Marico stock at a new high, but Q4 margins reach a multi-quarter low
Premium- Gross profit margins have contracted as much as 520 basis points owing to higher price of copra and rice bran oil
MUMBAI : Marico Ltd’s shares rose around 8% on Monday on the National Stock Exchange, hitting a new 52-week high of ₹454 apiece. This is despite the fact that the company’s operating profit margin fell sharply during the March quarter. Consolidated earnings before interest, tax, depreciation and amortization (Ebitda) margin stood at 15.9% in Q4, down from 18.9% in the year-ago period. The margins were the lowest in more than 20 quarters, said analysts from Jefferies India Pvt. Ltd.
Note that savings in other expenses softened the blow at the Ebitda level. Gross profit margins contracted as much as 520 basis points owing to the higher price of copra and rice bran oil.
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So, if margins have declined significantly, what are the investors excited about? The simple answer is that the worst is probably over on the margin front. Prices of copra, a key raw material for Marico, have corrected by about 15% from its recent highs. Plus, the company has taken another 15-20% price hike for Saffola in April.
In a report on 30 April, analysts from JM Financial Institutional Securities Ltd said: “Management opined that March quarter’s 15.9% Ebitda margin is the bottom; guidance for FY22 is more around 18-19% for now." For perspective, Ebitda margin for FY2021 stood at 19.8%.
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Besides, analysts said that the company’s focus remains on growth and its outlook is positive, despite the near-term volatility due to the pandemic.
Marico’s India volume growth was robust at 25% in the March quarter. True, a favourable base helped to an extent, given that domestic volumes had declined by 3% in the March 2020 quarter.
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Given the base effect, looking at the two-year compounded annual growth rate (CAGR) trends may be helpful. Jefferies’ analysts said two-year CAGR at 10% was also impressive.
In the domestic business, value growth of Saffola (refined edible oils) and Parachute coconut oil (rigid packs) was relatively better than value-added hair oils.
JM’s analysts said: “Saffola’s volume performance stood out given the strong base that it had to contend with, more so given a steep 30% price hike taken during the last six months in a bid to offset input costs pressure therein." Saffola’s volumes rose by 17% last quarter.
Marico’s overall revenue growth was strong at 34% year-on-year, which also aided Ebitda growth of 13% during the quarter, despite the margin contraction.
Meanwhile, the jump in Marico’s shares on Monday suggests that investors have factored in most of the positives, for now. Currently, the stock trades at 44 times estimated earnings for financial year 2022, based on Bloomberg data, suggesting strong growth expectations.
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