Investor's Eye
[August 20, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q1FY2014 FMCG earnings review
Macros catch up; turn very selective Key points -
Revenue growth moderates in absence of price hikes and slowing discretionary spends: The first quarter of FY2014 saw most of the fast moving consumer goods (FMCG) companies registering a volume-led top line growth, as the FMCG companies did not take any price hike in the backdrop of benign raw material prices. Hence the revenue growth for most of the FMCG companies moderated in this quarter in comparison with some of the earlier quarters. In Q1FY2014 the revenues of Sharekhan's FMCG universe grew by 10% year on year (YoY), which is lower compared with the mid-teen revenue growth in some of the earlier quarters. -
Slowdown in discretionary spending; limited impact on low-penetrated categories: Some of the premium FMCG categories witnessed moderation in revenue growth, as discretionary spending slowed down in the backdrop of a bleak macro-economic environment during the quarter. The most affected segment was personal products (especially the skin care category) in Q1FY2014. Hindustan Unilever Ltd (HUL)'s revenue growth in the personal product segment moderated to 2% year on year (YoY) from a double-digit growth in Q4FY2013. Zydus Wellness saw a slowdown in the face wash and scrub categories during the quarter. The paint segment also bore the brunt of a bleak macro-economic environment and early monsoon, affecting the overall sales growth in Q1FY2014. However, some of the low-penetrated categories, such as valued-added hair oil, household insecticides (HI), malted-food drinks (MFD) and hair colours, were able to sustain the growth momentum during the quarter. -
Benign input cost aided GPM improvement; but rupee's depreciation would take away the benefits in future: The prices of the key inputs for FMCG companies (including palm oil, LAB, sunflower oil, kardi oil, HDPE, raw tea and coffee) remained benign in Q1FY2014. This along with an improved revenue mix resulted in a strong improvement in the gross profit margin (GPM) of most of the FMCG companies in Q1FY2014. As anticipated, the impact of the rupee's depreciation against the dollar was not visible in Q1FY2014. But the management commentary of most FMCG companies indicated that if the rupee continues to depreciate in the coming quarters it will have an impact on the GPMs. -
Higher ad spending arrested significant improvement in OPM: A large part of the savings at the GPM level was invested in brand building and promotional activities in Q1FY2014. Hence, the operating profit margin (OPM) of most of the FMCG companies saw a lower expansion or no expansion compared with the expansion in the GPM during the quarter. Having said that, the bottom line growth for most of the FMCG companies (except for HUL) was in double digits. The adjusted profit after tax (PAT) of Sharekhan FMCG universe grew by about 14% YoY during the quarter. -
Mid-caps outperform large-caps: In Q1FY2014 most of the mid-cap FMCG companies outperformed the large-cap companies in terms of bottom line growth. The companies like Marico, Jyothy Laboratories and Bajaj Corp registered a strong bottom line growth of 25.4% YoY, 25.0% YoY and 110% YoY respectively on the back of a strong improvement in their profitability during the quarter. ITC's performance was a mixed bag with revenues growing by 10% YoY and an improving OPM helping the bottom line to grow by 18% YoY in Q1FY2014. ITC's core cigarette business saw a 2% dip in the sales volume. However, price hikes of above 15% YoY aided the profit before interest and tax (PBIT) margin to stand at around 32% during the quarter. HUL's volume growth in the domestic business moderated to 4% in Q1FY2014 (from 6% in Q4FY2013) resulting in a growth of just 7% in the revenues. Though the OPM saw a 100-basis-point improvement on a Y-o-Y basis, but a lower other income on a Y-o-Y basis resulted in a just 2.5% Y-o-Y growth in the adjusted PAT during the quarter. Godrej Consumer Products Ltd (GCPL)'s OPM remained under pressure resulting in a flat bottom line during the quarter. -
Outlook-tapering of discretionary spending and rupee's depreciation to dent performance: Q1FY2014 was a quarter of a mixed performance for most of the FMCG companies. However, things are going to be challenging in the quarters to come as the depreciation in the rupee against the dollar and the other major currencies, the sustained high food inflation and the growing macro-economic concerns are putting a lot of pressure on consumer sentiment and consequently on consumers' buying decisions. Though a normal monsoon would act as a driver for rural demand for consumer products, but the demand in the urban market is expected to be muted in the coming quarters. We believe the premium segments (especially skin care and foods) would continue to see a lower growth. In terms of items of daily consumption, we might not see any moderation in the category growth but downtrading will be unavoidable.
