Fw: Thematic Report (Switch from Tata Global Beverages to Mcleod Russel)

 

 

Thematic Report [July 09, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Switch from Tata Global Beverages to Mcleod Russel Key points Rising tea prices benefit plantation companies but unfavourable for tea processors and marketers: When tea prices go up it is preferable to invest in tea plantation companies rather than the tea processing companies. The rising tea prices would keep the profitability of the tea processing and branding companies under pressure, as raw tea is the key input for them. Also, there is this concern of the marginal users downgrading from branded tea to regional tea brands due to the price hikes undertaken by the branded tea players. On the other hand, tea plantation companies would gain from the rising tea prices, as it would have a direct positive impact on their profitability.  Thus, Mcleod is better placed than Tata Global Beverages currently: Tea contributes around 60% of Tata Global Beverages Ltd (TGBL)'s consolidated revenues. Since CY2008 tea prices have moved up significantly due to a shortfall of black tea in the international market. The margin of TGBL's tea segment that ranged in mid teens has slid to higher single digits in the recent past. On the other hand, Mcleod Russel India Ltd (MRIL)'s operating profit margin (OPM) moved up from around 10% in FY2008 to around 27-28% in FY2012. Hence, we recommend our investors to switch from TGBL to MRIL.  TGBL's diversification a good long-term strategy with little material in the near term: TGBL has undertaken several initiatives (such as joint ventures with PepsiCo India and StarBucks Corporation) to diversify from the commoditised tea and coffee business to the high-margin beverage business. The company now aims to enhance its presence in the healthy beverage space in the domestic market. However, we believe these initiatives will take some time to start adding substantially to the bottom line of TGBL. Nevertheless, these initiatives will improve the long-term growth prospects of the company.  Expect better returns from MRIL over next few quarters: Given the margin pressure and the stock's fair valuation, the gains in TGBL are limited from here. On the other hand, we expect MRIL to ride the upcycle in tea prices and consequently give better returns in the near term. Hence, we recommend a switch from TGBL (current market price: Rs117) to MRIL (current market price: Rs317). Click here to read report: Thematic Report   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Thematic Report (Closure of switch call from HUL to ITC with nearly 12% gains); Update - CESC (Stepping efforts to pull back retail), Fertilisers (Demand shifts to cheap fertilisers)

 

 

