C(ocoa + rude Oil) Hike ??
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Founder’s Recap
How the Price Hike of C(ocoa + rude Oil) Affects Us ??
Cocoa beans and crude oil?- seemingly unrelated commodities, with one being a sweet craving and the other being the power source of nations - yet both of these commodities joined hands lately as prices for both have shot up tremendously, which might not be good for inflation in India.
Why Are Cocoa Prices Rising?
Cocoa prices have risen over US$ 10,000 per metric ton (129% increase this year), reaching an all-time high in March 2024, breaking the previous highs of US$ 5,700 seen in the 1970s!
This is a direct result of the widening demand-supply gap, with supply falling short of 3,74,000 tons (10% of 2024 demand), up 5x from last year’s deficit of 74,000 tons - the biggest gap in 60 years!
To make matters worse. 60% of the world’s cocoa supply comes from just 2 countries - Ivory Coast and Ghana, thereby exposing the industry to 2 major threats:
This is a long-term story in action, with companies like Hershey’s stock being down 25% in the last year, with more pain seemingly ahead.
With the average price hike of 20% seen across brands already, this issue will either trigger a further increase in price or a reduction in the size of our favourite sweets.
Why Are Crude Oil Prices Rising?
Oil prices have risen to the level of US$ 90 per barrel in recent weeks - the first time prices have touched the US$ 90 mark since October 2023 (which occurred due to Russia and Saudi Arabia extending production cuts till the end of 2023).
Why Should You Care?
While the effect of the chocolate price hikes will have more of an effect on our mood and the sales of chocolate companies more than anything else, the crude oil issue is a little more serious.
With India hovering around the 5% inflation level, sustenance of current crude oil prices (or worse, an increase) could contribute detrimentally to our goal of bringing inflation under 4%. A delay in achieving ideal inflation rates automatically delays the possibility of rate cuts.
RBI already stated another pause on rate cuts this week, but from the looks of it, the next MPC meeting in June might have a similar response.
As we’ve said before, a rate cut is an incentive for businesses to grow business for cheaper loans, and delay in those rates leads to delay in progress - which might make investors a little jittery all too close to the elections. As usual, caution is advised!
Market Stories
领英推荐
How Samvardhana Motherson is Turning its Luck Around ??
You’d think that a company present in over 40 countries and is a global leader in everything electric, electronic or plastic that exists in a car (mirrors, cameras and even sunroofs) would have a bulletproof stock - but, unfortunately, that isn’t the case!
Samvardhana Motherson?(SAMIL), a literal mother-son venture, has showcased a 3x growth in revenues and 2x growth in profits over the past decade, tending to clients like Mercedes, BMW, Porsche and Audi in the process - but its stock price is a different story.
While the stock is up 4x in the past decade, the stock has been beaten down by contingencies at every point - almost like the story of the Greek legend Sisyphus?who was condemned to rolling a boulder up a hill, only for it to be rolled back down and for him to start the process all over again!
The stock is on one of its uptrends right now (~2x in the last year), and while one might assume the worst based on this decade-long trend of bad luck, this time around might just be different for SAMIL!
A Streak of Bad Luck
Despite its good fortune as a business, SAMIL’s share price has had 3 distinct moments?in the last decade where investors lost faith, with fault lying somewhere between “the company messed up” and “this was so random”.
While these may seem like one-off contingencies (and they are), the company is setting out to try and cushion itself to ensure these things don’t happen again.
Why Is This Time Different?
Technically, none of the above reasons for the stock price falling was SAMIL’s fault, but it did lead the company to the realisation that it needs to make some changes to its business:
If the company continues to work on these metrics, it could safeguard itself from the contingencies it faced in the past and prevent some in the future, solidifying investor confidence.
Is the Company Solid?
The Sehgal family has been at the reigns since the 80s, building SAMIL into the behemoth that it is, and might just have a better trajectory in place for its future:
Hence, while the Japanese promoters Sumitomo are reducing their stake in the company, they have clearly stated in the media that their current 9% stake will not waver and that they are merely taking a step back from active management as they have full faith in the Sehgal family’s capabilities.
With the stock currently trading at around a 1-year forward PE of 24x (in line with the industry average and a much more palatable multiple compared to the 45x quoted during the restructure), SAMIL’s price looks attractive as well.
Hence, with long-term growth factors, downside protection by tweaking their business, and attractive valuations combined, SAMIL surely deserves a spot on our watchlists!
We discussed all this and more on the latest episode of Common Cents by Rupeeting so check it out below!
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