Investor's Eye: Update - V-Guard Industries; Viewpoint - Asian Paints; Mutual Gains - Debt Mutual Fund Picks

 

Investor's Eye [January 21, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE V-Guard Industries Recommendation: Hold Price target: Rs490 Current market price: Rs451 Moving to a lower growth trajectory; price target revised down to Rs490  Key points V-Guard reported a flattish revenue growth (YoY) to Rs353 crore due to a sharp drop of 43% in the UPS sales. However, it managed an OPM of 8.2% (up 89 basis points YoY and 15 basis points QoQ) with a better product mix, and lower sales and advertising expenses. Further, with lower tax, PAT grew by 14% YoY to Rs17.5 crore, in line with our estimate.  The management lowered its revenue guidance from 20% to 12% for FY2014, given the slowdown in the consumer durable space (especially UPS and pumps). But it expects to sustain its OPM at around 8.5%.  Though the company ramped up its non-south business and managed its working capital well in Q3, it is moving to a lower earnings growth trajectory (we expect an 18% CAGR in FY2013-15 vs 27% during FY2011-13). Thus, we see no triggers for re-rating in the near future and advise to wait for a better entry point. We retain our Hold rating with a revised price target of Rs490 (16.5x FY2015E).      VIEWPOINT Asian Paints Premium valuation in a weak demand environment Key points Asian Paints' Q3FY2014 performance was below the Street's expectations with the PAT remaining flat at Rs329.4 crore, affected by a 120-basis-point Y-o-Y decline in the OPM and a 73% Y-o-Y rise in depreciation (on account of the commissioning of the Khandala facility).  The domestic decorative paint segment maintained a double-digit revenue growth while the industrial and automotive paint segments continued to reel under pressure in a subdued demand environment. The international business faired well with a strong performance in the Middle-East and Asia. The raw material prices hardened, affecting the gross profit margin. The stock is currently trading at 30.1x its FY2015E Bloomberg consensus EPS (a premium to its historical one-year forward P/E multiple of 26x) in spite of the weak demand environment. Thus, it could underperform the market over the next couple of quarters. Wait for a more favourable entry opportunity. The key risk to our view is a better and unexpected uptick in the demand or softening of raw material prices.  MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up Bond yields rose during the month but found strong support after the central bank surprised markets by keeping key rates unchanged at its mid-quarter monetary policy review. Yields increased on apprehension that the Federal Reserve might soon pare its bond-buying program which in turn could trigger foreign fund outflows from domestic markets. Bond yields continued to move up on concerns ahead of the release of key Consumer Price Index-based inflation data. However, buying by Foreign Institutional Investors (FII) provided some support later during the month. Higher-than-expected consumer inflation data increased the possibility of another rate hike by the central bank. Bond markets got major relief after the central bank kept interest rates unchanged at its monetary policy meet despite higher inflation numbers. However, gains were capped after the central bank did not rule out the possibility of a rate hike in future and said that the next monetary policy decision will depend largely on the upcoming macroeconomic data. The new 10-year benchmark bond yield closed up 8 basis points (bps) at 8.82% compared to the previous month's close of 8.74%. Bond / Debt Outlook Market participants will closely track the consumer and wholesale inflation numbers of December, which are likely to impact the RBI's decision on interest rates at its January policy meeting. In spite of the Federal Reserve's announcement of reducing its asset-purchase program, FIIs remained net buyers in bond markets in December. However, the real impact of the Fed's decision may be felt in January, when the tapering begins. The RBI will conduct the auction of Government Securities for an aggregate amount of Rs. 60,000 crore in the next quarter. The movement of the rupee will also remain in focus. 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.

Regards, The Sharekhan Research Team

 

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