Commodity Windfall Will Help Marico Invest In New Products
Marico Ltd. will use the windfall from lower commodity prices to invest in its newer businesses and introduce more grooming and food products as the share of coconut oil shrinks in India’s hair-care market.
“We are aggressively investing in changing the portfolio and reducing our dependence on Parachute and Saffola,” Saugata Gupta, managing director and chief executive officer at India’s largest hair oil maker, said in an interview with BloombergQuint. “The three big drivers of growth which we have identified is male grooming, premium hair nourishment and foods segments.”
Copra prices, according to Bloomberg data, declined nearly 24 percent this year. Motilal Oswal expects the prices of raw material—that accounts for 40-50 percent of material costs—to remain benign over the next 18-24 months. According to Jefferies, Marico’s operating margin may improve to more than 20 percent in 2019-20 due to a sustained fall in copra prices. That’s the highest estimate among peers tracked by the brokerage.
The market is favourable due to deflationary commodity cycle, Gupta said. He expects Marico’s margin to increase 200-300-basis points as prices of copra and crude have fallen. “We will use it judiciously between a pricing call and investing behind some of the new initiatives and for getting some margin increments,” he said, adding that it was something the company lost out on in the last 18 months because of rising input costs.
The focus on new products comes as Indians’ hair-care habits have changed with the use of lighter oils, styling gels and serums becoming more prevalent. According to Nielsen India, contribution of coconut oil to India’s hair-care market fell from 25 percent to 17 percent in five years through March 2018.
Known for its blue-bottled Parachute coconut hair oil and Saffola refined vegetable oil that’s marked as a healthier alternative, Marico also produces body lotion, and oats and soups under the two brands, respectively. The consumer goods maker, more than 58 percent owned by Chairman Harsh Mariwala and his family, also makes grooming and hair-care products under Set Wet, Livon, Hair & Care, Nihar and Mediker brands.
The share of coconut oil in its revenue fell to 39 percent in 2017 from 49 percent five years ago, according to its March 2018 investor presentation. Share of value-added amla hair oil and anti-hair fall treatment to its domestic revenue nearly jumped to 28 percent from 20 percent during the period.
Parachute coconut oil’s contribution to the domestic revenue is now at 38 percent, according to Gupta. “I will be happy if I can reduce it more by 7-10 percent over the next five years.”
Marico is in the process of internal restructuring as premium personal care and food require a different operating model, according to Gupta. They require higher innovation, much more risk taking and a more complex supply chain system, he said.
The company is creating two strategic business units which will run much more entrepreneurially and Marico will try to separate them out of the core business, he said. “As long as they are part of the core, they will contribute to 10 percent of top line. It is not going to get the focus.”