a correction before considering the stock.

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