Investor's Eye [July 10, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Closure of switch call from HUL to ITC with nearly 12% gains We close call with around 12% absolute return and 6% outperformance to Nifty: Our Switch Idea to shift from Hindustan Unilever Ltd (HUL) to ITC, released on December 2, 2011, has given a positive return of ~12.0% so far while the broader market has moved up by 5.8% over the same period. ITC has outperformed despite the sharp increase in the excise duty on cigarettes in this year's Union Budget (which is likely to affect the sales volume growth of its core cigarette business in FY2013) and HUL's better than expected financial performance in the past two quarters. We now close the switch call.   Rationale for closing the call HUL's premium over ITC has narrowed to 11% from 38% at time of initiating the call Historically HUL traded at a premium valuation to ITC. The valuation gap had widened to 38% from an average of 24% in December 2011, thereby prompting us to initiate the switch call. However, the valuation gap has narrowed down to 13.6% now, making the risk-reward ratio unfavourable. The premium of HUL over ITC has declined for two reasons: (1) a sharp appreciation of 25% in ITC's stock price and (2) a relatively better upgrade in the earnings estimates for HUL.   Remain bullish on ITC from a long-term perspective; HUL susceptible to weak monsoon-led potential slack in rural demand The aberration in the relative valuations of ITC and HUL has played out well; the risk-reward ratio in the switch trade is no longer favourable now. However, we continue to remain bullish on ITC and prefer the stock as our top pick in the fast moving consumer goods space for the long-term investors. ITC's core cigarette business is a lot more inelastic to the changing demand environment and the investments in the non-cigarette business will begin to yield better returns in the coming years.  On the other hand, HUL could face some margin pressures (due to the volatility in commodity prices and foreign exchange fluctuations) and also get adversely affected by a potential weak monsoon-led dampening of rural demand (the rural markets contribute 50% of its revenues). STOCK UPDATE CESC Cluster: Ugly Duckling Recommendation: Buy Price target: Rs405 Current market price: Rs307 Stepping efforts to pull back retail  Consolidated PAT hit by discontinuation of deferred tax: CESC's utility business (standalone) reported a PBT growth of 13% YoY. However the consolidated PBT grew by 19% YoY on a low base of the corresponding period of the previous year. The retail subsidiary reported a loss of Rs300 crore in FY2012. Moreover, in FY2012, the company stopped taking deferred tax in consultation with its auditors. Hence, the consolidated PAT declined by 11.5% YoY; ie lower than the PBT growth. Retail losses contained in spite of sales growth: The loss from the retail business dropped from Rs253 crore in FY2011 to Rs220 crore in FY2012, despite a 20% jump in sales growth. Besides that, a significant improvement has been witnessed in working capital. We view prudent cash flow as the game changer for the retail business.  Cash generation improved in standalone business; status quo maintained at the consolidated level: While inventory days and creditors' days are broadly in line with the previous trend, debtors' days jumped from 46 days to 72 days in FY2012 on account of prior period receivable accrued from tariff revision. Broadly, cash from operations (before capex) improved significantly in FY2012 to above Rs600 crore at the standalone level. On a consolidated basis, cash from operations remained positive and managed to gain a flattish growth YoY. An additional loan of around Rs1,300 crore was sourced to fund subsidiaries (largely new businesses), thereby increasing the consolidated debt even as standalone debt remained unchanged.  New power projects on track but property got delayed by a quarter: Currently, two generation capacities at Haldia (600mw) and Chandrapur (600mw) are in an advanced stage of execution. The management expects to commission Unit I in April 2013 and Unit II in July 2013 of Chandrapur. Further, the Haldia project is expected to get commissioned during September 2014. However, the Kolkata shopping mall is expected to complete by Q4FY2013 with a delay of a quarter.  Valuation and view: During FY2012, the PBIT level loss as % of sales declined to 18% from 24% in FY2011, as losses grew by 13% YoY; ie at a slower pace against sales growth of 20% in FY2012. The company aims to bring its retail business into EBITDA positive by FY2015 implementing a three pronged strategy. We believe the hangover of retail losses is over played in the stock currently but fundamentally, the company is witnessing early signs of transformation after it contained losses at the PBT level in spite of top line growth. We continue to rate CESC as a long term buy and expect benefits to accrue once the retail business turns around over the next few years. We maintain our target price of Rs405 on the stock.  SECTOR UPDATE Fertilisers Demand shifts to cheap fertilisers Key points Overall sales volume declined in June 2012: In June 2012, the aggregate sales of the domestically manufactured fertilisers (by 15 leading manufacturers) declined by 21% as compared with that in the same period of the last year. In the same period the import of fertilisers (DAP, MOP and complex fertilisers) also declined from 10.25 lakh tonne to 7.15 lakh tonne on account of lower imports of urea, DAP and MOP. The import of complex fertilisers increased by 62% during June 2012 mainly on the back of higher imports of lower graded complex fertilisers by Indian Potash, Zuari Industries and Nagarjuna Fertilizers. The import of urea, DAP and MOP decreased by 89%, 25% and 34% respectively during June 2012.  Sales of indigenous complex fertilisers declined in Q1FY2013: The sales of fertilisers declined by 13% in Q1FY2013 as compared to the same period of the last year. The sales volume of the fertilisers declined mainly due to the lower volume of urea and non-urea fertilisers. The indigenous sales of the DAP and complex fertilisers were lower in the first three months of the financial year mainly due to a lower demand, the shifting of demand towards urea and the high price of non-urea fertilisers as compared with the last year. The sales of DAP, MOP and complex fertilisers were lower by 20%, 25% and 27% respectively whereas the sales of urea declined by 5% during Q1FY2013. The sales of urea were also lower during the quarter mainly due to the lower imports by the government-owned trading agencies. Outlook: We believe that the sales of fertilisers in the coming months will remain low as compared to the last year. The demand for overall fertilisers will be lower mainly on the back of the lower sales of non-urea fertilisers during the current fiscal. The demand for urea will be higher as compared with the last year because of the shift in demand from non-urea fertilisers to urea fertilisers. The demand shifted to urea fertilisers mainly due to the high price of the non-urea fertilisers and the inflationary pressure on the farmer due to the rising cost of the other farm inputs and labour. So going ahead, the margin of the complex fertiliser manufacturers will remain under pressure. We, therefore, prefer pure urea manufacturers like Chambal Fertilisers along with single super phosphate (SSP) manufacturers like Rama Phosphate and Liberty Phosphate. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Housing Development Finance Corporation (A steady performance), Bajaj Auto (Annual report review)

