Investor's Eye: Update - Marico (Price target revised to Rs201), Bharat Heavy Electricals (Maintain Hold with price target of Rs260)

 

Investor's Eye [September 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Marico Cluster: Apple Green Recommendation: Hold Price target: Rs201 Current market price: Rs191 Price target revised to Rs201 We recently interacted with the management of Marico to get a view on the current business environment in the domestic and international markets. The key takeaways from our interaction are discussed in this note. Key takeaways Growth momentum to sustain in key domestic categories  Despite headwinds, such as a below normal monsoon and sustained high food inflation, Marico has not witnessed any significant slowdown in demand for its products in some of its key domestic categories.  Parachute witnessed an abnormal volume growth of 18% year on year (YoY) in Q1FY2013. However, Marico expects the growth rate to stabilise in the range of 8-10% in the coming quarters.  Saffola is likely to achieve a volume growth of around 11-12% YoY in FY2012 (compared with a five-year compounded annual volume growth of about 15% YoY). The company has been witnessing a slight slowdown in the upgradation of consumers from the other edible oil brands to Saffola edible oil for the past four to five months. However, the company says it is a short-term phenomenon and expects the growth rate to improve to 14-15% per annum in the long run. The value-added hair oil portfolio is expected to grow by 15-20% in the coming quarters. The key growth drivers shall be innovations in the product portfolio and improvement in the penetration of products. Mixed trend in raw material prices  The copra prices have corrected significantly from their highs but remained volatile in the recent past. The prices currently stand at around Rs4,175 per 100gm, down by almost 30% YoY.  In view of the volatile trend in the raw material prices the company has not passed the full benefits of the softening copra prices to the consumers. The company recently introduced a promotional offer of Rs2 on 45ml and 100ml packs. It will keenly monitor the price momentum in the coming months before taking any price reduction in the rigid packs.  On the other hand, the prices of the key inputs of Saffola have maintained their upward momentum. The prices of sunflower oil, safflower oil and rice bran oil were higher by 8%, 58% and 17% YoY respectively during the period July-August 2012.  The company last took a price hike in the range of 7-9% in January 2012. It is not likely to take any further price increases in the edible oil portfolio in the coming months to avoid any pressure on the sales volume.  This will have an impact on the margins of the Saffola edible oil portfolio. International business showing some improvement  Bangladesh (which contributes about 40% to the international business' revenues) has seen an improvement in the macro environment in the past few months and is expected to post a better performance in Q2FY2013. In Q1FY2013 Bangladesh had posted a decline of 2% YoY. The overall environment in the Middle East and North Africa region (which contributes around 25% to the international business) is better than in the previous year. In the Middle East the company has lost some momentum due to the new pack transition. However, the company has made efforts to communicate the same to the end-consumers and expects things to improve in the coming quarters. Egypt is showing signs of revival and the business environment is becoming normal. South East Asia (accounts for ~25% of the international business) is expected to maintain above-20% growth in the revenues on the back the sustained strong performance of the X-men business in Vietnam and the Code 10 business in Malaysia.  Overall, the international business is expected to grow in mid teens in FY2013. Going ahead, the company is banking on steps like cross-pollination, entry into new categories and improvement in the distribution reach. It expects the growth of the international business to revert to the 18-20% range over FY2014-15 and the operating profit margin (OPM) to improve above 11%. Outlook and valuation: We have fine-tuned our earnings estimates after incorporating the FY2012 annual report numbers. We expect Marico's top line and bottom line to grow at CAGR of ~17.0% and ~24.0% over FY2012-14. However, any significant moderation in the sales volume growth of some of the key domestic segments and any substantial increase in the prices of the key inputs would act as a key risk to the earning estimates. At the current market price the stock is trading at 31.0x its FY2013E earnings per share (EPS) of Rs6.2 and 24.7x its FY2014E EPS of Rs7.7. We have revised our price target upwards to Rs201 (valuing the stock at 26x its FY2014E EPS of Rs7.7, in line with the current valuation of the fast moving consumer goods basket). However, the current valuations do not provide any significant upside to the stock price. Hence, we maintain our Hold recommendation on the stock.     Bharat Heavy Electricals Cluster: Apple Green Recommendation: Hold Price target: Rs260 Current market price: Rs248 Maintain Hold with price target of Rs260 Key points Policy uncertainties abating: Bharat Heavy Electricals Ltd (BHEL) has witnessed a severe downgrade in valuation multiples in the last couple of years on account of a policy inaction-driven slowdown in the demand environment. However, the proposed initiatives to restructure debt on the books of the state electricity boards (SEBs), tariff hikes and flexibility in raising tariffs in future have kick-started the reforms at one end of the power sector, leading to renewed interest in the power generation and equipment companies. We believe the second stage of power reforms in the form of fuel security and quick regulatory approvals would boost the viability of power projects and consequently give a fillip to the power stocks. Competition remains intense but order cancellation concerns overdone: Despite the government's sudden activeness in pushing forward policy measures, the competition from the private sector and Chinese players remains intense and BHEL is likely to continue to lose market share. Thus, the incremental growth in fresh order intake in the boiler-turbine-generator (BTG) segment is likely to remain subdued despite the recent policy measures. However, in terms of the existing order book, we believe that the concern over the cancellation of BHEL's orders from the private power developers seems overplayed as the Inter Ministerial Group hasn't de-allocated any coal mine of BHEL's private clientele after scrutinising 29 coal mines. While the bank guarantee of two of its clients, GVK Power and DB Power, would be deducted as penalty, the bigger threat of large-scale order cancellations looks limited to us.  Breakthrough in non-BTG segment would be a positive trigger: The company is now focusing on the non-BTG segments, like railways, logistics and transmission & distribution (T&D), that have a significant growth potential. Recently, BHEL in consortium with Hitachi was among seven companies that bid in the Delhi Metro tender for the supply of 486 coaches. The company has also bagged India's first 800HVDC transmission line order worth Rs1,590 crore. Its spares and services business for renovation and modernisation of power plants also holds potential whose order inflow share has increased to 10% in FY2012 from 4% in FY2011. Margins and earnings to remain under pressure; maintain Hold with price target of Rs260: In addition to the firm input prices and competition-led margin pressure, there is a growing risk of liquidation damages being slapped by some of its clients who are blaming BHEL for delaying project execution. Moreover, the relatively lower order intake in recent years would reflect on its revenue growth and result in a marginal decline in the earnings over the next two years. However, a lot of negatives are reflected in the serious de-rating of the stock over the last two years. Thus, we maintain our relatively more positive view on the stock with a revised price target of Rs260 (10x FY2014 earnings). We maintain our Hold recommendation on BHEL despite the recent upsurge in the stock price.  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.

Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions

 

This e-mail message may contain information, which is confidential, proprietary, legally privileged or subject to copyright. It is intended for use only by the individual or entity to which it is addressed. If you are not the intended recipient or it appears that this mail has been forwarded to you without proper authority, you are not authorized to access, read, disclose, copy, use or otherwise deal with it and any such actions are prohibited and may be unlawful. The recipient acknowledges that Sharekhan Limited or its subsidiaries, (collectively "Sharekhan "), are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with due authority of Sharekhan . Sharekhan does not accept liability for any errors, omissions, viruses or computer problems experienced as a result of this email. Before opening any attachments please check them for viruses and defects. If you have received this e-mail in error, please notify us immediately at mail to: mailadmin@sharekhan.com and delete this mail from your records.