Investor's Eye: Pulse - IIP grows 0.6% in February 2013; Update - Infosys (Facing structural issues; hold for better exit option); Viewpoint - Shoppers Stop (Good business; expensive valuation)

 

Investor's Eye [April 12, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   PULSE TRACK IIP grows 0.6% in February 2013 In February 2013 the Index of Industrial Production (IIP) rose by 0.6%, which was above the market's estimate. The growth was contributed by a better than expected performance from the capital goods segment. The spurt was seen in the electrical machinery segment which lifted the growth in the capital goods segment as the other industries continued to post a tepid performance. Based on the three-monthly moving average, the IIP growth for February 2013 stands at 0.8% as against 2.7% in February 2012. The manufacturing sector, which constitutes about 76% of the IIP, managed to remain in the positive territory and increased by 2.2% year on year (YoY) as compared with the 2.5% growth in January 2013. The mining output remained bleak as it declined by 8.1% in February 2013 as compared with a decline of 2.2% YoY in January 2013. Moreover, the electricity output surprisingly witnessed a decline of 3.2% vs a growth of 6.4% in January 2013. In the use based category, the capital goods segment, which aided the growth in the IIP, grew by 9.5% YoY as compared with a decline of 1.7% in January 2013. The consumer goods segment grew by 0.5% as compared with a growth of 2.8% seen in January 2013.  On a sequential (month-on-month [M-o-M]) basis, the IIP declined by 3.1% in February 2013 to an absolute figure of 176.2 (181.8 in January 2013). Moreover, except for the 13.5% M-o-M growth in the capital goods segment all the other segments declined on a sequential basis. The electricity segment witnessed the highest decline of 12.6% sequentially. Though the February IIP growth of 0.6% is better than estimated, it hardly shows any sign of a turnaround in the industrial segment. Also, on a year-till-date (YTD) basis the IIP growth is merely 0.9%, which suggests that recovery is taking place at a much slower pace. The Consumer Price Index (CPI) inflation for March declined marginally (10.39% vs 10.9% in February) but remained in double digits. At this point of time the views are quite split on the next repo rate cut by the Reserve Bank of India (RBI) and the upcoming data releases (Wholesale Price Index, trade data) would play a key role in RBI's monetary easing prospects.    STOCK UPDATE Infosys  Recommendation: Hold Price target: Under review Current market price: Rs2,295 Facing structural issues; hold for better exit option Result highlights  Q4 performance disappointing; muted and wide guidance reflects growing uncertainty in business: Infosys' disappointing performance for Q4FY2013 proved that the Q3FY2013 performance was a flash in the pan. The revenues in organic terms declined by 0.2% quarter on quarter (QoQ) to $1,868 million and rose by 1.4% QoQ if we include the Lodestone numbers (much below our as well as the Street's estimates). With the full year's organic revenues at $7,289 million, showing a growth of 4.2% year on year (YoY), Infosys has not been able to meet even its organic guidance of a 5% year-on-year (Y-o-Y) growth. In the quarter the volume grew by 1.8% (including the Lodestone numbers) and the blended pricing declined by 0.7% QoQ. In rupee terms the revenues were up by 0.3% QoQ to Rs10,454 crore.  Contrary to expectations of an 11-13% revenue growth guidance, Infosys has guided for a 6-10% revenue growth for FY2014 and discontinued the practice of giving earnings guidance. The wide range of guidance and the discontinuation of the earnings guidance reflect the unpredictability of Infosys' earnings for the coming quarters.  Concerns structural in nature, cyclical issues too: Infosys' sub-par performance in the last one and half years is a reflection of both structural and cyclical issues. Even though we hope that the cyclical issues related to client-specific accounts and higher exposure to the discretionary portfolio will sort out in a phased manner, but what worries us are the structural issues, like the unrelenting pressure on the margin and the continued deterioration in the quality of earnings.  Valuation-derating of multiples to persist: Infosys has witnessed a sharp derating in its valuation multiples in the past two years. It trades at a significant discount of around 25% to Tata Consultancy Services (TCS) now. Given the structural issues faced by Infosys, we do not see any reason for rerating of the stock's valuation multiples on a sustained basis. Thus, any significant bounce (like the one seen after the unexpected good performance in Q3) should be used as an opportunity by investors to move out of the stock. After today's sharp fall, we recommend a Hold on the stock only to look for a better exit opportunity. We maintain our preference for TCS and HCL Technologies (HCL Tech) in the front-line IT pack.    VIEWPOINT Shoppers Stop  Good business; expensive valuation  Consumer demand cautiously positive: After the EOSS that ended early this season, wherein the customer response was good, the management sounded cautiously optimistic about the full price months, February and March, and stated that the demand is better than its own expectation. Short-term cost pressure continues: On the stand-alone business front, the company continues to reel under the headwinds of high fixed cost, people, power and rental (as a prudent accounting policy, the company provides for service tax on lease rentals in its books, though the same is being contested and the final outcome is yet not out, which suppresses its margin by 100-150 basis points). Thus, for the next 12-18 months, we do not expect any substantial levers for the stand-alone margin. But enough levers on hand for medium-term margin expansion: Despite cost pressure in the short term, we believe that there are adequate margin levers for SSL to play on in the medium to long term like (a) implementation of Goods and Services Tax (GST), wherein apart from the uniform taxation across all areas, the service tax set off would be available, enhancing the margin by 100-150 basis points; (b) approximately around 50% of the store area by FY2016 would be in the age bracket of two to three years (the most productive time for Shoppers Stop stores in terms of throughput as well as margins), enhancing the overall margin; and (c) HyperCity on a stand-alone basis would be churning out corporate-level profitability. The management is confident of delivering over 8% operating profit margin (OPM) by then from the current level of 6%. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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