Investor's Eye
[December 16, 2013] | | |
| Summary of Contents
PULSE TRACK November 2013 WPI inflation: rises to 7.52%; upward revision of September figure to 7.05% is also negative -
The wholesale price index (WPI)-based inflation for November 2013 grew higher than the market estimate as it inched up to a fourteen-month high of 7.52%. Moreover, a 59-basis-point upward revision in the September WPI inflation to 7.05% too acted as a negative surprise. The rise in inflation for November can be largely attributed to the rise in the primary articles and the fuel group inflation, which rose to 15.92% and 11.08% respectively in November 2013. -
Looking at the WPI constituents, the primary articles inflation rose to 15.92% from 14.68% in October 2013, largely on account of a spurt in the prices of food articles, which rose at its highest since July 2010 to 19.93%. The non-food articles inflation too rose to 7.60% (vs 6.79% in October 2013). The manufacturing inflation, which has a weightage of about 65% in the index, rose by 13-basis-points sequentially from 2.50% in October 2013. The fuel group inflation rose by about 75-basis-points and remained at an elevated level of 11.08%. -
On a month-on-month (M-o-M) basis, the WPI reading rose by 0.67% to 181.5 from 180.3 in October 2013. The index of primary articles rose by 1.87% month on month (MoM) to 256.3, while the index of the fuel group and the manufactured products were largely stable at 209.6 and 151.9 respectively. Moreover, the index for food inflation grew by 9.5% MoM to 256.4. Outlook
The WPI inflation climbed to a fourteen-month high in November, driven by a pick-up in the primary and fuel group inflation. The core inflation too increased to 2.7% vs 2.6% in October, indicating a pressure on prices. The consumer price index (CPI) inflation numbers, announced last week, was exceptionally high at 11.24% and the RBI itself had expressed that the level of inflation is uncomfortable. Hence, the market expects the RBI to raise the repo rate by 25-basis-points in the mid quarter policy review (scheduled on December 18, 2013). However, a more hawkish 50-basis-point rate hike would negatively surprise the market.
STOCK UPDATE Marico
Recommendation: Buy
Price target: Rs243
Current market price: Rs209 Price target revised to Rs243 Key points -
Near-term pressure on volume growth of domestic business: Like the other FMCG companies, Marico is also sensing the pressure of weak consumer sentiment (especially in urban India) in most its key product categories. The slowdown in the upgradation of consumers from non-branded to branded products and the cut in discretionary spending have affected the sales volume of the portfolio of its focused brands (including Parachute, Saffola and value-added hair oil portfolio) in the domestic market. The company expects the sales growth to continue to slow unless there is a substantial pick-up in demand in the coming quarters. -
Domestic business growth to improve in FY2015: With the expected softening in the food inflation and an overall improvement in the macro-economic environment, we expect the demand for consumer goods to revive (especially in the urban markets) in the first half of FY2015. Marico has above 55% market share in the branded coconut hair oil market and a strong positioning in the value-added hair oil segment. We believe the volume growth of Parachute coconut oil and value-added hair oil portfolio will recover to its historical trend in FY2015. The improvement in the volume growth would largely be driven by an upgradation in products and increase in rural penetration. Saffola has a strong positioning in the healthy edible oil space. With more and more consumers getting health conscious, we could see people shifting to a healthier version of edible oil in the domestic market. Hence, we expect Saffola to regain its double-digit growth momentum once the inflationary pressures are brought under control. Overall, we might see Marico's domestic business growing in double digits over the next two years. -
Copra prices almost doubled; the company is better placed with low priced inventory: Copra prices have spiked to Rs80 per kilogram in recent times which is almost double on a year-on-year (Y-o-Y) basis. Copra is one of the key inputs for Marico and accounts for close to 40% of its total raw material cost. The company has indicated that it has an inventory of copra (priced lower than the current copra prices) which will suffice for production till December 2013. Also, the company has undertaken an average price increase of 9% in its Parachute portfolio (in two tranches) to mitigate the impact of higher copra prices. Hence, the management is not expecting any significant impact of higher copra prices on the gross profit margin (GPM) in Q3FY2014. On the positive side, in the past few days the copra prices have slid to Rs70 per kilogram (in Kerala) due to a drop in demand. If the downward trend continues, we will not see any significant deceleration in the GPM going ahead. -
