Marico had a jolt at the start of FY21. The FMCG company primarily relied on brick-and-mortar stores for distribution before the Covid-19 pandemic. In April 2020, it launched an online store to distribute packaged food and cooking oils via food aggregators. This along with its rural dominance helped cushion much of the impact in early FY21.

In addition to acting fast, what allowed Marico to navigate through a difficult year was market leadership. It holds a market leader position in hair oil (through Parachute, 60% market share) and edible oils (through Saffola, 80% market share). This was helped by the pricing power the company enjoyed when discretionary spending on hair care products was low.

In Q1FY21, a quarter where FMCG companies like Hindustan Unilever and Dabur performed poorly, Marico’s revenue grew 29% QoQ and net profits by 68%. Between Q2-Q3 revenue was rising as flagship products sales sustained, while net profits declined due to rising input prices. Rising costs showed in its top line and bottom line numbers which declined in Q4FY21.

Marico ended FY21 worse than it started it, but as lockdowns are in play once more, can the FMCG company’s growth momentum return?

Rising input prices and advertising expenses bring down profits

Marico’s consistent revenue rise in FY21 was cut short in Q4. For the quarter ended March 2020, it reported a 5% decline QoQ in revenues to Rs 2,012 crore, as premium skin care and hair care products’ sales were lower. Revenues were higher by 34% YoY due to a low base in March 2020.

Net profits dropped by 27% QoQ to Rs 227 crore due to higher input prices and increasing advertising expenses. 

The price of raw materials like copra, coconut oil, kardi oil, rice bran, and liquid paraffin dropped sharply in Q1FY21 due to low production. FMCG companies using these raw materials saw a temporary decrease in input prices in Q1 and Q2. These prices rose in Q3 and Q4 as economic activity resumed.

In Q4, the raw materials price moved beyond their 2020 levels. The price of copra reached Rs 13,700 per 100 kgs, a 25% YoY rise, and the price of rice bran reached Rs 974 per 10 kgs, a 62% YoY rise. This pushed Marico’s raw materials expenses up by 48% YoY.

Advertising expenses were higher by 35% YoY reaching Rs 173 crore. This was spent in its core portfolio of hair oils, edible oils, and oats primarily in rural areas.

Due to rising input prices in Q4, Marico’s earnings before interest and tax (EBIT) took a hit. EBIT in Q4 was Rs 348 crore, a drop of 20% QoQ, with margins of 17.1%, a 330 basis point decline QoQ. The rising expenses brought down profit margins to 11.1%.

Pricing power to hold strong despite price hike

By April, the price of copra dropped 16% compared to its peak levels in January 2021. This will aid the company’s operating margins. Saugata Gupta, the managing director of Marico, said during the Q4 earnings call, that the price is down to the company’s “expected level.” This is because Marico planned for rising input prices in the previous quarter. Before the start of Q4, the FMCG company hiked the price of its hair oil and value-added hair oil (VAHO) by 5%. This was a precautionary measure to protect against further rise in copra prices. 

With the price of copra dropping since January and the price hike in effect since December 2020, Marico margins should receive a boost. The company already has a pricing advantage given its high market share in the hair oil (60%) and VAHO (37%) market. Competitors like Dabur’s Amla and Vatika hair oils and Emami’s Kesh King and 7oils are priced higher than Marico’s Parachute.

Price hikes will be felt more in rural areas than in urban areas. This is because of rural consumers’ lower spending on discretionary products like hair oils. The management is banking on a good monsoon season later this year which will increase the disposable income of the rural population keeping hair oil demand stable. 

Premium products decline, but overall volume growth steady

Even with the higher input prices and price hikes, volume growth has been steady. The domestic market (77% of the total market) clocked a strong 25% YoY volume growth in Q4FY21. This was the highest volume growth in over two years. The international market’s product volumes (Bangladesh, South East Asia, and the Middle East, and North Africa; 23% of the total market) grew by 20% YoY. 

The domestic market’s recovery began in Q1 itself while the international market only rebounded in Q2. Parachute led the hair oil while Saffola and VAHO lagged, posting a volume growth of 17% and 22% respectively. 

Premium products slowed down the volume growth in these two segments. Male grooming (Beardo, Set Wet), hair nourishment products (Livon, Mediker), and skincare (Kaya, PureSense) declined on a YoY basis in Q4. The premium product category, which was adversely affected during the first half of FY21, only began to show signs of recovery in Q4. 

Heading into FY22, with the second wave of Covid-19 causing lockdowns, discretionary spending will fall once again. This is expected to bring down Marico’s premium product sales. 

Marico is underrepresented in the premium hair care and skin care segment and is looking to gain market share. For this, it will continue its high advertising spend. Brokerages expect the second wave to bring down discretionary spending, adversely affecting premium VAHO products, but the high volume growth of hair oil and edible oil bodes well for Marico.

Marico has increased its rural dealers by 25% in FY20. After a pause in expansion in FY21, it looks to increase rural dealers by another 25% between FY 22-24. This will fortify its rural market, which is expected to fare better than urban areas during the second wave.

Core portfolio to withstand second wave headwinds

Marico’s stock hit a lifetime high in the trading session after its Q4 results were announced. Based on the FMCG company’s FY22 outlook, the response seems justified. Net profits fell in Q4 compared to the previous quarter, and margins took a beating, but this was because of rising input prices. By April, inputs like copra and rice bran have corrected by 10-15%, and are expected to go down further. Marico’s price hikes in response to this have already come into effect. This will help top-line growth and improve the operating margins as input prices drop.

The hike in products is not expected to allow competitors to take market share away from Marico. This is because it already enjoys a high pricing power in the hair oil and edible oil market. This has allowed its volumes in all three core categories (hair oil, edible oil, and VAHO) to post strong growth in Q4. Marico’s rural base is strong, and its core products’ demand is expected to sustain. This is the formula Marico used in FY21, and it will lean on it again in FY22