Investor's Eye: Special - Q3FY2014 Capital Goods & Engineering earnings review; Update - Telecommunications; Viewpoint - Britannia Industries

 

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Summary of Contents   SHAREKHAN SPECIAL Q3FY2014 Capital Goods & Engineering earnings review  Key points During Q3FY2014, the sales of our coverage universe showed a mixed performance. Among the large-cap companies, Larsen and Toubro (L&T) continues to outperform the rest while Bharat Heavy Electricals Ltd (BHEL) suffers from a weak demand outlook. In the mid-cap space, some companies exhibited signs of improvement, especially Crompton Greaves Ltd (CGL) as its restructured unit in Europe is recovering. However, the consumer goods companies witnessed some slowdown during this period; the numbers of V-Guard Industries (V-Guard) and CGL's consumer segment indicate the same. Excluding BHEL, the universe grew by 11% YoY and 13% QoQ. Further, the OPM of our coverage universe shows some signs of resilience, down 42BPS YoY and up 326BPS sequentially. This could be early signs of resilience of the margin but the sustainability of the same needs to be observed in the coming quarters.  The decent growth in the order inflow (up 34% YoY) remains the silver lining for the quarter, mainly contributed by the heavyweights like BHEL and L&T. The total order backlog of our coverage universe is 2.4x the book/bill ratio. However, during this period we saw signs of a slowdown in the consumer durable companies, eg V-Guard reported flat sales and CGL's consumer segment grew by 7% YoY only.  We believe the overall macro environment related to the investment cycle remains challenging. We are heading for the general election and currently there are hopes built in investors' mind that a new government would kick-start the investment cycle, boosting the valuation and price of several stocks. While one needs to cautiously watch the development surrounding the election, we keep L&T as our preferred pick in the large-cap space, as it could be the largest beneficiary of any change in the economic environment and is relatively well placed with business as well as geographical diversification.     SECTOR UPDATE Telecommunications Jan net additions grew by 26.1% MoM; Bharti led the pack The Cellular Operators' Association of India (COAI) has released its subscriber base figures for January 2014. For the month, the industry (excluding Reliance Communications [RCom and Tata Teleservices [Tata Tele] both of which also have a CDMA base) added 8.58 million subscribers on a cumulative basis, showing a growth of 26.1% over the previous month. The overall subscriber base grew by 1.24% on a month-on-month basis and is now at 703.4 million subscribers. View  The top three players (Bharti Airtel, Vodafone India and Idea Cellular) collectively hold 71% of the total subscriber market share and over 60% of the revenue market share.  Further, the takeover of Loop Mobile by Bharti Airtel is a step towards consolidation in the telecommunications (telecom) sector, which is likely to witness further consolidation and take-overs going forward.  We believe that an important event of spectrum auction is behind us, further we expect the new entrant (read Reliance Jio) to display rationality in its business, hence we do not expect a disruptive launch from Reliance Jio. These developments coupled with the consolidation drive should augur well for the incumbent players. We prefer Bharti Airtel in the telecom sector.   VIEWPOINT Britannia Industries Still some cream left  Key points Britannia Industries (Britannia) posted a strong operating performance in the first nine months of the current fiscal (with about a 90% growth in the PAT). That is in contrast with the performance of some of the other leading FMCG companies (who are bearing the brunt of a weak consumer sentiment and a slowdown in the premium categories). The strong bottom line growth can be attributed to a strong improvement in the OPM (up about 9% from 6% earlier; driven by an improved revenue mix and strategic actions taken to minimise costs in the past one year). The management is confident of growing the revenues ahead of the industry by improving the distribution reach (especially in rural India) and maintaining the healthy balance of the product portfolio in the coming years. Though competition is a challenge going ahead, but any more improvement in the margin can be a function of the benefits gained through high captive production and efficient supply mechanism. The stock is currently trading at 24x its FY2015E EPS of Rs37.9, which is around 15% discount to the valuation of some of the front-line FMCG companies. Thus, in view of its better growth prospects and strong earnings visibility, we believe Britannia has more upside of about 15% from the current level (despite a strong-run up in the recent past). 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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