Stock Review: MARICO

A steep rise in input prices and increase in subsidiary losses have eaten away into the profitability of coconut hair oil leader Marico. Had it not been for the divestment of its edible oil brand Sweekar and the reversal of excise duty provision, the company would have reported a net loss. Over the past few quarters, Marico was able to pass on higher input costs to consumers without impacting volumes. This was possible due to a strong market presence of its key brands.

But now it appears that the company is no more in a position to leverage the popularity of its brands. It increased prices by 8% during the March quarter, taking the annual price increase to as high as 32%. This pulled down its volumes to nearly 8% y-o-y from 10-12% in the earlier quarters.

With increasing difficulty in leveraging its brands further, it reduced advertisement spend to combat rising copra prices, which have shot up by 80% in the past one year. For the March 2011 quarter, ad spend relative to sales was only 9% compared with 15% in the corresponding quarter last year. Most of the ad spend cuts have been done in the subsidiaries – Kaya Skin and international businesses – than the Indian FMCG business.
But the tactics to cut ad budget appears unsustainable, given the competitive nature of Marico's business and new products in the pipeline. The management has indicated that this will go up gradually. Consolidated net profit was . 72.4 crore, which includes . 75.5 crore exceptional items minus the tax. This exceptional item includes . 50 crore from sale of Sweekar brand and non-cash gain of . 29.4 crore from reversal of excise duty provision for its hair oil product, which are onetime in nature.

The widening loss of its beauty related business under the chain of Kaya Skin Clinics is a cause of concern. The segment loss rose to . 37 crore in the March quarter from . 7 crore a year ago. Top line also fell by 26% to . 33.7 crore. The coming quarters also look challenging. Copra prices show no signs of reversal and any more increase in product prices may severely impact volumes. This coupled with lesser room to reduce other costs means an increase in topline may not come without a squeeze in profitability.