Marico Q2 profit rises but margins shrink on higher input costs

Fast-moving consumer goods maker Marico Ltd on Thursday reported higher consolidated net profit for the second quarter from a year earlier, but its earnings margin narrowed due to a sharp increase in input costs.

The maker of Parachute coconut hair oil and Saffola cooking oil posted a net profit of Rs 316 crore for the July-September period, compared with Rs 273 crore a year earlier.

However, second-quarter profit fell from the preceding three months; the company had posted a profit of Rs 365 crore during the April-June period, despite the country grappling with a severe second wave of Covid-19.

The company’s revenue from operations increased 22% to Rs 2,419 crore for the second quarter from Rs 1,989 crore a year earlier. But this was lower than the first quarter’s figure of Rs 2,525 crore.

Total expenses rose to Rs 2,039 crore from Rs 1,641 crore, led by a 35% increase in material costs to Rs 1,345 crore from Rs 1,010 crore a year earlier.

Marico’s shares fell 2.46% on Thursday to close at Rs 561 apiece in a Mumbai market that fell 1.9%. The shares have fallen about 7.4% since touching a one-year high on October 18.

Marico Q2: Other highlights

1) EBITDA increased 9% to Rs 423 crore from 389 crore a year earlier.

2) The EBITDA margin narrowed to 17.5% from 19.6% in the year-ago period.

3) International business recorded turnover of Rs 549 crore, up 13% on constant currency basis.

4) India business delivered revenue of Rs 1,870 crore, up 24% on a YoY basis. Volume growth was 8%.

5) Gross margin improved sequentially by 140 basis points, but was down 560 bps YoY as edible oil and crude oil prices remained high.

Marico commentary and outlook

The company said that, with more than 90% of its portfolio comprising daily-use items, it witnessed healthy demand trends across these categories while discretionary and out-of-home consumption also picked up to some extent.

Rural growth exceeded urban during the quarter but has slowed down sequentially. In the International business, it witnessed a steady quarter in all markets, except Vietnam, which was battling a severe Covid-19 surge.

Marico said the operating margin in the India business fell to 17.8% in Q2 from 20.6% a year earlier owing to sharp input cost pressure, which was only partly alleviated by pricing interventions in key portfolios and cost rationalization measures.

The premium personal care portfolio, comprising premium hair nourishment and male grooming products, had its best quarter since the onset of the pandemic. Livon Serums clocked double-digit growth over pre-Covid run rates. The male grooming portfolio grew in double digits, but still short of pre-Covid levels, Marico said.

The company said that since pace of rural growth has moderated despite normal monsoons and continued government stimulus, some degree of caution in the near-term growth outlook is warranted.

“In the current scenario, we expect to deliver double-digit revenue growth in the domestic business on the back of mid-single digit volume growth in H2,” it said. “However, we believe high-single digit volume growth is possible in Q4, if consumption trends do not worsen.”

Marico expects gross margin to improve sequentially in Q3 and Q4. However, it expects an improvement in operating margins to play out only in Q4, given that ad spends will rise from Q3 itself and a large part of the benefits of a second round of cost rationalization measures will start accruing in Q4.