Marico better placed than peers on costs amid commodity surge

Lower copra costs and price cuts to aid volumes and margins

The stock of consumer major Marico has been an outperformer over the past month, shedding about 3 per cent as compared to its peer index BSE Fast Moving Consumer Goods (FMCG) which has lost twice as much. While all FMCG companies will be impacted by the rise in commodity costs, the impact on the owner of Parachute and Saffola is expected to be lower.

This is on account of fall in its core input costs as compared to the commodity basket of other FMCG majors. The prices of copra, which  is used in making coconut oil based hair oils, is down 36 per cent YoY as compared to year ago levels.

The company, according to Kotak Institutional Equities, has reduced the price of select products of Parachute hair oil by 5 per cent and Parachute Jasmine oil by 13 per cent. In addition to this, it has lowered Saffola Gold and Active prices by 4-7 per cent. There have been some hikes as well with the prices of Kardi and Tasty blend going up by 3-8 per cent.

Given the fall in its raw material basket, Motilal Oswal Research highlights that the company has been the least affected (among major FMCG companies) by the recent sharp spike in raw material inflation. The price reductions, according to analysts, are expected to help boost volumes while lower costs would aid profitability.

Copra prices are expected to correct further with the advent of the new flush season. “In view of a consistent correction in the copra prices, we expect the gross margins to improve by 80-90 basis points sequentially (and by 50-60 basis points YoY) in Q4FY22,” say analysts at Sharekhan. Gross margins for the company have been improving from 41 per cent in the June quarter of FY22 to 44 per cent in the December quarter. Higher crude oil prices, however, will impact packaging costs though the impact on the overall cost base might be low.

In addition to the movement in raw material price, the street will track the market share gains across its key categories. Over the medium term, incremental stock gains will depend on the traction the company gets from food business and digital brands.