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Marico holds steady, despite rising commodity prices

Marico holds steady, despite rising commodity prices
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First Published: Mon, Jan 10 2011. 09 35 PM IST
Updated: Mon, Jan 10 2011. 09 35 PM IST
On a day when the markets fell by 2.4% and the BSE FMCG (fast moving consumer goods) index by 1.4%, Marico Ltd’s share price fell by just 0.5%. That may seem puzzling, given that much of its revenue comes from products made using agricultural inputs such as oils and oilseeds, whose prices are rising. Copra, from which coconut oil is extracted, contributes to about 40% of its raw material cost (looking at consolidated financials), with other contributors being safflower oil, sunflower oil, rice bran oil and others such as liquid paraffin and packaging material.
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Investors may be taking solace from Marico’s experience in tackling volatile commodity prices and managing its impact on sales growth and margins. Copra prices increased by about 15% in the first half, but the company increased prices by about 5% (weighted average basis) in the September quarter and by another 7-8% in the December quarter, said the management in a conference call. The full impact of these price increases will be visible in its December quarter results, contributing to higher sales growth and mitigating the effect of higher raw material costs.
Marico has said that it will pass on cost hikes to customers, capitalizing on the strength of its brands such as Parachute and Saffola. With Parachute, the company’s approach has been to convert users of unbranded oil by selling smaller packs, priced at Rs5 and Rs10, and it has generally held prices of these steady. But rising costs have forced it to hike the Rs10 pack’s price by 20%, while the base “recruiter” pack’s price remains unchanged.
Though Marico attempts to take a longer-term view, about five-six months, on its product prices, the sharp uptrend could change that. Between September and November, copra prices were up by 18%, rice bran oil by 7.5%, while safflower oil was up by a more modest 4%, based on data available on Marico’s website. Since it may have covered its raw material requirements in advance, these hikes will not immediately affect it. But eventually they will. Moreover, prices in December have risen further, as countries that are large producers of agricultural products have seen output getting affected due to bad weather conditions. These are likely to put further pressure on prices.
Marico had said that if input costs rise very sharply, it could temporarily affect margins because the company would focus on volume growth. That is a more sustainable strategy for a consumer company.
Also, its Kaya business is now coming back to normal, which reduces the impact on margins that was visible in earlier years. Its international business, which contributes about one-fifth to revenue, is also expected to contribute to growth. Rising inflation could also bring another benefit to Marico. Sellers of so-called loose oil will typically pass on price hikes immediately to consumers. If that means a narrowing of margins between them and Marico’s products, it may end up benefiting the company as well. Whatever the reasons, investors appear confident of Marico’s ability to ride out the inflationary situation prevailing in agricultural commodities.
Graphic by Yogesh Kumar/Mint
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First Published: Mon, Jan 10 2011. 09 35 PM IST
More Topics: BSE | Marico | Commodity | FMCG | Parachute |