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| SHAREKHAN SPECIAL Q1FY2013 FMCG earnings preview
Steady performance to sustain Key points -
Strong revenue growth momentum to sustain: In Q1FY2013, we expect the FMCG companies to maintain their double-digit revenue growth momentum. The growth would be driven by a mix of sales volume and price-led growth during the quarter. Our interaction with most of the FMCG companies indicates that the sector is yet to face the impact of the looming macro concerns and we expect a decent volume growth in most of the categories during the quarter. However the sales of discretionary items or premium categories might witness some slowdown in Q1FY2013. -
Raw material prices remained a mixed bag: The prices of some of the key inputs such as palm oil and copra have corrected from their highs and are lower on a year-on-year (Y-o-Y) basis (copra prices are down 40% YoY and palm oil prices are down 4.5% YoY). Further, the prices of sunflower oil and kardi oil have stabilised in the recent months. On the other hand, the prices of commodities such as HDPE, LAB, caustic soda, soda ash and raw tea substantially moved up on a Y-o-Y basis during the quarter (refer to table below). Also, a significant depreciation in the rupee against various currencies would have resulted in higher import prices for some of the key inputs (such as palm oil) in Q1FY2013. Having said that, the calibrated price hikes of the products would help FMCG companies to mitigate the impact of higher input prices. -
Margins to improve for most: We believe softening in the prices of the key raw materials and the benefits of calibrated price hikes in product portfolio would come into play for most of the FMCG companies in Q1FY2013. Marico will be the largest beneficiary of the correction in copra prices with an above 600-basis-point improvement anticipated in the gross margins during the quarter. We expect Godrej Consumer Products Ltd (GCPL)'s operating margins to improve by 150 basis points YoY to 16.5% largely on account of an improved revenue mix and a low base of Q1FY2012. -
Performance of Sharekhan's FMCG universe: We expect the top line of Sharekhan's FMCG universe to grow by ~17% YoY with most of the companies in the coverage universe posting a strong double-digit revenue growth (except for Zydus Wellness) in Q1FY2013. Since prices of most of the raw materials have corrected from their highs, we expect the margin profile of the FMCG companies under our coverage to be better in Q1FY2013 in comparison to Q1FY2012. However companies like Glaxo SmithKline Consumer Healthcare (GSK Consumer) and Tata Global Beverages Ltd (TGBL) are likely to witness a Y-o-Y decline in their operating margins, largely due to higher raw material prices. Mcleod Russel India Ltd (MRIL)'s is expected to post a robust performance. The revenues are expected to grow by 11.0% YoY to Rs120.4 crore and the profit after tax (PAT) is expected to grow by 56% YoY to Rs58.2 crore. The strong growth in MRIL's bottom line could be attributed to the anticipated significant improvement in the sales realisation during the quarter. Overall, we expect the operating profit and the adjusted PAT of Sharekhan's FMCG universe to grow by 20.1% YoY and 21.5% YoY respectively during the quarter. Outlook
In FY2012 the growth in demand for FMCG products in rural India was much ahead of that in urban India. However, a below-normal rainfall at the start of the monsoon season this year has dampened the overall sentiments. We believe these are early days to form a view. The progress of the monsoon during the July-August period will have to be keenly monitored as it will be the key determinant of rural economic growth in India. A below-normal monsoon will have its repercussion on the Indian FMCG sector in the coming quarters. We might see moderation in demand for FMCG products from rural India, which currently contributes 40-50% of the revenues for most of the FMCG companies under our coverage. Also, a below-normal monsoon will add on to the food inflation, thereby affecting the consumer buying decision in urban India. Hence in the scenario of high food inflation and below-normal rainfall we might see a moderation in sales growth for FMCG companies in the coming quarters. However we foresee a larger impact on the growth of discretionary and premium items rather than daily consumption items. Preferred picks: In an environment of uncertainties we prefer stocks with better earnings visibility and a strong balance sheet. Hence we like ITC in the large-cap space and GCPL and GSK Consumer in the mid-cap space. Q1FY2013 Construction earnings preview
No respite yet Key points -
A pick-up in execution to support revenue growth but weakness at PAT level to persist: The first quarter of FY2013 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against the mounting interest burden. We expect the aggregate revenue of the Sharekhan EPC universe (ex Punj Lloyd) to grow by a good 16% year on year (YoY) led by some pick-up in execution across projects. However, the earnings are estimated to decline by 22% on the back of a marginal decline in the margins and a sharp jump in the interest burden. -
Asset developers to also witness pressure on earnings: Asset developers, which have otherwise outperformed the EPC players, would feel the pinch too due to the rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a robust growth of 19% YoY in its revenue on account of consistent execution, consolidation of the Chongqing project and some signs of traction in the Elsamex division. But higher depreciation and a rising interest burden would dent the earnings, which would degrow by about 13% YoY. IRB Infrastructure Developers (IRB) too would post a nearly 7% decline YoY in its earnings in spite of a 17% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project. -