Trimming our earnings estimates: We have marginally trimmed our earnings estimates for FY2014 and FY2015 by 5% and 2% respectively to factor in the lower revenue growth and the increase in the price of copra in our earnings estimates. We have also introduced our FY2016 earnings estimate in this note. -
Near-term head winds, long-term growth prospects intact: We expect a strong revival in Marico's revenue growth (a double-digit growth is expected) in FY2015 with an improvement in the overall macro-economic and political environment in the domestic as well as the other key international markets. After the demerger of the Kaya business, the company is now better placed to focus on improving the growth prospects of its domestic as well as international consumer product businesses. On the other hand, the copra prices which had spiked significantly in the past three to four months have softened in the past few days due to a drop in demand. If this trend continues it will ease the pressure on the company's margin going ahead. -
Remains our top pick in the FMCG space: We like Marico in the mid-cap FMCG space on account of its three-pronged strategy of driving growth by growing its product portfolio by introducing new products, expanding into newer markets and undertaking inorganic initiatives in the domestic and international markets. The company can easily leverage on its strong brands to expand its foot prints in the domestic and international markets. Hence, in view of its portfolio of strong brands and better earnings visibility in the long run, we maintain our Buy recommendation on the stock with a revised price target of Rs243 (we roll it over to the average of the FY2015E and FY2016E earnings). At the current market price the stock trades at 30.2x, 24.6x and 20.7x its FY2014E, FY2015E and FY2016E earnings respectively. Greaves Cotton
Recommendation: Buy
Price target: Rs85
Current market price: Rs64 Engineering growth amid slowdown Key highlights Demand pressures to sustain in the near term
In H1FY2014, GCL revenues remained flat on a year-on-year (Y-o-Y) basis. The unfavourable macro-economic environment in form of low economic growth and higher interest rates has impacted the demand in the key user segments (automotive and construction equipment which form about 70% of the overall demand). With not much improvement in the macro-economic conditions, GCL expects the demand pressure to sustain over the next two quarters. We expect GCL to a report revenue growth of 2% in FY2014. New product launches and customer additions enable it to gain market share amid slowdown
Despite the sluggish sales in the key user industries, GCL has managed to gain a market share on back of new product launches. GCL has recently introduced products in the gensets, construction equipment and the automotive segment, which has helped it to sustain revenues despite the challenging macro environment. The new products have enabled GCL to increase its market share in these segments.
GCL has recently added TVS Motors to its client list. GCL would supply diesel engines to the TVS King range of three wheelers. Currently, the volumes for TVS Motors are small at 500 units per quarter, but are expected to ramp up going forward. Also, GCL indicated it is ready with the Quadricycle engines and in talks with OEMs for their supply. Focus shifts on margin improvement; to reduce working capital
One off charges (bad debts in subsidiary and inventory write-off) impacted the Q2FY2014 margins by 110-basis-points. Adjusting for these factors, the margins improved by 50-basis-points on a sequential basis. GCL plans to continue the ongoing cost control initiatives and focus on value engineering to curtail costs. We expect GCL margins to improve in H2FY2014 (the margin is expected at 13% in H2FY2014 as against 11.6% in H1FY2014).
Further, GCL plans to reduce the working capital by controlling the increase in the inventory and debtors. The reduction in the working capital would improve the cash flows for the company.
Valuation-re-rating candidate; Buy maintained: Though the demand would remain subdued in the immediate future, the company has effectively negotiated the slowdown this time around with a focus on introducing new products and penetrating into new large customers. Further, the revival in economy and the focus on margin improvement would improve the earnings in FY2015 and beyond. Thus, we believe that the company is well placed to ride the revival in demand and makes it as one of our preferred pick in the mid-cap space. We maintain our Buy recommendation on the stock with a 12-month price target of Rs85 (and see scope for significant re-rating once the demand from the automobile OEMs pick up and the general business conditions improve going ahead).
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Regards,
The Sharekhan Research Team | |
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