Fw: Investor's Eye: Special - Q2FY2013 FMCG earnings preview, Q2FY2013 Banking earnings preview, Q2FY2013 Cement earnings preview

 

 

Investor's Eye [October 05, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q2FY2013 FMCG earnings preview   Growth momentum to sustain  Key points  Steady top-line growth anticipated: Despite an uncertain macro environment and below-normal rainfall during most part of the monsoon season, we anticipate a decent top line growth for most of the companies in the fast moving consumer goods (FMCG) space. Our interaction with the managements of the FMCG companies under our coverage indicates that the consumer demand for value-for-money daily consumption items remained steady during the quarter. However, we believe that the premium and discretionary segments (including paints) would see some moderation in sales volume. Prices of key raw materials on a declining trend: The prices of the key inputs showed a declining trend during the quarter. The prices of palm oil, copra and linear alkyl benzene (LAB) declined by 10.4%, 31.4% and 1.4% year on year (YoY) respectively during the quarter. The prices of these inputs were lower on a sequential basis as well. On the other hand, the prices of some of other input likes kardi oil, caustic soda (flakes) and raw tea have firmed up in the recent times (as can be seen in table below).  Margin improvement visible for all: The decline in the prices of some of the key inputs, increase in the sales realisation, improvement in the revenue mix and cost saving initiatives should help the FMCG companies to post a decent improvement in their operating profit margin (OPM) in Q2FY2013. The likely exception is Mcleod Russel India Ltd (MRIL), whose margins are expected to remain lower on a year-on-year (Y-o-Y) basis because of lower tea crop (affected by abnormal rains in the August-September 2012 period).  Mid-caps likely to outperform large-caps: We expect Sharekhan's FMCG universe to post a decent top line growth of 14.5% YoY to Rs19,012 crore and a bottom line growth of 18.0% YoY to Rs3,310.9 crore. The mid-caps such as Godrej Consumer Products Ltd (GCPL) and Marico are expected to post a strong bottom line growth of 38.0% and 21.3% YoY respectively on the back of a strong revenue growth and an improvement in the margins during the quarter. GCPL's strong growth would be driven by organic and inorganic initiatives both. ITC and Hindustan Unilever Ltd (HUL) are expected to report a decent bottom line growth of 18% and 19% YoY respectively for the quarter. HUL would achieve a volume growth of around 9% in the domestic consumer business while ITC is expected to report another quarter of muted sales volume in the cigarette business for the quarter.  Sector outlook: The FMCG companies did not see any pressure on their sales volume on account of the below-normal rainfall and uncertain macro environment in Q2FY2013. The revival in the monsoon in August helped make up for the deficient rainfall earlier and the monsoon deficit at the start of October 2012 stood at 8% (vs 19% at the start of August 2012). The late rainfall is positive for the kharif crops such as rice and sugar while it will also help to retain the moisture in the soil, thereby helping the rabi crops. This will rebuild the consumer confidence (especially in rural India) in the coming quarters which along with the festive season starting from the end of October 2012 will help the FMCG companies to achieve a strong performance in Q3FY2013.  Valuation: In view of the stretched valuations of the FMCG companies, we maintain our selective stance on the sector. We continue to prefer ITC in the large-cap space and GCPL in the mid-cap space.    Q2FY2013 Banking earnings preview  Macro concerns to cast a shadow on earnings performance   Key points  Earnings to grow 19% YoY but remain flattish QoQ: The earnings of Sharekhan's banking universe are expected to grow at 19% year on year (YoY; down 0.2% sequentially) in Q2FY2013. The private banks are likely to grow at 24% YoY whereas the public sector banks (PSBs) are expected to see a growth of 16.5% YoY. However, excluding Bank of India (BoI) and Union Bank of India (due to a low base of Q2FY2012) the earnings are expected to grow at 16% YoY. The slower growth in the net interest income (NII) and the increased provisioning will continue to affect the earnings growth. Operating performance to weaken: Due to stagnation in the credit growth and pressure on the margins the operating performance of banks is likely to weaken. We expect the NII of our coverage universe to see a growth of 13.5% YoY compared with the 17.6% year-on-year (Y-o-Y) growth in Q1FY2013 and the 22% growth in Q4FY2012. The pre-provisioning profits are expected to show a growth of 16.2% as against the 19% growth seen in Q1FY2013.  