Investor's Eye
[June 14, 2013] | | |
| Summary of Contents
PULSE TRACK Inflation declines to a 43-month low of 4.70% -
The Wholesale Price Index (WPI)-based inflation continues to surprise positively as it slipped to a 43-month low of 4.70% (4.89% in April 2013) in May this year. The month-on-month (M-o-M) decline of 19 basis points in inflation can be attributed to a drop in the prices of manufactured products and fuels. The inflation rate for March 2013 has been revised downwards to 5.65% from 5.96% as per the provisional estimate. -
In May 2013 the fuel group inflation dipped to 7.32% from 8.84% in April led by a decline in the coal mining and mineral oil prices but the increase in the electricity prices to 27.86% (13.16% in April) restricted the decline in the fuel group inflation. The fall in the manufacturing inflation was restricted to 30 basis points as it declined to 3.11% from 3.41% on an M-o-M basis. However, the primary articles inflation rose to 6.65% from 5.75% in April 2013 on the back of a sequential increase in the food article prices from 6.08% in April 2013 to 8.25%. -
On an M-o-M basis, the WPI reading was flat at 171.6. The primary articles index was up by 0.57% to 229.3 led by a 1.5% increase in the food articles index. The fuel index dipped by 1.34% month on month (MoM) to 192 as the coal mining index and mineral oil index declined to 189.7 and 208.1 respectively in May 2013. The manufacturing index was up by 0.27% in May 2013 to 149.1. -
The softening of the WPI inflation to a 43-month low level and the downward revision in the March number allay the inflation concerns. The headline inflation has dropped within the Reserve Bank of India (RBI)'s comfort level (ie about 5%). The manufacturing inflation has continued to decline and the core inflation has slipped to 2.4%. The monsoons trend is also favourable which could ease the food inflation. However, the domestic currency has depreciated substantially, thereby increasing the stress on the current account deficit. Therefore, we expect the RBI to continue to reduce the policy rates though at a much measured pace.
STOCK UPDATE IL&FS Transportation Networks
Recommendation: Buy
Price target: Rs302
Current market price: Rs175 Environment ministry clears 3 road projects
Key points Receives nod to commence work on 3 road projects
IL&FS Transportation Networks Ltd (ITNL) has informed the Bombay Stock Exchange that concession agreements have been signed with the concerned authorities for the following projects: 1. The Kiratpur-Ner Chowk section of National Highway (NH)21 of 90.175km in Punjab and Himachal Pradesh
2. The Beawar-Gomti section of NH8 of 88km of the total 116km (capacity augmentation) in Rajasthan
3. The Sikar-Bikaner section of NH11 of 237.57km in Rajasthan The commencement of work on the aforesaid projects was pending receipt of clearance from the forest department. Moreover, the Forest Advisory Committee of the environment & forest ministry at a meeting held on June 10, 2013 cleared the proposal to commence work on all the aforesaid projects. The development is positive for ITNL. Status of Kiratpur-Ner Chowk project
ITNL is waiting for the appointed date for the Kiratpur-Ner Chowk but has already mobilised the contractors on site to start the construction work. The company had already received environmental clearance (EC) for the complete stretch. Forest clearance was pending for a stretch, indicating that work can be commenced in the balance stretch. Once the company receives the appointed date in a month's time the construction will take another 36 months. The project is expected to be partly completed during 2016 and the management is expecting toll revenues of Rs106 crore by then. The financial year 2016-17 will witness the full impact of the toll revenues, which are estimated at Rs233 crore. Status of Sikar-Bikaner project
In the Sikar-Bikaner project, other than a section of forest stretch in new alignments, work can be commenced in the rest of the stretch (193.58km) after obtaining the EC. The stage I EC has been done for the project and the environment ministry has now given the forest clearance. The company has received February 18, 2013 as the appointed date and started construction on the project. ITNL has already completed 11-12% of the project. The scheduled date of completion for the project is February 17, 2015 but the company expects it to get completed during September 2014. The company expects toll revenues to the tune of Rs22 crore during FY2015 and annual revenues of Rs62 crore in FY2016. Status of Beawar-Gomti project
At the Beawar-Gomti project, the company is awaiting a financial closure, which is expected by next month. If the company receives the appointed date during July 2013 then it will take another 36 months to complete the project. ITNL has not started any construction work on this project yet. The management has yet to estimate the toll revenues arising from this project. Outlook
We are confident of ITNL's ability to achieve faster clearances for its road projects and a financial closure thereafter. Considering the strong order backlog, an expected pick-up in project execution and a healthy new project award pipeline of NHAI, we remain positive on ITNL's financial performance going ahead. Moreover, we expect ITNL to be among the key gainers of the easing of competitive pressure in the large NHAI projects. We maintain our sum-of-the-parts based price target of Rs302 and Buy rating on the stock.
