Fw: Investor's Eye: Idea: GlaxoSmithKline Consumer Healthcare (A healthy pick; PT: Rs3,000); Pulse - (Inflation moderates to 9.11%)

 

 

Investor's Eye [December 14, 2011]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA GlaxoSmithKline Consumer Healthcare       Cluster: Evergreen Recommendation: Buy Price target: Rs3,000 Current market price: Rs2,544 A healthy pick Key points  Market leader in MFD segment: GlaxoSmithKline Consumer Healthcare (GSK) is a leader in the malted food drink (MFD) market with a market share of 71%. The MFD business accounts for around 94% of its overall domestic revenues. Over the years GSK has developed strong brands, such as Horlicks (a 55% market share) and Boost (a 13% market share), which are household names today. Judicious new launches and brand extensions to meet the consumer's needs and the expansion of its distribution reach have helped GSK to stay ahead of the competition and maintain its pricing power over the years. Double-digit volume growth in MFDs sustainable in the long run: The penetration of MFDs is low (22% overall) compared with some of the other consumer goods in India. With the rising per capita income and increased acceptance of health and wellness products, the demand for MFDs would increase in the years ahead. Hence, on the back of improved penetration (both rural and urban), increasing distribution reach, and sustained innovations and brand extensions GSK's volumes are expected to grow by 11-14% in the MFD segment in the long run. Entering into new categories: Leveraging the strong brand equity of Horlicks and ''supplementing the brand with consumer insights'', GSK has entered into newer categories, such as biscuits, noodles, energy bars, sports drinks, health supplements and oats, in recent years. While its biscuit segment grew at a CAGR of 30% over CY2007-10, the noodle segment gained a market share of 3% at an all-India level. The low penetration of some of the categories, such as noodles, oats, health supplements and energy drinks, provides strong visibility of future growth. Strong balance sheet: GSK is debt-free and has been consistently enhancing its cash balance over the years. Its cash balance currently stands at close to Rs1,000 crore and is expected to improve to around Rs1,170 crore in CY2012. The strong cash generation ability would take care of its future capex needs. GSK is known as a very good dividend payer. Over CY2005-09 its average dividend pay-out stood at 33% (CY2010 was an exception with a dividend of 70%).  Outlook and valuation: With a double-digit volume growth in the MFD segment and a strong growth in the newly launched products, we expect GSK's top line to grow at a CAGR of 19.2% over CY2010-13. The strong pricing power would help it to maintain the OPM at 16-17% over the same period. Hence, we expect GSK's bottom line to grow at a CAGR of 19.0% over CY2010-13. We initiate coverage on GSK with a Buy recommendation. Our price target for GSK is Rs3,000 based on 25x its CY2013E EPS of Rs120.3, which is a 25% discount to Nestle India's current multiple. The fair value as per the DCF method comes to Rs3,069. At the current market price the stock trades at 25.1x its CY2012E EPS of Rs101.3 and 21.2x its CY2013E EPS of Rs120.1. PULSE TRACK Inflation moderates to 9.11% The Wholesale Price Index (WPI)-based inflation for November 2011 came in at 9.11%, in line with the Street's expectations. However, the inflation for September 2011 has been revised upwards to 10% from the provisional figure of 9.72%.    Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Thematic Report (Ashok Leyland: LCVs boost volume growth); Update - GAIL India (Long-term supply agreement improves growth visibility)

 

 

