Investor's Eye
[August 30, 2013] | | |
| Summary of Contents
PULSE TRACK Q1FY2014 GDP grows tanks four year low of 4.4% -
India's gross domestic product (GDP) for Q1FY2014 came in at Rs13,71,446 crore, registering a year-on year (Y-o-Y) growth of 4.4%, which was below the market estimate. The lower growth in the GDP growth was due to the slump in the growth of the industrial segment. The agricultural segment improved while the services segment managed to maintain the growth at 6.6% in Q1FY2014. -
The growth in the industrial sector slowed down to 0.2% in Q1FY2014 from 2.7% in Q4FY2013 led by a 1.2% Y-o-Y decline in the manufacturing segment (vs 2.6% growth in Q4FY2013). However, the growth in the agricultural sector improved to 2.7% from 1.4% in Q4FY2013. The growth in the services sector was sustained at 6.6% mainly due to an uptick in community/ social services segment (9.4% vs 4.0% in Q4FY2013). -
From an expenditure perspective, consumption grew by 3.0% year on year (YoY driven by a 10.5% Y-o-Y jump in the government co)nsumption. The private consumption was dismal at 1.6% in Q1FY2014. The gross fixed capital formation declined by 1.2% YoY as compared with a growth of 3.4% in Q4FY2013 and 4.5% in Q3FY2013, indicating slower investments in the economy. -
Growth slump puts question mark on the government's ability to achieve the set target on fiscal deficit: The GDP growth has reached a four-year low largely pulled up by the dismal performance of the industrial segment. The services sector, which had been holding the fort, has thrown worrying symptoms. Given the hardening of the interest rates and ongoing policy issues, the investment cycle is expected to remain weak. Therefore, going by the current trends, the Q2FY2014 GDP growth could be even lower which may result in further downward revisions in the FY2014 GDP growth, which is projected around ~5.0%. This could have repercussions for other macro-economic variables, such as fiscal deficit (lower tax revenues) and current account deficit, which have been a concern with the foreign investors and rating agencies.
STOCK UPDATE Kewal Kiran Clothing
Recommendation: Buy
Price target: Rs913
Current market price: Rs744 Annual report review Key points -
Management's stance: In the FY2013 annual report, the management of Kewal Kiran Clothing Ltd (KKCL) tabled the macro-economic head wind that restricted the revenue growth for the company. It mentioned that the management's efficiency, its market-led approach and a strong discipline enabled it to marginally improve the bottom line performance. Going forward, the management emphasised that it is clearly focused on its growth trajectory and is investing in its core brands, infrastructure, distribution and innovations. On the economy front, the management stated that there is a strong relationship between the macro-economic scenario and the growth prospects of the apparel industry and the company. It reiterated the stance that the medium- to long-term Indian retail story continues to look strong, but also mentioned that the short-term sluggishness in the economy may persist. Despite these challenges, the company maintained its cautiously optimistic stance for the year ahead, banking on enhanced focus and strong execution. -
FY2013 performance snapshot: The company's top line remained largely flat from a turnover of Rs300 crore in FY2012 to Rs303 crore in FY2013 whereas the profit after tax (PAT) marginally improved from Rs52.1 crore in FY2012 to Rs53.4 crore in FY2013. The company continues to be in a strong financial position with total cash and investment aggregating Rs177 crore. For the year, it rewarded its shareholders by paying 41% of its profit in the form of dividend (Rs17.5 per share). The other efficiency parameters like return on capital employed (RoCE) and return on equity (RoE) also continue to be robust at 26.3% and 22.1% respectively. -
Buy maintained with target price at Rs 913: We remain optimistic about KKCL's outlook in light of its strong balance sheet position, working capital efficiency and minimal leverage. Also, improvement in the macro-economic environment and a revival in discretionary spending would boost the company's performance in FY2014. We maintain our positive bias for KKCL in the retail space and Buy recommendation with a price target of Rs913. At the current market price, the stock trades at 15.5x FY2014E earnings per share (EPS) of Rs51 and 12.5x its FY2015E of Rs63.0 respectively.
