Fw: Thematic Report (Switch from Tata Global Beverages to Mcleod Russel)

 

 

Thematic Report [July 09, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Switch from Tata Global Beverages to Mcleod Russel Key points Rising tea prices benefit plantation companies but unfavourable for tea processors and marketers: When tea prices go up it is preferable to invest in tea plantation companies rather than the tea processing companies. The rising tea prices would keep the profitability of the tea processing and branding companies under pressure, as raw tea is the key input for them. Also, there is this concern of the marginal users downgrading from branded tea to regional tea brands due to the price hikes undertaken by the branded tea players. On the other hand, tea plantation companies would gain from the rising tea prices, as it would have a direct positive impact on their profitability.  Thus, Mcleod is better placed than Tata Global Beverages currently: Tea contributes around 60% of Tata Global Beverages Ltd (TGBL)'s consolidated revenues. Since CY2008 tea prices have moved up significantly due to a shortfall of black tea in the international market. The margin of TGBL's tea segment that ranged in mid teens has slid to higher single digits in the recent past. On the other hand, Mcleod Russel India Ltd (MRIL)'s operating profit margin (OPM) moved up from around 10% in FY2008 to around 27-28% in FY2012. Hence, we recommend our investors to switch from TGBL to MRIL.  TGBL's diversification a good long-term strategy with little material in the near term: TGBL has undertaken several initiatives (such as joint ventures with PepsiCo India and StarBucks Corporation) to diversify from the commoditised tea and coffee business to the high-margin beverage business. The company now aims to enhance its presence in the healthy beverage space in the domestic market. However, we believe these initiatives will take some time to start adding substantially to the bottom line of TGBL. Nevertheless, these initiatives will improve the long-term growth prospects of the company.  Expect better returns from MRIL over next few quarters: Given the margin pressure and the stock's fair valuation, the gains in TGBL are limited from here. On the other hand, we expect MRIL to ride the upcycle in tea prices and consequently give better returns in the near term. Hence, we recommend a switch from TGBL (current market price: Rs117) to MRIL (current market price: Rs317). Click here to read report: Thematic Report   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Thematic Report (Closure of switch call from HUL to ITC with nearly 12% gains); Update - CESC (Stepping efforts to pull back retail), Fertilisers (Demand shifts to cheap fertilisers)

 

 