Investor's Eye [December 13, 2011]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Ashok Leyland: LCVs boost volume growth LCVs decoupling from IIP slowdown and... Against the dismal growth in the index of industrial production (IIP) of 3.5% between April-October 2011, the light  commercial vehicle (LCV) segment has grown by 28.7% year on year (YoY) in the same period. The strong divergence reflects the decoupling of LCVs from the slowing broader economy. The LCV cargo segment grew at a robust pace of 31% between April-October 2011 while the LCV passenger segment grew by 12% in the same period. In the last six years, LCVs have overgrown the IIP by an average of 2.1x. However, the year till date (YTD) FY2012 chart shows that the ratio averaged 8.2x, reflecting a strong outperformance over the IIP.  ...outgrew most automobile segments in YTDFY2012 Most automobile segments felt the impact of slowing economic growth, rising inflation and a deteriorating investment as well as consumption cycle. LCVs bucked the general trend of moderation and have emerged the strongest amongst most  automobile segments. Passenger cars were the worst hit while many other segments managed to grow in mid double digits. LCVs took the lead with over 30% growth between April-November 2011. Beta highest for ALL; Dost to provide essential diversification We believe the ALL - Nissan joint venture (JV) would see the maximum benefit as FY2012 is the first year of  diversification. The ALL - Nissan JV plans to sell around 12,000 units of the newly launched Dost in FY2012. Further in FY2013, the Dost platform would be expanded to passenger carriers also whereby volumes can grow multifold. The company is targeting 55,000 units in FY2013. We see the Nissan LCV JV to be significantly value accretive and provide ALL the new dimension of growth.  Ashok Leyland: Outlook and valuation Our volume estimates for ALL in FY2012 and FY2013 are pegged at 98,405 units and 1,11,000 units respectively. Our earning per share (EPS) estimates for FY2012 and FY2013 remain unchanged at Rs2.5 and Rs2.9 respectively. ALL is the cheapest stock among the auto OEMs. We value the company at Rs31 per share which discounts FY2013E EPS by 9x at the lower price earning (PE) band. In addition to the PE multiple on core business we assign a Rs5 book value per share for subsidiaries. We recommend a Buy on ALL.   STOCK UPDATE GAIL India       Cluster: Apple Green Recommendation: Buy Price target: Rs541 Current market price: Rs392 Long-term supply agreement improves growth visibility Event GAIL has signed a 20-year sales and purchase agreement (SPA) with Sabine Pass Liquefaction LLC, a unit of Cheniere Energy Partners, for the supply of 3.5 million tonne per year of LNG. The SPA has a term of 20 years starting from the date of first commercial delivery in CY2017 with an option to extend for another ten years. Impact The SPA will help GAIL to ensure long term gas supply for the growing demand. Though execution of this SPA will be in 2017, which is five years ahead, we believe considering domestic demand supply assurance is certainly a positive for the stock. View and valuation: Reiterate Buy The impact of this event is likely to be felt only in the long term, ie post CY2017. It certainly is a positive development for GAIL as it provides better visibility of LNG supply in the long term. Moreover, it should act as a positive as GAIL's new pipeline network is likely to face low utilisation in the initial years considering the current gas supply condition.  We retain our estimates and Buy rating on the stock with a target price of Rs541 (based on sum of the parts [SoTP] valuation).    "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Thematic Report; Pulse - (IIP growth nosedives by 5.1%); Update - Telecommunications

 

 

