| Summary of Contents STOCK UPDATE Marico
Recommendation: Hold
Price target: Under review
Current market price: Rs231 Kaya's demerger-a right step at a right time Key points -
Event: Marico restructuring its businesses into two separate entities -
The board of Marico passed a resolution approving restructuring of Marico's businesses into two separate entities, Marico Kaya Enterprises (MaKE; will house Kaya's skin care solution business) and Marico (will include Marico's existing domestic consumer business and international consumer business), effective from April 1, 2013. -
The demerger of Kaya was largely to enhance the value of the skin care solution business through a separate entity having different entrepreneurial talent. On the other hand, the restructuring of businesses is positive for Marico's consolidated business, as it will improve its margin profile and will result in improving the return ratios (as Kaya was a capital intensive business). -
There won't be any one-time expenses charge to the income statement of Marico or Kaya on account of the proposed demerger. The cost of restructuring would be about Rs2.5 crore, which will get adjusted against the share premium account in the balance sheet of Marico. -
The demerged entity MaKE will be separately listed on the bourses and will have a shareholding pattern similar to that of Marico (~60% promoters and 40% others). One equity share of Rs10 each of MaKE will be allotted at a premium of Rs200 per share for every 50 shares of Marico (indicating equity value of MaKE at ~Rs270 crore). -
Mr Saugata Gupta, current CEO of the domestic consumer business, would head Marico's fast moving consumer goods (FMCG) business, while Mr Vijay Subramanian (currently heads international business) will head MaKE. -
Outlook and valuation: The demerger of Kaya into a separate entity is positive for Marico as it would result in improving the margin profile and reducing the interest cost in the coming years. This will lead to earning accretion for Marico in FY2014. Marico could focus on improving the growth prospects of its consumer business in the long run. Kaya's business was considered as a drag on Marico's earnings and the demerger would result in re-rating of Marico's stock price. On the other hand, MaKE might look at roping in a strategic partner to improve its growth prospects in the long run.
At the current market price, the stock trades at 28.3x its FY2014E earnings per share (EPS) of Rs8.2 and 24.5x its FY2015E EPS of Rs9.4. We will review the earnings estimate and the price target after the announcement of the Q3FY2013 results. Thus, we maintain our Hold recommendation on the stock with the price target under review.
SECTOR UPDATE Telecommunications Subscriber base falls sharply-a reflection of rationalising competitive intensity After a marginal increase to the tune of 0.88 million in the subscriber base of the telecommunications (telecom) companies in October 2012, the GSM operators collectively shed over 9 million subscribers in November 2012. In the last five months, GSM subscriber base has declined by around 15.3 million, with the operators withdrawing the discount offers and increasing the cleaning exercise of the non-active subscribers (inactive for more than 90 days). -
In November 2012, all the operators reported a dismal performance. At an all-India level, the GSM operators reported a negative net subscriber addition of 9.02 million users compared with a gain of 0.88 million users in October 2012. The total GSM subscriber base as of November 2012 stood at 663.78 million users, down 1.34% on a month-on-month (M-o-M) basis. -
Among the top three GSM operators, Bharti Airtel led the fall in the GSM subscriber base, shedding almost 2.8 million subscribers in comparison with a gain of 0.49 million subscribers in October 2012. Bharti Airtel's subscriber base as of November 2012 stood at 183.61 million subscribers, down 1.5% on an M-o-M basis. The company's subscriber market share for the month stood at 27.66% as against 27.71% in October 2012. -
Vodafone India and Idea Cellular also reported a decline in their subscriber market share during the month. Vodafone India and Idea Cellular lost 2.38 million subscribers and 1.56 million subscribers respectively during the month. Highlights of the month -
The month again witnessed a decline in subscriber base. The subscriber base has now fallen in three out of the last four months. -
Factors such as rationalisation of subscriber acquisition costs in the form of cutting of dealer commissions, disconnecting inactive users, tariff increases and withdrawal of bonus offers are definitely having an impact. -
After witnessing the trend of the last few months, we believe that the growth in subscriber additions has slowed down and will continue to do so as telecom companies focus on improving the quality of their revenues, instead of increasing their subscriber base through tariff wars to improve their margins. -
The three major operators, Bharti Airtel, Vodafone India and Idea Cellular collectively lost more than 6.7 million subscribers (74.7% of the total) in November 2012. -
The subscriber base in the coming months should fall as well as the operators withdraw from the circles in which they had failed to retain spectrum in the November 2012 auctions. We expect the incumbent operators, Bharti Airtel, Vodafone India and Idea Cellular, to benefit from the same. -
In November 2012, circle A lost the maximum number of subscribers, shedding approximately 4.2 million subscribers, with Tamil Nadu accounting for a major chunk of the same. Valuation: The dwindling subscriber numbers in the recent months is a reflection of the declining competitive intensity in the telecom sector as operators are withdrawing discounts/freebies and intensifying the cleaning exercise of the non-active subscribers. Going forward, we would probably witness a more muted subscriber addition, at least for the next couple of months. We are not duly worried about the negative subscriber addition in the recent months as it will gradually weed out the non-active subscribers and also improve the revenue per minute (RPM) and average revenue per user (ARPU) which will positively affect the margins. On the regulatory front, after the failure of the 2G spectrum auctions, the price target for circles that received no bids (Mumbai, Delhi, Karnataka and Rajasthan) war slashed by 30%. The new auctions are scheduled to take place in March 2013. The auction of 900-MHz spectrum for Mumbai, Delhi and Kolkata will also take place simultaneously. We expect these auctions to have a much more rational pricing environment, even though the reserve price for the 900-MHz spectrum remains on the higher side. Overall, the leaders like Bharti Airtel have a definite advantage in comparison with the newer players. Given the signs of easing of the competitive intensity and the belief that the telecom sector is headed for a better future, we retain our positive stance on Bharti Airtel.
SHAREKHAN SPECIAL Q3FY2013 Auto earnings preview
Drive with caution Festive season marks earnings recovery
The festive season (spread over October 2012 and November 2012) marked earnings recovery for the automobile (auto) sector in Q3FY2013. The Sharekhan auto universe (excluding Tata Motors) is expected to report a 15.5% growth in the quarter's earnings. Barring for few companies like Ashok Leyland, Bharat Forge and FAG Bearings India (FAG), most auto companies are expected to show a healthy growth year on year (YoY). Maruti and M&M to outperform in the OEM segment, Apollo Tyres and Exide to lead ancillaries
The auto original equipment manufacturers (OEMs) are expected to report a 6.6% decline in their profitability. Maruti Suzuki (Maruti) and Mahindra and Mahindra (M&M) are expected to outpace OEMs with a growth of 131% and 27% respectively. Apollo Tyres is expected to emerge as a top performer in the ancilliaries followed by Exide Industries (Exide). Amongst the OEMs, Ashok Leyland would disappoint by posting a loss. Bharat Forge is expected to disappoint the most among the ancillaries. Q4FY2013 sales likely to remain subdued, expect gradual recovery in FY2014
After the end of the festive season, December 2012 saw sales declining for most companies. Automotive sales are likely to remain subdued in Q4FY2013. With an improving macro-economic outlook and softening of interest rates, we expect a gradual recovery in the volumes in FY2014. In a structural upturn, companies that hold on to their market share or are expected to gain back the lost ground would gain the most. We expect Maruti and M&M to outperform among the OEMs.
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