Fw: Investor's Eye: Update - Hindustan Unilever, Federal Bank, Raymond, Maruti Suzuki India, CanFin Homes; Viewpoint - Hero MotoCorp

 

 

Investor's Eye [April 29, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Hindustan Unilever Recommendation: Hold Price target: Rs500 Current market price: Rs498 Moderation in volume growth arrested Result highlights Q4 performance a mix bag: The performance of Hindustan Unilever Ltd (HUL) was a mix bag in Q4FY2013. The volume growth of 6% in the domestic consumer business was ahead of the Street's as well as our expectations of a 5% volume growth. However, the same is way below the 10% volume growth clocked by the company in the past. The benign raw material prices helped HUL to achieve an improvement of 125 basis points in its gross profit margin (GPM). The improvement in the profitability of the core soap and detergent segment and the strong operating performance of the beverage segment (with an 18% year-on-year [Y-o-Y] growth in revenues and a 250-basis-point improvement in the PBIT margins) were the highlights of the quarter. The personal care business disappointed again. The revenues of the personal product segment grew by just 12.1% year on year (YoY) as it bore the brunt of cuts in discretionary spending. The PBIT margin of the personal product segment declined by over 200 basis points YoY.  Performance snapshot: In Q4FY2013, HUL's net sales grew by 12.5% YoY to Rs6,367.1 crore vs the expectation of Rs6,357.4 crore for the quarter. The benign key input prices helped the company to improve its GPM by 123 basis points to 46.1%. However, on account of competitive intensity the company maintained higher spending on advertisements during the quarter. Hence, the advertisement spending as a percentage of sales increased by 93 basis points YoY to 12.9% during the quarter. The other expenses as a percentage of sales declined by 58 basis points YoY to 14.6%, despite of a 30-35-basis-point impact of increase in the royalty charges. The operating profit margin (OPM; excluding the operating income) improved by 84 basis points YoY to 13.7%, which is largely in line with our expectation of 13.4% for the quarter. Hence, the operating profit grew by 19.8% YoY to Rs872.1 crore. However, a higher incidence of tax resulted in a 16.6% Y-o-Y growth in the adjusted profit to Rs780.0 crore (which is marginally lower than our expectation of Rs803.6 crore). Paid final dividend of Rs6 per share: The company paid its shareholders a final dividend of Rs6.00 per share for FY013. Hence, with an interim dividend of Rs4.50 per share and a special dividend of Rs8.00 per share the final dividend works out to Rs18.50 for FY2013. Excluding the special dividend, the dividend yield for HUL stood at 2.6% in FY2013. Outlook and valuation: HUL was able to arrest the moderation in the sales volume in Q4FY2013 after two quarters of sequential moderation in the volume growth. However, the sustenance of the improvement in the volume growth in the current inflationary environment would be the key focus area for the company. We like the company's strategy of continuous innovation in the product portfolio with focus on long-term growth in the domestic market. Also, the benign raw material prices would help the company to tackle the near-term growth concerns.  We believe the next two quarters will have to be keenly monitored in terms of any improvement in the volume growth. We broadly maintain our earnings estimates for FY2014 and F2015. At the current market price the stock is trading at 29.9x FY2014E earnings per share (EPS) of Rs16.6 and 27.1x FY2015E EPS of Rs18.4. We maintain our Hold recommendation on the stock with the existing price target of Rs500.     Federal Bank Recommendation: Buy Price target: Rs545 Current market price: Rs448 Operating performance disappoints Result highlights  Federal Bank's Q4FY2013 net earnings were in line with our estimate, which declined by 6.6% year on year (YoY) to Rs221.9 crore. Though the operating performance was subdued, a relatively better growth in the non-interest income and a lower tax outgo cushioned the net profit to an extent. The net interest income (NII) growth was short of our estimate as it declined by 2.3% YoY to Rs479.8 crore, led by ~40-basis-point sequential dip in the net interest margin (NIM) to 3.07%. A reduction in the base rate, a higher growth in the corporate segment and interest reversals contributed to the decline in the NIMs. The business growth picked in Q4FY2013 but was dominated by the wholesale segment. The advances grew by 16.8% YoY (11.7% quarter on quarter [QoQ]) mainly from the large corporate segment. The current account and savings account (CASA) ratio dipped to 26.9% from 29.5% in Q3FY2013. The bank's growth in the non-interest