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PULSE TRACK Inflation drops to a 41-month low of 4.89% -
The Wholesale Price Index (WPI)-based inflation for April 2013 surprised positively as it came in below estimate and slipped to a 41-month low of 4.89% (5.96% in March 2013). The month-on-month (M-o-M) decline of 107 basis points in inflation can be attributed to a decline in all the three major constituents of the WPI but largely to the drop in the primary articles and the fuel group category. However, the inflation rate for February 2013 was revised upwards to 7.28% from 6.84% as per the provisional estimate. -
The primary article inflation declined to 5.75% (as compared with 7.60% in March 2013) largely driven by food inflation as it declined by 265 basis points sequentially to 6.08%. The fuel group inflation dipped to 8.84% from 10.18% in March 2013 on the back of a dip in the mineral oil prices. Moreover, the manufacturing inflation continued to show a downtrend as it declined to 3.41% (4.07% in March 2013). -
On an M-o-M basis, the WPI reading was marginally up by 0.5% to 171.5. The primary articles index was up by 2.0% to 228.0 led by a 2.6% increase in the food articles index. The fuel index dipped marginally by 0.7% month on month (MoM) to 194.6 as the mineral oil index declined to 214.0 in April 2013 from 216.0 in March 2013. The manufacturing index was up by 0.2% in April 2013 to 148.7. -
The inflation data for March 2013 has once again surprised positively as it is the lowest in 41 months. Though there has been an upward revision in the provisional numbers, but the headline inflation has dropped within the Reserve Bank of India (RBI)'s comfort level (ie about 5%). The manufacturing inflation has continued to decline and the core inflation has slipped to 2.8%. We expect the RBI to continue to reduce the policy rates though at a much measured pace now and are factoring in an additional reduction of 50 basis points in the repo rates during the course of the current fiscal.
STOCK UPDATE
Bank of India
Recommendation: Hold
Price target: Rs376
Current market price: Rs324 Asset quality challenges remain Result highlights -
Bank of India (BoI)'s Q4FY2013 performance was in line with our estimates as the bank's net earnings declined by 20.6% year on year (YoY; down by 5.8% sequentially) to Rs756.6 crore. Though a tax write-back of Rs192.1 crore cushioned the earnings to an extent, but a slower growth in the net interest income (NII) and a dramatic rise in the provisions contributed to a year-on-year (Y-o-Y) decline in the profits. -
The NII growth was in line with our estimate as it declined by 1.0% YoY (up 7.3% quarter on quarter [QoQ]) to Rs2,476.0 crore. The sequential rise in NII was on the back of a 10-basis-point improvement in the net interest margin (NIM; global) to 2.46%. -
The advances grew by 16.3% YoY (up 4.7% QoQ) driven by loans to the small and medium enterprise (SME) segment (up 14.3% QoQ) and the agri segment (up 10.7% QoQ). The current account and savings account (CASA) ratio dipped marginally to 31.9% from 32.8% in Q3FY2013. -
During the quarter slippages remained high (2.7% of the opening advances) whereas the bank also restructured loans to the tune of Rs2,159 crore. However, the reductions in the non-performing assets (NPA; mainly contributed by write-offs) were in tandem with the slippages which led to the marginal decline in the gross NPAs on a quarter-on-quarter (Q-o-Q) basis. -
The non-interest income grew by 16.7% QoQ (up 13.1% YoY), largely driven by a higher treasury income (Rs157.3 crore vs Rs73.6 crore in Q4FY2012) and an 8% Y-o-Y rise in the fee income. The cost/income ratio of the bank dipped to 41.9% as compared with 42.8% in Q3FY2013. Valuation
BoI's Q4FY2013 performance was relatively better since the NIM improved and the gross NPA declined on a Q-o-Q basis. The management has guided for a reduction in the gross NPAs to 2.7% in FY2014, an improvement in the NIM and the return on assets (RoAs). However, given the weak economic environment any significant improvement in the operating performance seems difficult. We expect BoI's earnings to grow at a compounded annual growth rate (CAGR) of 18.9% (FY2013-15), leading to return on equity (RoE) and RoA of 14.0% and 0.7% respectively. We maintain our Hold rating on the stock with a price target of Rs376.