 

 

Investor's Eye [July 11, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Housing Development Finance Corporation Cluster: Evergreen Recommendation: Buy Price target: Rs785 Current market price: Rs678 A steady performance  Result highlights HDFC's Q1FY2013 results were broadly in line with our estimates as its net profit grew by 18.6% year on year (YoY; down 24.4% sequentially) to Rs1,002 crore driven by a strong growth in the net interest income (NII) and a higher dividend income (up 21% YoY).  The NII increased by 19.1% YoY; down 25.2% sequentially to Rs1,304 crore. This was led by a strong growth in the loans and stable interest spreads. During Q1FY2013 the overall loans expanded by a strong 23% YoY (by 19% excluding the loans sold). The individual loans were up 29% YoY (up 23% excluding the loans sold) while the interest spreads remained stable at 2.27%.  The loan approvals saw a growth of 17% compared with the 20% growth in FY2012 whereas the disbursements grew by 20% during the quarter. However, the gross non-performing assets (NPAs) expanded slightly on a quarter-on-quarter (Q-o-Q) basis as the gross NPAs (GNPAs) were at 0.79% vs 0.74% in Q4FY2012 (based on six-month overdue, the GNPAs stood at 0.49% vs 0.44% in Q4FY2012). The outstanding provisions including the standard asset provisions on the balance sheet stood at Rs1,711 crore as against the GNPAs of Rs1,190 crore. Valuation HDFC continues to grow its book at a healthy rate despite a challenging environment. The growth is aided by a strong distribution network (metro and non-metro regions both) and competitive pricing of products. We expect the loan book to expand at a compounded annual growth rate (CAGR) of 20% over FY2012-14 leading to a growth of 19% (CAGR) in the earnings. We maintain our Buy recommendation on HDFC with a sum-of-the-parts (SOTP) based price target of Rs785 (valuing the subsidiaries and investments at Rs235 per share).     Bajaj Auto Cluster: Apple Green Recommendation: Hold Price target: Rs1,690 Current market price: Rs1,513 Annual report review  Export growth and margin sustenance: the key achievements of FY2012 Bajaj Auto Ltd (BAL) grew its exports by 31% year on year (YoY) in FY2012; the growth was much higher than the 6.3% year-on-year (Y-o-Y) growth in its domestic business. A strong demand for two-wheelers and three-wheelers from Africa, Latin America and South East Asia helped the exports touch 1.58 million units in the fiscal. The company maintained its status as the most profitable automotive original equipment manufacturer (OEM) in the country with its operating profit growing by 18% YoY.  Reviving domestic share and sustaining margins: the key goals for FY2013  The management has expressed its dissatisfaction over the company's sluggish performance in the domestic market as well as the loss of its market share to the competition. Thrust on new product launches, increased marketing initiatives and improving delivery are expected to support growth and help BAL outperform the industry. Outlook: growth environment challenging; maintain Hold The management has guided for a volume target of 5 million units in FY2013. This reflects a growth of over 15% during the year. Given the challenging macro headwinds in some export markets as well as in the domestic market, we believe that achieving the FY2013 guidance may be difficult. The management is banking on new product launches to boost the market share and growth in FY2013 but given the overall industry growth expectations of 12% for FY2013, the outperformance looks difficult. Our estimates for FY2013 and FY2014 remain unchanged. In view of the adverse demand scenario in H1FY2013 and a likely negative surprise on the margin front in Q1FY2013, we maintain our Hold recommendation on BAL.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Sharekhan Special: Q1FY2013 Construction earnings preview

 

 

Sharekhan Special [July 05, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 Construction earnings preview  No respite yet Key points  A pick-up in execution to support revenue growth but weakness at PAT level to persist: The first quarter of FY2013 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against the mounting interest burden. We expect the aggregate revenue of the Sharekhan EPC universe (ex Punj Lloyd) to grow by a good 16% year on year (YoY) led by some pick-up in execution across projects. However, the earnings are estimated to decline by 22% on the back of a marginal decline in the margins and a sharp jump in the interest burden. Asset developers to also witness pressure on earnings: Asset developers, which have otherwise outperformed the EPC players, would feel the pinch too due to the rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a robust growth of 19% YoY in its revenue on account of consistent execution, consolidation of the Chongqing project and some signs of traction in the Elsamex division. But higher depreciation and a rising interest burden would dent the earnings, which would degrow by about 13% YoY. IRB Infrastructure Developers (IRB) too would post a nearly 7% decline YoY in its earnings in spite of a 17% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project.  Only small EPC companies might record positive earnings growth: In our universe, we expect smaller EPC players like Gayatri Projects (Gayatri), Pratibha Industries (Pratibha) and Unity Infra (Unity) to post a growth in their earnings led by the robust execution of their projects and sustained margins despite a high interest burden. This expectation is supported by their strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals.  Outlook: situation likely to improve from H2: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India. However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our bullish bias on ITNL, Unity Infra and Pratibha. Our bullish stance on IRB Infra is more of a tactical call to take advantage of the event-led wide gap in the valuations of IRB Infra and ITNL. Click here to read report: Sharekhan Special   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Sharekhan Special: Q1FY13CementPreview050712

