While the prices of sunflower, corn and rice bran oils have declined in the past few months, the matter that is of prime importance to Marico is the hardening of the price of its key raw materials, copra and kardi oil (safflower oil). These two commodities showed a significant decline in February 2009.
Copra prices (the key raw material for the flagship brand, Parachute) have declined by 4.9% month on month (down 12.4% compared with the average prices in July 2008) whereas the price of kardi oil has fallen by 16.3%.
The company’s Saffola volumes suffered in Q3FY2009 and grew by a meager 3% y-o-y. This was on account of a hefty increase in the premium (currently about 50%) enjoyed by the Saffola products over the other edible oils due to a reduction in the prices of the latter as a result of the softening of the raw material prices.
However, the management indicates that the volume growth has recovered slightly to mid single digits in Q4FY2009 till date.
The softening of the kardi oil prices though largely seasonal is likely to provide an opportunity for the company to take correction in the price of Saffola to lower the premium over the other edible oils which it targets to bring down to 30%.
However, we believe a clearer picture of the quantum of the price reduction in the Saffola brand will emerge by May-June 2009 by when the seasonal supply excess shall get absorbed.
Overall, we believe that competitive pricing of Saffola will help the company get its volume growth back on track.
Marico is trading at 81.7% premium to the Sensex and the valuation which is broadly in line with its historical peak valuations as can be seen from the above chart.
We believe it deserves to trade at these levels, considering the decent growth expected in its earnings in FY2010 even in the current macro scenario.