SECTOR UPDATE Fertilisers Normal monsoon and price reduction to support demand ahead Key points -
Sales decline marginally in April 2013: During April 2013, the aggregate sales of the fertilisers (by 15 leading manufacturers) saw a marginal decline of 11% as compared with the same period of the last year. The sales of fertilisers were lower mainly because of the poor sales of non-urea fertilisers. In April 2013, the production and import of diammonium phosphate (DAP), NPK (nitrogen, phosphorus and potash) and muriate of potash (MOP) fertilisers declined drastically due to a lower demand because of a drought and poor agriculture activity during the period. The production of DAP and complex fertilisers have also declined drastically on account of a low rainfall and high prices. The demand for urea witnessed some turnaround. -
Normal monsoon and price reduction to drive sales ahead: The India Meteorological Department (IMD) has issued the first stage of long range forecast for the south-west monsoon to be normal. The south-west monsoon seasonal rainfall for the country as a whole is most likely to be normal (96-104% of long period average [LPA]), with the highest probability of 46%. However, the probability for the seasonal rainfall to be deficient (below 90% of LPA) is 10%, whereas the chance of excess rainfall (above 110% of LPA) is 3%. The LPA of the seasonal rainfall over the country as a whole for the period of 1951-2000 is 89cm. The IMD will issue the second stage forecast in June, 2013. A recent reduction in the maximum retail price (MRP) of the non-urea fertilisers will also help in reviving the demand of fertilisers in the upcoming sowing season. Outlook: We believe that going ahead the demand for the fertilisers is likely to increase from the current level on account of a normal monsoon and a recent price cut in the non-urea fertilisers (in range of 5%). However, in the near term (next two quarters), the fertiliser manufacturers may witness a muted to negative growth in revenues on account of lower trading and the margin may remain under pressure due to liquidation of the high-cost inventory. But going ahead, the normal monsoon and a recent decline in the prices of non-urea fertilisers will drive the demand. For a long-term perspective, we have a positive view on the sector. We prefer stocks like Chambal Fertilisers, Coromandel International and Rama Phosphates which are attractively valued after the recent price correction.
VIEWPOINT Eicher Motors Two-wheelers in high growth trajectory; CV sales subdued Q1CY2013 conference call highlights Two-wheeler business on robust growth path
EML is witnessing a robust demand for the two-wheeler business. The business recorded a volume growth in excess of 50% in FY2013. EML continues to have a waiting period of about four to six months on its products. With the new plant (having capacity of 1.75 lakh units per annum) commencing operations recently, we expect EML volumes to continue to witness a strong growth going ahead. MHCV industry to remain subdued in near term
The medium and heavy commercial vehicle (MHCV) industry has been facing pressure with a double-digit decline in the volumes for the past two quarters. With not much improvement in the economic outlook in the near term, we expect the MHCV sales to remain under pressure in the near term. We expect the MHCV volumes to remain lacklustre in H1FY2014 with the recovery expected in the H2FY2014. Gaining market share in the MHCV space
EML has been gaining market share in the MHCV space on account of an increased penetration both in the geographic as well as the product (heavy duty space). EML's market share increased from 10.9% in FY2012 to 13.3% in FY2013. With the increasing dealer network and broadening product profile (focus into the heavy CV and the bus segment), we expect EML to continue gaining market share in the MHCV industry. Margin improvement to sustain
EML reported a better than expected margin in Q1CY2013 on account of a record margin in the two-wheeler space and an improvement in the CV business. With the strong volume growth expected in the two-wheeler business, we expect the benefits of the operating leverage to continue having favourable impact on the margin. Also, with the recovery in the CV business, the levels of discounting would reduce helping to sustain margin improvement going forward. Valuation
We have reduced our revenue assumptions for CY2013 and CY2014 given the sluggish CV demand. However, we have raised our margin assumption given the strong operating performance both in the two-wheeler and the CV space. Our revised earnings per share (EPS) estimates for CY2013 and CY2014 stand at Rs162.6/share and Rs227.6/share respectively. The stock can trade at 14x one-year forward earnings. Additionally, we assign Rs100/share book value for the engine business. Given the recent run-up in the stock price, we have a neutral view on the company.
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