income was strong at 22.6% YoY (down 3.4% QoQ), on account of a modest fee income growth (11.3% YoY), a treasury profit to the tune of Rs57.6 crore (Rs36.4 crore in Q4FY2012) and higher recoveries from the written off account (Rs17.4 crore in Q4FY2013). The asset quality showed signs of stress in Q4FY2013, especially from the corporate, and small and medium enterprise (SME) segments as the slippages increased in these segments. Moreover, the bank restructured Rs219.6 crore of advances, thereby taking the restructured book to 4.6% of advances. Valuation Federal Bank's Q4FY2013 results disappointed at the operating level as the NIMs declined sharply on a quarter-on-quarter (Q-o-Q) basis. Further, the slippages remained high mainly contributed by the corporate and SME segments. The management expects the return on equity (RoE) to expand by 150 basis points in FY2014 driven by an uptick in the NIMs and a decline in the credit cost. However, we believe the tough economic environment is likely to play out on the bank's performance despite the strong initiatives taken by management. Therefore, we have reduced the valuation multiple and rolled over the valuation to FY2015 estimate, resulting in price target of Rs545. The stock is currently trading at 1.0x FY2015 book value. We maintain our Buy rating on the stock.     Raymond Recommendation: Buy Price target: Rs477 Current market price: Rs281 Upgraded to Buy Q4FY2013 consolidated key result highlights Revenue growth at 13.1% YoY: Raymond's net sales increased by 13.1% year on year (YoY) to Rs1,081.4 crore on account of a strong performance of the textile (on account of a good growth of the Makers brand), garmenting (result of extended end of season sale and inventory liquidation exercise), and hardware and tools business. EBITDA margin expands by 44 basis points: An improvement in the gross profit margin (GPM; +30 basis points YoY) coupled with the cost rationalisation efforts (mainly the staff cost expense) was the main contributor to the EBITDA margin expansion, which increased by around 40 basis points to 10.1% for Q4FY2013. Profit lags operational performance: Despite the EBITDA growth at 18.2% on a year-on-year (Y-o-Y) basis, the higher incidence of tax coupled with exceptional items to the tune of Rs5.83 crore resulted in the company reporting a marginal profit after tax (PAT) of Rs61 lakh.  Inventory liquidation largely over: The management indicated that the company has reduced its high cost inventory from around Rs110 crore to around Rs29 crore and the inventory situation was much more manageable today. With the inventory liquidation largely done with, we believe that better times lie ahead for the branded apparels segment. Focus on land bank monetisation: The management expect a master plan draft on the monetisation to be out in the next six months. We believe that any development on this front would help the company in reducing its debt and strengthening its balance sheet. Conservatively, we have built in 50% value of the land in our price target for the company.  Upgrade to Buy; price target Rs477: In the wake of improving business fundamentals, cleaner balance sheet and exhibition of lean working capital execution, the management's enhanced focus towards the monetisation of its lucrative 120 acre land bank parcel (with its core team in place) coupled with the stock's underperformance in the recent times (ruling at an attractive valuation at EV/EBITDA of 4.3x its FY2015) led us to upgrade the stock from Hold to Buy, with a price target of Rs477 (we have valued the core retail business at 5.5x its FY15 EV/EBITDA + 50% value of the land bank parcel).     Maruti Suzuki India Recommendation: Buy Price target: Rs1,950 Current market price: Rs1,681 Price target revised to Rs1,950; upgraded to Buy Result highlights  Q4FY2013 results incorporate SPIL numbers, hence not comparable; stand-alone business reports better operating performance Maruti Suzuki India Ltd (MSIL)'s Q4FY2013 numbers incorporated the results of Suzuki Power Train India Ltd (SPIL; the diesel engine manufacturing arm of the Suzuki Group) and hence are not comparable. The margins more than doubled after incorporating the SPIL numbers. However, if we exclude SPIL, the core automobile (auto) business reported a better operating performance. The core business reported an operating profit margin (OPM) of 10.6%, which is an improvement of 330 basis points year on year (YoY) and 260 basis points sequentially. This is on account of a lower discounting and the yen's depreciation. A higher other income and a lower taxation led to the net profit coming at 46% above estimate, which pleasantly surprised the market. Passenger vehicle industry to grow in mid-single digits in FY2014, MSIL to maintain market share The passenger vehicle industry ended FY2013 with a growth of meagre 2%. With the continued challenging macro-economic conditions (subdued economic scenario, high inflation and higher fuel prices), the growth in the passenger vehicle industry is expected to remain lacklustre in FY2014. The management expects the industry to record a growth of 5% in FY2014.  