On October 3, Marico witnessed a 5.9% increase in its stock price, reaching a new 52-week high of Rs 595. ICICI Securities has upgraded its rating on the consumer goods company’s stock from “add” to “buy” and raised the target price from Rs 610 to Rs 670, indicating a 19% upside potential.
The upgrade by the brokerage is supported by several factors. Anticipated improvements in volume growth for Parachute Coconut Oil, higher revenue from the food segment compared to the edible oil business, and a focus on scaling up Direct-to-Consumer (D2C) brands profitably are among the key considerations, according to analysts at ICICI Securities in an October 1 report.
Marico is aiming for medium-term volume growth of around 8%, which is seen as a positive indicator of its ambition to achieve faster growth on a larger base.
Shining in the Hair Oil Segment
Over the past decade, Marico’s Parachute Coconut Oil has significantly increased its market share compared to unbranded players. The share of unbranded players has declined from 50% in FY04 to approximately 30% in FY23.
With stable copra (dried coconut) prices and the potential recovery in rural consumption, volume growth is expected to gradually improve.
In the value-added hair oil (VAHO) segment, competition among bottom-of-the-pyramid brands appears to have reached a bottom.
The premium hair oil segment has faced challenges as consumers shifted to value price points due to inflation concerns. However, competitive intensity has now normalized.
Therefore, with an increased focus on premiumization and rural recovery, the growth of value in the VAHO segment is expected to gradually improve and achieve double-digit value growth in the medium term, according to ICICI Securities.
Food for Growth
Marico’s pricing strategy has limited the distribution of Saffola edible oil to modern trade, e-commerce, and the top 10 cities.
A shift in marketing tonality is expected to reposition Saffola from being an edible oil for consumers with heart ailments to a choice for those seeking a healthier lifestyle. This shift should deepen brand penetration.
Marico has plans to achieve 15-20% CAGR growth in its food portfolio during FY23-25. This strategy may help diversify the portfolio and reduce volatility in operating profit margins due to fluctuations in commodity prices.
Gross margins in the food business are higher than those in Saffola (oil). ICICI Securities suggests that breaking even is feasible with a revenue scale of Rs 200 crore in the foods segment.
In a report on the consumer goods sector, Emkay maintained a “hold” rating on Marico and offered a target price of Rs 565, indicating a 3% downside from the then-current market price of Rs 585.
As of 12:34 pm, the stock was trading at Rs 579.05 on the NSE, marking a 3.1% increase from the previous close.