Investor's Eye [December 12, 2011]  Sharekhan www.sharekhan.com

Summary of Contents Thematic Report Switch from Infosys to TCS Key points In the uncertain demand environment for the Indian IT services companies, it is advisable to stick to the leader Tata Consultancy Services (TCS) which is our preferred stock among the frontline IT companies. TCS is likely to sustain its much superior track record in terms of revenue growth and margin stability in the coming quarters.  On the other hand, Infosys is facing transition issues (management change) and the management offers weak commentary on the demand outlook. Industry surveys also indicate that Infosys' top clients are likely to cut back on IT spending, spearheaded by British Telecom (BT), its single largest client. In comparison, the survey indicates a 23% increase in IT spend by TCS' clients. Moreover, according to media reports, Infosys' management has undertaken desperate measures like working on some Saturdays to boost revenues in Q3.  In terms of valuations, TCS trades at a slight premium to Infosys. The relatively sharper run up in Infosys (as compared to TCS) has narrowed down its discount to TCS which could be utilised as an opportunity to switch from Infosys to TCS due to the latter's superior growth outlook. Currently, we have a Buy rating on TCS and Hold rating on Infosys. Risk: The key risk to our call is the potential distortion in quarterly results due to cross currency fluctuations (especially Euro/USD and Pound/USD).  Switch from Infosys to TCS: As TCS and Infosys are both the flag bearers of the Indian IT sector, it would be imprudent to completely avoid one over the other. However given the current macro uncertainties it would be better to increase exposure to TCS by cutting some exposure in Infosys till the time the disparity in the latter's fundamentals gets adjusted in its stock valuation.  Why we prefer TCS TCS better placed for market share gains: TCS' diversified scale of operations and higher exposure to the high spending banking, financial services and insurance (BFSI; 43% as against Infosys' 35%) and infrastructure management services (IMS; 9.6% as against Infosys' 5.8%) verticals will help it to garner higher market share gains. In the last one year, TCS has gained the highest market share among the Indian IT incumbents. TCS has gained market share quarter over quarter with its market share standing at 37.4% for the September 2011 quarter, up from 35.9% a year back. During the same period, Infosys has seen its market share drop to 25.9% from 26.8% a year back. Valuation: At the current market price of Rs1,180 and Rs2,731 of TCS and Infosys respectively, they trade at 19.0x and 17.3x FY2013 earnings estimates. In the last six months TCS' average premium over Infosys was around 8.2%, which is likely to expand further in the coming quarters with Infosys likely to lag behind TCS in financial performance parameters. Infosys' stock is likely to remain weak in the run-up to third quarter results, with recent earnings warning and a potential miss and revision of FY2012E guidance. Further, we believe Infosys' earnings will remain vulnerable to downgrades in FY2013E as compared to TCS owing to TCS' relatively higher exposure to BFS and IMS verticals. On the overall sector perspective, we continue to remain cautiously optimistic and would keenly wait for the finalisation of IT budgets for CY2012. Our interaction with the company's management suggests at budget closure by end January 2012. We continue to maintain our earnings estimates and price targets for both the stocks. We maintain Hold on Infosys with a price target of Rs2,772 and Buy on TCS with a price target of Rs1,250. PULSE TRACK IIP growth nosedives by 5.1% In October 2011 the Index of Industrial Production (IIP) declined by 5.1%, slipping significantly below the market estimate. The October IIP numbers are the weakest in 31 months and were a result of a decline in manufacturing, mining and capital goods output. For the year till date (YTD) FY2012, the IIP growth stands at 3.5% as against 8.7% in YTD FY2011. However, the IIP growth number for September has been revised upwards marginally to 2% from 1.9%. SECTOR UPDATE Telecommunications       Regulatory news continue to unfold, new telecom policy to be unveiled by early 2012 The Telecom Commission (TC) has reached a consensus on the following matters for the new telecom policy 2011, ie National Telecom Policy, to be out by early 2012. One-time charge for spectrum above 6.2MHz Uniform licence fee of 8% Tower companies to be brought under the licencing regime Liberal M&A norms Negative regulatory news flow coupled with falling rupee to keep stocks under pressure: The commission will meet again on December 13-14, 2011 to fine-tune the policy decisions on which it has reached a consensus. The outcome of the meeting would be shared by the end of this year. We believe that till the time the new policy is unveiled with clarity, the negative regulatory reports in the media and the falling rupee are likely to keep the telecom stocks under pressure. Long-term trajectory looks positive; liberal M&A norms to protect the downside: With the return of the pricing power in the hands of the existing players, we believe the domestic environment has turned positive . Further, the negative regulatory developments and news flow (levy of one-time spectrum charges, higher uniform licence fee of 8% and bringing tower companies under the licence net) have been in public domain for long and been discounted by the market. Thus though we see risks to the profitability and cash flow in the short term, the long-term outlook continues to be positive. We also believe that the expected liberalisation of the M&A norms would act as a downside cushion for the sector. We maintain our Buy rating on Bharti Airtel with a price target of Rs468.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - IL&FS Transportation Networks (Expected easing of competitive intensity is favourable); Viewpoint - HSIL (Challenging environment ahead)

 

 

