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STOCK UPDATE Bharti Airtel
Recommendation: Hold
Price target: Rs340
Current market price: Rs317 India exceeds expectation, Africa disappoints; maintain Hold Bharti Airtel (Bharti)'s Q4FY2013 overall results were in line with the expectation on the operating front, aided by a strong volume as well as the margin improvement in the domestic mobile segment. The consolidated revenues/operating profit grew by 1% and 4.9% respectively. The company's African business disappointed on all grounds, viz volume, pricing as well as margin. Key result highlights -
Subdued top line performance, due to Africa: The consolidated revenues grew by 1% on a sequential basis and were lower than our expectation, which was largely due to a decline in revenues from the African business (-1.7% quarter on quarter [QoQ]). The revenues of the domestic mobile business grew strongly at 3.2% QoQ, led by a 5.1% traffic growth and flat realisation. -
Operating profit in line with estimate; grew at 4.9%: The performance of the consolidated margin surprised positively (+117 QoQ basis points), despite a setback from the Africa front (margin declined by 110 basis points QoQ). Consequently, the operating profit grew by 4.9% on a sequential basis. -
Reported PAT misses expectation: The reported profit after tax (PAT) missed our as well as the Street's expectations, largely owing to Rs203 crore foreign exchange (forex) loss booked in the interest expense coupled with increased provision of deferred tax liability due to an increase in the surcharge from 5-10%. Adjusting the same, the profit would be just shade lower than our estimate (at Rs746 crore vs our expectation of Rs776 crore). Key positives -
A strong volume growth in the domestic mobile business. -
Data growth on an upwards trajectory -
A positive leverage impact witnessed on the margin of the Indian and south Asian businesses. Key negatives Outlook and valuation -
The telecom majors' (Bharti and Idea Cellular [Idea]) Q4FY2013 results coupled with their management's positive commentary make us believe that the Indian telecom operational environment is turning favourable aided by forced consolidation. The improving fundamentals of the sector are visible in the form of a strong traffic growth (Idea +8.5% QoQ; Bharti +5.1% QoQ), reduced churn levels (Idea 4.3% vs 10.1% QoQ; Bharti 3.2% vs 5.9% QoQ) and strong growth in the data business, leading to a margin expansion. Thus, we believe that the Indian operational environment remains favourable for the incumbents with a scope for margin improvement. -
Bharti on one hand has witnessed a good operational display in the Indian market, but continues to reel under pressure in the African region. The performance of the African business for Q4FY2013 disappointed on all fronts. Thus, we believe that the African business will continue to reel under pressure in the near term, though the medium-term prospects remain bright. -
In the light of this environment, wherein the positive tick from the India business gets negated with a lacklustre performance from the African business, we largely maintain our consolidated estimate for the company. The subdued African performance coupled with the regulatory overhang that Bharti faces compels us to maintain our Hold recommendation on the stock with a price target of Rs340. At our price target, the stock would be valued at 6.8x EV/EBITDA FY2015E. We believe that the performance of the African business would become a key monitorable for Bharti's rerating going forward and any positive development there should augur well for the stock. GlaxoSmithKline Consumer Healthcare
Recommendation: Hold
Price target: Under review
Current market price: Rs4,175 Results in line with expectation Result highlights -
Q1CY2013 in line with expectation: GlaxoSmithKline Consumer Healthcare (GSK Consumer)'s Q1CY2013 results were in line with our expectation. The volume growth in the malted food drink (MFD) segment stood at 8%. It was yet another quarter of a strong year-on-year (Y-o-Y) improvement in the gross profit margin (GPM; by ~280 basis points) on account of benign raw material cost, strategic sourcing of key inputs and price increases undertaken in the portfolio. The company took an average price increase of around ~5% in its MFD portfolio during the quarter. Horlicks and Boost (two of GSK Consumer's pillar brands) registered a strong value growth of 18% year on year (YoY) and 25% YoY respectively during the quarter. Around 171-basis-point Y-o-Y decline in the operating profit margin (OPM; excluding the business auxiliary income) was the key disappointment for the quarter. Also, the export division continues to disappoint with just 5% Y-o-Y growth in revenues. -
