Fw: Investor's Eye: Update - Apollo Tyres; Special - Q4FY2012 FMCG earnings preview, Q4FY2012 Cement earnings preview

 

 

Investor's Eye [April 09, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Apollo Tyres Cluster: Apple Green Recommendation: Buy Price target: Rs91 Current market price: Rs82 Extension of anti-dumping duty positive, price target revised to Rs91 Government stays anti-dumping duty on non-radial tyres from China, Thailand Anti-dumping duty would continue to be levied on non-radial bus/truck tyre imports from China and Thailand.  The finance ministry has extended the validity of anti-dumping duty on such bias tyres by another six months till October 7, 2012.  The anti-dumping duty had lapsed on October 8, 2011. This extension has come in the wake of a sunset review initiated in August last year.  The bulk of the sales by turnover of the domestic tyre industry comes from the non-radial bus and truck tyres. Impact of the extension of anti-dumping duty The truck tyre replacement market is dominated by non-radial tyres and constitutes 65-70% of the tyre market's size by value.  Most of the Chinese tyres are imported and sold in the truck tyre replacement market at a much cheaper price against the available branded tyres.  To protect the interests of the Indian tyre manufacturers the Indian government first imposed an anti-dumping duty on bias tyres imported from China and Thailand through a notification dated July 24, 2007. The duty was extended again on August 26, 2010 at new rates. The latest notification has extended anti-dumping duty on non-radial tyres till October 2012. Valuation We believe Apollo Tyres is the best sustainable tyre play in the Indian context on account of its product and regional diversification. The lower prices of natural rubber are expected to help its margins. Of late, the most crucial truck tyre replacement market has shown some signs of revival and this is expected to benefit the company. Apollo Tyres is now the largest radial tyre manufacturer in India and would gain from the shift from bias tyres to radial tyres.  Given the favourable headwinds-lower natural rubber prices and anti-dumping duty on tyre imports from China and Thailand--the stock is likely to see a re-rating. We keep our FY2014 earnings per share (EPS) estimate of Rs14.9 unchanged but we increase our price target to Rs91 per share. We are thus discounting the FY2014 earnings estimate by 6.1x, which is the long-term mean. We remain bullish on Apollo Tyres and keep it as our top pick in the auto ancillary sector.  SHAREKHAN SPECIAL Q4FY2012 FMCG earnings preview  Key points Strong top line growth is foreseeable: We expect Q4FY2012 to be yet another quarter of strong top line growth driven by a mix of sales volume growth and price increases for all the fast moving consumer goods (FMCG) companies under our coverage (except for Zydus Wellness [Zydus]). Our interaction with some of the FMCG companies under our coverage gave us the clear indication of a strong demand environment for daily consumption items in the domestic market. Also, the focus on enhancing the reach of their products (especially in rural India) is helping these companies to improve the consumption of products/categories. On the other hand, the discretionary/premium categories might witness some pressure on sales volume in Q4FY2012. The acquisitions made by some of the FMCG companies (including Godrej Consumer Products Ltd [GCPL], Marico and Dabur India) in the recent past would help in achieving a robust top line growth.  Raw material prices remained a mix bag: Though the prices of some of the key inputs, such as palm oil, copra and sunflower oil, have corrected from their highs, the prices of the other key inputs such as kardi oil, rice bran oil, LAB and HDPE have remained substantially higher on a year-on-year (Y-o-Y) basis. The FMCG companies had implemented calibrated price increases in their respective product portfolios during the fourth quarter. Despite that we expect the gross margin of some of the FMCG companies (including Bajaj Corp, GlaxoSmithKline Consumer Healthcare [GSK Consumer] and Zydus) to remain lower on a Y-o-Y basis. On the other hand, we expect the gross margin of Marico to improve substantially year on year (YoY) while that of Hindustan Unilever Ltd (HUL) and GCPL (reaping the benefits of low raw material inventory) is expected to remain stable on a Y-o-Y basis.  OPM to improve YoY: The rationalisation of the advertisement spends and stringent management of the operating cost would help the FMCG companies to post a better picture at the operating level. Performance of Sharekhan's FMCG universe: We expect the top line growth of most of the FMCG companies to remain above 17% YoY except for companies like Zydus, which is bearing the brunt of competitive intensity in categories such as scrubs and face wash. With the most of the companies likely to post a better margin picture, we expect companies under Sharekhan's FMCG universe to achieve a robust bottom line growth (except for Zydus and GSK Consumer). Despite a flat operating performance, Tata Global Beverages Ltd (TGBL) is expected to post around 26% Y-o-Y growth in the bottom line mainly on account of a lower interest cost YoY. Going ahead: Union Budget 2012-13 proposed a basic duty hike of 2% in consumer goods and an increase in the service tax rate by 2%. Also, the commodity price momentum has remained volatile for the past few months. In view of this, we expect the FMCG companies to go for price hikes in their respective product portfolios in the coming months. Having said