Investor's Eye: Special - Interim budget 2014-15 (High on intent, as expected); Update - Relaxo Footwear, Punj Lloyd, Automobiles

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Summary of Contents     SHAREKHAN SPECIAL Interim budget 2014-15 High on intent, as expected While presenting the budget for FY2014-15 (vote on account-interim budget), the last of the United Progressive Alliance-II government, the finance minister tried to manage market expectations relating to the containment of the twin deficits and the goal of a higher growth (6% for FY2015). The tweaking of the indirect tax rates in favour of some sectors like automobiles (auto), fast moving consumer goods (FMCG) and capital goods could be seen as a last ditch attempt to address the concerns that have been triggered by the economy's slowdown. Though the budget has set a tall target for growth and deficits, but it has failed to touch the problems of several other sectors and the structural problems on both the revenue and expenditure fronts. Within its constraints, the interim budget does touch upon some issues but going ahead, the market's focus will shift to the other events, mainly the general election and global cues. Highlights The gross domestic product (GDP) growth is estimated at 4.9% for FY2014 which implies a growth of at least 5.2% for Q3 and Q4 of FY2014. The fiscal deficit (FD) is estimated at 4.6% for FY2014 (vs the budgeted target of 4.8%) and is pegged at 4.1% (Rs5.24 lakh crore) for FY2014. The FD target for FY2017 is 3% of the GDP. The revenue deficit is estimated at 3% for FY2015 vs 3.3% in FY2014. The government expects a 19% growth in its tax revenues and Rs56,900 crore from divestment proceeds (vs Rs25,800 crore in FY2014). For FY2014 the current account deficit is estimated at $45 billion, which is significantly lower than $88 billion in FY2013. The planned expenditure for FY2015 has been maintained at FY2014 levels while the non-planned expenditure has been pegged slightly higher at Rs12.08 lakh for FY2015. The gross borrowings of the government are pegged at Rs5.97 lakh crore (lower than the expectations of Rs6.25 lakh crore), which is slightly higher than the revised figure of Rs5.63 lakh crore in FY2014. However, the net borrowings are pegged at lower than the FY2014 figure of Rs4.57 lakh crore. It envisages capital infusion of Rs11,300 crore (vs Rs14,000 crore in FY2014) in the public sector banks (PSBs). STOCK UPDATE Relaxo Footwear Recommendation: Buy Price target: Rs300 Current market price: Rs265 Upgraded to Buy with a revised price target of Rs300 Key points  Despite the slowing growth in most consumer segments, Relaxo Footwear (Relaxo) managed to sustain its growth momentum in Q3FY2014 with a revenue growth of 16.2% accompanied by an improvement in the margin and a stupendous growth of 77% in the earnings. Our meeting with the management provided us the confidence that Relaxo can potentially sustain its growth momentum. First, the low-cost branded footwear segment is growing at a healthy rate driven by uptrading from the unorganised segment. Moreover, Relaxo is leveraging on its brand strength (advertising push with leading movie stars as brand ambassadors to further increase its market share and grow at higher than industry growth rate). Thus, we are estimating an average annual earnings growth of 30% for FY2013-16. While the stock price has doubled in the last 28 months since we initiated our coverage (September 10, 2012) on the company, Relaxo still trades at a 25-30% discount to its peers in spite of the strong earnings growth outlook. Consequently, we are upgrading our rating on the stock from Hold to Buy with a revised price target of Rs300 (valued at a 20% discount to Bata India at 18x FY2016E earnings). Punj Lloyd Recommendation: Reduce Price target: Rs21 Current market price: Rs26 Another quarter disappoints; Reduce rating with a price target of Rs21 Key points  Punj Lloyd posted another weak quarter led by a lower execution in the overseas business (South Asia) and cost inflation (the provisioning of Rs100 crore in the Indonesian and Malaysian subsidiaries) aided by a higher debt burden (a gross debt of Rs6,735 crore) leading to a consolidated net loss. The order inflow remains weak during 9MFY2014 (the current order book at Rs18,852 crore, 1.7x FY2013 revenues). The debt-equity ratio (including the working capital debt) stands close to 3x and the company continues to face execution issues in Libya and at some other overseas geographies. Punj Lloyd is in a difficult situation where the management is restructuring the business in an already tough macro environment and high debt-equity ratio. Thus, the immediate outlook remains uncertain with expectations of a weak financial performance. Consequently, we retain our cautious stance on the stock with a Reduce rating and price target of Rs21 (EV/EBITDA of 6x). SECTOR UPDATE Automobiles Excise duty reduction provides relief to the automotive sector Key points The government provided relief to the automotive sector by reducing the excise duty by 4-6% across the segments (two-wheelers, cars, utility vehicles and commercial vehicles). Though the proposal pertains only for four months (till June 2014), it would only aid in arresting the declining trend in some of the segments rather than act as a catalyst for reviving the volume growth in the automotive sector.  M&M and Maruti Suzuki remain our preferred picks in the automotive space; prefer Hero MotorCorp in the two-wheeler segment. 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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