MARICO CONTINUED TO POST DISMAL RESULTS WITH SMALL GROWTH IN SALES OPERATING PROFIT

News:

 Marico reported revenue growth of 3.2% to Rs 2496 crore (Idirect estimate :Rs 2499.9 crore) on the back of 1% growth in domestic business & 11% constant currency growth in international business sales. Domestic volume growth of 3%. On a 3-year CAGR basis, volume growth was 7%

·         Parachute business seen 11% sales decline largely due to price cuts given copra prices have been benign from last few quarters. Moreover, parachute volume was dipped by 3%. Saffola edible oil sales grew by 4% with high single digit volume growth. VAHO (value added hair oil) segment saw 2% value growth during the quarter

·         Foods business continue to witness strong growth of 26%. On the basis of Q2 sales, foods business annual run rate (ARR) has been Rs 650 crore. Personal care business seen a growth of 40% on a low base. Its digital first brands reached ARR of Rs 250 crore constitutes of Rs 150 crore ARR sales for Beardo. The strong 11% growth in international business contributed by 10% growth in Bangladesh and  South East Asia, 16% growth in South Africa & 11% growth in MENA region

·         Gross margin inched up by 117 bps with benign copra prices & sharp drop in edible oil prices. Overhead & employee spends were higher by 33 bps & 47 bps respectively. The company increased its advertisement spend by 10% to Rs 213 crore (51 bps higher as % of sales). Operating profit grew by 2.4% to Rs 433 crore (Idirect estimate : Rs 440.4 crore) with small 17 bps contraction in operating margin to 17.3%. Higher finance cost & lower other income resulted in 2.9% dip in net profit to Rs 307 crore (Idirect estimate : Rs 308.8 crore)

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 Marico has been witnessing sluggish growth in its hair oil product portfolio given hair oil category is highly penetrated. Moreover, high inflation in edible oil resulted in volume contraction in last few quarters. The only growing part of product portfolio is foods & digital first brands. We believe these segments would continue to grow at faster pace given the company is leveraging Saffola’s brand equity & Beardo’s e-commerce channel strength to its advantage however, their contribution to sales is very small (less than 10%). We believe sharp decline in edible oil inflation would result in improvement in gross margins in coming quarters. However, we remain cautious on hair oil (Parachute, VAHO) sales growth prospects on a longer term basis.

Impact:

Neutral