Though commodity prices have fairly stabilised on a Y-o-Y basis, the depreciating rupee might result in a higher import cost for some of the FMCG companies which will have an impact on the GPMs. In view of the current inflationary environment and slowing growth rates, we don't see FMCG companies hiking prices in the near term. Hence, we believe the second and third quarters of FY2014 need to be keenly monitored from the point of view of the operating performance of the FMCG companies. We also believe the government needs to take some stringent actions to improve the macro-economic environment. Q1FY2014 Auto earnings review
Auto sector slips into red; farm equipment companies better positioned to face downturn Earnings performance mixed; Maruti and Apollo Tyres outperform
In Q1FY2014, the aggregate revenues of the automobile (auto) companies under our active coverage showed a marginal decline of 1% in the revenues while the net profit grew by 8.5% as compared with that of Q1FY2013. Companies like Maruti Suzuki (Maruti) and Apollo Tyres reported a strong growth in earnings while companies such as Bajaj Auto and Greaves Cotton reported a flattish earnings growth for the quarter. Ashok Leyland reported a loss during the quarter, dragging the overall performance of the coverage universe. Auto tracking universe (including nine stocks under soft coverage) reported 10% decline in net profit
Sharekhan's auto tracking universe (including nine stocks under soft coverage) reported a revenue growth of 3% year on year (YoY) but the net profit declined by 10% in spite of a 51-basis-point improvement in the margin; clearly, the rising interest cost (especially in case of Tata Motors) has dented the earnings. Gains from easing of raw material prices negated by low revenue growth, and high interest cost and depreciation
Most of the companies under our tracking universe reported an improvement in the contribution margin on account of lower material costs due to subdued commodity prices. However, the subdued revenue growth led to an operating deleverage and significantly negated the benefits of lower material prices. Plus, the rise in the interest burden and depreciation charges dented the earnings growth during the quarter. Maruti, Apollo Tyres and M&M outperform; Ashok Leyland and Tata Motors disappoint
Maruti's Q1FY2014 earnings grew by about 50% on account of synergistic benefits due to merger of Suzuki Powertarin India Ltd (SPIL; engine manufacturing arm) with itself. Apollo Tyres and Mahindra and Mahindra (M&M) reported a strong double-digit earnings growth on account of lower material prices and an improved product mix. Ashok Leyland disappointed the most by reporting a loss in the quarter on account of a steep decline in the medium and heavy commercial vehicle (MHCV) volumes and a higher discounting. Tata Motors disappointed (reporting a 27% decline in profit) due to a sharp decline in the stand-alone margin and an increase in the interest and depreciation expenses. Demand outlook muted; M&M preferred pick (Escorts from soft coverage)
The auto volumes are expected to remain in the negative territory for Q2FY2014 on account of a subdued economic environment, a firming of interest rates and increased diesel prices. The volumes could recover in H2FY2014 on account of the festive season and a low volume base in the corresponding period of the last year. The raw material prices are benign but the sharp depreciation in the rupee is likely to negate the benefits of subdued commodity prices. M&M remains our preferred pick in the auto sector as it is well placed to face the slowdown on account of a strong recovery in the tractor demand. Q1FY2014 Banking earnings review
Persistent macro-economic challenges cast a shadow on earnings and asset quality Key points -
Weak Q1 results; PSBs falter but private banks still hold on: During Q1FY2014, the earnings of Sharekhan's banking universe grew by 3.5% YoY. Though the growth was largely in line with our muted expectations, but the disappointment came in the form of severe pressure on asset quality. In case of the public sector banks (PSBs) the net interest income (NII) growth was sluggish but the treasury gains added to the overall income. However, a jump in the provision for the deterioration in assets affected the performance at the net profit level. On the other hand, the private sector banks continued to report a strong growth in their earnings (up 24.0% YoY) but the sustainability of the same is becoming questionable. -
Growth in core operating income falters: The NII of our banking universe grew by 10.8%, which is lower than the growth seen in the earlier quarters but in line with our muted expectations. The operating profit grew by 12.9% YoY, largely on the back of a strong uptick in the treasury profit during the quarter. However, the core operating profit (excluding the treasury gains) declined by 0.7% YoY, led by a 9.8% Y-o-Y decline in the same by PSBs. The private players posted a healthy growth of 20.6% YoY in their core operating profit. -
Asset quality worsens for PSBs, private banks withstand NPA pressures: The gross non-performing assets (NPAs) of our banking universe rose sequentially, as the slippages remained high in Q1FY2014. Private banks under our coverage (except Federal Bank) maintained the asset quality at healthy levels. The restructured book was largely stable on a sequential basis due to upgrades from the restructured book. -
Outlook-estimates downgraded; performance of PSBs to get dented by the spike in bond yields and tough macro-economic conditions; accumulate ICICI Bank; SBI a better bet among PSBs: In the coming quarters, the financial performance of the PSBs would be dented severely by a rise in the bonds yields (losses from treasury operations), NPA provisions and pressure on the margins. Therefore, in our post-result report (July 24, 2013), we had downgraded the estimates for most of the banks under our coverage.
However, the BSE Bankex has underperformed (30.4% vs 8.9% Sensex in a three-month period) the benchmark indices by a significant margin and at least partially captures the impact on the earnings of banks. Private banks, on the other hand, are better positioned to manage the asset quality and net interest margin (NIM) pressures. However, the new private sector banks with a weak deposit profile (Yes Bank, Kotak Bank etc) have also seen a sharp derating of multiples. Unfortunately, despite the recent correction the stock prices would suffer until some clarity emerges on the macro-economic front and the Reserve Bank of India (RBI) withdraws its liquidity tightening measures. We have a cautious view on the sector (as was strongly highlighted in the sector note last month following the announcement of the liquidity tightening measures by the RBI).
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Regards,
The Sharekhan Research Team | |
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