Marico Ltd.

NSE: MARICO | BSE: 531642 | ISIN: INE196A01026 |Industry: Personal Products
|Expensive Performer

Marico Ltd.    
13 Oct 2020
Covid19 is driving a strategic shift in Marico's priorities

by Suhani Adilabadkar

Homegrown FMCG firm Marico manufactures the world’s largest coconut oil brand, Parachute. After more than 30 years of existence, Marico touches the lives of 1 out of every 3 Indians. Creating niche products to gratify the needs of premium and super premium customers, the company’s product mix includes Parachute, Saffola, Parachute Advansed, Saffola Oats, Hair & Care, Livon, Set Wet, Mediker, Beardo and Revive, market leaders in their respective categories. 

For June quarter FY21, Marico reported mixed results as revenues declined, while PAT grew in double digits supported by exceptional gains and margins jumped 298 bps YoY. The stock has gained 55% from its 52-week low struck in March 2020.

Quick Takes

  • Marico reported mixed results as revenues declined 11% YoY, PAT grew in double digits, 24% YoY supported by exceptional gains and margins jumped 298 bps YoY.
  • Saffola refined edible oils, with market share of 77% grew by 16% in volume terms, aided by the in-home consumption tailwind.
  • Saffola Oats with 34% market share has grown 41% in value growth in Q1 FY21.
  • VAHO constituting 24% of India business witnessed major Covid impact declining 30% in volume terms in Q1FY21.
  • The company has medium-term aspirations of delivering 13-15% revenue growth on the back of 8-10% volume growth in India business and operating margin of more than 19%.

June Quarter FY21 was a shock to the system

Marico reported a double digit decline in revenues, impacted by the Covid lockdown and supply chain disruptions in domestic business (77% revenue mix) falling 15% while international business (23% revenue mix) grew 2% YoY in Q1 FY21. While Bangladesh reported double digit positive growth, Vietnam, MENA and South Africa moved in negative territory.

Operating revenues came out at Rs. 1925 crore in Q1 FY21 compared to Rs. 2166 crore same period previous year, declining 11% YoY. Operating profit turned out flat with 1.3% YoY growth, reported at Rs. 467 crore in Q1 FY21. Margins jumped 298 bps aided by lower A&P (declining 37% YoY) reported at 24.26% in June quarter FY21 against 21.28% corresponding June quarter FY20. Supported by exceptional gain (Rs. 64 crore), Net profit jumped 24% YoY reported at Rs. 390 crore in Q1 FY21 compared to Rs. 315 crore same period previous year.  

Strategy Deviation – From Niche to Large Tailwind Categories

Immunity, hygiene and health are now cornerstones of our altered routine. Even if we have a vaccine tomorrow, these changed behaviour patterns are likely to persist. Companies catering to our needs have also altered their manufacturing processes, capex plans, marketing practices, product mix and distribution channels. Marico, known for creating niche products, serving the premium and super premium class is now moving away from its core strategy.

To battle competitive intensity, where a horde of its FMCG peers are manufacturing immunity boosters and hygiene products, Marico is shifting its focus on health and hygiene. The company recently launched a hygiene portfolio consisting of products such as Mediker sanitizer, Safe life handwash, House Protect, Travel Protect and Veggie Clean. In fact the hygiene portfolio contributed more than 1.5% of India turnover in June quarter FY21. Coming to the health or healthy foods category, in times when customers are downtrading and premiumization isn’t the right strategy to follow, Marico has shifted its strategy to chase tailwind large categories instead of creating a niche for itself.

Clarifying the management’s stance, Mr. Saugata Gupta, MD and CEO, Marico said, “We are deviating from our creating niches and growing multiple niches because category creation takes a lot of time and it does not give you scale. That is a significant shift that we want to do in Foods”.

 Maintaining the Core – Parachute, Saffola and Saffola Oats As Consumer Preferences Shift

Coming to its core engine performance, starting with Parachute, accounting for about 40% of India business declined 12% in value and 11% in volume terms in Q1 FY21 impacted by lockdown restrictions. The company is channelizing all its cost savings from premium pricing and distribution through price reduction to permanently reset and gain market share (currently at 62%) in the coconut oil market where 30-35% of market is unbranded.

Marico expects to grow Parachute volumes in the range of 5-7% over the medium term. The market leader Saffola refined edible oils, with market share of 77% grew by 16% in volume terms, aided by the in-home consumption tailwind. In this respect, Mr. Gupta said, “The strategic shift in pricing and promotion in the portfolio and effective brand communication over the past few quarters has allowed us to capitalize on the heightened health consciousness and increased in-home cooking”. Saffola contributes 20% of India business turnover. Marico was expecting growth of 20% from Saffola for the quarter, but it was stunted by fall in CSD (canteen stores department) and modern trade business. As customers are back to their usual purchases after pantry loading in March and April, the company aims to sustain high single digit volume growth over the medium term in this franchise.

The foods business which mainly constitutes of Saffola Oats (with 34% market share) has grown 41% in value in Q1 FY21 while Saffola FITTIFY Gourmet and Coco Soul ranges witnessed a lacklustre quarter due to nil production in April & May and low demand due to its discretionary nature.

The company launched Saffola Honey, during the quarter and recently introduced, Saffola Kadha mix and Saffola turmeric milk mix as immunity boosters.

Marico aims to scale up its food business which was around Rs. 200 crore last year to Rs. 500 crore by FY22. Another important category, Value Added Hair Oil (VAHO) constituting 24% of the India business witnessed a major Covid impact, declining 30% in volume terms in Q1FY21, as billing was stalled for a large part of April due to the extended lockdown and also due to tepid demand for premium hair oils.

The VAHO segment has been underperforming over the past four quarters mainly due to lack of participation in bottom of pyramid. The company aims to revive volume growth in this franchise in the near term with focused pricing and marketing initiatives. And lastly, the premium personal care portfolio of premium hair nourishment, male grooming and premium skin care reported sharp declines due to significant fall in discretionary category sales. Around 10-15% of Marico’s product portfolio is discretionary in nature.

Though the core business would recover in near term, the pandemic has brought about a strategic deviation in its charted course. Will its medium-term aspirations of delivering 13-15% revenue growth on the back of 8-10% volume growth in India business, double digit constant currency growth in international business and maintaining operating margin at more than 19% still stand good? Only time will tell.


Marico Ltd. is trading below it's 30 day SMA of 368.8
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