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PULSE TRACK RBI hikes repo rate by 25 basis points but eases short-term liquidity keeping festive season in mind -
In the second quarter monetary policy, the Reserve bank Of India (RBI) has raised the repo rate by 25 basis points in line with its concerns related to the elevated level of consumer and wholesale inflation. At the same time, the RBI has reduced the marginal standing facility (MSF) rate by 25 basis points and has taken additional measures to ease the short-term liquidity by raising the borrowing limits by the banks (in the 7-day and 14-day repo window to 0.5% instead of 0.25% of the net demand and time liabilities [NDTL]), which has cheered the market. The RBI governor has done well to manage the expectations and has narrowed down the corridor between the repo rate and MSF rates to 100 basis points, indicated earlier as a part of the unwinding of the unconventional measures taken in July to arrest volatility in the currency market. In the review, the RBI has highlighted its focus on inflation (including consumer inflation) and the commentary does not rule out the possibility of another 25-basis-point rate hike depending upon the data releases in the coming months.
STOCK UPDATE Marico
Recommendation: Buy
Price target: Rs236
Current market price: Rs211 Price target revised to Rs236 Marico's Q2FY2014 financials have been restated to exclude the financials of Kaya, which is being demerged into a separate entity called Marico Kaya Enterprises (MaKE) with effect from April 1, 2013. Result highlights -
Volume growth tapered down to mid-single digits: Marico's consolidated revenues grew by 4.7% year on year (YoY) to Rs1,118.4 crore, driven by a muted volume growth of 4% in Q2FY2014. The volume growth tapered down to 4% in Q2FY2014 from ~10% in Q1FY2014 largely on account of the persistent inflationary pressures affecting the growth rate of most of the segments for the company. Also, the primary sales in Q2FY2014 were lower on account of a one-time correction of stocks in trade at the distributor's level. Parachute rigid packs recorded a volume growth of 1%, while Saffola edible oil and value-added hair oil portfolio reported a volume growth of 7% and 15% respectively during the quarter. The revenues of the international business grew by 14% YoY in Q2FY2014, driven by a favourable exchange rate impact of 11% YoY. -
Enhanced profitability boosted the bottom line: The copra prices were up by close to 30% YoY, while some of the other key inputs such as kardi and rice bran oil were lower by 21% YoY and 15% YoY respectively during the quarter. Despite the higher copra prices, Marico's consolidated gross profit margin (GPM) improved by 150 basis points YoY to 50% in Q2FY2014, which we believe is mainly due to the efficient buying of raw material and holding inventory at lower prices. This along with ~200-basis-point decline in the advertisement spends as percentage to sales resulted in a 214-basis-point year-on-year (Y-o-Y) improvement in the operating profit margin (OPM) to 15.1%. The operating profit grew by 22.1% YoY to Rs168.5 crore during the quarter. This along with the lower interest expenses resulted in a 26% Y-o-Y growth in the profit after tax (PAT) after minority interest to Rs105.9 crore. -
Management expects volume growth to pick up in second half: In Q2FY2014, the primary sales volume growth for Marico stood at 1% due to a one-time stock correction at the distributor's level. However, the secondary sales volume growth was ~9% during the quarter. The management expects to witness a volume growth in the range of 8-9% in the second half of the year (with rural growth expected to remain strong and lower base of H2FY2013). Also, the company has taken price increases of around 9% in Parachute and about 6% in the value-added hair oil portfolio, which should improve the overall revenue growth for the company in the second half of the fiscal. -
Higher copra prices to dent margin in H2FY2014: The copra prices are currently trading at above 60% in the domestic market. The management expects the copra prices to cool off in January-February 2014. Though the management has taken a 9% price increase in Parachute, we don't expect it to entirely mitigate the impact of inflation in the copra prices. Hence, we might see the GPM coming under some pressure in the second half of the fiscal. However, the management has guided the advertisement sales to stay at around 12%, which will not put much pressure on the OPM. -
Outlook and valuation: We have revised our earning estimates for FY2014 and FY2015 to factor in the exclusion of the demerged entity, Kaya, from the consolidated business. Kaya was the lost-making entity at the operating level and because of its exclusion from the consolidated entity, we will see a better margin picture for Marico's consumer business (includes domestic and international fast moving consumer goods [FMCG] business) in the coming years. In terms of the domestic consumer business, the management has emphasised on enhancing reach in rural India to drive the future growth. Also, they would be focusing on innovation in its portfolio to achieve a consistent growth in the long run. We believe with the demerger of Kaya, the company would be better placed to focus on its core consumer business in the domestic and international markets.
