Whether the news is good or bad depends on where you stand. Falling copra prices are good for the consumer but not for the producers. Shift the lens to Marico Ltd and the picture is unclear. Rising costs of copra have been singeing its profit margins in earlier quarters. Now that they are declining, margins should improve. But it’s not that simple.

The price of copra in the September quarter has declined by 12% over the June quarter. October continues to see the soft trend continue. The management believes that prices will remain soft. The bottles of Parachute coconut oil that Marico sells alone contribute 36% to its revenues and that sold in other forms—such as pouches—could take it higher. It’s a crucial product for the company.

When prices were going up, Marico took a measured approach. To illustrate, if the price of copra rose by 34% over a year ago as of June, the price of Parachute’s 100ml bottle rose by 22%. The firm must choose carefully how it plays the pricing game on the way down as well. Its main sight is set on converting users of loose oil to its brand, and then retaining them.

Since this segment is more price sensitive, Marico will have to pass on lower costs by cutting prices or giving more volume for the same price. But if it passes on all the cost savings, then what use of it being a market leader. So it will retain some savings from lower input costs, to spend more on advertising, some for margins and the rest will reflect in lower prices. While this sounds elegant in theory, in practice it will have to time the cuts carefully.

This will be the key event to monitor over the next few quarters, as it will affect both sales growth and margins.

Now, Marico’s India volume growth in the September quarter did disappoint, coming in at 6%. While Parachute’s sales grew by 8%, the company’s value-added hair oils portfolio got hit by a sharp cut in sales to the canteen sales department. Excluding it, volume growth was 10%, but that’s only a small consolation. Its Saffola refined oil saw volume growth of 5%.

Overall, value sales rose by 19.6% over a year ago, chiefly due to higher product prices and Marico’s international business also did well, with sales rising by 18%. In India, the company said that rural markets continued to do better than urban centres, with sales rising by 24% compared to 11% in urban areas.

The desire to maintain sales growth and market shares meant that while all operating expenses grew lower than sales, material costs grew ahead of sales. That pulled down its Ebitda (earnings before interest, tax, depreciation and amortization) margin by 86 basis points over a year ago and by 1.5 percentage points sequentially. However, higher other income and a lower tax rate led to its net profit rising by 18% over a year ago.

Marico is confident of volumes growing by double digits in the second half of FY19. It also intends to reinvest a part of the savings from lower input costs in advertising, to drive sales growth in India and abroad. While margins should increase from current levels, they will be held back by its desire to invest savings in advertising and offset higher costs elsewhere.

The company’s shares are barely up from their year-ago levels. Investors should watch for volume growth trends in the second half, and also how it navigates the falling price of copra. These could determine if there are positive or negative surprises to its forecast. Still, the second half should see a much more spirited performance from Marico.

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