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.

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