Investor's Eye
[February 21, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q3FY2013 FMCG earnings review
Sales volume remained under pressure Key points -
ITC, Bajaj Corp and Zydus Wellness outperformed; HUL disappointed: The third quarter of FY2013 was yet another quarter of strong performance for ITC with above 20% growth in revenues and profit after tax (PAT). Some of the niche players like Zydus Wellness and Bajaj Corp posted a strong operating performance with the PAT growing by 22% and 47% respectively (aided by a strong revenue growth and a significant improvement in margin). Godrej Consumer Products Ltd (GCPL) posted a mixed bag performance with around 26% year-on-year (Y-o-Y) growth in the consolidated revenues and a single-digit growth in the operating profit (affected by higher media and promotional spends). Hindustan Unilever Ltd (HUL) posted a disappointing operating performance with a moderation in volume growth and a decline in the operating profit margin (OPM). Marico's performance was below the bar with a slowdown in the sales of key domestic categories and a sustained sluggish performance by its international business. -
Sales volume remained under pressure: The fast moving consumer goods (FMCG) categories felt the heat of the weak consumer sentiments, which got affected by the persistent inflationary pressures and an uncertain macro environment in Q3FY2013. The discretionary and premium categories were under pressure for the last two to three quarters. However, in Q3FY2013, the essential categories, such as toothpaste, soaps and detergent, came under pressure. The third quarter of FY2013 is the second consecutive quarter where HUL's sales volume growth witnessed a moderation of 200 basis points to 5%. The volume growth of Colgate India's toothpaste segment declined to ~7% in Q3FY2013 from 11% in Q2FY2013. On the other hand, Marico and GCPL have seen moderation in sales volume of some of its key categories during the quarter. -
GPM improved for most: The benign key raw material prices and higher sales realisation aided most of the FMCG companies to post a substantial improvement in the gross profit margin (GPM) in Q3FY2013. GCPL, Marico, Bajaj Corp and Zydus Wellness are some of the FMCG companies under our coverage who have witnessed a significant improvement in their GPM in the range of 200-400bps on a Y-o-Y basis during the quarter. -
High advertisement spends affected OPM: The FMCG companies invested heavily behind the brand building and promotional activities of it new launches in the domestic market. Also, the companies continued to support their existing product portfolio with adequate advertisement spends. Hence, the higher advertisement spends arrested a significant improvement in the OPM of the FMCG companies in Q3FY2013. -
Outlook and view: The sustained inflationary pressure affected the consumer sentiments, which impacted their buying decisions towards the consumer products. The impact of inflationary pressure on sales of essential consumer products came with a lag but was clearly visible in the Q3FY2013 results. We believe the government should take some growth revival actions to improve the consumer sentiments. Also, the government is likely to focus on improving the disposable income in the hands of rural population by implementing various schemes in the upcoming Union Budget. On the other hand, with the commodity prices expected to remain benign, we expect the FMCG companies to enhance focus on improving the volume growth in the coming quarters. We believe this to be a short-term phenomenon as the long-term consumer goods story of India is intact.
View: We continue to maintain our penchant for the FMCG companies having good balance sheet and strong earning visibility over the next two to three years. We maintain ITC, GCPL and Bajaj Corp as our top pick in the FMCG space. Q3FY2013 Construction earnings review
Flat revenues and margin; interest cost weighs down earnings Key points -
EPC companies continued to witness stress on top line and bottom line; though margin improved: For Q3FY2013 the net profit of the engineering, procurement and construction (EPC) companies (ex Punj Lloyd [Punj], Ramky Infra [Ramky] and C&C Construction [C&C]) declined by 75% year on year (YoY) on account of a muted revenue growth and EBITDA coupled with higher interest expenses. The revenue growth was subdued across our universe except for Pratibha Industries (Pratibha) and Unity Infraprojects (Unity), which pulled up the cumulative revenue growth to 0.4% YoY. At the operating level, many companies witnessed a margin contraction due to higher raw material prices. IVRCL and Pratibha were the worst being hit as their margins fell by 253 basis points and 120 basis points respectively. On the other hand, barring IVRCL and Ramky, other companies registered more than 100-basis-point improvement in their margins on account of a better cost management and revenue booking from the high margin projects. Overall, due to the mixed margin performance, the EBITDA for our universe (ex Punj, Ramky and C&C) remained almost flat by 2.7% YoY in Q3FY2013. Further, the 41% year-on-year (Y-o-Y) rise in the interest cost led to a decline at the earnings level. -
Asset developers fare better: On the other hand, the infrastructure developers performed much better in comparison with the EPC players. The aggregate revenues for IL&FS Transportation Networks Ltd (ITNL) and IRB Infrastructure Developers (IRB) combined were up 33% YoY, higher than our expectation, on account of the strong execution and consistent toll collection. On the margin front, though IRB saw a contraction (119 basis points) due to margin contraction in the build-operate-transfer (BOT) segment, ITNL witnessed almost flat margin on account of the higher share of its revenues coming from its construction arm, resulting in a cumulative 30% growth at the operating level. However, the interest and depreciation expenses on an aggregate increased by 36% YoY and 51% YoY respectively. Consequently, the cumulative net profit was up by 13% YoY. -
Outlook: For the last seven to eight quarters, the infrastructure sector has been continuously underperforming with its net profit growth being in the negative territory. Poor execution due to want of clearances, approvals and land along with a continuous rise in the interest rates has been leading to the poor performance. The situation is further aggravated by the order intake continuing to be weak across segments. Thus, the three key things that are monitorable going ahead include: (1) faster clearances/approvals and land acquisition; (2) a pick-up in order inflow across sectors; and (3) a reduction in interest rates. Till then, we prefer being very selective and our top pick remains ITNL among the larger players and Unity among the smaller players. Q3FY2013 Telecom earnings review
Improving fundamentals After a horrendous period of the previous four years or so, the fundamentals of the telecommunications (telecom) sector finally witnessed a mild resurgence owing to a reduction in the competitive intensity. Most major operators, such as Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone India (Vodafone), raised their voice rates in the select circles and also undertook an across the board tariff hike for 2G data, indicating a return of pricing power. The tepid response to the November 2012 auction also provided a much needed sentiment boost to the telecom sector, which was already reeling from a huge debt burden. The forthcoming March 2013 spectrum auction should also witness a similar response, at least for the sale of spectrum in the 1,800-MHz band, indicating a lower cash outflow for the telecom companies.