Investor's Eye [July 10, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Closure of switch call from HUL to ITC with nearly 12% gains We close call with around 12% absolute return and 6% outperformance to Nifty: Our Switch Idea to shift from Hindustan Unilever Ltd (HUL) to ITC, released on December 2, 2011, has given a positive return of ~12.0% so far while the broader market has moved up by 5.8% over the same period. ITC has outperformed despite the sharp increase in the excise duty on cigarettes in this year's Union Budget (which is likely to affect the sales volume growth of its core cigarette business in FY2013) and HUL's better than expected financial performance in the past two quarters. We now close the switch call.   Rationale for closing the call HUL's premium over ITC has narrowed to 11% from 38% at time of initiating the call Historically HUL traded at a premium valuation to ITC. The valuation gap had widened to 38% from an average of 24% in December 2011, thereby prompting us to initiate the switch call. However, the valuation gap has narrowed down to 13.6% now, making the risk-reward ratio unfavourable. The premium of HUL over ITC has declined for two reasons: (1) a sharp appreciation of 25% in ITC's stock price and (2) a relatively better upgrade in the earnings estimates for HUL.   Remain bullish on ITC from a long-term perspective; HUL susceptible to weak monsoon-led potential slack in rural demand The aberration in the relative valuations of ITC and HUL has played out well; the risk-reward ratio in the switch trade is no longer favourable now. However, we continue to remain bullish on ITC and prefer the stock as our top pick in the fast moving consumer goods space for the long-term investors. ITC's core cigarette business is a lot more inelastic to the changing demand environment and the investments in the non-cigarette business will begin to yield better returns in the coming years.  On the other hand, HUL could face some margin pressures (due to the volatility in commodity prices and foreign exchange fluctuations) and also get adversely affected by a potential weak monsoon-led dampening of rural demand (the rural markets contribute 50% of its revenues). STOCK UPDATE CESC Cluster: Ugly Duckling Recommendation: Buy Price target: Rs405 Current market price: Rs307 Stepping efforts to pull back retail  Consolidated PAT hit by discontinuation of deferred tax: CESC's utility business (standalone) reported a PBT growth of 13% YoY. However the consolidated PBT grew by 19% YoY on a low base of the corresponding period of the previous year. The retail subsidiary reported a loss of Rs300 crore in FY2012. Moreover, in FY2012, the company stopped taking deferred tax in consultation with its auditors. Hence, the consolidated PAT declined by 11.5% YoY; ie lower than the PBT growth. Retail losses contained in spite of sales growth: The loss from the retail business dropped from Rs253 crore in FY2011 to Rs220 crore in FY2012, despite a 20% jump in sales growth. Besides that, a significant improvement has been witnessed in working capital. We view prudent cash flow as the game changer for the retail business.  Cash generation improved in standalone business; status quo maintained at the consolidated level: While inventory days and creditors' days are broadly in line with the previous trend, debtors' days jumped from 46 days to 72 days in FY2012 on account of prior period receivable accrued from tariff revision. Broadly, cash from operations (before capex) improved significantly in FY2012 to above Rs600 crore at the standalone level. On a consolidated basis, cash from operations remained positive and managed to gain a flattish growth YoY. An additional loan of around Rs1,300 crore was sourced to fund subsidiaries (largely new businesses), thereby increasing the consolidated debt even as standalone debt remained unchanged.  New power projects on track but property got delayed by a quarter: Currently, two generation capacities at Haldia (600mw) and Chandrapur (600mw) are in an advanced stage of execution. The management expects to commission Unit I in April 2013 and Unit II in July 2013 of Chandrapur. Further, the Haldia project is expected to get commissioned during September 2014. However, the Kolkata shopping mall is expected to complete by Q4FY2013 with a delay of a quarter.  Valuation and view: During FY2012, the PBIT level loss as % of sales declined to 18% from 24% in FY2011, as losses grew by 13% YoY; ie at a slower pace against sales growth of 20% in FY2012. The company aims to bring its retail business into EBITDA positive by FY2015 implementing a three pronged strategy. We believe the hangover of retail losses is over played in the stock currently but fundamentally, the company is witnessing early signs of transformation after it contained losses at the PBT level in spite of top line growth. We continue to rate CESC as a long term buy and expect benefits to accrue once the retail business turns around over the next few years. We maintain our target price of Rs405 on the stock.  SECTOR UPDATE Fertilisers Demand shifts to cheap fertilisers Key points Overall sales volume declined in June 2012: In June 2012, the aggregate sales of the domestically manufactured fertilisers (by 15 leading manufacturers) declined by 21% as compared with that in the same period of the last year. In the same period the import of fertilisers (DAP, MOP and complex fertilisers) also declined from 10.25 lakh tonne to 7.15 lakh tonne on account of lower imports of urea, DAP and MOP. The import of complex fertilisers increased by 62% during June 2012 mainly on the back of higher imports of lower graded complex fertilisers by Indian Potash, Zuari Industries and Nagarjuna Fertilizers. The import of urea, DAP and MOP decreased by 89%, 25% and 34% respectively during June 2012.  Sales of indigenous complex fertilisers declined in Q1FY2013: The sales of fertilisers declined by 13% in Q1FY2013 as compared to the same period of the last year. The sales volume of the fertilisers declined mainly due to the lower volume of urea and non-urea fertilisers. The indigenous sales of the DAP and complex fertilisers were lower in the first three months of the financial year mainly due to a lower demand, the shifting of demand towards urea and the high price of non-urea fertilisers as compared with the last year. The sales of DAP, MOP and complex fertilisers were lower by 20%, 25% and 27% respectively whereas the sales of urea declined by 5% during Q1FY2013. The sales of urea were also lower during the quarter mainly due to the lower imports by the government-owned trading agencies. Outlook: We believe that the sales of fertilisers in the coming months will remain low as compared to the last year. The demand for overall fertilisers will be lower mainly on the back of the lower sales of non-urea fertilisers during the current fiscal. The demand for urea will be higher as compared with the last year because of the shift in demand from non-urea fertilisers to urea fertilisers. The demand shifted to urea fertilisers mainly due to the high price of the non-urea fertilisers and the inflationary pressure on the farmer due to the rising cost of the other farm inputs and labour. So going ahead, the margin of the complex fertiliser manufacturers will remain under pressure. We, therefore, prefer pure urea manufacturers like Chambal Fertilisers along with single super phosphate (SSP) manufacturers like Rama Phosphate and Liberty Phosphate. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Housing Development Finance Corporation (A steady performance), Bajaj Auto (Annual report review)