Only small EPC companies might record positive earnings growth: In our universe, we expect smaller EPC players like Gayatri Projects (Gayatri), Pratibha Industries (Pratibha) and Unity Infra (Unity) to post a growth in their earnings led by the robust execution of their projects and sustained margins despite a high interest burden. This expectation is supported by their strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals. -
Outlook: situation likely to improve from H2: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India. However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our bullish bias on ITNL, Unity Infra and Pratibha. Our bullish stance on IRB Infra is more of a tactical call to take advantage of the event-led wide gap in the valuations of IRB Infra and ITNL. Q1FY2013 Cement earnings preview
Realisation to support earnings growth Key points -
Volume offtake improved in Q1FY2013: With an increased consumption from the rural market and a partial pick-up in the infrastructure activity, the cement offtake in the domestic market improved in Q1FY2013. The all-India cement volume in the April-May 2012 period grew by 11.9% year on year (YoY). However, the volume data of the large players for June 2012 is not encouraging (shows a decline month on month [MoM]) due to the arrival of the monsoon. Overall, we expect the volume growth to support the revenue growth of the cement players in Q1FY2012. Among Sharekhan's cement universe, Madras Cements, JP Associates and Shree Cement are likely to register an impressive volume growth on the back of the stabilisation of their new capacities. For FY2013 we expect the all-India cement demand to grow at around 8% as compared with a 6.3% growth in FY2012. -
Average realisation for Q1FY2013 to be higher YoY as well as QoQ: Cement prices in April 2012 increased by an average of Rs10-15 per bag due to an increased cement offtake in the northern, western and central regions. The western, eastern and southern (Tamil Nadu) regions witnessed relatively higher price hikes during Q1FY2013. On the other hand, cement prices in northern and central regions witnessed relatively lesser price hikes. The average cement realisation in Q1FY2013 is estimated to be higher by around Rs200-250 per tonne quarter on quarter (QoQ). The realisation of the companies under our coverage is expected to increase by 4% to 8% sequentially. Shree Cement, and Orient Paper and Industries (Orient Paper) are expected to post a relatively higher growth in their realisation. Further, on a year-on-year (Y-o-Y) basis as well, cement prices across the major cities were higher. Hence, cement companies are expected to register a double-digit growth in their revenues. Further, as per our channel check, the cement prices have gone up by Rs10 per bag after the Competition Commission of India (CCI) imposed a penalty on cement companies for cartelising. We believe cement prices will see a seasonal correction in the coming couple of months. However, for FY2013 the average realisation will be higher as compared with that in FY2012. -
Cost pressure to offset benefit of price hikes; margins continue to be under pressure: With the support of growth in the volume as well as realisation, the revenue of the cement companies under our coverage is likely to increase by 9% to 35%. However, the positive impact of the increased realisation on the margins is expected to be offset by the cost pressure in terms of higher power & fuel and freight charges (due to an increase in the lead distance). The Sharekhan cement universe is expected to post a mixed bag of results on the margin front. Companies like Shree Cement, India Cements and Orient Paper are likely to report an expansion in their operating profit margin (OPM) whereas Madras Cements and UltraTech Cement (UltraTech) are expected to register a contraction of 300-475 basis points in their margin. -
Average bottom line to increase by 17.7% YoY (ex Grasim): The cumulative revenue of the Sharekhan cement universe is expected to grow by 17.3% (ex Grasim Industries [Grasim]). However, on account of the continued cost pressure the cumulative OPM is expected to contract by 46 basis points. The average bottom line growth of Sharekhan cement universe works out to 17.7%. Shree Cement, Madras Cements and Orient Paper are expected to post a healthy earnings growth in the range of 24-90% YoY. On the other hand, UltraTech is likely to post earnings growth of 9.1% and India Cements is likely to post a decline of 4.8% in its earnings YoY. -
Outlook going ahead: Due to the increased consumption from the rural housing segment and a partial pick-up in the infrastructure activity, the cement demand has improved over the past couple of months. Going ahead in FY2013, we believe the domestic demand for cement will grow by around 8% as compared with the 6.3% growth in FY2012. Further, with the healthy realisation and a likely improvement in the utilisation ratio (marginal), we believe cement companies would register a double-digit growth in the revenues. However, the key risk remains the cost pressure in terms of the power & fuel cost and the freight charges. Further, any break in the supply discipline (due to the penalty imposed by the CCI) could affect the stability of cement prices at higher levels. Hence, we maintain our neutral view on the cement sector but are positive on selective picks. In the large-sized space we prefer Grasim and among the mid-sized 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. | | | | | |