that, we expect the companies to go for calibrated price hikes taking into account the competitive environment in the respective categories. We expect the steady volume growth momentum to sustain for most of FMCG companies, despite the price hikes implemented in the coming quarters. The steady volume growth would be on the back of an increase in the distribution reach, renovation/innovations amongst the product portfolio and steady consumption of FMCG products in the domestic market. With the implementation of price hikes and the prices of the key raw materials staying lower than their highs, we expect the margins to more or less remain stable in the coming quarters. Valuation: We retain our view of remaining selective in the sector. We prefer ITC, Marico and GCPL from the current levels. Since our last update on the company (on February 8, 2012) Bajaj Corp has moved up by 14% and there could be upside of another 11-13% from the current level. Though HUL's business fundamentals are intact, but the current valuations do not provide any upside from the present levels.   Q4FY2012 Cement earnings preview  Key points Volume offtake improved in Q4FY2012: With a pick-up in the infrastructure activity, the cement offtake in the domestic market improved in Q4FY2012. The all-India cement volume in the January-February 2012 period grew by 10.1% year on year (YoY). What's more, the March 2012 volume data of the large players is encouraging. Hence, we expect the volume growth to support the revenue growth of the cement players in Q4FY2012. However, on a year-till-date (YTD; April-February 2012) basis the volume growth in the domestic industry was limited to 5.6%, which is below the industry's expectation as well the projected gross domestic product (GDP) growth for the current fiscal. Among the Sharekhan's cement universe, companies like JP Associates Ltd (JAL) and Shree Cement are expected to register an impressive volume growth on the back of the stabilisation of their new capacities.  Average realisation for Q4FY2012 to be higher on a YoY and QoQ basis: Cement prices in the February-March 2012 period increased by an average of Rs15-18 per bag due to an increase in the railway freight and excise duty. The western and eastern regions witnessed relatively higher price hikes during Q4FY2012. But the cement prices in the southern and northern regions largely remained unchanged during the quarter. We expect the average cement realisation in Q4FY2012 to be higher by around Rs150-175 per tonne quarter on quarter (QoQ) for companies operating in the western and eastern regions. On the other hand, the realisation of the cement companies operating in the southern and northern regions is expected to increase by Rs50-75 per tonne QoQ. Among our coverage companies the realisation is expected to increase by 2-5% sequentially. JAL and Orient Paper and Industries (Orient Paper) are expected to post a relatively higher growth in their realisation. However, on a year-on-year (Y-o-Y) basis, cement prices across major cities were higher during the quarter. Hence, cement companies are expected to register a double-digit growth in their revenues for the quarter. Further, as per the recent channel checks the cement prices are likely to remain strong in the near term.  Cost pressure to offset benefit of price hikes; margin continues to be under pressure: With the support of growth in the volume as well as cement realisation, the revenues of the companies under our coverage are likely to increase by 5% to 36%. However, the positive impact of the increased realisation on the margins is expected to be offset by the cost pressure in terms of power & fuel and freight charges (due to an increase in the lead distance). The Sharekhan cement universe is expected to post a mixed performance on the margin front. Companies like India Cements, Madras Cement and JAL are likely to post an expansion in their operating profit margin (OPM) whereas Orient Paper, Grasim Industries (Grasim) and Shree Cement are expected to register a contraction of 200-350 basis points in their margins.  Average bottom line to decline by 6.3% YoY: Though the cumulative revenues of the companies under the Sharekhan cement universe are estimated to increase by 12.9% YoY, but the average bottom line of the universe is expected to decline by 6.3% on account of margin pressure and an increase in the interest and depreciation charges. India Cements and Madras Cement are expected to post a healthy earnings growth in the range of 53-58% on a Y-o-Y basis whereas JAL and Grasim are likely to post a decline in their earnings.  Click here to read report: Investor's Eye Outlook Due to a pick-up in the infrastructure activity and increased consumption from the rural housing sector, the demand for cement has improved in the past couple of months. Going ahead, in FY2013 we believe the domestic demand for cement would grow at around 8-9%. Further, with supply discipline and a likely improvement in the utilisation ratio the cement realisation would remain strong. However, the key risk remains the cost pressure in terms of power & fuel cost and freight charges. Moreover, an increase in the supply by the mid-sized cement players to deliver a higher volume may break the discipline and could be a concern with regard the stability of the cement prices at higher levels. Hence, we maintain our neutral view on the cement sector but are positive on selects cement companies. In the large-cap space we prefer Grasim and among the mid-cap companies we like Orient Paper. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.