| Summary of Contents
STOCK UPDATE Bajaj Corp
Recommendation: Buy
Price target: Rs303
Current market price: Rs240 NOMARKS' acquisition in line with the strategy -
Event: Bajaj Corp has signed a definitive agreement with Ozone Ayurvedic (OA) to acquire entire intangible assets, including the trademarks, of NOMARKS brand for an undisclosed amount. NOMARKS is the second largest brand in the fast-growing anti-marks/anti-blemish category. The acquisition is in line with Bajaj Corp's strategy to acquire niche brand/company in the domestic or international market. The company has not disclosed any financial details of the acquisition. However, in view of some of the past acquisitions in the fast moving consumer goods (FMCG) space (in the range of 2-2.5x sales) and a brand turnover of Rs40 crore, we believe the deal size would be in the range of Rs80-100 crore. Considering the cash and cash equivalents of close to Rs425 crore on the books of Bajaj Corp, we believe the funding of the acquisition won't be an issue for the company. -
About the brand: NOMARKS is the second largest brand in the fast-growing anti-marks/anti-blemish category. It has more than 12% market share in Rs342 crore anti-marks category, which is growing at 27% per annum. The brand also has presence in the categories such face wash, facial cream, facial soap, facial scrub and lotion based on natural science of Ayurveda. Some of these categories are very niche and have low penetration in India. -
Outlook and view: Bajaj Corp was scouting for strategic acquisition in the domestic/international market for the last few years. NOMARKS' acquisition will add value to Bajaj Corp's product portfolio and will help the company to enhance itself from a single brand company to a multi-brand company. NOMARKS has presence in niche categories, which could improve the growth prospects of Bajaj Corp in the long run. At the current market price, the stock is trading at 18.0x its FY2014E earnings per share (EPS) of Rs13.3 and 13.7x its FY2015E EPS of Rs17.5. We maintain our Buy recommendation on the stock with a price target of Rs303.
SHAREKHAN SPECIAL Q1FY2014 Telecom earnings review
Robust performance; positive outlook Result snapshot -
The Q1FY2014 performance of the domestic telecommunications (telecom) companies was above expectations on the revenue as well as margin front. These companies reported a 4-7% sequential growth in their revenues led by an improved realisation (up 4-6% sequentially) and modest traffic growth (up 2-3% sequentially). In the post-result interaction, the management sounded confident that the business environment was improving and the pricing discipline that led to the company's good performance would sustain. A benign competitive environment, relatively soft regulatory hurdles and attractive valuations of the telecom companies make us positive on the sector. Highlights of Q1FY2014 results -
Strong revenue performance: The telecom players exhibited a strong revenue growth during the first quarter of FY2014 led by a higher than expected realisation growth and a modest volume growth. Bharti Airtel's Indian wireless business grew at 5.3% quarter on quarter (QoQ) while Idea Cellular's revenues grew by 7.9% on a sequential basis in this quarter. Across the board, the realisation grew by 4-6% QoQ aided by a reduction in the discounted minutes and a selective increase in the voucher rates. We believe the pricing discipline is likely to continue. -
Data growth continued unabated: Though the voice business continues to be the mainstay of the telecom operators, but data volumes that picked pace in the last six to eight months continued to grow at a healthy rate and grew at 14-20% QoQ in Q1FY2014. -
Margins improved across board: The robust revenue performance was accompanied by a reduction in the churn levels and the rationalisation of the subscriber acquisition cost, resulting in a robust margin expansion for the players. Bharti Airtel's domestic wireless business' margin expanded by 190 basis points sequentially while the margin expansion was of whopping 415 basis points QoQ for Idea Cellular. Q1FY2014 Construction earnings review
Situation remains worrying; decline in revenues with pressure on margin and rising interest burden weigh down earnings Key points -