Despite the challenging industry environment, MSIL improved its market share in the passenger vehicle space. MSIL's market share improved from 38.3% in FY2012 to 39.2% in FY2013 on account of good demand for the diesel cars (Swift, Dzire) and an entry into fast-growing utility vehicle (UV) space with Ertiga. With a planned diesel capacity of 3 lakh diesel engines and a sustained demand for the diesel products, we expect MSIL to maintain the market share in the passenger vehicle industry. Yen's depreciation to aid margins further The yen has depreciated 13% in the last four months. As against the rate of Rs0.67/yen in Q3FY2013, the yen has depreciated to Rs0.58/yen in the January-April 2013. In Q4FY2013, MSIL's margin improved by 130 basis points on account of a favourable yen movement. We expect MSIL's margin to improve by 70 basis points in FY2014 if the yen/rupee rate sustains at the current levels. Moreover, MSIL's discounts/car reduced from Rs12,159/car in Q3FY2013 to Rs10,597/car in Q4FY2013. This is on account of a favourable product mix. The diesel cars (Swift, Dzire and Ertiga) have zero discounts. Also, the petrol versions of the above models do not have discounts. Further, the increased sales of the new Alto (which also has zero discounts) helped in the overall reduction in the discounts. The management expects the discounts to remain at the similar levels, which would support the margin going forward. Merger of SPIL to provide synergistic benefits MSIL announced the merger of SPIL with itself. SPIL is the producer of diesel engines and transmissions. Given the increased preference for the diesel cars, the merger would bring synergistic benefits. MSIL is setting up a plant in Gurgaon with a capacity of 3 lakh diesel engines per annum, which is expected to be operational in H2FY2014. A single entity would provide benefits in the form of better sourcing, localisation, production planning and overall cost synergies. Valuation We are retaining our volume assumptions for FY2014 and FY2015 at 1.27 million and 1.43 million respectively. However, we have raised our margin estimate on account of a lower discounting and a further depreciation of the yen. Also, the merger of SPIL with the stand-alone business is expected to raise the margin further. We have revised our FY2014 and FY2015 earnings estimates to Rs117/share and Rs130.3/share respectively. Our price target stands revised at Rs1,950/share. We recommend Buy rating on the stock.     CanFin Homes Recommendation: Buy Price target: Rs220 Current market price: Rs157 Strong growth in advances to continue Result highlights  CanFin Homes' Q4FY2013 results were in line with our estimate as the net profit grew by 8.4% year on year (YoY) to Rs15.5 crore. The operating performance remained strong, though the higher operating expense (opex) and tax rates had some impact on the Q4FY2013 profit. For FY2013, the company made a profit of Rs54.12 crore (up 23.5% YoY). The lnet interest income (NII) registered a growth of 38.7% YoY to Rs31.5 crore. This was mainly driven by a strong growth in advances. The loan book grew by 49.9% YoY (11.7% quarter on quarter [QoQ]) driven by 111.2% growth in the disbursements. During the quarter, the sanctions showed a robust growth of 40% QoQ (89.3% YoY). The management targets to grow its loan book by 37.0% in FY2014 to Rs5,500 crore. The opex was high, though lower than Q3FY2013, due to addition of new branches and manpower during the year. There was a provision reversal of Rs1.38 crore from non-performing asset in Q4FY2013. The company also provided Rs3 crore towards standard asset provision in Q4FY2013. Valuations and outlook During Q4FY2013, the CanFin Homes' operational performance remained strong as the NII growth was robust. The company has added 17 branches in FY2013 and will add another 10-12 branches in FY2014, which will drive the growth in advances and will soften the cost/income ratio. Also, the company's sanctions have grown at 89.4% in FY2013 whereas the home loan demand remains buoyant (in the southern regions), which should lead to a strong growth in loans. We expect CanFin Homes' earnings to grow at a compounded annual growth rate (CAGR) of 25.0% over FY2013-15 leading to a return on equity (RoE) of 17.2%. Further, the company has announced attractive dividend of Rs4 per share (dividend yield 2.5%), which makes the stock attractive. We maintain our Buy recommendation on the stock with a price target of Rs220.   