Sunday, April 12, 2009
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.
The Sensex ended higher yet again with a gain of nearly 4.5 per cent at 10,804 in a highly volatile week. In the process, the index has now soared nearly 30 per cent (2,478 points) in the last five trading weeks.
Among the index stocks, Jaiprakash Associates was the top gainer with a gain of almost 18 per cent. Tata Steel, Larsen & Toubro, Reliance Infrastructure, Tata Motors, ICICI Bank, DLF, Reliance Communications and HDFC gained in the range of 8-16 per cent.
As mentioned last week, the target for the current rally remains 12,600 which could be achieved in the next couple of months. In the coming week, the index is likely to face some resistance around the 11,000-mark, and further up at 11,200. The 11,000-mark is R3 (Resistance 3 or 0.62 per cent retracement of the February range) on the monthly charts, and 11,200 is R3 on the quarterly charts.
Since, the rally has been so sharp and the 14-day RSI (Relative Strength Index) continues to remain in the overbought zone, profit taking or a sharp retracement in coming days cannot be ruled out.
The chances of a pull back or some profit taking before the index hits 12,600 are high. Going forward, factors such as general election, corporate results and global markets will weigh heavy on the market sentiment. Hence, the volatility is likely to remain high.
The base for the current rally is 9,650-9,710. Only consecutive close below these levels would change the trend back to the negative zone.
The NSE Nifty moved in a range of 252 points, from a low of 3,149, the index moved to a high of 3,401, and finally ended with a gain of 4 per cent at 3,342.
This week, the index is likely to test its 200-DMA (simple daily moving average) at 3,437. The index may face some resistance around these levels before continuing its upward journey. Above this, the Nifty is likely to rally to 3,470-3,500.
However, in case of a downside, the index is likely to find support around 3,245-3,185. Once 3,185 is breached, the index may see a steep fall towards the 3,000-mark