 

 

Sharekhan Special [July 05, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 Cement earnings preview  Realisation to support earnings growth Key points  Volume offtake improved in Q1FY2013: With an increased consumption from the rural market and a partial pick-up in the infrastructure activity, the cement offtake in the domestic market improved in Q1FY2013. The all-India cement volume in the April-May 2012 period grew by 11.9% year on year (YoY). However, the volume data of the large players for June 2012 is not encouraging (shows a decline month on month [MoM]) due to the arrival of the monsoon. Overall, we expect the volume growth to support the revenue growth of the cement players in Q1FY2012. Among Sharekhan's cement universe, Madras Cements, JP Associates and Shree Cement are likely to register an impressive volume growth on the back of the stabilisation of their new capacities. For FY2013 we expect the all-India cement demand to grow at around 8% as compared with 6.3% in FY2012. Average realisation for Q1FY2013 to be higher YoY as well as QoQ: Cement prices in April 2012 increased by an average of Rs10-15 per bag due to an increased cement offtake in the northern, western and central regions. The western, eastern and southern (Tamil Nadu) regions witnessed relatively higher price hikes during Q1FY2013. On the other hand, cement prices in northern and central regions witnessed relatively lesser price hikes. The average cement realisation in Q1FY2013 is estimated to be higher by around Rs200-250 per tonne quarter on quarter (QoQ). The realisation of the companies under our coverage is expected to increase by 4% to 8% sequentially. Shree Cement, and Orient Paper and Industries (Orient Paper) are expected to post a relatively higher growth in their realisation. Further, on a year-on-year (Y-o-Y) basis as well, cement prices across the major cities were higher. Hence, cement companies are expected to register a double-digit growth in their revenues. Further, as per our channel check, the cement prices have gone up by Rs10 per bag after the Competition Commission of India (CCI) imposed a penalty on cement companies for cartelising. Going ahead, we believe cement prices will see a seasonal correction in the coming couple of months. However, for FY2013 the average realisation will be higher as compared with that in FY2012. Cost pressure to offset benefit of price hikes; margins continue to be under pressure: With the support of growth in the volume as well as realisation, the revenue of the cement companies under our coverage is likely to increase by 9% to 35%. However, the positive impact of the increased realisation on the margins is expected to be offset by the cost pressure in terms of higher power & fuel and freight charges (due to an increase in the lead distance). The Sharekhan cement universe is expected to post a mixed bag of results on the margin front. Companies like Shree Cement, India Cements and Orient Paper are likely to report an expansion in their operating profit margin (OPM) whereas Madras Cements and UltraTech Cement (UltraTech) are expected to register a contraction of 300-475 basis points in their margin.  Average bottom line to increase by 17.7% YoY (ex Grasim): The cumulative revenue of the Sharekhan cement universe is expected to grow by 17.3% (ex Grasim Industries [Grasim]). However, on account of the continued cost pressure the cumulative OPM is expected to contract by 46 basis points. The average bottom line growth of Sharekhan cement universe works out to 17.7%.Shree Cement, Madras Cements and Orient Paper are expected to post a healthy earnings growth in the range of 24-90% YoY. On the other hand, UltraTech is likely to post a earnings growth of 9.1% and India Cements likely to post a decline of 4.8% in its earnings YoY.  Outlook going ahead: Due to the increased consumption from the rural housing segment and a partial pick-up in the infrastructure activity, the cement demand has improved over the past couple of months. Going ahead in FY2013, we believe the domestic cement demand will grow by around 8% as compared with the 6.3% growth in FY2012. Further, with the healthy realisation and a likely improvement in the utilisation ratio (marginal), we believe cement companies would register a double-digit growth in the revenues. However, the key risk remains the cost pressure in terms of the power & fuel cost and the freight charges. Further, any break in the supply discipline (due to the penalty imposed by the CCI) could affect the stability of cement prices at higher levels. Hence, we maintain our neutral view on the cement sector but are positive on selective picks. In the large-sized space we prefer Grasim and among the mid-sized companies we like Orient Paper.   Click here to read report: Sharekhan Special   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Sharekhan Special: Q1FY2013 FMCG earnings preview