Asset quality under stress: Given the rising stress in the mid corporate and small and medium enterprises (SME) segments the asset quality pressures are likely to continue in Q2FY2013 as well, though the rate of slippages and restructuring could decline. The provisioning is expected to remain high and we expect a 4% Y-o-Y (14% QoQ) increase in the provisions for the banks under our coverage. Outlook: The banking stocks have rallied on the hope of the easing of interest rates, resumption of investment cycle based on the reforms initiated by the government and attractive valuations. Going ahead, the earnings will remain under pressure due to the slowing credit growth and asset quality pressures. We continue to prefer private banks like Axis Bank, ICICI Bank and Federal Bank. Among the state-owned banks we prefer larger banks like Punjab National Bank (PNB) and Bank of Baroda (BoB).   Q2FY2013 Cement earnings preview   Low base to drive earnings growth  Key points  Low base effect to drive earnings growth of the cement companies in Q2FY2013: The cement companies are set to display strong earnings growth during Q2FY2013, mainly on account of the low base effect of Q2FY2012. Though the cement prices did soften sequentially in the seasonally weak monsoon season, the blended realisations for the companies under our coverage are expected to be higher by 6-20% as compared to the same period last year (Q2FY2012). Hence, the cumulative earnings of Sharekhan's cement universe are expected to increase by 64.9% on year-on-year (Y-o-Y) basis. The companies like Shree Cement, UltraTech Cement, Grasim Industries and Orient Paper & Industries are expected to post higher earnings growth whereas companies like India Cements and Madras Cements are expected to post a decline in their earnings.  Volume offtake affected due to the seasonal slowdown in Q2FY2013: Due to the monsoon season, the execution of the infrastructure projects and other construction activity has witnessed a slowdown. Therefore, the cement offtake has been affected during Q2FY2013. The PAN India cement players like ACC and Ambuja Cements have registered a decline in its dispatches for the Q2FY2013 due to the monsoon season and the overall weakness in the demand environment. Overall, we accept that the volume growth is unlikely to support the revenue growth of the cement players in Q2FY2013. For the year FY2013, we expect the all-India cement demand to increase at around 7-8% as compared with 6% registered in FY2012. Cement realisation for Q2FY2013 reduced on a Q-o-Q basis in some regions but remains higher on a Y-o-Y basis: The cement prices in August-September 2012 have decreased by an average of Rs5-10/bag in the southern and eastern regions due to the seasonal weakness and the poor demand environment. However, the Western, Northern and Central regions have witnessed a relatively better demand environment. Thus, the average cement realisation remains largely flat compared with Q1FY2013 level. We estimate the average cement realisation in Q2FY2013 to be lower by around Rs100-150/tonne on a QoQ (quarter on quarter) for the companies operating in the southern and eastern regions. However, on a Y-o-Y basis, the cement realisation remains at a higher level. The cumulative revenues of the companies under our coverage are expected to increase by over 14.8% on a Y-o-Y basis. Further, as per our channel check, the cement prices have gone up by Rs5-6/bag after increase in the diesel price by Rs5/litre. For the year FY2013, the average realisation will be higher as compared with FY2012.  Higher realisation on a Y-o-Y basis results in margin expansion: With the support of growth in the cement realisation, the revenues of the companies under our coverage are likely to increase in the range of 5-50%. Further, the negative impact on the margins due to increase in the freight charges (because of increase in lead distance) is expected to be offset by the higher cement realisation. Therefore, most of the cement companies are expected to register expansion in the margin. The cumulative operating profit margin (OPM) of the companies under our coverage is expected to improve by 222 basis points on a Y-o-Y basis. 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: Stock Idea: Persistent Systems (Persistently innovating)