VIEWPOINT Hero MotoCorp  Low on growth; high on margin  Conference call highlights Management guides for higher single-digit growth for industry The management expects the two-wheeler industry to register a higher single-digit growth in FY2014. The continued macro-economic challenges in the form of weak economic growth and high fuel prices would restrict the overall growth. They expect the scooter sales to continue outperforming and increase its share in the overall industry. HMCL going slow on exports due to subdued environment Given the subdued environment, HMCL is going slow on its export plans. The industry's exports declined by 1% in FY2013, which is the first decline since FY2002. HMCL exports in FY2013 fell 16% to 1.61 lakh units. However, HMCL has commenced exports to new countries like Latin America and Africa, which are expected to shore up the export volumes in FY2014. HMCL market share declines on increased competition Honda Motorcycle & Scooter India (Honda)'s aggressive expansion into the domestic market has lead to a decline in the market share for the incumbents. HMCL being the market leader has seen a maximum erosion of its market share. HMCL's share in the two-wheeler space declined from 45.1% in FY2012 to 42.9% in FY2013. Though HMCL's market share for the motorcycles declined from 55.9% in FY2012 to 53.2% in FY2013, its market share for scooters increased from 16.2% in FY2012 to 18.8% in FY2013. Given the recent entry of Honda into the entry-level motorcycle space, we expect HMCL to continue losing its market share in the domestic two-wheeler industry.  Margin improvement to sustain HMCL Q4FY2013 margin improved by 120 basis points sequentially and was 80 basis points above our expectation. This was on account of the lower commodity prices and the yen's depreciation. The yen denominated import contributed to 5% of sales. Given the further yen depreciation and subdued commodity prices, we expect a sustained improvement in HMCL's margin. Further, HMCL has taken price increases of 1-3%, which would help sustain the margin. Valuation We have lowered our volume assumption on account of a subdued domestic industry and an increased competition, resulting into a loss of market share. HMCL's margin is expected to improve given the weakness in the yen and the recent price hikes taken. Our earnings estimates for FY2014 and FY2015 stand revised at Rs111.6 and Rs142.2 per share respectively. We have a Neutral view on the company. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Investor's Eye: Update - HDFC Bank, Mahindra Lifespace Developers, Logistics, Special - Monthly economy review

 

 

Investor's Eye [April 23, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE HDFC Bank Recommendation: Hold Price target: Rs712 Current market price: Rs689 Strong operating performance Result highlights  HDFC Bank's Q4FY2013 performance was in line with our estimate as the net profit grew by 30.1% year on year (YoY) to Rs1,889.8 crore. This was driven by a strong growth in the net interest income (NII; up 20.6% YoY) and lower provisions (down 27.0% YoY). In Q4FY2013, the NII grew by 20.6% YoY to Rs4,295.3 crore. The net interest margins (NIMs) increased by 20 basis points quarter on quarter (QoQ) to 4.5% (adjusting for reclassification of acquisition cost on retail loans), which contributed to a strong growth in the NII. The business growth was strong as the advances grew by 22.7% YoY (-0.7% QoQ). The growth in advances was mainly driven by the retail advances (up 27.3% YoY). The current account and savings account (CASA) ratio increased to 47.4% from 45.4% in Q3FY2013. The fee income growth was slightly subdued at 10.8% YoY while the foreign exchange (forex) income declined by 38% YoY. The income from the sale of investments was Rs65 crore as against the loss of Rs71.5 crore in Q4FY2012. Overall, the non-interest income increased by 10.7% YoY. The asset quality held up well as the gross non-performing assets (NPAs) declined by 3 basis points sequentially to 0.97% in Q4FY2013 whereas the net NPAs remained firm at 0.2%. Moreover, the proportion of the restructured advances to overall advances reduced to 0.2% in Q4FY2013 from 0.3% in Q3FY2013. Valuation and outlook: HDFC Bank's earnings growth was in line with our estimate, though the spurt in NIMs (due to reclassification) came as a surprise. The bank expects to maintain the credit growth at 4-6% higher than the industry average and NIMs in the range of 4.1-4.5%. Further, the bank continues to increase the branch expansion and expects the cost-to-income ratio to improve gradually going ahead. We have largely maintained our estimate and expect earnings to grow at a compounded annual growth rate (CAGR) of 26.5% over FY2013-15. Though the bank continues to deliver strongly on all fronts, the premium valuation limits any meaningful upside. Therefore, we maintain Hold rating on the stock with a price target of Rs712.   