EPC companies continued to witness stress on top line and bottom line; margin declines: For Q1FY2014, the net profit of the engineering, procurement and construction (EPC) companies (excluding Punj Lloyd [Punj], IVRCL) declined by 39% year on year (YoY) on account of a decline in the revenues and EBITDA coupled with higher interest expenses. Our construction universe witnessed a cumulative decline in the revenues to 5% YoY barring Gayatri Projects (Gayatri; which registered a 10% year-on-year [Y-o-Y] growth). At the operating level, all the companies witnessed a margin contraction (except Simplex Infrastructure, which showed a 114-basis-point improvement YoY) due to higher raw material prices. IVRCL, Ramky Infra [Ramky] and Gayatri were the worst hit as their margins fell by 569 basis points, 558 basis points and 415 basis points respectively. On the other hand, Pratibha and Unity Infraprojects (Unity) registered a decline of 110 basis points YoY and 115 basis points YoY respectively in their operating profit margin (OPM). Overall, due to the deteriorating margin performance, the EBITDA for our universe (excluding Punj, IVRCL) declined by 13% YoY in Q1FY2014. Further, the 16% Y-o-Y rise in the interest cost led to a decline at the earnings level. -
Asset developers fare relatively better: On the other hand, the infrastructure developers performed relatively better in comparison with the EPC players. The aggregate revenues for IL&FS Transportation Networks Ltd (ITNL) and IRB Infrastructure Developers (IRB) combined were down by 3% YoY, lower than our expectation, on account of the lower execution. On the margin front, though IRB saw an expansion (63 basis points) due to margin expansion in the construction segment, ITNL witnessed an expansion of 630 basis points in the margin on account of the higher share of its revenues coming from its build-operate-transfer (BOT) segment as against its construction arm, resulting in a cumulative 9% growth at the operating level. However, the interest and depreciation expenses on an aggregate increased by 21% YoY and 11% YoY respectively. However, ITNL reported a lower other income and IRB reported a higher effective tax rate of 31.8%, which led to a cumulative net profit decline of 2% YoY. -
Outlook-gets tougher with deterioration in macro conditions: For the last eight quarters, the infrastructure sector has been continuously underperforming with its net profit growth being in the negative territory. Poor execution due to want of clearances, approvals and land along with a continuous rise in the interest rates has been leading to the poor performance. The situation is further aggravated by the weak order intake across segments. The recent measures by the Reserve bank of India (RBI) and the deteriorating macro conditions negate hopes of any revival in the near term. We retain cautious view on the sector. We have revised the price target for Gayatri and Pratibha to Rs202 and Rs44 respectively. Also, we believe that it is better to remain with Larsen and Toubro (L&T), the industry leader, and avoid mid-caps in the space. Monthly economy review Economy: macro-economic issues aggravate as headline inflation picks up and rupee depreciates sharply -
In June 2013 the Index of Industrial Production (IIP) declined by 2.2%. The growth was lower than expected largely because of persistent weakness in the manufacturing, mining and capital goods segments, and a decline in the electricity index to 157.0 (172.4 in May 2013). Moreover, the May IIP growth has been revised downwards to (2.8%) from the provisional estimate of (1.6%). Based on the three-monthly moving average, the IIP growth for June 2013 stands at (1.0%) as against (0.3%) in June 2012. -
The Wholesale Price Index inflation number for July 2013 surprised negatively as it was higher than the Reserve Bank of India (RBI)'s comfort level of about 5%. While the core inflation remains low, the rising pressure on food inflation and the depreciation in the local currency cast a shadow on the inflation outlook for the rest of the year. The Consumer Price Index (CPI) inflation is already high (9.64% for July 2013) which along with fuel price hikes could further affect the prices. However, the RBI is concerned about the rising current account deficit and has taken several measures (tightened liquidity, curbed gold imports etc) to deal with it. Therefore, we do not expect any respite from the RBI in the near term unless the macro-economic situation improves significantly. -
India's trade deficit was stable at $12.3 billion in July 2013 as compared with $12.2 billion in June 2013. However, it declined by 29.8% year on year (YoY) as the country's total imports declined in July 2013. In July imports declined by 6.2% YoY (down 0.4% YoY in June 2013) to $38.1 billion while exports grew by 11.6 % YoY, for the first time in four months, to $25.8 billion due to the falling rupee. -
After the announcement of stiff measures to curb volatility in exchange rates since mid July this year, the markets were expecting the RBI to maintain a status quo in its Q1FY2014 policy review and that is what eventually happened. Therefore, the repo rate now stands at 7.25%, the cash reserve ratio at 4.0%, and the marginal standing facility and bank rates are at 10.25% each. Further, the central bank has trimmed the growth forecast for FY2014 to factor in the evolving conditions in the domestic economy as well as the global economy. Banking: credit offtake remains sluggish, margin pressure increases due to a rise in interest rates -