 

 

Stock Idea [September 28, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK IDEA Persistent Systems Cluster: Emerging Star Recommendation: Buy Price target: Rs552 Current market price: Rs414 Persistently innovating Key points Well placed in the under-penetrated OPD space: Persistent Systems Ltd (PSL) is a niche player in the highly under-penetrated outsourced product development (OPD) market. According to industry reports, the OPD market was worth close to $8 billion in 2009 and is expected to grow at 19.1% CAGR over 2009-13. The addressable worldwide R&D/product engineering services market was worth approximately $35.4 billion in 2009 and is expected to reach $65.7 billion by 2013, growing at a CAGR of 16.7%. PSL has helped its customers develop over 3,000 products over the last five years. With strong domain expertise and years of experience in the OPD business, PSL is well placed to garner the incremental spending taking place in the global R&D space.  Investing for the future growth augurs well for deeper client mining: Over the last four years, PSL has consistently invested in the areas of innovative technologies (cloud computing, analytics, collaboration and mobility) to penetrate deeper into clients' wallet and the expertise that it has built in these areas over the years has started reflecting in its numbers. In the last two years, these four areas have contributed close to 40% of the total revenues and their combined contribution is poised to increase in the coming years with the increasing size of the funnel of orders in these segments. On the other hand, the proactive efforts to invest in the newer technologies would help the company to offer a better value proposition to its clients, get a bigger share of their R&D spending and diversify its offerings further. PSL is amongst the few Indian IT companies with considerable expertise in the area of innovative technologies with niche offerings in the OPD space.  Higher IP-led revenues = Margin improvement: With expertise in the OPD business and confidence of its clients, PSL continues to invest in acquiring and building intellectual property (IP) to gain a foothold in the non-linear side of the business. Its IP-led revenues have grown from $1 million in FY2007 (1.5% of total FY2007 revenues) to $18.3 million in FY2012 (8.8% of total FY2012 revenues). Currently, the company owns around 14 IPs and is continuously investing in building IP both on its own (close to 5% of its manpower deployed on IP creation) and through collaborations with leading universities, research laboratories and clients. PSL is also actively looking at the inorganic route (it has already made three acquisitions in the IP space) to acquire the right IPs to enhance its growth prospects. Going forward, the management is aiming to earn 20% of its revenues from the non-linear space in the next three to four years. This, we believe, will differentiate the company from the rest and help improve its margin in the coming years.  Undemanding valuation, buy: PSL has proven expertise in the OPD space, a strong presence in the newer technologies, strength to improve its IP base and the best-in-the-class margin profile which set it apart from the other mid-cap IT companies. Its earnings are expected to grow at a CAGR of 23% over FY2012-14. At the current market price of Rs414, the stock trades at 9.3x and 7.7x FY2013 and FY2014 earnings estimates respectively. In view of the niche offerings, the best-in-the-class margin profile and strong cash kitty (Rs85 per share), the current valuation seems to be undemanding. We initiate coverage on PSL with a Buy rating and a 12-month price target of Rs552 based on our target PER of 10x FY2014E earnings.  Click here to read report: Stock Idea < /font>   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: Thematic Report (Forex gains for auto sector, impact on FY2013 earnings)

 

 

Thematic Report [September 27, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Forex gains for auto sector, impact on FY2013 earnings   Maruti and Hero MotoCorp in OEMs and Apollo Tyres in ancillaries to benefit the most from rupee's appreciation The rupee has appreciated by 4.4% to 53.25 against the dollar and by 3.3% to 0.685 against the yen in the last one month. We evaluated our automobile (auto) tracking universe to ascertain the impact of the strengthening rupee on their earnings in FY2013. The rupee's appreciation benefits Hero MotoCorp and Maruti Suzuki (Maruti) the most amongst the original equipment manufacturers (OEMs) as their royalty bill will reduce and the import of components from Japan will get cheaper. Among the ancillaries, Apollo Tyres stands to gain the most. Exporters such as Bharat Forge and Bajaj Auto appear to be affected as their export realisations will be lower but there may not be any impact on their earnings in FY2013 as they have hedged their inflows for the rest of the year. Mahindra and Mahindra (M&M) remains the most insulated from the volatility in the currency market. At a macro level, the rupee's appreciation, the lower international crude prices and the moderation in the auto loan financing rates are expected to revive sentiments during the forthcoming festive season. Our preferred picks in the auto sector are M&M and Maruti. Royalty-paying companies benefit: Hero MotoCorp and Maruti  Maruti: Royalty forms 5.5% of the company's sales. The company pays royalty bi-annually and generally hedges its rupee-yen exposure for the following quarter. The benefit of the rupee's recent appreciation would accrue in Q4FY2013. We estimate an impact of 0.9% on the company's EPS purely on account of the royalty if the rupee sustains at the current levels. Hero MotoCorp: After splitting from Honda Motor Company (Honda) the company originally agreed to pay Rs180 crore as a fixed royalty to Honda and charges the same under "Depreciation" every quarter. However, the company faces the risk of the rupee's depreciation. Due to a sharp depreciation in the rupee, the royalty payable every quarter had swelled to Rs228 crore in Q1FY2013. On new models, such as Ignitor, Impulse and Maestro, the incremental royalty is guided at around 1% of the total sales. We estimate an EPS benefit of 1.4% in FY2013 assuming the rupee-yen rate sustains at the current levels. Outlook  Directionally, the study above indicates Maruti, Hero MotoCorp and Apollo Tyres will be the primary beneficiaries of the rupee's appreciation with the assumption that the rupee shall sustain at the current levels for the rest of the year. However, we are not changing our Hold recommendation on the stocks on which we have a rating (Maruti and Apollo Tyres) because of specific issues related to each company. Maruti would announce extremely weak Q2FY2013 numbers while Apollo Tyres would face the Competition Commission of India's penalty in the near term.  Also, in view of the fact that the rupee has limited visibility in the medium term, we continue to prefer the stock that is insulated from the fluctuations in the currency market, ie M&M. Our price target of Rs849 for M&M was achieved today. We will review our call on M&M after the announcement of its September 2012 volume numbers for a possible upgradation.   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: Company Report - MCX Ltd - Opportunity abound - BUY

