Investor's Eye
[December 18, 2013] | | |
| Summary of Contents
PULSE TRACK RBI prefers to wait for more data, maintains status quo in its mid quarter policy review In a surprise move, the Reserve Bank of India (RBI) preferred to hold on to the key policy rates despite an expectation of a minimum 25-basis-point hike in the repo rate. As a result, the broader market soared with the Bank Nifty climbing by 1.3% and bond yields correcting by 10 basis points intra-day to 8.8%. The RBI justified its stance (a rather soft stance on inflation) as it expects food inflation to drop, given the indications coming from vegetable prices. Additionally, the lag impact of the past rate hikes and slower growth could also exert a downward pressure on non-food inflation. Therefore, the RBI preferred to wait for the forthcoming data. Nevertheless, being mindful of the repercussions of high inflation and volatility in the external environment the RBI reiterated its intention to take necessary action, if required, even on off-policy dates.
Forthcoming data points be key to RBI's action
In the mid quarter review, the RBI articulated that it would rather wait for more data than react to spikes in certain data, especially at a time when growth is under pressure. While the central bank has acknowledged high inflation, it expects the same to moderate, driven by (a) moderation in food inflation (especially vegetable prices); and (b) a dip in non-food inflation led by the lagged impact of the past hikes and a slowdown in growth. In the forthcoming data (ie December consumer price index [CPI]/wholesale price index [WPI]), if the inflation rate does not moderate to the expected levels, the RBI may have to resort to rate hikes again.
Liquidity eases though RBI retains the curbs on LAF
Liquidity has improved in the system as borrowings from the marginal standing facility (MSF) and liquidity adjustment facility (LAF) declined to about Rs40,000 crore vs an average of Rs50,000 crore in November 2013. This was largely driven by increased foreign currency non-resident (bank) flows, term repos and export financing by the RBI (around 1% of the net demand and time liability [NDTL]). However, the money supply (M3) growth of 14% has turned out to be higher than the RBI's expectation of a 13% increase. Therefore, the RBI has not completely removed the curbs on the LAF borrowings while open market operations (OMOs) have been lower, which indicates the RBI's intentions to maintain liquidity in a given range. However, the RBI's comfort has increased on the current account deficit (CAD) front and is better prepared to deal with the tapering by the US Federal Reserve.
Banks unlikely to reduce deposit rates but any softening in bond yields to help banks
While the RBI has held on to rates, the banks are not in a position to cut the deposit rates or the lending rates since the deposit growth itself remains subdued (excluding $26 billion of foreign currency non-residence (bank) [FCNR (B)] flows). However, the bond yields that had climbed to more than the 8.9% levels have softened and are closer to the September 30th level (ie 8.76%) which should help banks. Most of the banks have retained the lending rates and may find it difficult to pass on the rate hikes due to their rising non-performing assets and slower credit offtake. While the banking stocks have reacted positively to the RBI's policy, we maintain a cautious view on the sector as we expect the weak macros to affect banks' earnings.
STOCK UPDATE
Bajaj Auto
Recommendation: Buy
Price target: Rs2,284
Current market price: Rs1,939 Better outlook for FY2015; upgrade to Buy Domestic motorcycle demand to recover in FY2015
After two consecutive years of slowdown (ie FY2013 and FY2014), the domestic motorcycle industry is expected to recover in FY2015, retracting to its long-term compound average growth rate (CAGR) of 10-12%. Favourable macro-economic factors such as higher economic growth, easing of interest rates and stability in fuel prices would lead to the demand recovery. Further, rural income is expected to rise given the expected higher crop output and the increase in the minimum support prices (MSP). The two-wheeler segment derives a significant chunk of revenues from rural areas, about 45%, and is likely to see an increase in the demand.
To regain market share from Q4FY2014 on the back of new product launches and increased capacity
Bajaj Auto Ltd (BAL) has underperformed in the domestic motorcycle industry in the last six months on the back of a decline in the sales of their flagship Discover (executive segment) brand. Its overall motorcycle market share has declined from 24.5% in FY2013 to 21.5% in H1FY2014. The market share loss can be attributed to the increase in competition and the production constraints on the newly launched models.
