The Street certainly thinks that Marico Ltd got a good price for Sweekar, its sunflower oil brand. Marico’s share price gained by about 3% over Friday’s close.

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The brand’s revenue was about Rs100 crore, according to a research note by Emkay Global Financial Services Ltd. Marico has not disclosed the price at which it sold the brand to Cargill India Pvt. Ltd.

Sweekar had ceased to be a focus brand for Marico and was selling on what the company management called its residual brand equity. Though it did not actively support the brand, it was still bought by some consumers.

Marico’s disinterest in Sweekar was, in part, due to rising competition, which affected pricing power. Also, consumers began to switch between soya oil and sunflower oil, depending on which was cheaper. Marico decided to cut its exposure, not wanting to be held ransom to commodity price fluctuations. It produced enough to meet demand, positioned it as a premium product, and did not mind much that the product still sold in decent numbers.

Cargill already has two sunflower oil brands, Gemini and NatureFresh. Thus, thwarting competition appears to be the main reason for this acquisition.

When Marico acquired coconut oil brand Nihar in 2006, it paid about Rs220 crore to buy a brand with Rs120 crore revenue. Its brand Parachute was already the market leader in the coconut oil segment. But Nihar could have become a bigger threat in somebody else’s hands.

Cargill may have been willing to pay a premium that was linked to the brand’s growth potential, rather than its current size. One will have to wait for Marico’s 2011 annual report to know the consideration.

Profit from the sale will add to Marico’s non-operational income, and should reflect in its March quarter results, since the sale is effective as of 25 March. Marico could use the cash to either lower debt or fund an acquisition.

The timing of the sale is also opportune, as it offsets to some extent the uncertainty caused by the civil unrest in West Asia and North Africa. This area contributes 7-8% to Marico’s turnover and some loss in revenue will be visible.

Marico has hiked prices of Parachute in January and that of Saffola in February. While this will protect its margins from rising input costs, the effect on volume growth will be watched by investors.

They will await its March quarter results to see whether the price hikes were adequate enough to protect margins, without hurting volume growth.

Graphic by Yogesh Kumar/Mint

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