Mar 6, 2012|
Are Edible Oil companies good investment bets?
India with its huge 1.2 bn population, and GDP growth of approximately 8%, generates a major demand for edible oil. Despite being one of the largest producers of oilseeds in the world, India's domestic production of edible oil is insufficient to meet these overall needs. As much as of 50% of the edible oil demand is met through imports. Palm oil constitutes the lion's share of 78% whereas soyabean oil, sunflower oil and other edible oils form the balance of the import basket (as per Solvent Extractors Association of India). Due to the huge reliance on imports, domestic edible oil companies are vulnerable to global demand-supply dynamics and currency rate movements. Seasonality coupled with higher share of imported inputs entails longer inventory holding thereby stretching the working capital of the companies. To add to this, the huge presence of the un-organised market arising from low entry barriers keeps the profitability of the industry woefully low.
Profitability on the edge (FY11)
Source: Ace Equity
Resulting from these competitive market conditions with no product differentiation, most edible oil companies are operating on wafer-thin margins of less than five per cent (see Table below). Also, companies such as BCL Industries and Ruchi Soya Industries, having piled on debt of nearly two times their equity components, are further financially stressed. These companies are literally on tenterhooks and reported net margins of a mere one per cent of sales in FY11. However, Raj Oil Mills earns slightly better margins than peers as it sources raw materials domestically and so has more comfortable leverage with a debt/equity ratio of 0.4. Thus volatile earnings, high leverage and poor margins make edible oil companies susceptible to losses in a cyclical downturn. A classic case is KS Oils, which has the most stretched balance sheet, and was pushed into the red in FY11. Although, Amrit Banaspati and JVL Agro have managed to give attractive returns on equity, these companies historically have been big importers raising doubts on the sustainability of future returns.
Brand strength shields Marico
In the low margin edible oil market, one company that has forged way ahead of its counterparts is Marico. This company is present in the super-premium edible oil market with its Saffola brand, and clocks net margins of around 13%. Saffola edible oil was launched way back in the 1960s, but was promoted as healthy oil for the heart in the 1990s. Marico set up the Saffola Healthy Heart Foundation in 1991, and followed it up with several rounds of mass-media campaigns. The Foundation conducts camps to build awareness about risks that our modern lifestyle poses to the heart, and helps people lower those risks. These initiatives have created a 'good for the heart' image for the Saffola brand. This unique brand acceptance allows Marico to command a substantial premium over other edible oil brands and shields it from vagaries of the industry dynamics.
Given the large demand in India, there is a huge dependence on raw material imports. The intense competition in a market with little product differentiation and vulnerability to commodity cycles, has squeezed the profitability of the edible oil companies. Marico has overcome these structural problems by successfully building the Saffola brand with healthy heart image. So, Marico, having "cooked" its brand strategy well is clearly a safer investment bet among edible oil stocks.
||Madhu Gupta (Research Analyst), Managing Editor, ResearchPro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages. Madhu contributes towards our small cap service Hidden Treasure.
More Views on News
Aug 9, 2017
While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.
Dec 9, 2016
Procter & Gamble Hygiene and Health Care has announced the first quarter results of the financial year ended June 2017 (1QFY17). The company's sales rose by 12.5%YoY while net profit rose by 50.1% YoY during the quarter.
Nov 30, 2016
Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.
Nov 30, 2016
GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.
Nov 28, 2016
Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407