Marico’s Q1FY22 update is decent, but stock valuations aren’t cheap anymore

Shares of Marico Ltd hit a new 52-week high on June 30 on the National Stock Exchange. So far this calendar year, the stock has appreciated over 30%, outperforming the broader Nifty 100 Index. As such, valuations don’t come cheap. Currently, stocks are trading at around 46 times estimated earnings for fiscal 2023, based on data from Bloomberg, suggesting that investors are capturing a good deal of optimism in the stock price.

The company released its pre-earnings update for the quarter ended in June, highlighting important trends seen in the last quarter. Marico said major input costs have started to cool after peaking at the start of the quarter, although gross margins will remain under pressure due to consumption of higher cost inventory. This should improve from the September quarter.

On the other hand, operating margins are expected to improve significantly during the June quarter sequentially due to better operating leverage and a trend towards medium-term expectations. Recall that the Ebitda margin in the March quarter was 15.9% and was the lowest Marico had seen in the many previous quarters. EBITDA is earnings before interest, taxes, depreciation and amortization; a key measure of profitability.

Granted, the June quarter operating margin is expected to be lower year over year given that June 2020 margins were unusually high at 24.3%, mainly due to the streamlining of A&P and other expenses. general during the base quarter. As a result, Marico expects moderate growth in net income in the June quarter.

In addition, Marico’s Indian operations recorded over 30% revenue growth, supported by strong double-digit volume growth in 1TFY22. Of course, a favorable base has helped here. It should be noted that volume growth in India stood at 25% during the March quarter, also partly helped by a favorable base quarter.

Commenting on the update, Varun Singh, analyst at IDBI Capital Markets and Securities Ltd, said, “The volume growth rate of Parachute coconut oil and saffola has now normalized to 5-7% and 10 to 11% respectively. The strong growth of the food portfolio looks exciting (on a low basis, high growth is always easy). We are generally positive on Marico. “

Marico said: “Value Added Hair Oils (VAHO) made a smart recovery across the franchise, albeit on a low basis, due to billing constraints during most of April last year. . “

“VAHO’s continued rebound is positive, and further comments should be watched,” analysts at Motilal Oswal Financial Services Ltd said in a July 4 report. The broker added: “The stock is trading at a premium compared to historical valuations, but better visibility of earnings relative to its peers during FY22 will result in sustained premium multiples.”

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