Investor's Eye: Special - Q4FY2013 FMCG earnings preview (Pressure on sales volume likely to sustain in Q4), Q4FY2013 Telecom earnings preview (Industry consolidation to benefit incumbents; regulatory overhang continues)

 

Investor's Eye [April 08, 2013]  Sharekhan www.sharekhan.com

Summary of Contents       SHAREKHAN SPECIAL Q4FY2013 FMCG earnings preview   Pressure on sales volume likely to sustain in Q4 Key points Sales volume to remain under pressure: With no sign of revival in the macro-economic environment, we expect the sales volume growth in most of the fast moving consumer goods (FMCG) categories (including the discretionary and highly penetrated segments) to remain under pressure in Q4FY2013. Most of the FMCG companies have taken adequate steps such as promotional add-ons/discounts on the key stock keeping units to improve the sales volume. However, these measures would take some time to yield the desired results. We expect the top line growth of most of the FMCG companies to be in mid teens, driven by a mix of volume and value during the quarter. We expect Hindustan Unilever Ltd (HUL)'s consumer business volume growth to sustain at about 5% while GlaxoSmithKline Consumer Healthcare (GSK Consumer)'s volume growth in the malted food drink (MFD) segment is expected to remain at around 7%. The volume growth in Marico's Parachute coconut oil and Saffola edible oil is expected to sustain in mid single digits due to the significant pricing premium enjoyed by the products (in both the segments) over the other brands in the domestic market. Godrej Consumer Products Ltd (GCPL)'s domestic soap sales volume growth is expected to remain in single digits (expected to be higher than the industry growth). Bajaj Corp is expected to maintain a strong sales volume growth of about 20% year on year (YoY) in Q4FY2013. Margin improvement for most: With the prices of the key inputs, such as palm oil and rice bran oil, lower on a year-on-year (Y-o-Y) basis and the prices of the other raw materials (such as kardi oil, sunflower oil, caustic soda flakes) stabilising on a sequential basis, we expect most of the FMCG companies under our coverage to post a decent gross profit margin (GPM) for Q4FY2013. Also, an improvement in the revenue mix and a higher sales realisation would add to the overall margin performance.  Bottom line to outperform top line for most: We expect the bottom line growth of most FMCG companies under our coverage to be higher than the top line growth in Q4FY2013. The biggies such as HUL and ITC are expected to report a decent bottom line growth of about 20.1% and 17.2% YoY respectively (driven by an improvement in the margins and an increase in the other income). We expect Bajaj Corp to post a robust performance with a volume-led top line growth of about 28% YoY and a bottom line growth of about 38% YoY. An improvement in the operating profit margin (OPM) and a higher business auxiliary income would help GSK Consumers to post about 18% Y-o-Y growth in the reported profit after tax (PAT). The recent slew of measures (including distribution enhancement and adequate media spending on brands) would help Zydus Wellness to post a decent operating performance with an 18% Y-o-Y growth in the top line and a 23.0% growth in the bottom line. Though we expect Marico's operating profit to grow by 25% YoY, but the bottom line is expected to grow by 14.2% YoY largely on account of a higher interest outgo during the quarter. We expect GCPL's adjusted PAT (after minority interest) to grow by 13% YoY to Rs196.0 crore. Outlook and valuation: In Q3FY2013 the essential consumer goods categories had seen a dip in volume growth due to weak consumer sentiments owing to high inflation and an uncertain macro-economic environment. We expect the sales volume to remain under pressure in Q4FY2013 as well. The correction in the prices of the key inputs has helped the FMCG companies to take adequate measures to arrest the drop in the volume growth. However, these steps will take some time and we might see an improvement in the sales volume from Q1 of FY2014 (if the macro-economic environment shows some signs of revival). On the brighter side, despite slowdown concerns FMCG companies have maintained their thrust on innovation and renovation by entering into new segments or introducing variants of the existing products. Though there might be hitches in the near term but the long-term growth story of the domestic consumer goods sector is intact.  Top picks from the sector: We maintain ITC as our top pick in the large-cap FMCG space in view of its strong balance sheet and the decent upside potential of its stock from the current levels. In the mid-cap space, we like Bajaj Corp on account of its strong business performance in the past several quarters and thrust on inorganic growth activities to improve its growth prospects in the long run.   Q4FY2013 Telecom earnings preview  Industry consolidation to benefit incumbents; regulatory overhang continues Key points After the mixed performance of Q3FY2013, we expect the telecommunications (telecom) companies (telcos) to report improved performance aided by strong subscriber addition and healthy volume growth. We expect Bharti Airtel (Bharti) and Idea Cellular (Idea) to benefit from the withdrawal of operators like Uninor and Videocon from select circles, which would translate into better net subscriber additions for the telcos. In fact, the subscriber figures for January and February 2013 already confirm this trend. The incumbents gained market share in the last couple of months. On the EBITDA margin front, we expect a modest sequential expansion, Bharti (+90 basis points) and Idea (+50 basis points), for service operators while for the tower play, Bharti Infratel, we expect a 110-basis-point quarter-on-quarter (Q-o-Q) margin compression on account of the high fuel cost. Outlook and valuation The recent trends in revenue market share and subscriber market share have shown the incumbents gaining in terms of both these parameters following the withdrawal of certain operators from select circles and a decline in the competitive intensity. Some regulatory concerns such as 3G ICR issues have emerged while there is no clarity on issues such as one-time spectrum payment and spectrum refarming. However, certain green shoots such as a decline in the freebies and discounts have been witnessed. Given this trend, we believe that the headline tariffs are also likely to increase in the medium term. Overall, we believe that the business environment for the telecom service providers is likely to improve with consolidation on its way. However, the fluid and vague regulatory environment compels us to maintain our cautiously optimistic view on the sector. Bharti remains our preferred pick in the telecom space owing to its leadership position in the Indian mobile telephony space. Currently, we have a Hold rating on the stock with a price target of Rs340.   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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