| Summary of Contents
| SECTOR UPDATE Transmission and distribution Headwinds to keep valuations depressed Key points -
The order awarding activity of Power Grid Corporation of India (PGCIL) has intensified since August 2011 (after a dry spell of four months). In October this year, the momentum further picked up as PGCIL awarded projects worth Rs4,074 crore. -
Nonetheless, the transmission and distribution (T&D) market is getting fragmented with more domestic players entering newer segments. For example, in the 765kv sub-station category, after the removal of the circuit breaker in the scope of contract in early FY2012, there have been many new entrants like Larsen and Toubro (L&T), EMC, Jyoti Structures and Techno Electric (Techno). These new entrants have posed a tough competition to the traditional T&D majors like ABB, Areva and Siemens (which together commanded 100% market share in the previous year) and have already captured 66% market share in FY2012. -
Valuation wise, most companies are trading at a 25-30% discount to their average five-year multiple; however the uncertainty with regard to the order inflow amid intense competition and margin pressure would maintain the bearish sentiments in the T&D stocks. The problem of intensifying competition looks structural now and is unlikely to go away in the near future. Hence, we recommend investors to stay away from the sector till clarity emerges on the competitive landscape. FMCG Notified stipulation on pack size-a disappointer Notification to restrict change in pack size and weight of FMCG products -
The consumer affairs ministry has notified that 20 consumer products be retailed only in stipulated pack sizes as part of an amendment to the Legal Metrology Act. -
This policy move is specifically targeted at those FMCG companies that decrease the grammage to non-standard sizes. In a scenario of higher raw material prices, most of the fast moving consumer goods (FMCG) companies follow the practice of reducing the pack sizes of certain stock keeping units (SKUs) of their products (that is an indirect way of increasing the prices) while keeping the prices unchanged to ease the pressure on their margins. -
The new Legal Metrology Act is likely to come into effect from July 1, 2012. View: If the new rule comes into force, it will likely have an impact on the profitability of the FMCG companies. Their inability to sell recruiters pack or low-priced SKUs and make promotional offerings on certain SKUs might affect the growth of their top line. Also, in a scenario of firm raw material prices, an increase in the packaging cost would put more pressure on the profitability of these companies. However, since the rule is likely to be implemented in July 2012, it will not pressurise the margins in FY2012 but it will definitely affect the profitability in FY2013. Having said that, the FMCG companies and the associations of various industries (including soaps and biscuits) are lobbying against the implementation of the rule. Prima facie, we believe FMCG companies like Hindustan Unilever (HUL), Procter and Gamble, Britannia Industries, Marico and Tata Global Beverages will be affected the most by implementation of this act. | | "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." | | | |
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