Mahindra Lifespace Developers Recommendation: Buy Price target: Rs460 Current market price: Rs390 Better execution and new land deals to be key drivers Result highlights  Revenues and OPM disappoint: Mahindra Lifespace Developers (MLD)'s Q4FY2013 stand-alone revenues declined by 27.0% year on year (YoY) to Rs102.2 crore on account of subdued execution during the quarter. The stand-alone revenues showed a growth of 66.3% quarter on quarter [QoQ]) though. During the quarter, five new projects (Bloomdale, Ashvita, Aqualily, and Iris Court phases II and IIIA) had entered in revenue recognition mode while one project (Eminente-Angelica, Mumbai) had been completed. The operating profit margin (OPM) of the company took a huge hit and declined by 594 basis points YoY to 16.8% on account of an increase in the employee cost (up 228 basis points) and other expenditure (up 699 basis points) though this increase was marginally offset by a lower cost of projects (down 334 basis points). However, a lower effective tax rate of 20.5% as against 29.1% in Q4FY2012 and that of 32.1% in Q3FY2013 supported the poor operating performance limiting the decline in the profit after tax (PAT) to 27.7% YoY at Rs23.2 crore. Sales booking momentum continues; three out of eight MoUs executed: The sales booking maintained the upward momentum seen in the previous quarter, with MLD recording sales of Rs151 crore (0.38 million square feet [mn sq ft]) in Q4FY2013 vs sales of Rs155 crore (0.39mn sq ft) in Q3FY2013 and Rs53 crore (0.13mn sq ft) in Q4FY2012. The sales primarily took place in its new Hyderabad project, Ashvita, and a subsequent phase of Iris Court, the Chennai project. A positive development of the quarter was that the company had executed three memoranda of understanding (MoUs) out of eight signed for new lands: two in Mumbai (Andheri: 0.37mn sq ft; Boisar: 0.55 lakh sq ft) and one in Bangalore (Bannerghatta: 0.67 lakh sq ft). The eight MoUs are expected to generate Rs5,000 crore revenues with a 25% average land cost. Acquisition of land bank through leverage to provide next leg of growth: MLD increased its net debt by over Rs500 crore during FY2013 to acquire three land parcels of which two are in Mumbai and one is in Bangalore. The three projects are at various stages of designing, approvals and customer research. Further, the company is planning to raise Rs500 crore through non-convertible debentures (NCDs) to fund the remaining five land parcels for which it has signed MoUs and begun due diligence. We believe MLD has started leveraging its strong balance sheet for acquiring new land parcels in the currently distressed markets. The current land deals are expected to provide the next leg of growth, albeit the company has to maintain its cash flows by improving its execution.  Signs of traction in integrated cities: At Mahindra World City (MWC), the integrated business city promoted by the company, the total number of operational facilities grew by three (as compared with the previous quarter) to 47 vs 62 in Chennai. On the other hand, in Jaipur, seven customers were added in DTA to the operational list taking the count to 13. Maintain Buy with a price target of Rs460: We continue to like MLD due to the quality of its management and its strong balance sheet that is currently leveraged (as expected) for acquiring new land parcels in distressed markets and for better execution of the existing land bank. Our long-drawn concern over delayed approvals has faded as the company saw some traction on that front, with approvals coming in faster in Q4FY2013. Going ahead, we expect the momentum to continue, which would augur well for the company as it will get more room to launch new projects and thereby support growth. We maintain our Buy recommendation on the stock with a price target of Rs460. At the current market price, the stock is trading at 1.0x its net asset value and 16.3x FY2014 earnings estimate.   