The credit offtake has grown by 16.6% YoY (as of August 9, 2013), which is higher than the 14.9% year-on-year (Y-o-Y) growth recorded in the previous month (on July 12, 2013). The credit growth during the given fortnight could be a one-off phenomenon (driven by the shifting of borrowings from commercial papers [CPs] to bank credit as the rates at the shorter end have increased significantly) and is unlikely to sustain due to the weakening economic growth. However, the fortnight's credit growth is lower than the RBI's projection of 15.0% for FY2014. -
The deposit growth has slowed down to 13.0% YoY (as of August 9, 2013) as compared with the 13.7% Y-o-Y growth recorded in the previous month (on July 12, 2013). The growth in the deposits remains subdued due to the competitive returns offered by the other instruments. The RBI has targeted the FY2014 deposit growth at 14.0%. -
A slower growth in the deposits compared with the advances remains a concern for banks. The credit/deposit ratio for the banks remains at an elevated level of 77.6% (as of August 9, 2013). -
The yield on the government securities (G-Secs; of ten-year maturity) stood at 8.41% on August 21, 2013 and was higher than the average of 7.83% maintained in July 2013. Moreover, the five-year and ten-year G-Sec yields grew by 47 and 33 basis points respectively on a month-on-month (M-o-M) basis. Since mid July 2013, the RBI has announced several liquidity measures to stem the rupee's fall. This has led to a sharp increase in the short-term yields and has also had a spill-over effect on the long-term bond yields. Further, the depreciation in the rupee and the expectation of more stringent measures will maintain the pressure on the bond prices. Equity market: FIIs turn net sellers
During the month-to-date (MTD) period of August 2013 (August 1-20, 2013), the foreign institutional investors (FIIs) were net sellers of equities while the domestic mutual funds were net buyers in the equity market. Banking stocks underperform in August 2013 due to weakening asset quality and jump in bond yields
In the last one month, the BSE Bankex has declined by 15.8% as compared with a decline of 11.0% in the Sensex. The banking stocks underperformed due to rising asset quality pressures (evident in their Q1FY2014 results) and a sharp rise in the bond yields after the RBI's liquidity tightening measures. Though recently the RBI has provided some relief from the rising bond yields (it has allowed the transfer of bonds from the "available for sale" [AFS] portfolio to the "held to maturity" [HTM] portfolio at July 15, 2013 prices; the HTM limit has been raised to 24.5% of the net demand and time liabilities [NDTL] from 23% proposed earlier), but the asset quality remains the sector's dominant concern.
SECTOR UPDATE Telecommunications Slow July; net addition at 1.5 million Key points -
The Cellular Operators' Association of India (COAI) released its subscriber base figures for June and July of 2013 collectively. For June, the incumbents added 2.82 million subscribers; the overall addition was also strong at 3.57 million. Come July, the net addition run rate slowed, and during the month the industry added 1.49 million subscribers on a cumulative basis. -
The overall GSM subscriber base grew by 0.22% on a month-on-month (M-o-M) basis to 672.7 million subscribers in July this year. -
Led by seasonality, the gross additions were slow for the month, as a result Bharti Airtel (Bharti) and Idea Cellular (Idea) added merely 0.48 million and 0.3 million subscribers respectively. -
The top three operators, ie Bharti, Vodafone India (Vodafone) and Idea, cumulatively added merely 0.17 million subscribers. -
For the month, Vodafone saw a negative net addition of 0.61 million (a fall in the overall subscriber base of the company). The company's subscriber base for July stood at 154.42 million. -
Aircel and Uninor reported decent subscriber addition, adding 0.62 million and 0.15 million subscribers during the month. -
On the basis of regions, circle B (constituting Haryana, Kerala, Madhya Pradesh, Punjab, Rajasthan, Uttar Pradesh and West Bengal, saw a decline in its aggregate subscriber base, which dropped by 1.08 million subscribers from 265.7 million subscribers in June 2013 to 264.6 million subscribers in July 2013. -
Despite the low net addition for the month, the top three operators have been accounting for a lion's share of subscriber addition for the past few months, resulting in the consolidation of the subscriber market share in their favour. Overall, the top three players, Bharti, Idea and Vodafone, now account for more than 70% of the subscriber market share and we expect the market share of these operators to continue to consolidate at the expense of the smaller operators.
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. | | | |
No comments:
Post a Comment