Marico slips in Q4 on high input costs; copra price rises 61%

Marico continued to reel from high input cost pressure for another quarter. During the January-March (Q4) period, its consolidated gross profit margin contracted by 551 basis points year-on-year (y-o-y) to 46.7 per cent. In the fourth quarter, the price of copra, which has the largest share in the total input cost, surged by 61 per cent y-o-y. On the other hand, prices of other key raw materials, such as liquid paraffin and safflower oil, were up by 20-26 per cent.

Consequently, its operating profit margin contracted by 260 basis points, the highest fall in the past several quarters, to 17 per cent and was lower than the 18-19 per cent estimate by analysts. This shows that Marico’s decision to hike coconut oil prices to protect its margin did not help. 

 
The price hike of 22 per cent between October 2017 and March 2018 led to a 5 per cent decline in rigid pack volumes of Marico’s flagship product, Parachute coconut oil. This confined the overall volume growth of the domestic business to 1 per cent. A high-base effect and a 1 per cent decline in Marico’s Saffola refined edible oil affected volume growth. According to the management, headwind in the super-premium segment of edible oils  continues.

 
Though Marico posted a 7.2 per cent y-o-y rise in net profit in Q4 (up by 2 per cent in 2017-18), it is due to an 18 per cent fall in tax outgo. Else, profit before tax was down 0.7 per cent y-o-y.

Marico’s stock is down a little over 6 per cent in the past two trading sessions, after the Q4 results on Wednesday.
The price hikes in the past few months enabled Marico to report a 12.6 per cent y-o-y rise in revenue in Q4, despite the dismal volume growth in the domestic business, which accounted for 78 per cent of total turnover in 2017-18. A 16 per cent growth rate in the international business, in constant currency terms, supported the top line. 

The management now expects 5-7 per cent volume growth in Parachute,  owing to a change in strategy. “Parachute, being the market leader, is well placed to capture a significant share of this (loose form of coconut oil which is 30-35 per cent of the coconut oil market) growth potential,” they said. 
Double-digit growth in the value-added hair oil segment (22-23 per cent of sales) and in the international business is seen as leading to 8-10 per cent growth in overall volumes in 2018-19. The worry is that since inflationary pressure is expected to continue in April-September, the operating margin is likely to remain around 
17 per cent.

Given the lacklustre performance and outlook, analysts are neutral on the stock, which is trading 38-40 times its 2018-19 earnings.

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