In Friday’s stock-market blood bath, the Nifty FMCG (fast-moving consumer goods) index was fairly resilient, declining by 1.7%, while some other sectoral indices lost more than 3%. Among the FMCG firms, shares of Marico Ltd touched a new 52-week low.
For perspective: at the current market price of about ₹282.55, the stock is close to its three-year low seen in March 2017.
According to Bloomberg data, Marico shares trade at 31 times estimated earnings for FY21. True, valuations are not demanding compared to stocks of larger peers such as Hindustan Unilever Ltd or Nestlé India Ltd.
However, investors will be disappointed if they are looking for a meaningful outperformance in the Marico stock from a near- to medium-term perspective.
For one, growth expectations are low. The company’s India revenue stood flat year-on-year in nine months ended December (9M FY20). For perspective, the domestic business accounted for 78% of Marico’s FY19 turnover.
“With slight recovery expected in the March quarter, we expect financial year 2020 sales growth at about 1%. Given that about 70% of India revenue is from hair oil, muted rural demand will likely restrain any growth acceleration from the strategic initiatives already in place," wrote analysts at SBICAP Securities Ltd in a report on 24 February.
According to the broking firm, Marico’s edible oil portfolio will continue to perform sub-par.
In the December quarter, the company’s overall India business volume had declined by 1%.
In general, the slowdown in rural demand has been a worry for many consumer-related firms, and Marico’s experience has not been any different. Some expect demand to improve if the rabi season turns out to be better than expected.
The company has also been coping with increased competition and down-trading. Analysts at Nirmal Bang Institutional Equities wrote in a report on 27 February: “Management indicated that while there is no drop in penetration or consumption in the company’s core categories, the conversion from loose to branded, has slowed down drastically. In fact, there was actually reverse migration from branded to loose in certain rural markets."
Meanwhile, as investors wait for demand recovery, keeping an eye on copra prices will help. Copra is a key input for Marico. Benign copra prices have helped the company in terms of margin expansion in 9M FY20, although the pace of gains had narrowed in the December quarter. According to SBICAP Securities, pricing in line with copra will be critical for Marico’s medium-term volume aspiration.