Performance snapshot: GSK Consumer's Q1CY2013 net sales grew by 15.6% YoY to Rs939.9 crore (largely in line with our expectation of Rs933.4 crore). The growth was driven by a mix of volume and value, with the volume growth standing at around 8% YoY during the quarter. The core MFD segment grew by about 18% while the packaged food segment (largely biscuits) increased by about 25% YoY during the quarter. The GPM improved by 276 basis points YoY to 62.1% in CY2013. The OPM (excluding the business auxiliary income) declined by 171 basis points to 18.2% in Q1CY2013. This was largely on account of a sharp 352-basis-point Y-o-Y increase in the advertisement spends as a percentage of sales, which spiked up during the quarter, largely on account of an innovative marketing campaign on key brands such as Horlicks and Boost and the launch of Horlicks Promind in Q1CY2013. Hence, the operating profit grew by just 5.6% YoY to Rs170.8 crore. However, a strong growth in the business auxiliary income (of around 56% YoY) and a high other income resulted in an 18.5% Y-o-Y growth in the reported profit after tax (PAT) to Rs156.4 crore (in line with our expectation of Rs155.2 crore). -
Outlook and valuation: The management has indicated that going ahead its focus will be on improving the sales growth by clocking a decent volume and a value growth. This will be driven by supporting the brand with adequate media and promotional activities (in the range of 16-17% of sales) and sustained enhancement in the distribution reach. The OPM is expected to sustain in the range of 15-15.5% for CY2013.
We have slightly tweaked upwards our earning estimates for CY2013 and CY2014 to factor in little higher than earlier anticipated GPM and business auxiliary income. At the current market price, the stock trades at 33.5x its CY2013E earnings per share (EPS) of Rs124.7 and 29.1x its CY2014E EPS of Rs143.3. We continue to like GSK Consumer on account of its strong cash pile of close to Rs1,500 crore and focus on improving the growth prospect in the long run. However, the current valuation does not provide much of the upside room in the stock to play. Hence, we maintain our Hold recommendation on the stock with the price target under review. Greaves Cotton
Recommendation: Buy
Price target: Rs95
Current market price: Rs72 Engineering growth on back of new product launches Result highlights New product launches to drive growth
GCL expects the launch of new products to drive revenues in FY2014. GCL recently introduced a mini-tractor to boost presence in the farm equipment segment. Further, introduction of a compressed natural gas (CNG) engine in the Tata Motors' Iris would boost the automotive revenues. Also, the company is planning to launch products such as batching plant and boom pumps in the construction equipment space, which would enhance revenues. Similarly, the new engine platform for the industrial engines would drive growth. GCL has planned investment of Rs100 crore in the development of new products in FY2014. Foray into mini-tractors opens new growth avenue
GCL forayed into the mini-tractor space with the launch of an 11 horse power (hp) tractor "Ustad". The mini-tractor would enable GCL to move up the value chain in the farm equipment space. Ustad has been initially launched in the states of Maharashtra, Gujarat and some southern states, and would be launched pan India in a phased manner. GCL plans to launch more tractors (15hp and 18hp) in the mini segment to further bolster presence. The tractor would be sold through the current farm equipment dealerships of the company. GCL plans to tap the opportunity in the 400 crore mini-tractor space. Focus on international market provides next growth opportunity
GCL is planning to focus on exports to enhance revenues. GCL plans to focus on markets such as Middle East, SAARC, East Africa and South East Asia. GCL is targeting revenues of 10% from the international operations in the next three years. The exports would open up new growth opportunity and provide diversification for GCL. Construction segment's revenues improve in H2FY2013; aims for breakeven in FY2014
The revenues of the construction equipment segment improved in H2FY2013 with the pick-up in the infrastructure activity. The revenues saw a strong growth of 27%. Backed by a strong revenue growth, the losses in the segment declined from Rs7 crore in H2FY2012 to Rs4.3 crore in H2FY2013. While the company is seeing traction in the road segment, it expects recovery in the concrete space in FY2014, which would further improve revenues. GCL is expecting the construction equipment space to breakeven in FY2014, which would boost the profitability for the company. Valuation
To factor the higher revenues due to foray into the mini-tractor segment and the launch of new products, we have raised our revenue assumption for FY2014 by 3%. However, given the margin pressure, we have marginally reduced our margin assumption from 13.7% earlier to 13.3% for FY2014. However, we have maintained our earnings estimates for FY2014 and FY2015 at Rs6.9/share and Rs7.9/share respectively. Our price target remains unchanged at Rs95. We maintain our Buy recommendation on the stock.
