Marico

Marico’s stock has been an underperformer in the FMCG pack despite the market preference for defensive stocks over the past year.

The better growth rates managed by larger FMCG rivals over the past three quarters and muted performance from Marico, due to higher raw material prices, have weighed on the stock. But with price hikes in the FMCG space tapering off and input prices for the company correcting from their peaks, Marico may deliver better growth in the year ahead.

An expanding international business, a promising new product pipeline and brands positioned strongly on the beauty and wellness plank, suggest that the business is well placed to weather any moderation in consumer spending. Investors can buy the stock, currently trading at a PE of about 16 times its estimated 2009-10 earnings; at a discount to larger rivals such as Hindustan Unilever, Nestle and Dabur India.

Marico delivered a strong 27 per cent sales growth in the first nine months of 2008-09, driven by healthy growth in the Parachute and hair oils business, an expanding contribution from new products (now 15 per cent of sales) and strong growth in the international business.

Though Marico’s coconut oil brands saw spiralling raw material prices (copra), significant price increases taken over the year (thanks to a dominant market share) and a volume growth of 7-9 per cent, helped the business register reasonable growth. The edible oil brands faced substitution by cheaper rivals, but this was more than made up by a strong show from Marico’s overseas operations in Bangladesh, West Asia, Egypt and South Africa.

The strong sales, however, failed to trickle down to profits (12.5 per cent growth) due to the upward spiral in the prices of safflower seed and copra.

Signs of relief on input costs are now evident, with copra prices correcting by about 13 per cent and safflower prices by about 20 per cent from their levels in December. While the former promises to expand hair oil margins, the latter allows room to revive volume growth in the Saffola brand through price offs.

Re-launch of brands in the South African business and a favourable currency equation suggests that overseas operations may continue to chip in with good growth. The company’s presence in nascent product categories such as male grooming, hair creams and styling gels, as also new product prototypes – Saffola Zest – a healthy snack and low glycemic rice – hold considerable scope for scaling up in size.