SECTOR UPDATE Logistics Cargo declines 3% in FY2013; March remains sluggish Key points The total cargo volume at major ports in FY2013 reported a decline of 3% year on year (YoY) mainly due to a 55% year-on-year (Y-o-Y) decline in cargo at the Mormugao port. The volumes for March have also declined by 3% YoY, thus remaining sluggish. The Mormugao volumes have been suffering since June 2012 owing to a mining ban in the state of Goa. Excluding Mormugao, the aggregate increase in the cargo at the major ports was 1% in FY2013. The other ports which registered a decline in their cargo traffic in FY2013 were Vishakhapatnam (-13%), Haldia (-9%), Chennai (-4%), Kolkata (-4%), Jawaharlal Nehru Port Trust (JNPT; -2%) and Cochin (-1%). The container volumes remained flat in FY2013. For March 2013, the volumes remained tepid with a 1% Y-o-Y growth. In the light of the lower export-import (EXIM) trade, we do not foresee any signs of a recovery in the container volumes in the near term. Further, the major ports of JNPT and Chennai are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. A slowdown in the EXIM trade as well as the domestic trade has resulted in a contraction in the cargo volumes owing to which the logistics industry is undergoing a challenging phase. The container volumes continued with their declining trend which does not augur well for the logistics players. We do not foresee any signs of a recovery in the container volumes in the near term. Further, the major ports of JNPT and Chennai which handle two-thirds of the country's container volumes are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. Thus, we expect the overall sluggish performance to continue in the immediate term. However, we continue to prefer Gateway Distriparks Ltd (GDL) due to the robust long-term growth potential of each of its business segments, ie container freight station, rail and cold storage. The stock is currently trading at a price earnings (PE) of 7.4x based on its FY2015E earnings per share (EPS) of Rs16.6. Outlook and view A slowdown in the EXIM trade as well as the domestic trade has resulted in a contraction in the cargo volumes owing to which the logistics industry is undergoing a challenging phase. The container volumes continued with their declining trend which does not augur well for the logistics players. We do not foresee any signs of a recovery in the container volumes in the near term. Further, the major ports of JNPT and Chennai which handle two-thirds of the country's container volumes are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. Thus, we expect the overall sluggish performance to continue in the immediate term. However, we continue to prefer GDL due to the robust long-term growth potential of each of its business segments, ie container freight station, rail and cold storage. The stock is currently trading at a PE of 7.4x based on its FY2015E EPS of Rs16.6.   SHAREKHAN SPECIAL Monthly economy review   Economy: Inflation declines to 5.96% in March; RBI policy review (on May 3rd) in focus In February 2013 the Index of Industrial Production (IIP) rose by 0.6%, which was above the market's estimate. The growth was driven by a better than expected performance from the capital goods segment. A sharp growth was recorded in the electrical machinery segment which lifted the growth in the capital goods segment, as the other industries continued to post a tepid performance. Based on the three-monthly moving average, the IIP growth for February 2013 stands at 0.8% as against 2.7% in February 2012. The Wholesale Price Index (WPI)-based inflation for March 2013 surprised positively as it slipped to a 40- month low of 5.96% (6.84% in February 2013). The month-on-month (M-o-M) decline of 88 basis points in inflation is attributed to a decline in all the three major constituents of the WPI but mainly the primary articles and manufacturing segments. However, the inflation rate for January 2013 was revised upwards to 7.31% from 6.62% as per a provisional estimate. India's trade deficit eased further to $10.3 billion in March 2013 from $14.9 billion in February 2013 and a high of $20.8 billion in January 2013. The trade deficit declined by 23.8% year on year (YoY) and 30.9% month on month (MoM) in March 2013. Exports increased by 7.0% YoY (up 4.2% in February 2013) to $30.9 billion while imports declined by 2.9% YoY (up 2.7% in February 2013) to $41.2 billion. In its mid quarter policy review (on March 19), the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points to 7.5%, in line with the market's expectation. The cash reserve ratio (CRR) was kept unchanged at 4%, though the RBI vowed to support liquidity via open market operations (OMOs) and other instruments. The central bank also took note of the steps announced in the Union Budget for 2013-14 to contain the fiscal deficit and of the decline in the core inflation but reiterated that it has limited room for monetary easing in the current circumstances. However, in view of the recent decline in the trade deficit and the sharp decline in core inflation the market expects the RBI to reduce the repo rate by another 25 basis points.  