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Stock pick of the week: Marico's valuation has become reasonable after recent correction

Marico’s share price fell by 24% in last six months compared to 4% gain in the ET FMCG Index. Due to this underperformance and resultant fall in valuation, its growth challenges are fully priced in now, making the company a favourite of analysts.

, ET Bureau|
Last Updated: Mar 09, 2020, 06.30 AM IST
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Marico continues to face growth challenges, but its valuation has become reasonable after the recent correction.
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With a 2% y-o-y fall in consolidated revenue growth, Marico reported a lacklustre third quarter of 2019-20. The consolidated revenue fall would have been higher had the 5% y-o-y fall in domestic revenues not been partially compensated by 8% revenue growth in the international markets. The reasonable 10% y-o-y growth in consolidated net profit was due to higher financial income (up by 31% y-o-y) and lower corporate tax rate (22.9% this year vs 26.4% last year).

Marico is expected to face growth challenges in the coming quarters also, mostly due to weak rural demand and the resultant consumer down-trading. Downtrading refers to the consumer behaviour of shifting from premium brands to cheaper brands during harsh times. For example, Marico is doing badly on its value added hair oil segments now. While the parachute volume came down only by 2% y-o-y, value added hair oil volume fell by 7%. This is an industry wide problem and Dabur, its main competitor in the value added segment, is also facing growth challenges.

However, analysts are getting bullish on this counter now because the stock market has already reacted negatively to the growth challenges faced by Marico during the last six months. Its share price fell by 24% in the last six months compared to 4% gain in the ET FMCG Index. Due to this significant underperformance and the resultant fall in valuation, both in absolute terms and compared to other players in the industry, its growth challenges are fully priced in now.

Marico is also proactively reacting to market situations. For example, Marico is slowly passing on the benefit of copra price fall to the consumers and thereby, reducing its price premium compared to unorganised players. Though this may result in margin moderation, this should help Marico shore up its coconut oil volumes. After a big fall, copra prices have started stabilising now and this should moderate the competition from unorganised players. Saffola’s sales volume benefitted due to sudden spurt in edible oil prices and resultant price increase by competitors. To protect its margin, Marico is also expected to pass on the cost inflation in the coming months.

Marico’s international business, which contributes 22% to revenues, did well in the third quarter because of its good performance in Bangladesh. International business is also expected to do well in the coming quarters, due to strong macro environment in key markets like Vietnam and Bangladesh.

Analysts’ views
  • Buy: 21
  • Hold: 15
  • Sell: 14

Marico

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.

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