Over the next six months, BAL has planned new launches in the executive segment to regain its lost market share. Also, the capacity of the newly launched Discover series would be ramped up from January 2014. We expect BAL to gradually regain its market share from Q4FY2014 on the back of new launches and the increase in the production capacity.
Export segment revives; to tap new markets
Export sales had rebounded in the last quarter on the back of a recovery in the demand in Sri Lanka and the Egyptian markets. Further, BAL plans to tap into new markets in Africa and Latin America to ramp up exports. BAL has also commenced exports to the Indonesian market using, its partner, Kawasaki's distribution network.
Valuation-correction offers an entry opportunity
The domestic motorcycle demand is expected to recover in FY2015. Also, the new product launches and increased capacity would enable BAL to regain its market share in the motorcycle space. Further, BAL has witnessed a recovery in the export volumes and plans to enter new markets to boost volumes.
We have broadly maintained our earnings estimates for FY2014 and FY2015. The recent correction in the stock price offers an attractive entry point for investors. Given the favourable outlook, we upgrade our recommendation to Buy with a price target of Rs2,284. BAL remains our preferred pick in the two-wheeler space.
SECTOR UPDATE
Fertilisers Better sales volume; but outlook remains cautious Key points -
Low base coupled with normal monsoon boosts sales volume in non-urea fertiliser segment: During November 2013 sales of non-urea fertilisers were better as compared with urea sales on account of a lower base effect and higher acreage of sowing in the current rabi season (due to humidity in soil and high level of water in reservoir). Though the demand for diammonium phosphate (DAP) is still met largely through cheaper imports, the domestic manufacturers reported strong traction in the sales volume of the other complex fertilisers during the month. The monthly sales of urea declined by 10% during the month. -
YTD sales of non-urea fertilisers remain dull but likely to improve in coming months: The total fertiliser sales have declined by 3% on a year-till-date (YTD) basis as compared with the same period of the last year. Though the sales of non-urea fertilisers improved in October and November 2013, but lower sales in the past six months have affected the overall YTD sales. The sales of DAP and complex fertilisers were lower by 21% and 4% respectively in November this year largely on account of lower imports as mentioned in our previous reports (and also due to a high inventory) whereas the sales of urea increased by 3% on the back of higher indigenous production. Recent key developments
Subsidy payments pick up: The finance ministry has sought additional funds of Rs2,000 crore for providing fertiliser subsidies under the non-plan expenditure head. The ministry has granted Rs10,000 crore under a special banking arrangement (SBA) as sought by the Department of Fertilisers to help the industry tide over the liquidity crunch. The SBA, under which fertiliser companies can take loans against subsidy receivables, would help the industry meet its fund requirements till the time the cash subsidy is released by the finance ministry. The urea subsidy was exhausted after making payments till July, while the provision for non-urea fertilisers will finish by December end after making payments till September. In October 2013 against Rs12,000 crore sought by the Department of Fertilisers, the finance ministry approved Rs5,500 crore under a SBA at an interest rate of 10.7% per annum. The government agreed to bear an interest of 8% per annum with 2.7% interest to be borne by the industry. The total subsidy pending for FY2012-13 is around Rs32,000 crore. Outlook-dull demand and delay in subsidy payments remain as drag; retain cautious stance: We maintain our cautious outlook on the fertiliser sector due to a delay in the payment of subsidy and a continuous increase in the usage of imported gas which is making the situation worse. We believe that demand for urea and non-urea fertilisers in the rabi season will remain on the higher side as compared with the same period of the last year due to higher sowing and a decline in inventories of the non-urea fertilisers. In terms of our preference in the fertiliser sector, we would rather prefer pure urea manufacturer like Chambal Fertilisers and Chemicals (whose valuation has become attractive after a steep correction).
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Regards,
The Sharekhan Research Team | |
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