Against all odds

FMCG stocks have borne the brunt of the demonetisation move with the Street looking at couple of quarters or even more of muted or fall in earnings for these companies. Not surprising then that Marico too felt the heat with the stock hitting a low of ₹240 in November. 

In fact, in the second quarter of FY17, the company had reported a 3% decline in sales as volumes grew a mere 3%. Similarly its international sales, which accounts for 22% of its revenue, grew around 5%. Flagship brand Parachute, which accounts for 27% of the topline, saw a 19% decline in sales. Analysts have already lowered their expectation both on the margins and volume front, especially in the rural market, post demonetisation. Of the 39 analysts tracking Marico, 72% are bearish as they believe that volume growth will be muted besides the company will face pricing pressure both in rural and urban markets. 

But what’s interesting is that Harsh Mariwala has taken the bearish undertone in the market to perk up his holdings. In fact, for the first time since 2014, Mariwala and a promoter entity have purchased shares from the open market. From 16^th November to 17^th November, Arctic Investment & Trading Company purchased 5.58 lakh shares at ₹250.82 in four tranches from the open market. On 7^th December, Arctic bought an additional 95,000 shares. In all, the entity bought 653,000 shares worth ₹16.42 crore at an average price of ₹252 a share. Mariwala, in his personal capacity, too, bought 1.91 lakh shares from the open market at an average price of ₹256 a share, thus valuing the transaction at ₹4.89 crore. Post this transaction Mariwala’s  personal holding stands at 1.56%, which is worth ₹506 crore at current market price of ₹255 a share. Incidentally, independent director Atul Choksey too purchased over 28,000 shares. 

Though at 33x estimated FY18 earnings the stock is trading way above its ten-year average of 26x one-year forward, a small section of analysts believes that the current weakness in the stock is a good opportunity for long-term investors.

MOSL’s Krishnan Sambamoorthy, who is among the only three analysts to have a buy call on the stock, believes Marico offers an attractive investment opportunity, given its high-quality business and strong growth prospects with access to 4.6 million outlets in urban and rural areas. “With its strong brands, the company has consistently grown its earnings at an outstanding pace despite considerable input cost volatility,” says Sambamoorthy, who expects earnings growth to bounce back to 24% in FY18 from 9% in FY17. Whether investors are buying into the story is still not clear, but that is not preventing Mariwala from doing what he has to do.