Marico numbers to get a massage with pricier coconut oil
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Is coconut oil a hair oil or edible oil? Marico Ltd would be keen to know the answer, as the GST (goods and services tax) Council will soon get down to deciding rates. While GST rates on all consumer products are of interest, if one takes the government’s word at face value — that consumer prices will not increase—then the impact on companies should be minimal. In any case, many FMCG (fast-moving consumer goods) firms, including Marico, have units in states such as Assam to avail of excise benefits. These will continue under the GST regime.
Of more immediate interest to Marico’s investors should be an increase in its Parachute pure coconut oil sold in bottles. Some pack sizes have seen prices increase by 7-10% in March. This comes on the back of a sustained increase in copra prices, which are up by 38% since October while coconut oil is up by 42%, as per prices maintained by Marico.
The increase in Parachute prices may seem relatively less and even delayed, compared to the raw material price trend. This may be deliberate. For one, Marico may have locked in earlier to lower input prices. Also, the company did not reduce prices sharply when input costs fell. It prefers to maintain its margins in a range. When input prices increase, this strategy allows it to increase market share, as buyers of loose oil shift to Parachute as the price differential between the two narrows. About a third of the coconut oil market by volume is still sold in loose form.
Parachute’s market share in coconut oil is likely to have risen in the March quarter, and with the increase in price, margins should improve in fiscal year 2018. Post-December quarter results, when domestic coconut oil volume had declined by 1% due to demonetization, the company said it expects to recover and grow by 5-6% in the near term. In Bangladesh, which contributes to 45% of Marico’s international sales, the firm had said sales growth of coconut oil will return to constant currency growth in the fourth quarter.
The raw material prices in other inputs in edible oils for its Saffola range or for paraffin oil for its value-added hair oils are stable or increasing. Broadly speaking, a firming of its cost base should allow for price hikes, with the extent depending on demand and competition. Urban demand is expected to be in better form in FY18, which should help the premium part of Marico’s portfolio.
Rural markets were affected more by demonetization than urban markets in the December quarter. FY17 was expected to be better due to a better monsoon. If rural demand recovers, that should help its low-price packs and hair oil sales.
The Marico stock has risen by 23% since end-December and is trading around the same level it was in early September. It trades at a price-to-earnings multiple of 40 times the estimated FY18 mean earnings per share, based on estimates polled by Reuters. That makes it a relatively expensive stock. If product prices keep increasing, if demand improves and if GST benefits become evident, the stock’s valuation could still be justified. A near-term risk is supply disruption when GST is implemented.