Investor's Eye [December 09, 2011]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE IL&FS Transportation Networks       Cluster: Emerging Star Recommendation: Buy Price target: Rs330 Current market price: Rs167 Expected easing of competitive intensity is favourable Key points Preferred bidder for Chongqing Expressway group: The company has emerged as the preferred bidder for acquiring a 49% equity stake in Chongqing Yuhe Expressway Co (Chongqing Yuhe) in China. Chongqing Yuhe operates 58 kilometre of Yu He Expressway in Chongqing, located in southwest China, with the toll concession rights till 2032. The road project has been operational for the last nine years. The expressway is significant because it connects to a major industrial belt in the Chongqing region, thereby allowing the Chinese company to enjoy consistent traffic flow throughout the year and offering a decent growth prospect. Further, the Chongqing municipality has assured an annuity based payment on a certain part of the road the stretch beyond which will be tolled. However, the contours of the deal would be known by the end of this month after the signing of the agreement by both the parties. Expected moderation favourable; Maintain Buy: In view of ITNL's leadership in the road vertical, its strong relationship with state governments, its relatively diversified and derisked business portfolio, and strong parentage we remain positive on the company for two key reasons: 1) Given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector; 2) Order inflow is likely to improve on the back of expected moderation in competitive intensity as smaller players are unable to achieve financial closure. On the flip side, the FY2013/14 estimates are at risk if the company is unable to bag decent projects over the next 3-6 months. Currently, its order book stands at Rs8,900 crore, that is 3.5x its FY2011 construction revenues to be executed over the next two to three years. At the current market price the stock is trading at 6.8x and 6.2x its FY2012E and FY2013E earnings. Hence we maintain our Buy rating on the stock with a price target of Rs330.  VIEWPOINT HSIL       Challenging environment ahead Key points HSIL operates in two key business segments, namely sanitary ware and container glass division. Each business segment contributes 50% revenue. The company sells sanitary ware under the Hindware brand and manufactures glass under the AGI brand. While it is the number one player in the sanitary ware market with a 40% market share, it is the second largest player in the container glass space with a 17% market share (70% market share in southern India, the biggest market for container glass).  The organised segment is growing at over 12% per annum and we expect the growth to sustain driven by the increased demand for new houses and the burgeoning young earners with a rising disposable income. Being the largest domestic player in the sanitary ware business HSIL is likely to benefit the most from this incremental demand. However, the slowdown in the property market in recent times has affected the overall volume growth of this industry.  Key risk includes longer than expected slowdown in the real estate market will affect the demand for building products while sharp volatility in prices of soda ash can affect the margins in the container glass division. Moreover, in order to fund the huge capex of Rs650 crore it could see an increase in its debt-to-equity ratio, which presently stands at 0.6x. This will increase the interest burden on the earnings of the company. The return on equity (RoE), which stands at 15%, could fall to around 10% in the coming two years.  Outlook and valuation: The company has a strong financial track record in terms of earnings. It is also operationally efficient. With the new capacities coming on stream in the next two years the company is well placed to capture the incremental demand in both the sanitary ware and container glass markets. The company's management is confident of achieving a 25% growth in its revenue in the coming years. However, a longer than expected slowdown in the real estate market (which is the key consumer of its sanitary ware) and an increase in the price of soda ash could adversely affect the performance of the company. At the current market price the stock is trading at price-to-earnings ratio of 10.7x, discounting its FY2011 earnings per share. On a comparative basis, the stock's valuation is in line with that of its peers despite its lower return ratios.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - Transmission and distribution (Headwinds to keep valuations depressed); FMCG (Notified stipulation on pack size-a disappointer)

 

 

Investor's Eye [December 08, 2011]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Transmission and distribution       Headwinds to keep valuations depressed  Key points The order awarding activity of Power Grid Corporation of India (PGCIL) has intensified since August 2011 (after a dry spell of four months). In October this year, the momentum further picked up as PGCIL awarded projects worth Rs4,074 crore.  Nonetheless, the transmission and distribution (T&D) market is getting fragmented with more domestic players entering newer segments. For example, in the 765kv sub-station category, after the removal of the circuit breaker in the scope of contract in early FY2012, there have been many new entrants like Larsen and Toubro (L&T), EMC, Jyoti Structures and Techno Electric (Techno). These new entrants have posed a tough competition to the traditional T&D majors like ABB, Areva and Siemens (which together commanded 100% market share in the previous year) and have already captured 66% market share in FY2012.  Valuation wise, most companies are trading at a 25-30% discount to their average five-year multiple; however the uncertainty with regard to the order inflow amid intense competition and margin pressure would maintain the bearish sentiments in the T&D stocks. The problem of intensifying competition looks structural now and is unlikely to go away in the near future. Hence, we recommend investors to stay away from the sector till clarity emerges on the competitive landscape.  FMCG       Notified stipulation on pack size-a disappointer  Notification to restrict change in pack size and weight of FMCG products The consumer affairs ministry has notified that 20 consumer products be retailed only in stipulated pack sizes as part of an amendment to the Legal Metrology Act.  This policy move is specifically targeted at those FMCG companies that decrease the grammage to non-standard sizes. In a scenario of higher raw material prices, most of the fast moving consumer goods (FMCG) companies follow the practice of reducing the pack sizes of certain stock keeping units (SKUs) of their products (that is an indirect way of increasing the prices) while keeping the prices unchanged to ease the pressure on their margins.  The new Legal Metrology Act is likely to come into effect from July 1, 2012. View: If the new rule comes into force, it will likely have an impact on the profitability of the FMCG companies. Their inability to sell recruiters pack or low-priced SKUs and make promotional offerings on certain SKUs might affect the growth of their top line. Also, in a scenario of firm raw material prices, an increase in the packaging cost would put more pressure on the profitability of these companies. However, since the rule is likely to be implemented in July 2012, it will not pressurise the margins in FY2012 but it will definitely affect the profitability in FY2013. Having said that, the FMCG companies and the associations of various industries (including soaps and biscuits) are lobbying against the implementation of the rule. Prima facie, we believe FMCG companies like Hindustan Unilever (HUL), Procter and Gamble, Britannia Industries, Marico and Tata Global Beverages will be affected the most by implementation of this act.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - Cement (Low-base effect boosts volumes in November), Media (FDI limit to hike in cable industry....)

