When India entered another lockdown in Q1FY22, FMCG companies were optimistic as packaged goods consumption was expected to rise with people stuck at home. One such company was Marico, the maker of Parachute hair oils, Saffola edible oils, and a range of other FMCG products. However, Marico received a bigger boost from the lockdown than expected.
In Q1YF22, Marico reported its highest quarterly sales ever. Discretionary spending was higher than during the first wave, and this helped it earn higher margins on premium products. Input cost pressures which hurt FMCG companies for the past two quarters finally began to ease. Distribution was strong because of a focus on e-commerce and rural markets performed better than expected. This sets up Marico for a strong Q2FY22, but will the company be able to meet these expectations?
Revenue rises YoY in Q1 but profits dip on input cost pressures
Marico’s revenues grew by 31.2% YoY to Rs 2,525 crore in Q1FY22 due to higher e-commerce deliveries compared to the FY21 lockdowns. On a sequential basis, revenues rose by 25% as packaged food consumption was higher than Q4FY21 when lockdowns were absent. Net profits were Rs 365 crore, a 6% YoY fall due to rising raw material costs.
Input cost pressures led to a 5.1 percentage points decrease in EBITDA margins to 19.1%. Marico uses inputs like copra, liquid paraffin, and palm oil to make its hair oils and skincare products, and vegetable oil, rice bran for its edible oils. It also uses high-density polyethylene (HDPE) for packaging.
Hair oil volume growth continues despite price hikes
Marico already hiked prices of its products, mainly hair oils and edible oils, as early as Q3FY21. This was when cost pressures for inputs like palm oil, copra, and rice bran first surfaced. Price hikes continued in Q4FY21 as cost pressures did not ease. At the start of FY22, Marico’s hair oils and value-added hair oils (VAHO) were priced 4-5% higher than the previous quarter.
Saugata Gupta, Marico’s Managing Director described Q1FY22 in the earnings call as one of the rare quarters in the past decade with high price inflation on all of the company’s three main inputs (copra, crude oil, and vegetable oil). In Q1FY22, raw material expenses rose by 50% YoY to Rs 1,489 crore.
However, the management said the worst of the input cost pressures have subsided. They expect prices to moderate in Q2FY22 and decline in the second half of FY22. Copra prices are already down by 13% sequentially and by 35% since January, relieving pressures on its hair oil and VAHO margins.
Even with sanguine expectations on input cost pressures, Marico is still hesitant to cut prices. Gupta said the company will wait till the end of Q2 before cutting hair oil and VAHO prices. On the other hand, its edible oil prices, mainly Saffola, will likely see no price cuts. Crude oil prices still remain elevated (up 42% in 2021) and volatile, which is why Marico is unlikely to cut edible oil prices.
Volume recovery steady, premium products to drive growth
A challenge for FMCG companies when hiking prices is the adverse effect on sales volumes. Theoretically, as prices rise, consumers’ demand for products decline. This forces FMCG companies to think twice before hiking prices. But Marico’s sales growth was strong (25% QoQ growth in Q1) despite price hikes over the past two quarters.
Analysts said Marico’s sales realisations were higher in Q1FY22 because consumers preferred packaged food products while indoors, and they didn’t mind paying more in the absence of many other discretionary expenses. This led to sustained YoY volume growth of 10% and 21%, respectively, for Parachute and Saffola. The VAHO segment’s volumes grew by 34% YoY because of the low base due to lower discretionary spending and hence lower premium product sales during the first wave.
Discretionary spending, however, was stronger during the second wave than the first. The effect of higher discretionary spending was seen not just in Marico’s VAHO products sales, but also in premium skincare and personal care products. The company said these high-value and strong margin premium products will be its ‘growth engines’ given the lack of penetration of these products in urban markets.
Another strategy Marico will employ is premiumisation, by upselling premium products. Its main driver for this will be Apcos Naturals (Apcos), an ayurvedic cosmetics maker. Marico acquired a 60% stake in Apcos in July 2021. The company plans to make high-margin premium products online first. This will include its premium hair care and skincare products (Livon, Kaya Youth, SetWet) and Apcos’ ayurvedic products. Marico is targeting revenues of Rs 450-500 crore (5-6% annual revenue) from this channel by FY24.
In Q2FY22 however, the company expects moderation in copra prices which will help its hair oil and VAHO margins This will be accompanied by higher prices of products and strong volumes, which will aid realisations. What will be a worry, especially for edible oils, is improving outdoor movement decreasing the need for at-home consumption. Saffola’s volume growth tapered in Q1FY22 to 10% YoY (compared to 17% in Q4FY21) and might fall further as demand declines.
Ecommerce and rural distribution remains key
Marico’s strong rural performance in Q1FY22 came as a surprise to the market. The management said rural sales in Q1FY22 outperformed Q1FY21’s rural sales when the national lockdown was in effect. Rural sales in Q1FY22 were higher than Q1FY20 as well when there were no lockdowns. This was unlike the performance of other FMCG companies which faced an uphill battle in rural areas due to the rising Covid-19 cases in Q1FY22.
The growth in rural sales was because of the company’s pricing advantage especially in its core hair oils and edible oils range. Marico’s Parachute hair oil is priced 20-40% cheaper than competitor’s hair oils.
Marico’s pricing power in the hair oil and edible markets, helped the company take market share away from unorganised players. Analysts said smaller companies could not pass on higher input costs to customers and hence larger players like Marico benefitted. This helped its core brands — Parachute and Saffola, increase their market share from Q3FY21 to Q1FY22 when input costs surged.
Other smaller product segments like premium haircare (Set Wet, Beardo, Livon, etc.) and skincare (Kaya Youth, Parachute body lotion, etc.) expanded their market share. This was because of a strong e-commerce distribution pipeline. In Q1FY22, e-commerce sales were Rs 175 crore, a 60% growth YoY, contributing 9% of domestic revenues.
Marico’s fledgling food products (honey, oats, noodles, etc.) portfolio expanded its market share on the back of distribution through its Saffola online store and e-commerce channels. Saffola honey has a 25% market share and competes with Dabur and Patanjali. Saffola Soya Chunks also has a 14% market share and competes with Adani Wilmar’s Fortune and Ruchi Soya’s Nutrela.
Targeting growth through core products’ market share
As input cost pressures ease, based on the company’s expectations, margins could rise sequentially. How Marico cuts prices will determine the effect it has on sales realisations and hence top-line growth. As raw material prices decline, analysts expect its bottom line to expand going forward.
With FY22 starting positively, Marico set big targets for the rest of the year. What’s more, these targets were beyond its core brands of Parachute and Saffola. For instance, Marico is planning to sell its male grooming hair care products under the brand Beardo through brick and mortar stores. Nearly 90% of Beardo’s sales in Q1FY22 were through e-commerce. The company also sees a Rs 5,000 crore opportunity in the foods market (currently at Rs 170 crore) and aims to expand it in the northern and eastern states between FY 22-24. Through the acquisition of Apcos, Marico wants to move its premium haircare and skincare products into a direct-to-customer e-commerce channel by FY24.
These ambitions are strong and provide multiple growth opportunities in the coming years. But whether the company capitalises on them remains to be seen