 

MCX Ltd: Opportunity abound – BUY CMP Rs1,318, Target Rs1,510, Upside 14.7% Financial Technologies promoted Multi Commodity Exchange (MCX) is a market leader in India's burgeoning commodity derivatives market. Its journey of becoming a dominant commodity exchange with 86% market share has been fascinating. Interestingly, the next largest player has only 10% market share. The domestic commodity derivatives market after being opened up in 2003 has witnessed robust 85% CAGR in turnover. This was driven by widening commodity portfolio and rising interest in hedging and speculation due to increasing price volatility. In the aforesaid time, MCX registered a much stronger 200% CAGR in its turnover. MCX's strategic initiatives of building a globally referable commodity portfolio, product innovation, global strategic alliances and cutting edge trading technology helped it garner a dominant market share. More importantly, trading depth/liquidity has substantially improved and remains a cornerstone of its dominance. Aided by increasing turnover and fixed cost leverage, MCX's OPM has seen tremendous expansion; doubling to 63% over FY08-12. With further room for capacity utilization improvement, margin will most likely be sustained at elevated levels The opportunity for growth remains huge given a much lower derivative turnover/total physical flow multiple of India versus the developed markets. For instance, gold turnover on MCX is just 15x of the total physical flow in the economy versus 75-85x in the developed economies. Similar is the case for crude, aluminium, copper among others. Additionally, positive regulatory announcements (passage of FCRA bill) could open host of growth avenues. We conservatively estimate revenue/earnings to witness 14%/15% CAGR over FY12-14 considering recent moderation in revenue growth. Current valuation of 17.5x FY14E P/E is inexpensive for a secular growth story like MCX; also attractive in comparison with emerging market peers. Initiate with BUY and 9-month TP of Rs1,510. Company's investment in MCX-SX can provide further upside to our price objective. Click here for the detailed report on the same. Warm Regards, Amar Ambani

Fw: Investor's Eye: Update - Grasim Industries (Price target revised to Rs3,405), Banking (CDR restructuring cases continue to rise)

 

 

