Marico: Impact of rising market share on margins will interest investors

Marico’s stock gained about 2 per cent on Wednesday on account of good traction in volumes of its flagship brand — Parachute hair oil (volume growth of 9 per cent). However, Marico’s overall domestic volume rose just by 5 per cent, while other FMCG players reported double-digit volume growth in Q3.

This was due to muted volume growth of Saffola and smaller coconut oil brands. A 15 per cent year-on-year (YoY) rise in net sales to Rs 1,861 crore (marginally below analysts’ expectations of Rs 1,867 crore) was also driven by higher prices, mainly of its Parachute hair oil.

In the near term, there are some tailwinds. Saugata Gupta, managing director and chief executive of Marico, believes there will be a 15-20 per cent YoY decline in copra prices (copra accounts for 40-50 per cent of raw material costs), which will be positive from the margins point of view.

However, the company is considering investing aggressively in new products to drive volumes and market share. Higher investments, therefore, could keep margins under check. While the company is confident about its upcoming launches, analysts are skeptical of success of its new products.

According to analysts at Prabhudas Lilladher, Marico had launched Saffola FITTIFY Gourmet and Set Wet global edition range of perfume sprays, but the success rate of its new launches has been poor.

While the company expects 9-10 per cent growth in overall volumes in FY20 (8 per cent in FY19), Ebitda margin may get capped at Q3 levels of about 18-19 per cent. The expected volume growth will also be supported by a double-digit rise in the value-added hair oil category and an improvement in Saffola (expectation of 5-6 per cent rise during October 2018-March 2019).

In Q3, Marico saw a 39-basis-point contraction in gross profit margin to 46.3 per cent — despite a 20 per cent YoY fall in copra prices — mainly on account of a time lag in reflecting changes of raw material prices.

However, control on other operating expenses helped improve Ebitda margin YoY after a gap of six quarters, albeit marginally, to 18.8 per cent.

Net profit rose 13 per cent to Rs 251.7 crore against analyst expectations of Rs 259 crore. The Street will keenly watch out for the impact of the company’s push to improve volumes and market share, on margins.

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