Marico sacrifices margins in September quarter to drive volume growth

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Higher input costs are not always a bad thing if you can turn it to your advantage. Marico Ltd’s September quarter results is one example of that.

Copra prices, which form the biggest component of the company’s raw materials, rose exponentially (on an average 17% up quarter-on-quarter and 84% higher year-on-year). But Marico held the prices of its flagship Parachute Coconut Oil steady in the September quarter. That gives it a big edge over the loose oil and smaller brands, whose prices would have increased. This helped volume growth—the Parachute portfolio (bottled packs) recorded a 12% year-on-year volume growth, also supported by 6% volume decline in the base September 2016 quarter. This segment contributed a fourth of Marico’s revenue for fiscal year 2017.

Overall, the domestic business, which accounted for as much as 77% of the company’s turnover last fiscal year, did well on the volume front, recording an 8% year-on-year growth for the September quarter. At a time when volume growth is hard to come by for consumer goods firms, Marico is doing very well.

Competitive pricing, continued investments and pipeline refilling in general trade were the primary reasons that boosted volumes, according to the company. The gains from lower rates under the goods and services tax were passed on to consumers in the form of lower retail prices in some product categories.

A combination of these factors meant that Marico’s consolidated revenue for the September quarter increased 6% over the same period last year to Rs1,536 crore. However, higher costs weighed on the profit margin. Ebitda margin declined 68 basis points to 16.9%. A basis point is 0.01%. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Marico’s September quarter numbers are largely in line with Street expectations. The stock rose by 0.8% on Monday, slightly higher than the rise in the BSE Sensex.

Volume growth may have cheered, but will that continue is the question. Input costs are not budging. With copra prices expecting to be firm, Marico has taken a 10% price hike in its key Parachute portfolio effective October. This may hit volume growth a bit. However, a narrower price differential over the loose oil market may still give it an advantage. In general, investors should watch if it can deliver a mix of higher volumes and higher pricing.

Marico’s shares have lagged the BSE FMCG index increasing 6.5% so far this fiscal year compared to a 10.4% rise in the index. There’s little to suggest a dramatic reversal in the trend. Plus, valuations aren’t cheap. The Marico stock trades at 46 times estimated earnings for this fiscal year, based on Bloombergdata.