 

Investor's Eye [December 05, 2011]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Cement       Low-base effect boosts volumes in November Cumulative volume for pan-India players grew by 16.3% on low base effect: The volume growth of the top three domestic cement players, namely ACC, Ambuja Cements and UltraTech Cement (UltraTech), for November 2011 was impressive on a year-on-year (Y-o-Y) basis. This was largely on account of the low base of November 2010. Among the companies Ambuja Cements registered a robust 29.3% growth in its dispatches due to the low base effect (in November 2010 the company's dispatches had dropped by 9% year on year [YoY]) and an improvement in the cement offtake. Further, UltraTech has also posted an impressive dispatch growth of 16.3% YoY for the month. On the other hand, ACC has posted a 5.2% growth in its dispatches. Hence, cumulatively the pan-India players have registered a 16.2% volume growth. On a month-on-month (M-o-M) basis the cumulative dispatches declined by 2.7%.  Cement offtake remains sluggish, western region witnessed improvement: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country remained sluggish primarily due to the slowdown in the real estate segment and slower than expected execution of government infrastructure projects. Further, the political hurdle in Andhra Pradesh also remained a key drag on the volume growth of Andhra Pradesh, which is a major state of the southern region. However, the issue of unavailability of river sand in the western region was resolved during November and hence the cement offtake in the region was relatively better. The southern and eastern regions continued to face a sluggish demand environment.  Cement price hike in most parts of the country, southern region remains stable: During the month cement prices in most parts of the country increased by Rs5-15 per bag of 50kg. The western and eastern regions witnessed the highest price hike month on month (MoM) whereas cement prices in the southern region remained largely unchanged on an M-o-M basis. The price hike was largely on account of the supply discipline mechanism followed by the manufacturers. However, dealers are of the view that the current price hike is likely to sustain (except in the eastern region) in the near term as cement offtake is expected to improve going ahead.  Outlook: remain bullish on Grasim and Orient Paper: We believe the sector could underperform in the near term as there is a possibility that the cement manufacturers may fail to adhere to supply discipline due to a likely pick-up in the cement offtake. However, we believe any correction in the sector will provide the investment opportunity for select companies. We prefer Grasim Industries (Grasim) in the large-cap space and Orient Paper and Industries (Orient Paper) in the mid-cap space.   Media       FDI limit to hike in cable industry.... Hike in FDI limit in cable: favourable regulatory framework fuels growth prospects After making digitisation of cable TV across the country compulsory by December 31, 2014, the government is set to increase the foreign direct investment (FDI) limit in the sector from 49% to 74%. The Telecom Regulatory Authority of India (TRAI)'s recommendation to increase the FDI limit from 49% to 74% for direct-to-home (DTH) TV, Internet Protocol TV (IPTV) and teleport has been validated by the information & broadcasting (I&B) ministry.  Currently FDI is allowed up to 74% in mobile TV, HITS and IPTV whereas the permissible foreign investment cap for cable distribution companies is 49%. The move will make the distribution of FDI uniform across platforms including DTH, IPTV, mobile TV, HITS and cable companies. However, the FDI ceiling for local cable operators will remain 49 % (it has been so since 1995) as the recommendation to reduce it to 26% by TRAI has been rejected by the I&B ministry. According to industry estimates, the total fund requirement for the DTH and cable industry will be close to Rs250-300 billion for the successful implementation of digitisation. Thus, an increase in the FDI limits will make the funding easier for the companies in an environment of high interest cost coupled. Besides, most companies already have high debts on their books.  View: We view this development as a welcome breather for the Indian cable distribution sector, which is reeling under high debts and negative cash flows. As the cable industry is gearing up for the compulsory digitisation mandate, it has become important for the companies to equip themselves with funds to create the necessary infrastructure. The possible increase in the FDI limit to 74% will help the companies to garner funds without creating further pressure on the balance sheets. We remain positive on the DTH space from a longer-term perspective. However, we remain selectively biased toward Dish TV.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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