Stock Review: Marico

 

Raw Material Costs Up 25%; Co Will Hike Prices Again

 

THE stock of Marico shot up by 5% on Tuesday soon after the company declared a superior growth profit for the September 2010 quarter. However, it lost some of these gains by the end of the day's trading after it came to light that higher other income and lower depreciation had boosted profitability. The stock closed 2% above the previous day's closing price.

   The growth in Marico's operating profit could not match the growth in net sales and net profit. The year-on-year growth in consolidated operating profit is 7% as against 12.5% growth in net sales. The operating margin in the second quarter is the lowest in the last four quarters.

   Marico is mainly present in the hair and skin care, and edible oil businesses. It owns the hair oil brand, Parachute, and the cooking oil brand, Suffola. The increase in the prices of copra and sunflower, the main inputs for its products, was responsible for the lower operating margins. The price of copra has increased by more than 20% to 25% y-o-y. This resulted in a 21.1% increase in the company's raw material expenses. In the September month, the company already had one round of price hike across products. It increased the prices of products under the Parachute brand by 5% and of those under the Saffola tag by 1% to 5%. Going forward, the management has said it will have one more price . The company is also present in the skin care segment through Kaya Skin clinics. It has clinics in India, Middle East Asia and South East Asia. Earlier this year, Marico acquired Singapore based Derma Rx for about . 100 crore to improve the product portfolio and get access to skin care product technologies. Financially, the skin care business was struggling last year. However with a 28% y-o-y growth in the category, the management expects to breakeven by the end of this fiscal.
Overall, the growth in volumes across sectors has been good. Volume growth of Parachute products was 10%, Saffola, 18%, and international business, 18%. With another round of hike in product prices, the operating margins will be under control. If the price hike is supported by growth in volume, Marico will have a better second half than the first one. Taking into account the latest results, the stock trades at a price to earning of 31.