 

 

Sharekhan Special [July 05, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 FMCG earnings preview   Steady performance to sustain Key points  Strong revenue growth momentum to sustain: In Q1FY2013, we expect the FMCG companies to maintain their double-digit revenue growth momentum. The growth would be driven by a mix of sales volume and price-led growth during the quarter. Our interaction with most of the FMCG companies indicates that the sector is yet to face the impact of the looming macro concerns and we expect a decent volume growth in most of the categories during the quarter. However the sales of discretionary items or premium categories might witness some slowdown in Q1FY2013.  Raw material prices remained a mixed bag: The prices of some of the key inputs such as palm oil and copra have corrected from their highs and are lower on a year-on-year (Y-o-Y) basis (copra prices are down 40% YoY and palm oil prices are down 4.5% YoY). Further, the prices of sunflower oil and kardi oil have stabilised in the recent months. On the other hand, the prices of commodities such as HDPE, LAB, caustic soda, soda ash and raw tea substantially moved up on a Y-o-Y basis during the quarter (refer to table below). Also, a significant depreciation in the rupee against various currencies would have resulted in higher import prices for some of the key inputs (such as palm oil) in Q1FY2013. Having said that, the calibrated price hikes of the products would help FMCG companies to mitigate the impact of higher input prices. Margins to improve for most: We believe softening in the prices of the key raw materials and the benefits of calibrated price hikes in product portfolio would come into play for most of the FMCG companies in Q1FY2013. Marico will be the largest beneficiary of the correction in copra prices with an above 600-basis-point improvement anticipated in the gross margins during the quarter. We expect Godrej Consumer Products Ltd (GCPL)'s operating margins to improve by 150 basis points YoY to 16.5% largely on account of an improved revenue mix and a low base of Q1FY2012.  Performance of Sharekhan's FMCG universe: We expect the top line of Sharekhan's FMCG universe to grow by ~17% YoY with most of the companies in the coverage universe posting a strong double-digit revenue growth (except for Zydus Wellness) in Q1FY2013. Since prices of most of the raw materials have corrected from their highs, we expect the margin profile of the FMCG companies under our coverage to be better in Q1FY2013 in comparison to Q1FY2012. However companies like Glaxo SmithKline Consumer Healthcare (GSK Consumer) and Tata Global Beverages Ltd (TGBL) are likely to witness a Y-o-Y decline in their operating margins, largely due to higher raw material prices. Mcleod Russel India Ltd (MRIL)'s is expected to post a robust performance. The revenues are expected to grow by 11.0% YoY to Rs120.4 crore and the profit after tax (PAT) is expected to grow by 56% YoY to Rs58.2 crore. The strong growth in MRIL's bottom line could be attributed to the anticipated significant improvement in the sales realisation during the quarter. Overall, we expect the operating profit and the adjusted PAT of Sharekhan's FMCG universe to grow by 20.1% YoY and 21.5% YoY respectively during the quarter. Outlook In FY2012 the growth in demand for FMCG products in rural India was much ahead of that in urban India. However, a below-normal rainfall at the start of the monsoon season this year has dampened the overall sentiments. We believe these are early days to form a view. The progress of the monsoon during the July-August period will have to be keenly monitored as it will be the key determinant of rural economic growth in India. A below-normal monsoon will have its repercussion on the Indian FMCG sector in the coming quarters. We might see moderation in demand for FMCG products from rural India, which currently contributes 40-50% of the revenues for most of the FMCG companies under our coverage. Also, a below-normal monsoon will add on to the food inflation, thereby affecting the consumer buying decision in urban India. Hence in the scenario of high food inflation and below-normal rainfall we might see a moderation in sales growth for FMCG companies in the coming quarters. However we foresee a larger impact on the growth of discretionary and premium items rather than daily consumption items.  Preferred picks: In an environment of uncertainties we prefer stocks with better earnings visibility and a strong balance sheet. Hence we like ITC in the large-cap space and GCPL and GSK Consumer in the mid-cap space.   Click here to read report: Sharekhan Special   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.