Investor's Eye [September 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE   Grasim Industries Cluster: Apple Green Recommendation: Hold Price target: Rs3,405 Current market price: Rs3,237 Price target revised to Rs3,405 Key points VSF prices increase in September 2012  The price of viscose staple fibre (VSF) has increased in September 2012 and with that the average price for Q2FY2013 is expected to be higher by around Rs3/kg on a quarter-on-quarter (Q-o-Q) basis. The VSF realisation of Grasim Industries (Grasim) was Rs128/kg in Q1FY2013. Now, as per the current price, the average realisation for Q2FY2013 is expected to be around Rs131/kg. The recent price hike is supported by a better demand environment and an increase in the prices of the competing fibres like cotton (whose price has increased by Rs8-10/kg).  VSF volume in Q2FY2013 to be higher on Y-o-Y as well as Q-o-Q basis The better demand environment for VSF products in the domestic as well as the international markets will help the company to register a higher volume in Q2FY2013 as compared with Q2FY2012. The VSF volume is also expected to be higher on a sequential basis as the VSF plant was shut for about 27 days in Q1FY2013. Therefore, the likely growth in the realisation and the volume is expected to support the stand-alone revenues of the company in the coming quarter.  Government authority recommends de-allocation of Grasim's coalfield in Chhattisgarh As per media reports, the Inter-Ministerial Group looking into coalfield allocations has recommended taking back coal blocks from Grasim. Grasim and Electrotherm jointly hold a coal block in Bhaskarpara, Chhattisgarh. The government panel has recommended that the block be cancelled. Grasim acquired the coal block in Chhattisgarh to produce cement and reduce its dependency on imported coal. However, the block is not operational and is not contributing to the coal requirement of the company at present. Therefore, the likely move will not have any direct impact on the earnings of the company. Further, the de-allocation of the coal block is just a recommendation made by the panel and needs to be finalised by the government.  Cement prices increased by Rs5-6/bag to offset the diesel price hike; the average cement price remains lower compared with Q1FY2013 On account of the recent hike in the diesel prices by Rs5/litre, the cement manufacturers have increased cement prices by Rs5-6/bag to offset the cost inflation. However, cement prices corrected significantly in August and early September 2012. Therefore, the average price of cement in the major Indian cities has corrected by around Rs10-12/bag compared with the Q1FY2013 level. Further, as per our channel check with the cement dealers, the price correction has been relatively high in the southern region and less in the northern and western regions. On the demand front, most of the regions in India have witnessed a slowdown on account of slower than expected execution of the infrastructure projects and a sluggish demand from the real estate segment. Therefore, the revenues of Grasim's cement business would decline sequentially in the coming quarter. However, the revenues from the cement business are expected to be higher in Q2FY2013 on a year-on-year (Y-o-Y) basis.  Outlook and valuation We continue to prefer Grasim to the other large players due to its strong balance sheet, comfortable debt-equity ratio (0.32x Q1FY2013), attractive valuation and diversified business. On the valuation front, we continue to value the stock using the sum-of-the-parts valuation method and arrive at a revised fair value of Rs3,405 per share. However, on account of a sharp run-up in the stock price of the company in recent times (Grasim has appreciated by 27% in the past three months), we maintain our Hold recommendation on the stock with a revised price target of Rs3,405. At the current market price, the stock trades at a price/earnings ratio of 11.5x and 10.4x, discounting its FY2013 and FY2014 estimated earnings per share respectively.   SECTOR UPDATE Banking CDR restructuring cases continue to rise We recently met the deputy general manager of the Corporate Debt Restructuring (CDR) cell to understand the asset quality scenario and the reasons for a rise in the restructuring cases.  Restructuring proposals rising rapidly  Due to weakness in the macro economy there has been a significant increase in the number of bank loan restructuring proposals. In the first five months of the fiscal, around 60 cases amounting to Rs31,000 crore were approved by the CDR cell. Going ahead, the cumulative restructured loans could inch up to Rs3.25 lakh crore by FY2013 end (~6.1% of the system's advances) as projected by rating agency CRISIL. Iron & steel the largest contributor so far; infrastructure's contribution could rise The iron & steel sector is the largest contributor (23%) to the restructured loans followed by the infrastructure, textiles and telecommunications sectors. As per the CDR cell, the proportion of restructuring proposals from the infrastructure sector is expected to increase due to the ongoing issues in the power and road segments.  RBI committee's recommendations on restructuring largely positive for the sector The Reserve Bank of India (RBI) committee's recommendations on restructured loans are positive for the banking sector. The committee recommended increased provisions and higher promoters' contribution in sacrifice in cases of restructuring of loans. Banks have submitted the feedback and the final guidelines are expected by October end. ...but two points of contention emerge The banks have a difference of opinion over mainly two points, ie on the regulatory forbearance and the calculation of the sacrifice amount. According to them, doing away with the regulatory forbearance on standard restructured loans would result in a sharp increase in the non-performing assets (NPAs) and provisioning. The banks want clarity on the calculation of the diminution in the fair value of the restructured advances. Further, the banks also want some relaxation in the right to recompense which is 100% at present. Private banks better placed vs PSBs  The number of restructuring proposals continues to rise at a scorching pace and the public sector banks (PSBs) have seen a faster growth in the number of restructuring proposals. The sharp increase in the CDR referrals and even in the non-CDR restructuring cases suggests rising stress on the asset quality of banks. Going ahead, we believe the restructuring proposals would increase, albeit at a slower rate, since most of the big-ticket accounts, Air India etc, have been restructured. Further, the RBI's final guidelines on restructuring (expected by October end) will also discourage the non-genuine cases. The private banks are better placed as for them the proportion of restructured loans (1.6% of advances vs 5.7% for the PSBs) remains much lower than the PSBs'. Though we are cautious on most PSBs because of their high exposure to the troubled segments and higher proportion of restructured loans, we prefer Bank of Baroda, Punjab and National Bank, and State Bank of India due to their reasonable valuation and stronger earnings profile which shall help them to withstand asset quality pressures. 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.