Marico stocks surge 11% as falling input cost prices aid margins

The stock of Marico is up over 11 per cent since the end of the July-September quarter, aided by a fall in input cost prices. This has helped the stock outperform benchmark indices this year. A Marico investor would have made 14.9 per cent gains since December last year, even as the S&P BSE Sensex is up 4.1 per cent.

Falling raw material costs, especially copra, has buoyed sentiment for the stock. Copra is a key raw material in the making of coconut oil. A continuing fall is likely to help act as a tailwind in the next quarter too, if past trends are anything to go by.

Copra prices have fallen by around 32 per cent this calendar year. This has usually had a corresponding positive effect on raw material costs for the company. Flagship brand Parachute Coconut Oil accounts for a significant chunk of the company’s sales.

The company had earlier increased prices on the back of rising raw material costs. It can now choose to pass on the benefits to consumers to a certain extent. Additional marketing spends can also help consolidate its position in the market. Both these factors will improve its competitive position.

The company had earnings before interest, tax, depreciation and amortisation (Ebitda) margin of around 17 per cent in the September quarter. The Ebitda margin is a measure of how much operating profit the company makes as a percentage of its sales.

The reported margins came at a time when copra prices were at Rs 10,496 per 100 kilograms. This has fallen to Rs 9,600 in November. This 8.5 per cent further decline since the end of the September quarter is a positive. The management had indicated in an earnings call that the softening copra prices would result in higher margins in the second half of the year, even with limited copra price correction.

Bloomberg estimates show that over 90 per cent of analysts tracking the stock has a buy or hold rating on the stock. However, the consensus target price has almost been breached. This would indicate that room for upside is limited