Investor's Eye
[December 12, 2012] | | |
| Summary of Contents PULSE TRACK IIP grows above market expectations at 8.2%; expect rate cuts only in Q1CY2013 -
In October 2012 the Index of Industrial Production (IIP) grew by 8.2% after declining by 0.7% in September 2012. The higher than expected growth in the IIP in October was due to a lower base effect and a strong festive season-driven rebound in the manufacturing segment (up 9.6%) during the month. The uptick in the consumer durables and capital goods segments, which grew by 13.2% and 7.5% respectively, also aided the overall surge in the IIP during October 2012. The IIP growth for September has been revised to -0.7% from the provisional estimate of -0.4%. Therefore, based on the three-monthly moving average, the IIP growth stands at 3.3% as against 0.3% in October 2011. -
The manufacturing sector, which constitutes to about 76% of the IIP, increased by 9.6% year on year (YoY) as against a decline of 1.5% YoY seen in September 2012. The mining output witnessed a decrease of 0.1% as against an increase of 2.3% in September 2012. Moreover, the electricity output saw a growth of 5.5% vs a growth of 3.9% in September 2012. In the use-based category, the capital goods segment surprisingly grew by 7.5% YoY as compared with a decline of 12.9% in September 2012. Moreover, the consumer goods segment grew by 13.2% YoY driven by a 16.5% growth in the durable consumer goods and a 10.1% growth in the non-durable consumer goods. -
On a sequential basis (month on month [MoM]), the IIP grew by 5.0% in October 2012 to an absolute figure of 171.3 (163.1 in September 2012). The manufacturing segment grew by 4.1% MoM. The mining segment reported an increase of 10.1% MoM followed by a 7.2% month-on-month (M-o-M) increase in the electricity segment. In the use-based category, the consumer goods segment reported a 7.3% M-o-M increase led by a 10.7% M-o-M increase in the consumer durable goods segment. However, the capital goods segment declined by 2.9% on an M-o-M basis. -
Although IIP grew to its 16-month high of 8.2% in November 2012, a large part of the growth in IIP is attributable to the low base effect. This level of growth may not be sustainable. The index number in October 2011 (158.3) were low as the numbers of working days were less due to the festive season, thus the low base. Based on the three-monthly moving average, although the IIP has grown by 3.3% vs 0.3% in the previous year, it is largely due to the high growth in October 2012 and may be masking the reality. Also, the revision of IIP growth for September 2012 to -0.7% suggests the persisting weakness in the economy. Further, the consumer price index (CPI) and the consumer food inflation for November 2012 at 9.90% and 11.81% as compared with 9.75% and 11.43% last month strengths the case for a plausible rate cut by the Reserve Bank of India (RBI) in the first quarter of 2013 (January - March 2013).
STOCK UPDATE Raymond
Recommendation: Hold
Price target: Rs508
Current market price: Rs478 Downgraded to Hold Key points Male grooming-an emerging category in India: The Indian male grooming segment is a Rs3,000 crore market and is growing at a brisk pace due to its strong acceptance from the young male population (especially in urban India). Though the male grooming segment is in nascent stage, it has moved far beyond vanilla products like deodorants, shaving products and moisturisers, to include anti-wrinkle creams and body washes. Some of the categories such as deodorants, hair gels and creams are growing at above 30%. Though the soap category is a mature and a highly penetrated market in India, the male soap category is around Rs300-400 crore and is growing well above the industry rate. With an improving awareness and a rising income, we expect the male grooming segment to maintain a strong growth momentum in the coming years as well. Raymond enhancing its male grooming product portfolio: Raymond already has a male grooming range of products (including perfumes, deodorants, shaving cream and hair gel) under Raymond and Park Avenue. In the deodorants' segment, Park Avenue has a market share of 7%. The company is planning to launch a beer shampoo under its Park Avenue brand, which will be targeted at young Indians. It will be priced in line with shampoo brands like Hindustan Unilever's Clear and Procter & Gamble's Head & Shoulders, which are also targeted at young men. Raymond might also look at entering other sub-segments in the hair care segment over the long run. The launch of the beer shampoo would be an add-on to the current portfolio. The male grooming products have better margin compared with some of the other personal care products in India. However, the segment currently contributes less than 5% to the company's overall turnover. Hence, we don't expect the male grooming products to add-on substantially to the company's profitability. Having said that, an increase in the scale of segment operations might add-on to profitability of the company in the long run. Expect better H2FY2013: In view of the ongoing festive and marriage season, we expect the demand for the company's products to revive, enabling the garment, textile and denim segments to post strong sales performance. Further, the key input prices (including cotton and wool) have remained stable, which will help the company to post a better margin in the coming quarters. Overall, we expect the H2FY2013 to be much better in terms of sales and profitability compared with H1FY2013. However, any significant increase in the key input prices would act as a risk to our earning estimate. Target price revised to Rs508, downgrade to Hold: We have revised our price target upward to Rs508 based on our sum-of-the-parts (SOTP) valuation. Since our last update (dated on October 23, 2012), Raymond's stock price has moved up by almost 28%, leaving limited upside from the current levels. Hence, we downgrade our rating on the stock from Buy to Hold. At the current market price, the stock trades at 23.5x its FY2013E earnings per share (EPS) of Rs20.3 and 16.3x its FY2014E EPS of Rs29.3.
SECTOR UPDATE Automobiles Duty hike by Sri Lanka Key points -
Sri Lanka increases import duty on auto sector: The Sri Lankan government hiked the duty on automotive imports from India. While it has levied duty of Rs10 lakh on import of commercial vehicles, the duty on cars has been increased from 73% to 173%. This is the second instance of a duty hike on Indian imports after the Sri Lankan government had similarly raised duties on two- and three-wheelers earlier in April 2012. -
Impact likely on Ashok Leyland, Maruti and M&M: Sri Lanka contributes a significant chunk of Ashok Leyland's volume, forming 8% of the overall volume. Maruti Suzuki (Maruti) and Mahindra & Mahindra (M&M) have a relatively lower impact, with Sri Lankan exports contributing less than 1% of their overall volumes. -
Impact on earnings assuming 50% drop in the export volumes to Sri Lanka: We have done a scenario analysis considering a 50% drop in the export volumes given the steep increase in the duty. The maximum impact would be felt by Ashok Leyland (decline of 19.8% in FY2014 earnings per share [EPS]) followed by M&M (decline of 0.4% in FY2014 EPS) and Maruti (decline of 0.3% in FY2014 EPS). We are not making any changes to our estimate as of now.
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