Banking: slowdown in deposit growth to limit transmission of monetary easing Despite the year-end push, the credit growth remained subdued. The credit offtake increased by 13.9% YoY (as of April 5, 2013), which was lower than the 14.1% Y-o-Y growth recorded in the previous month (as on March 22, 2013) compared with the RBI's projection of 16%. On a year-till-date (YTD) basis, the credit growth (as of April 5, 2013) stands at 13.9% as compared with the 18.7% Y-o-Y growth in the previous year. The deposits have grown by 13.2% YoY (as of April 5, 2013). The growth in the deposits was subdued throughout FY2013 due to competitive returns offered by the other instruments. Consequently, the growth in the deposits has been much lower than the RBI's guidance of 15.0%. A slower growth in the deposits compared with the advances remains a concern for banks. The credit/deposit ratio for the banks remains high as it has increased to 77.4% (as on April 5, 2013) from 77.0% (as on April 6, 2012). The yield on the government securities (G-Secs; of ten-year maturity) stood at 7.78% as on April 18, 2013 and was lower than the average of 7.89% maintained in March 2013. Moreover, the five-year and ten-year G-Sec yields declined by 20 and 10 basis points respectively on an M-o-M basis. As the yields of the short-term G-Secs have declined more than the longer-term G-Secs on an M-o-M basis, the yield curve has turned normal from inverted.  Equity market: FIIs remain net buyers During the month-to-date (MTD) period of April 2013 (April 1-17, 2013), the foreign institutional investors (FIIs) were net buyers of equities and the domestic mutual funds were net sellers of equities. For the MTD period the FIIs bought equities worth Rs596 crore while the mutual funds sold equities worth Rs325 crore.  Banking stocks outperform in April 2013 In the last one month, the BSE Bankex has appreciated by 11.9% as compared with an uptick of 2.3% in the Sensex. The improved macro-economic numbers, viz a decline in core inflation to 3.5%, a dip in the trade deficit have given rise to expectations of another rate cut by the RBI in the coming monetary policy review. This has led to the outperformance of the banking stocks. However going ahead, the earnings growth for the public sector banks (PSBs) is expected to remain weak for Q4FY2013 due to a slower growth in the core income and asset quality pressures. In addition, the political turmoil has given rise to apprehensions about the continuity of reforms which could affect the economy's recovery.     Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Investor's Eye: Update - ITC (Price hikes in cigarette basket inevitable), Gayatri Projects (Positive development on power projects augurs well); MG - Debt Mutual Fund Picks

 

 

Investor's Eye [April 18, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE ITC Recommendation: Buy Price target: Rs340 Current market price: Rs315 Price hikes in cigarette basket inevitable Key points ITC hikes cigarette prices: After a sharp increase in taxes on cigarettes in the Union Budget for 2013-14 as well as in the budgets of the key states, ITC has increased the prices of its key cigarette brands by 11-20% (as seen in the table below). The company has increased the price of Gold Flake-regular size cigarette (the key contributor to the company's cigarette sales volume) by around 15% to Rs55 for a pack of 10 cigarettes. The weighted average price increase currently stands at about 14%. The price increase was in line with our as well the Street's expectation. We had stated in our Stock Update dated March 21, 2013 that ITC would have to implement a price increase of over 15% to maintain its PBIT margin in the 31-32% range. We expect additional price hike of around 3-4% in the coming months. Cigarette sales volume to remain subdued in FY2014: A price increase of over 15% for the second consecutive year will definitely have an impact on the cigarette sales volume of ITC. We have factored in around 1.0-1.5% decline in the sales volume of ITC's cigarette business for FY2014. We believe ITC would strongly promote the newly launched cigarettes in the 65mm category and launch some of its prominent brands under this category.  Outlook and valuation: We expect ITC to increase the prices of some of the other key brands in the coming months. The revenue growth of ITC's cigarette business would be led by price hikes, as cigarette sales volume are expected to remain subdued in FY2014. Overall, we expect the revenues of the cigarette business to grow in mid teens. We also expect ITC's profitability to sustain above 30% in FY2014.  At the current market price the stock trades at 33.0x its FY2013E earnings per share (EPS) of Rs9.6, 27.4x FY2014E EPS of Rs11.5 and 23.2x FY2015E EPS of Rs13.6. We maintain our Buy recommendation on the stock with a price target of Rs340.     