Volume-led focus, margin gains improve Marico's growth prospects: Experts

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Marico, which has lagged many of its FMCG peers on the bourses, could see a reversal in its fortunes. Thanks to receding prices of key input items, the company is now focussing on driving volume and value growth.

With Cyclone Gaja hitting Tamil Nadu in November last year, copra prices had started increasing. This also impacted investor sentiment, with Marico’s stock falling by about 9 per cent since the start of 2019 versus a fall of 1 per cent in the S&P BSE FMCG index. The Street was concerned about Marico’s near-term profitability as copra accounts for 45-50 per cent of its total raw material cost. Profitability pressure also hinted at the company’s inability to increase efforts to push volumes.

However, copra prices have corrected in March 2019 (down 13 per cent from January 2019) and the management expects another 10-20 per cent fall in copra prices going ahead. And, it expects to reinvest the gross margin gains to garner more volumes, while capping profitability gains at the operating level.

“You may see gross margin improvement (with lowering copra prices). But, we would like to invest behind our brand building,” says Vivek Karve, chief financial officer, Marico. Gross margin expansion will get reinvested, he adds, and expects selling and advertising spends as a percentage of revenue to increase by 100-150 basis points next financial year from around 9 per cent during April-December 2018. Yet, expect some expansion in the Ebitda (earnings before interest, tax, depreciation and amortisation) margin, which is likely to remain almost at 9MFY19 levels of 17.5 per cent for FY19 (full year), but go up to around 18 per cent or by 50 basis points in FY20.

 
The targeted rise in advertising spends will get support from an expected improvement in rural business that accounts for 32-33 per cent of revenues, while benefits of goods and services tax (GST) will propel overall volumes in the near-to-medium term. This would be mainly driven by three key portfolios – Parachute rigid (hair oil in the blue bottle), value-added hair oil (VAHO) and Saffola refined oil. Parachute rigid accounts for one-third of the company’s overall business. VAHO and Saffola contribute to above 25 per cent and a little less than 20 per cent of Marico’s top line, respectively.

Though the brand investments would be across the product portfolios, according to Karve, this would help revive volume growth of VAHO, which was not up to the mark in the last two quarters (grew by 5-7 per cent). As per a recent note of JM Financial, with easing margin pressure, Marico is looking at active participation in growth at bottom of the pyramid segment in VAHO, where it faced major problem due to unattractive pricing. Karve targets double-digit volume growth in VAHO. Besides, the company is also working to improve the growth trajectory of its Saffola refined oil.

However, a higher base could restrict overall volume growth, mainly for its flagship products —Parachute rigid (hair oil in the blue colour bottle), believes Karve. Post 9 per cent volume growth during April-December 2018, the company expects Parachute rigid to rise by 5-7 per cent in the near term. Thus, overall domestic volume growth is estimated at 8-10 per cent in FY20. The improvement in volumes will also accrue from new products, revenue contribution of which is likely to double over the medium term from 3-4 per cent currently.

Analysts say a volume-led focus, along with margin gains, albeit marginal, improves Marico’s long-term growth prospects. “We see buying opportunities possibly emerging on the stock given that the management does not seem as sanguine as the market on the margin expansion potential for FY20,” say analysts at JM Financial.

Analysts led by Abneesh Roy at Edelweiss Securities, too, are bullish on the stock. In a report earlier this month, they said, “We expect Marico to sustain growth momentum riding a healthy pipeline of innovative products, market share gains and growth in international business. We also believe that margin pressure is behind.” Their target price for the stock is Rs 392.

At Rs 340, the stock trades at 38 times FY20 estimated earnings which is at a 24-25 per cent discount to top FMCG peers.




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