MARKET OUTLOOK Hopes belied, back to square one
Hightened macro-economic concerns to push benchmark indices to lower range Going nowhere; lost opportunity: The benchmark equity indices had pushed out of a multi-month range (Nifty; 4700-5300) and moved into a new orbit (Nifty; 5400-6000) after the change at the finance ministry last year. Favourable global cues and the Reserve Bank of India (RBI)'s monetary easing stance around the same time had helped the market to rise close to its previous high (Nifty; over 6000). But the recent knee-jerk policy announcements to tackle the run on the local currency, populist push from the United Progressive Alliance (UPA)-II government (with an eye on the forthcoming general election) and spike in crude oil prices have developed fault lines in the economic revival story. Consequently, the benchmark indices are slipping back into the lower range last seen in the era preceding P Chidambaram's return to the finance ministry. It is like a novice lost in a jungle who keeps pushing ahead but ends up moving in circles, going nowhere. Paying the price for profligacy but no lessons learnt: The proposed tapering of the quantitative easing programme by the US Federal Reserve (Fed) has jolted the global financial markets that had got addicted to the ample dose of easy and cheap liquidity. The worst affected are the markets of the emerging or developing countries that have a relatively high dependence on foreign inflows to fill the gap in their trade imbalances and current account deficit. The official estimates peg India's current account deficit at around $70-80 billion with additional requirement to roll over short-term foreign debt of $80-90 billion. This means India requires $180-190 billion of foreign capital in this financial year alone. But that appears a difficult task considering the facts that the expected liquidity squeeze will affect the foreign fund inflows and foreign investors are busy withdrawing funds from the Indian debt market. Consequently, the Indian Rupee has been among the worst performing currencies globally despite India's manageable level of external debt of around 20% of the gross domestic product (GDP; unlike in 1991 when the external debt of the country had risen to 40% of the GDP). But unfortunately, the policy response to the crisis has not been well coordinated and has failed to have the desired effect. Worst still, the government has gone ahead with a populist scheme like the Food Security Bill that would add to the burgeoning subsidy burden. The subsidy burden has already bloated by Rs50,000-60,000 crore due to a spike in the crude oil prices and the rupee's depreciation (fuel subsidy estimated to cross the Rs2-trillion mark in FY2014 as against expectations of Rs1.3-1.4 trillion a couple of months back). Corporate earnings performance belies growth expectations; earnings estimate downgrades pick up: The corporate earnings growth for Q1FY2014 disappointed even though the expectations were quite muted. The slowdown in the economic growth has percolated deeper since the revenue growth has turned flattish (after remaining over 20% for many quarters) while margins are sliding on account of a weak rupee, thereby affecting corporate profitability. Consequently, barring a few sectors (information technology [IT], pharmaceuticals [pharma] etc), earnings estimate downgrades have picked up again leading to much lower consensus earnings estimates across sectors. Given the macro-economic situation, we see the risk of further downgrades in the earnings estimates. Uncertainty and volatility to prevail; global events and elections important: The Indian stock market is plunging along with the other emerging markets like Indonesia, Brazil, South Africa and Turkey, which have serious fiscal imbalances. With global events likely to remain unfavourable going ahead (amid the unwinding of the unprecedented policy of massive liquidity infusions in the aftermath of the 2008 debt crisis), and a populist policy framework in the run-up to the general election and muted corporate earnings growth at home, the equity market would remain volatile in the near future with a limited scope for hiding in the traditionally safe-haven stocks (fast moving consumer goods [FMCG] and private banks). The Sensex' valuation is also not cheap (post-downgrade of its earnings estimates) at close to 14.0-14.5x one-year forward earnings (close to the long-term average valuation multiple) despite the difficult macro-economic scene and weak Q1FY2014 corporate results.
It is advisable to be selective (export-oriented companies that benefit from a weak rupee may be considered) and look at only systematic and gradual building of portfolio with a medium-term outlook .
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Regards,
The Sharekhan Research Team | |
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