Shares of consumer goods firm Marico Ltd had underperformed the Bombay Stock Exchange’s fast-moving consumer goods index in the market crash since January last year. The prices have, however, caught up in the past few months.
One reason is that prices of copra, the main raw material for the company, has dropped by about 12% in the past few months. Prices of another raw material, safflower, have also fallen.
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In most consumer goods categories, a sharp drop in raw material prices leads to competition from the unorganized segment. In segments such as soaps and detergents and tea, rural consumers have begun migrating to cheaper brands. This limits the ability of firms with branded products to gain from drop in input costs.
Marico is better off than its peers in this regard because of relatively high brand loyalty.
While the company has in the past adjusted prices to align with falling commodity prices, its steady market share of over 50% in the hair oil market has improved its pricing power.
As a result, analysts expect the company to retain quite a bit of the gains from falling copra prices.
Analysts at IIFL Capital say that Marico is unlikely to drop prices of Parachute hair oil, as there is little fear of consumers switching to cheaper alternatives.
Prices of its edible oil brands may have to be dropped though, given the intense competition in the segment and relatively low brand loyalty.
One concern is that the recent fall in copra prices may not sustain, given the government’s decision to hike its minimum support price. But IIFL analysts point that copra prices have moved independent of the government’s floor price in the past. Demand for copra has weakened thanks to the widening of the price gap between coconut and palm oils, and since supply has been steady, prices are expected to remain weak.
With these cost savings expected to flow into profits, interest in Marico’s shares could revive. The only constraint is that the stock already trades at nearly 20 times past earnings. IIFL’s estimates indicate that earnings are expected to grow by 25% and 20%, respectively, in the next two fiscal years.
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