In line with the revision of our earning estimates, we have revised our price target to Rs236 (valuing the stock at 26x its FY2015E earnings per share [EPS] of Rs8.7, which is 13% discount to the target multiple of Hindustan Unilever Ltd [HUL]). We maintain our Buy recommendation on the stock on account of its better earnings visibility of about 20% over the next two years. Also, the investors of Marico would get one equity share of MaKE for every 50 shares held of Marico, which will enrich their overall investment in the company. At the current market price, the stock trades at 28.7x its FY2014E EPS of Rs7.3 and 24.2x its FY2015E EPS of Rs8.7. Gateway Distriparks
Recommendation: Buy
Price target: Rs140
Current market price: Rs117 Price target revised to Rs140; rail division surprises; CFS still lags behind Result highlights Higher realisation but lower volume and margin at JNPT CFS affect stand-alone profitability
In Q2FY2014, Gateway Distriparks Ltd (GDL) reported a 19% decline in its stand-alone net profit on account of a decline in the earnings before interest, tax, depreciation and amortisation (EBITDA) margin by 212 basis points from 42.8% in Q2FY2013 to 40.7% in Q2FY2014. The EBITDA margin remained almost flat at 40.7% on a quarter-on-quarter (Q-o-Q) basis. However, the revenues grew by 9% year on year (YoY) to Rs50.3 crore on account of a 13% increase in the realisation, though the volume shrunk by 4% at the Jawaharlal Nehru Port Trust (JNPT). On a sequential basis, the realisation grew by 7% while the volume declined by 3%. Strong performance by the rail division led to higher than estimated consolidated revenues
The consolidated revenues stood at Rs250 crore, which is above our estimate. The revenues grew by 16% YoY and by 2% quarter on quarter (QoQ). The cold chain division witnessed a 34% growth in the revenues at Rs35 crore on account of capacity addition. On the other hand, the rail division saw a decline of 2% YoY in the volume but a 22% increase in the realisation, resulting in a revenue growth of 20% YoY. In the other container freight stations (CFSs), the Chennai, Vishakhapatnam and Kochi CFSs together saw a growth of 12% YoY in their volume (up 5% QoQ), which along with a 15% decline in the realisation (down 9% QoQ) led to a 5% year-on-year (Y-o-Y; 14% sequential) growth in the revenues. Consolidated PAT higher on account of lower effective tax rate
The consolidated profit after tax (PAT) is above our estimate on account of higher than expected revenues and a lower effective tax rate (ETR) during the quarter. The ETR for the quarter stood at 12.3% as against 26.3% during Q2FY2013 and 15.2% during Q1FY2014. The profit for the quarter rose by 13% YoY to Rs33.7 crore. Maintain Buy with revised price target of Rs140
We have revised our earnings estimates for FY2014 and FY2015 after factoring in the lower CFS volume and higher interest expenditure. Consequently, we have revised our price target to Rs140 but maintained our Buy rating on the stock. We continue to have faith in GDL's long-term growth story based on the expansion of each of its three business segments, ie CFS, rail transportation and cold storage infrastructure. Also, a revival in the EXIM trade would augur well for the company. At the current market price, the stock trades at 9.9x and 8.7x its FY2014E and FY2015E earnings.
SHAREKHAN SPECIAL Q2FY2014 IT earnings review
Performance delivered in a seasonally strong quarter -
Impressive performance in a seasonally strong quarter: After a decent June quarter, the numbers for the September 2013 quarter of the top four Indian information technology (IT) companies broadly met all the parameters of Q2 being a seasonally strong quarter. While Tata Consultancy Services (TCS) and HCL Technologies (HCL Tech) continued to deliver consistent good results, Infosys positively surprised all with a solid top line performance. On the other hand, Wipro's improved revenue growth trajectory and encouraging management outlook gave further signs of a secular revival of demand. The aggregate sequential revenue growth of the top four IT companies was at 4.2% (2.8% in the June quarter) and the highest in the last seven preceding quarters. During the quarter, our preferred picks in the top tier IT companies are TCS and HCL Tech which continue to outperform the broader market indices and also the CNX IT index with a return of 30% and 44% (49% and 89% return in the last one year) respectively. On the other hand, our mid-cap pick Persistent Systems delivered a return of 26% in the last three months (49% in the last one year). -
Management maintains consensus on secular demand green shoots: In continuation of the overall management commentary witnessed in the June 2013 quarter, the Companies managements in the September 2013 quarter too maintained a consensus on improving green shoots in the demand environment led by an overall improvement in the US regions and some pockets of Euro zone. TCS continued to witness broad-based growth opportunities in its traditional service lines as well as in the discretionary portfolio, while Infosys' management having a clear departure from its earlier 'cautiously optimistic' view and gave a much more optimistic picture of the demand environment (also reflected in the increase in guidance to 9-10% from 6-10% earlier). HCL Tech too witnessed a growth traction in its targeted re-bid segment and the infrastructure managed services (IMS) line (33% of revenues), which continued to remain a sweet spot. Moreover, the $4 billion deal pipeline justifies the positive stance of the management. On the other hand, Wipro's guidance for Q3FY2014 (1.8% to 3.6% in dollar terms) remained almost at the same level as that of Q2FY2014 despite December being a seasonally weak quarter, which reflected in the company's positive outlook. -
US immigration reform bill a structural overhang on the sector, though unlikely to get a clear passage soon: The immigration bill agenda, which had taken a back seat in October 2013 due to the US parliamentarians trying to strike a deal to end the shutdown and to avoid a possible US default by raising the debt ceiling, is back in focus now. The House of Representatives is expected to meet during the first week of November 2013 to discuss the immigration agenda. Though the absence of consensus among the parties will restrict the blanket passage to the comprehensive immigration bill for anytime soon. Further, an increase in the lobbying efforts from the Indian IT incumbents and also from some US IT companies (IBM) will help to dilute the final version of the bill. Though the bill overhang could exert some pressure on the stock performance in the near term, the price correction if any in the due course could be best used as a buying opportunity especially in the top four IT companies for a decent return in the next 12 months. -
Valuation-positive stance maintained: We have been maintaining a positive stance on the IT sector since the last two years with our preferred bets being TCS and HCL Tech in the tier I IT companies and both have delivered exceptional returns of 95% and 179% respectively. We continue to maintain our positive stance on the sector driven by the improving business visibility and also supported by the currency tail winds. All the top four Indian IT companies (Infosys, TCS, HCL Tech and Wipro) now stand with a Buy recommendation as they are well placed to capture opportunities offered by the improving operating environment in the key geographies like the USA and Europe (expected to witness more secular recovery in FY2015E). Though our preferred bets continue to remain TCS and HCL Tech, we have added Infosys to the conviction list. In the mid-cap space, we like Persistent Systems and CMC.
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