SECTOR UPDATE Fertilisers Subsidy cut again; negative for fertiliser players Key points Consecutive year of reduction in subsidy for non-urea fertilisers
The government has approved the proposal of the Department of Fertilizers for lowering the subsidy paid on non-urea fertiliser (like muriate of potash [MOP], diammonium phosphate [DAP] and other complex fertilisers) by 15% under the Nutrient Based Subsidy Scheme (NBS) for 2013-14. The reduction in the subsidy paid on DAP and MOP would be Rs12,350 per metric tonne (PMT) and Rs11,300PMT respectively, which is 14% and 21.7% lower than the previous year. Along with a reduction in the subsidy, the government has also asked the fertiliser manufacturers to reduce the price of DAP and MOP in the range of Rs1,000-1,500 PMT from the current level to provide relief to the farmers, but the immediate reduction would hurt the profitability of the manufacturers. The subsidy rates will be effective from April 1, 2013. The decision is driven by the need to cut the subsidy bill and also to align the retail selling prices of fertilisers in India to that of the softening prices globally. Decline in prices of raw material and stable currency prompt the subsidy cut
India is highly dependent on the imports of the raw material in order to manufacture complex fertilisers. India imports nearly 100% of its raw material requirement and is the largest importer of phosphoric acid and MOP in the world. Considering the 20-25% decline in price of phosphoric acid and MOP along with a stable exchange rate, the government has partially reduced the subsidy (15%) along with some reduction in the maximum retail price (MRP; 5%) also. Inventory losses to dent the financial performance
The high-cost inventory level of non-urea fertilisers (DAP and MOP) is close to 6 million tonne as against the average of 2 million tonne, which means that any immediate reduction in prices of DAP and MOP will negatively impact the profitability of the fertiliser companies. Most companies would have to make provision for a mark down in the value of inventory in the system. Moreover, the margin in the fertiliser trading business would remain under pressure due to a delay in the release of the subsidy payments in FY2014. Outlook; near term pressure provides an opportunity
Most players (like Chambal Fertilisers) would make provision for the expected inventory losses in January-March quarter and a further hit on the profit and loss account cannot be ruled out in Q1. This would continue to act as a drag on our valuation of the fertiliser stocks in the near term in spite of an attractive valuation. However, a normal monsoon could ease some pain for the fertiliser companies. Notwithstanding the near-term pain, we believe that the prevailing concerns offer a good entry point for investors with a long-term investment horizon. We prefer industry leaders like Coromandel International and Chambal Fertilisers as our preferred stocks that can be accumulated over the next few months. Automobiles Downslide continues Key points Volumes decline for most companies
For the automobile (auto) manufacturers, April 2013 proved to be yet another difficult month. Most of the companies, excluding Mahindra and Mahindra (M&M), reported a year-on-year (Y-o-Y) decline in the volumes. Tata Motors and Hero MotoCorp continued to underperform, reporting a double-digit decline in the volumes. M&M outperforms
M&M outperformed the automotive industry despite the 3% hike in the excise duty on sport utility vehicles (SUVs) and the strike at the Igatpuri engine plant. The auto sales grew 2% year on year (YoY) as compared with the negative growth by its other counterparts. The tractor sales positively surprised showing a strong growth of 38% YoY. The tractor sales rebounded strongly after four consecutive months of decline. Tata Motors and Hero MotoCorp underperformed
Tata Motors' sales declined 15% YoY. The passenger car sales nearly halved on account of the ageing product profile. The growth in the light commercial vehicle (LCV) segment also moderated from a strong double-digit to a mid-single-digit growth. Hero MotoCorp also underperformed with sales declining in the double digits. Hero MotoCorp has been loosing market share in the motorcycle space due to aggressive product launches by Honda Motorcycle & Scooter India (Honda). Sales to remain subdued in H1FY2014, expect recovery in H2
The automotive sales are expected to remain under pressure until H1FY2014. With not much improvement in the macro-economic scenario, we expect the sales to remain under pressure. We expect a recovery in H2FY2014 on account of pro-growth polcies by the government before elections and further softening of the interest rates.
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