SECTOR UPDATE FMCG Prices of key inputs remain stable; freebies galore Key points -
Prices of key inputs stabilising: The prices of the key inputs for the fast moving consumer goods (FMCG) industry, such as palm oil, copra, kardi oil, coffee and HDPE, have corrected from their highs and seen some downward momentum in recent months. Palm oil prices, on an average, are down by 3% to MYR2,280 a tonne compared with the Q4FY2013 average of MYR2,362 a tonne. Copra prices are down by 7% to Rs43/kg in May 2013 compared with the average price in Q4FY2013. The other key inputs such as HDPE and LABFS have also seen some correction in recent months (refer to the charts at the end of the note). If the prices of these raw materials continue to see a downward trend, then it will be positive for the FMCG companies, as they can continue to focus on improving their sales volume in a tough environment where consumer sentiment has been dampened by sustained inflationary pressures. -
Promotional add-ons and freebies with new offerings: Our channel checks suggest that the FMCG companies including Hindustan Unilever Ltd (HUL), Procter and Gamble (P&G), Marico and Britannia Industries have opted for promotional add-ons/freebies to lure consumers into buying their products. We have seen higher offers on soaps, detergents and shampoos, which are highly competitive categories in the domestic market. With kardi oil and sunflower oil correcting in the past few months, we might see promotional offerings on Saffola oil brands in the coming months. Also, a price cut on the Saffola edible oil brand cannot be ruled out as it will help in reducing the pricing premium that Saffola enjoys over the other brands in the market. -
Sustained focus on new product addition: Against the backdrop of dampened consumer sentiments, the FMCG companies have remained aggressive in introducing new products in the domestic market (refer to the "New product launches" table). The companies have maintained their thrust on entering the low-penetrated premium categories which could be one of the key drivers of their growth in the long run. A large number of new products were seen in the domestic personal care segment (especially in the skin care and hair care categories) during our channel checks. HUL appears to have been very aggressive in launching new products in the domestic market in recent months. The products have been launched largely in the premium personal care segment. -
Normal monsoon would be a positive: The monsoon season has started on a positive note arriving on the coastal regions of Kerala on schedule and then spreading around the country. The rainfall from June 1 to 12 was 23% above average and covered around half of India as per the India Meteorological Department (IMD). This triggered early planting of summer crops, including rice, oilseeds and cotton, in many parts of the country. The IMD is expecting normal rainfall in the ongoing monsoon season. However, we believe it's early days yet to comment on it. The July-September rainfall is important for the agricultural production in India (especially the kharif crop). A normal rainfall in the key crop producing states would result in a higher income in the hands of the rural population, which would help in improving the rural demand for the FMCG companies (the rural market contributes 30-35% of their revenues). Also, a higher agricultural production would result in the cooling off of some agri-commodities prices, which act as the key inputs for some FMCG companies. -
Outlook and view: With the inflationary pressures moderating, we could see an improvement in the sales of the FMCG companies in the coming quarters. However, a substantial improvement in the volume growth of the FMCG companies could be seen from the second quarter of FY2014. The monsoon has begun on a positive note and a normal monsoon would further help in trimming down the inflationary pressures in the coming months. Having said that, the sharp depreciation in the rupee against the dollar in the recent past would act as a dampener for the FMCG companies, which have a large amount of dollar-denominated debt on their books and also import large quantities of the key inputs in dollars. Remaining selective while selecting stocks, we prefer ITC in the large-cap space and Bajaj Corp and Jyothy Laboratories in the mid-cap space.
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