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Commodity costs continue to ease even further
According to latest data released by Marico (MRCO), we have prepared a report giving an update on Copra and other key commodities utilized by the company for the month and quarter ended Jun’19.
Copra Calicut average prices down 25.3% YoY in Jun’19 quarter
* Copra’s deflationary cycle is a key factor that underpins our confidence on the company’s earnings prospects, along with strong Parachute volume growth, VAHO sales growth and healthy momentum in new products.
* The raw material basket for Marico continued to see deflation for the fifth consecutive month. In Jun’19, Copra Calicut price was down 1.6% on MoM basis and Cochin Coconut oil was down 3.8% MoM.
* On an average basis for 1QFY20, Copra Calicut prices were down 25.3% YoY to INR96.6/kg and Cochin Coconut oil prices were down 23.6% YoY. Copra accounts for 40-50% of the raw material costs for Marico. Importantly, even other key commodities were down YoY during the quarter (LLP down 0.5% YoY and HDPE down 21.3% YoY).
* The decline in prices continued and was ahead of management’s expectation of 15-20% drop in copra costs for FY20 v/s FY19. We are already building in 400bp/240bp expansion in gross margin for 1QFY20/full-year FY20.
* During the quarter, company passed on some benefits of the deflation in raw material prices through a few minor price cuts and promotions in some part of the portfolio. For example: Parachute Coconut Oil pouch of 100ml saw a price cut of 5.9% to INR32, Parachute Jasmine price was reduced to INR42/90ml (- 4.5%), 9.1% cut in Nihar Naturals (from INR44 for 98ml to INR40 for 98ml), and Parachute Ayurvedic oil saw 14.8% cut (from INR135 per 190ml to INR115).
* Along with a benign raw material environment over the next two-three quarters, two other factors also underpin our confidence on Marico’s earnings prospects:
* Strong performance of Parachute volumes in recent quarters and healthy growth prospects in the VAHO segment,
* Good traction being witnessed on new product development.
* Moreover, with over 30% of sales coming from rural (management is targeting 40%), and particularly with its technological edge over peers, Marico is also becoming an interesting play on rural growth.
* Targeting 40x June’21 EPS, we get a target price of INR435, 20% upside to the CMP. From a medium-term perspective, particularly if the targeted 7-8% sales come in from new products, we believe that Marico is one of the few companies, which can give 50-60% returns over the next 2-3 years. Maintain Buy.
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