Key developments
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Telcos served with a demand of one-time spectrum fee: The telecom companies (telcos) were served notices demanding payment of one-time spectrum fee. Consequently, most companies dragged the government to the court and obtained a stay on the decision. -
4G licence holders permitted to offer voice services: The Telecom Commission permitted players with a broadband wireless access (BWA) license (4G service) to provide voice services under the unified licence regime. The BWA license holders would be permitted to offer voice services to customers by paying an additional Rs1,658 crore for a pan-India licence. The development increases the possibility of Reliance Industries Ltd (RIL) entering the voice telephony space, thus raising the risk of emerging as a disruptive force in the industry. -
Supreme Court orders unsuccessful bidders in November 2012 auction to cease operations: The Supreme Court ordered the telecom companies that were unsuccessful in winning the fresh 2G spectrum in November 2012 auction or those that did not participate in the auction process to immediately cease operations. The ruling led to players like Uninor shutting operations in Mumbai. Outlook and valuation: The recent months have witnessed a substantial decline in competitive intensity providing the telecom players with elbow room to increase tariffs and reduce discount and freebies. We believe that the era of cut-throat tariff war is over. Moreover, most of the overhangs such as the issue of one-time spectrum fee have been factored in by the market. In view of the improving fundamentals, we maintain our positive bias on the telecom sector and prefer Bharti owing to its leadership position in the Indian telecom market.
SHAREKHAN BUDGET SPECIAL Union Budget preview
High on expectation; test of government's reformist credibility The Union Budget 2013-14 will test the finance minister's ability to deal with the three concurrent objectives, ie containing fiscal deficit by cutting expenditure, reviving economic growth and announcing populist measures keeping 2014 national elections in mind. Focusing on only one objective will defeat the other. Hence, the finance minister has to tread cautiously and innovatively to deal with these challenges. Given the reform momentum since September 2012, the budget will definitely have something to offer for the market. Key measures expected to be announced in the budget -
Containing the fiscal deficit to 4.8% in FY2014: This remains among the top priorities with the government to avoid downgrading of India's credit rating. The finance minister has reaffirmed commitment to meet the stiff target of 4.8% fiscal deficit in his recent media/investor interactions. In addition to some efforts to improve the tax collections, the key focus would be to reduce planned and non-planned expenditures. We expect a lower growth in allocation for defence and for some social schemes in this Union Budget. -
Discussion on key reformist bills: In the budget session, about 72 bills are likely to be presented, which includes key bills like land reform, tax reform (Direct Tax Code [DTC] and Goods and Services Tax [GST]) and insurance bills. The passage of these bills will be positive for the economy and market. The government has already conceded on the demands of various states with regards to implementation of GST. Thus, it is possible that the government may give a roadmap to implement GST in the diluted form in FY2014 itself. The government has been able to pass the foreign direct investment (FDI) in retail and aviation despite a stiff resistance, which makes us believe that a few more sectors may be opened for FDI. -
Reducing the CAD vulnerability and promote savings: The finance minister would also like to take measures to reduce the current account deficit, which has been running high at +5% levels. Therefore, there could be measures to discourage investment in physical gold and to encourage savings in other instruments, including equities. The tax rates are unlikely to change materially, though the non-taxable income limit could be raised upwards to Rs2 lakh. -
Efforts to kickstart investment cycle: On the economy front, the finance minister would like to continue the reforms that began since September 2012. The efforts to improve the infrastructure (especially roadblocks in the power sector), deepening of the corporate bonds market etc inorder to kick-start the investment cycle may be focused upon. Outlook
Overall, the finance minister has raised the Street's expectation by hinting towards a prudent and responsible Union Budget. However, it remains to be seen whether the ruling party has the political will to take tough decisions and avoid populist measures. We remain hopeful and believe that the finance minister would be able to assert upon the UPA leadership to take forward the good work of the last few months .
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