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Friday, December 16, 2011

Fw: Investor's Eye: Pulse - (Monetary policy update); Update - Cement (Channel check indicates price cut), Information technology (Impressive performance continues)

 

Sharekhan Investor's Eye
 
Investor's Eye
[December 16, 2011] 
Summary of Contents
PULSE TRACK
Monetary policy update
  • RBI in its mid quarter policy review has kept the key rates unchanged (repo rate at 8.5%, CRR at 6%) while made important indications in terms of reversing the rate hikes going ahead. Although, there was anxiety in terms of CRR easing within some corners of market, RBI played safe by waiting for stable trend in inflation and rupee. RBI also expressed the rising concerns on the GDP growth due to deterioration in domestic and global environment. Since, RBI has clearly articulated the peaking of rates hikes and need to support growth the easing of CRR could happen sometime in Q4FY12 followed by the repo rate cuts.

SECTOR UPDATE
Cement   
Channel check indicates price cut

We have recently done a channel check with the cement dealers. We present below the key points of the same:
  • Cement prices declined in the north, east and central; unchanged in west and south: Our interaction with the cement dealers indicates that cement prices have corrected in the northern, central and eastern regions of India by around Rs10 per bag in the last couple of days. The correction in the price is largely on account of a lower than expected cement offtake due to slower execution of infrastructure projects. Prices have remained unchanged on a month-on-month (M-o-M) basis in the western and southern regions.
  • Central region witnessed relatively higher pressure on price: The central region has witnessed a relatively higher pressure on the price (declined by Rs10-12 per bag of 50 kg) compared to the northern and eastern regions. As per our interaction with the dealers in Lucknow and Bhopal, the volume offtake is lackluster, hence prices have fallen down by Rs10-12 per bag. The move will affect the realisations of Jaiprakash Associates, Prism Cement, Birla Corporation, Century Textiles and Heidelberg Cement will be affected due to their higher exposure to the central region.
  • Northern and eastern regions witnessed price correction of Rs5-7 per bag: The cement prices in the key states of the northern region have corrected by Rs5 per bag. The demand environment in the northern region has been affected due to a slower than expected execution of infrastructure projects. Companies having higher exposure to the northern region like Shree Cement, JK Lakshmi Cement, JK Cement and Mangalam Cement are expected to face an adverse impact on their realisations. On the other hand, the eastern region has continued to witness a sluggish demand environment. The cement price in Kolkata has declined by around Rs8 per bag to around Rs300-305 per bag. The key cement players in the region are Birla Corporation, OCL India and Lafarge India. 
  • Western region relatively better with improved offtake in Gujarat as well as Maharashtra: In the western region the demand environment is relatively better (both in Gujarat and Maharashtra) on account of government infrastructure projects in Gujarat and lifting of ban on river sand in Maharashtra. As per cement dealers in Gujarat, the cement price could increase from the current level by Rs5-7 per bag in the near term, whereas in Mumbai and other major cities of Maharashtra, prices have remained unchanged on an M-o-M basis. 
  • Southern region continues to benefit from the tight supply discipline: The southern region continues to face a lack of any material demand on account of the slowdown in the real estate market and the political hurdles. The present average cement price in Hyderabad is in the range of Rs260-285 per bag. We believe an improvement in the demand environment is unlikely in the near term and could take some more time. The key players operating in the region are India Cements, Madras Cement, Dalmia Cement and Chettinad Cement. 
  • Outlook on pricing: Given the supply discipline, the cement manufacturers have managed to maintain cement prices at a healthy level in spite of lackluster demand. Going ahead, with the capacity addition in place and a likely break in the supply discipline by mid sized players, we believe cement prices could come under pressure. However, the average cement realisation for cement players in FY2012 will remain higher compared to the average cement realisation in FY2011. We maintain our neutral view on the sector. However, we believe any correction in the sector will provide an investment opportunity in select companies. We prefer Grasim Industries in the large size space and Orient Paper and Industries in the mid size space.
 
Information technology   
Impressive performance continues

Accenture has started the new fiscal with an impressive set of numbers for Q1FY2012. The performance was better than its guidance and was backed by a strong growth in the outsourcing revenues and growth across verticals and geographies. The revenues were up 17% year on year (YoY) and 5.8% quarter on quarter (QoQ) to $7,074 million. The order booking remained strong on a year-on-year (Y-o-Y) basis to $7.8 billion though the same was lower on a quarter-on-quarter (Q-o-Q) basis. Going forward, for Q2FY2012 the company has increased the guidance range to factor in the uncertain macro-economic environment and the delay in spending at the start of the new year. For FY2012 the company has maintained a revenue growth guidance of 7-10% to $27.3-28.1 billion. The company has cut its earnings guidance on account of cross-currency headwinds. The management remains watchful about the macro-economic environment and the company's clients are taking proactive action to respond to the current, more volatile market conditions. The demand for outsourcing remains strong and going forward, the management expects the outsourcing business to grow in double digits and the growth in the consulting business to moderate. 

Valuation: Accenture's numbers for Q1FY2012 reinforced the belief that the demand environment for the IT industry is stable currently. However, going forward the management remains watchful of the macro-economic uncertainties. Nevertheless, Accenture's management remains optimistic more about the demand for outsourcing services than the discretionary spend (consulting) in the coming quarters. The optimism in the outsourcing demand augurs well for the Indian IT vendors. We maintain our cautiously optimistic stance on the Indian IT sector and our top pick in the sector remains Tata Consultancy Service. 
 
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
 
 

Click here to read report: Investor's Eye
     
Regards,
The Sharekhan Research Team
myaccount@sharekhan.com
 
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