Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Mark-to-market/  Marico numbers to get a massage with pricier coconut oil
BackBack

Marico numbers to get a massage with pricier coconut oil

Sustained increase in copra prices have starting reflecting in Parachute coconut oil pricesa matter of much interest to investors and beneficial to Marico share prices

Marico share prices could also be affected by how the GST Council sees coconut oil—as hair oil or edible oil—when deciding the GST rate on consumer products. Graphic: Subrata Jana/MintPremium
Marico share prices could also be affected by how the GST Council sees coconut oil—as hair oil or edible oil—when deciding the GST rate on consumer products. Graphic: Subrata Jana/Mint

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.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 31 Mar 2017, 07:28 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App