Gayatri Projects Recommendation: Buy Price target: Rs275 Current market price: Rs76 Positive development on power projects augurs well Some of the recent news flow and developments also augurs well for the company and provide better visibility and confidence. Thermal Powertech Corporation India (TPCIL; GPL 51%, Sembcorp 49%) Signing of PPA for 500MW out of 1,320MW power plant GPL's subsidiary TPCIL has executed a power purchase agreement (PPA) with Power Distribution Companies of Andhra Pradesh, wholly owned by the government of Andhra Pradesh, for supply of 500MW power to the Central, Eastern, Southern and Northern Power Distribution Companies of Andhra Pradesh for 25 years.  We believe the development is in line with the company's ongoing efforts to sign the PPA agreement for a 1,320MW capacity power project and is a major positive. Further, signing of the PPA with other state governments will help the company in getting timely loan disbursals from banks. NCC Power Projects (GPL 45%, NCC 55%) Potential entry of strong partner in the power project: Sembcorp and Genting reported to be interested buyers Sembcorp, Singaporean utility major, as well as Malaysian Genting have reportedly conducted due diligence to buy a power plant owned by Nagarjuna Construction Company (NCC; 55% stake) and GPL (45% stake). The Rs7,047 crore coal-based project with a capacity of 1,320MW is located in Krishnapatnam, Andhra Pradesh. The extent of interest that NCC and GPL are willing to offload is not known, but foreign utilities might be looking at a majority stake, which will be offloaded by NCC, while Gayatri will stay on the project. Outlook GPL through its wholly owned subsidiary Gayatri Energy Ventures is already executing a 1,320MW joint venture power project with Sembcorp at Krishnapatnam in Andhra Pradesh. The said project is executed at a total estimated outlay of Rs6,869 crore funded through Rs5,151 crore of debt and Rs1,718 crore of equity. Sembcorp had bought 49% stake in the project at Rs1,042 crore at 24% premium to the book value. Additionally, Sembcorp has provided Rs250 crore structured loan (optionally convertible preference shares). We believe if Sembcorp and Genting do become partners of GPL after NCC's stake acquisition than it will mitigate the execution risk of the project to a considerable extent. The benefits of a synergy between Sembcorp and GPL would get further strengthened by partnering in other major power projects in the same state. The funding pressure of the two large power projects would ease which in turn would be beneficial for GPL in improving its balance sheet strength. Further, an exit strategy may arise for GPL from the power projects at a lucrative valuation as witnessed in the past. We have valued GPL's stake in the two power projects cumulatively at Rs98 per share (NCC Power Project [Rs54] + TPCIL [Rs44]) at 50% of the book value. We have a Buy rating on the stock with a price target of Rs275.   MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up Bond yields fell in the first week of March on hopes that the central bank will cut interest rates in its mid-quarter monetary policy review. Improving cash conditions, as seen by a sharp drop in banks' borrowings from the central bank, also supported debt markets initially. However, later yields rose to their highest level in two-and-a-half months on better-than-expected Index of Industrial Production (IIP) data and higher Consumer Price Inflation (CPI) numbers. It rose further when the Reserve Bank of India (RBI) in its monetary policy review said there is limited room for further rate cuts. Political uncertainty in the country also made sentiments weak. Moreover, the central bank's cautious outlook overshadowed its planned debt purchases of Rs. 10,000 crore via Open Market Operations (OMO), which was largely anticipated, given the tight liquidity condition. In the last week of the month, yields started rising again after a key ally of the ruling UPA pulled out of the coalition Government.  The 10-year benchmark bond ended up 8 basis points (bps) to close at 7.95%, compared to the previous month's close of 7.87%. Bond / Debt Outlook The overall sentiment is likely to remain bearish as fresh supply will hit markets in the new financial year. The twin deficits continue to pose serious challenges to the domestic economy. The CAD levels continue to move up despite signs of consolidation on the fiscal front. As it is one of the considered indicators in the RBI's policy, it seriously restricts the central bank to ease policy rates aggressively. The recently-released CAD numbers reinforce the RBI's hawkish guidance for the year ahead. With no major trigger visible in the month of April, yields are expected to remain range bound and can take directional cues from political developments in New Delhi.   Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.