 

 

Investor's Eye [July 11, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Housing Development Finance Corporation Cluster: Evergreen Recommendation: Buy Price target: Rs785 Current market price: Rs678 A steady performance  Result highlights HDFC's Q1FY2013 results were broadly in line with our estimates as its net profit grew by 18.6% year on year (YoY; down 24.4% sequentially) to Rs1,002 crore driven by a strong growth in the net interest income (NII) and a higher dividend income (up 21% YoY).  The NII increased by 19.1% YoY; down 25.2% sequentially to Rs1,304 crore. This was led by a strong growth in the loans and stable interest spreads. During Q1FY2013 the overall loans expanded by a strong 23% YoY (by 19% excluding the loans sold). The individual loans were up 29% YoY (up 23% excluding the loans sold) while the interest spreads remained stable at 2.27%.  The loan approvals saw a growth of 17% compared with the 20% growth in FY2012 whereas the disbursements grew by 20% during the quarter. However, the gross non-performing assets (NPAs) expanded slightly on a quarter-on-quarter (Q-o-Q) basis as the gross NPAs (GNPAs) were at 0.79% vs 0.74% in Q4FY2012 (based on six-month overdue, the GNPAs stood at 0.49% vs 0.44% in Q4FY2012). The outstanding provisions including the standard asset provisions on the balance sheet stood at Rs1,711 crore as against the GNPAs of Rs1,190 crore. Valuation HDFC continues to grow its book at a healthy rate despite a challenging environment. The growth is aided by a strong distribution network (metro and non-metro regions both) and competitive pricing of products. We expect the loan book to expand at a compounded annual growth rate (CAGR) of 20% over FY2012-14 leading to a growth of 19% (CAGR) in the earnings. We maintain our Buy recommendation on HDFC with a sum-of-the-parts (SOTP) based price target of Rs785 (valuing the subsidiaries and investments at Rs235 per share).     Bajaj Auto Cluster: Apple Green Recommendation: Hold Price target: Rs1,690 Current market price: Rs1,513 Annual report review  Export growth and margin sustenance: the key achievements of FY2012 Bajaj Auto Ltd (BAL) grew its exports by 31% year on year (YoY) in FY2012; the growth was much higher than the 6.3% year-on-year (Y-o-Y) growth in its domestic business. A strong demand for two-wheelers and three-wheelers from Africa, Latin America and South East Asia helped the exports touch 1.58 million units in the fiscal. The company maintained its status as the most profitable automotive original equipment manufacturer (OEM) in the country with its operating profit growing by 18% YoY.  Reviving domestic share and sustaining margins: the key goals for FY2013  The management has expressed its dissatisfaction over the company's sluggish performance in the domestic market as well as the loss of its market share to the competition. Thrust on new product launches, increased marketing initiatives and improving delivery are expected to support growth and help BAL outperform the industry. Outlook: growth environment challenging; maintain Hold The management has guided for a volume target of 5 million units in FY2013. This reflects a growth of over 15% during the year. Given the challenging macro headwinds in some export markets as well as in the domestic market, we believe that achieving the FY2013 guidance may be difficult. The management is banking on new product launches to boost the market share and growth in FY2013 but given the overall industry growth expectations of 12% for FY2013, the outperformance looks difficult. Our estimates for FY2013 and FY2014 remain unchanged. In view of the adverse demand scenario in H1FY2013 and a likely negative surprise on the margin front in Q1FY2013, we maintain our Hold recommendation on BAL.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.