Investor's Eye: Update - Bajaj Auto; Special - Q3FY2014 FMCG earnings review, Q3FY2014 Cement earnings review; Mutual Gains - Debt Mutual Fund Picks

 

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Summary of Contents   STOCK UPDATE Bajaj Auto  Recommendation: Buy Price target: Rs2,072 Current market price: Rs1,846 Readjusting estimates to factor in lower export volumes; price target revised to Rs2,072 Key points  After facing disruption in the exports to Sri Lanka and Nigeria, Bajaj Auto has been hit by the decision of the Egyptian government to impose a one-year ban on the import of two- and three-wheelers. Egypt constitutes about 9% of the exports and 4% of the overall volumes; consequently, we have revised our export volume assumptions for FY2014 and FY2015. In the domestic market, Bajaj Auto has been unable to hold its market share due to heightened competition. Moreover, the company has also lagged its peers due to a growing shift towards scooters recently. However, the company has realised its mistake and accordingly repositioned the Discover brand. However, it would take time to reflect in the volume numbers and hence gaining market share would be a challenge. We have revised down our price target to Rs2,072 (in line with the revision in the earnings estimates). But we maintain our Buy rating as the stock has already corrected owing to the concerns mentioned above. Given the challenges facing Bajaj Auto in the immediate term (including a wage settlement with workers), we prefer Hero MotoCorp (not rated; purely on relatively higher volume growth, presence in scooter segment and enhanced focus on exports) in the two-wheeler space.       SHAREKHAN SPECIAL Q3FY2014 FMCG earnings review Key points Given the tough macro conditions, FMCG companies continued to witness moderation in the demand environment with the tapering of volume growth in some of the premium/discretionary categories. A higher promotional and advertisement spending, affected the profitability of most of the companies.  Beating the trend were companies such as GlaxoSmithKline Consumer Healthcare, Jyothy Laboratories, Dabur India and Britannia Industries, that managed to post a reasonably strong performance in an uncertain demand environment due to their niche and better market positioning in some of the faster growing segments.  In terms of the outlook, we believe that the revival of demand is still a few quarters away. Moreover, we expect the profitability to remain under pressure due to recent inflation in commodity prices and sustained high media spending in the near term. Thus, we retain our cautious view on the sector and it is better to be very selective. ITC remains our top pick in the large cap FMCG space (due to its strong cash generation ability and discounted valuation compared with the large-cap peers) while we continue to have a positive stance on Marico and Jyothy Laboratories. Dabur India (on account of a better earnings visibility) and Britannia Industries are two other stocks that are not under our active coverage but on which we have a positive view.    Q3FY2014 Cement earnings review  Key points Despite a subdued demand environment, the cement companies under our coverage reported a marginal growth in revenues. Pan-India players, like ACC, Ambuja and UltraTech reported a decline in the volume sales. Whereas, regional players, like Shree Cement and Ramco managed to show a growth in volumes by sacrificing on the average realisations. The higher power and fuel (up 5% excluding Ramco) cost, and freight cost (up 9%) contracted the OPM (down 350BPS), while the realisations remained under pressure. Consequently, the operating profits decline by  19% YoY.  We expect the cement industry to continue with an overhang of oversupply situation in the key markets due to unfavourable macro economic conditions. Consequently, we have retained our cautious stance on the sector and do not have a Buy rating on any stock. However, the regional players (Ramco and Shree Cement) are trading at a higher discount to the pan-India players may offer an opportunity for long-term investors.  MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up Bond markets started on a positive note on the back of value-buying and fall in global crude oil prices. The falling trend of bond yields continued as slowing headline inflation and contraction in industrial production increased the probability that the RBI will keep policy rates on hold. Bond markets got further support on the back of strong demand at every weekly Government Securities auction during the month. However, the trend reversed on profit booking as investors trimmed positions ahead of the RBI's monetary policy review. Moreover, a RBI panel suggested that Consumer Price Inflation be made a priority while deciding on monetary policy measures. This increased the possibility of a sustained period of high interest rates, which hit bond markets further. Although bond yields surged after the RBI unexpectedly hiked key policy rates, but the movement reversed soon as the monetary policy statement turned out to be more dovish than anticipated. Bond yields also rose on concerns over foreign fund outflows after the Federal Reserve further reduced its monthly bond-buying program. After moving in the range of 8.52% to 8.84%, the 10-year benchmark bond yield closed 5bps down at 8.77% compared with the previous month's close of 8.82%. Bond / Debt Outlook The RBI's next monetary policy will be held after two months, so the major trigger for the bond market could be the Government's fiscal consolidation. In the remaining two months of the fiscal year 2013-14, the Government's major sources of revenue might come from collection of spectrum auction and PSU stake sale. Consumer inflation numbers will be tracked closely as it is likely to impact the RBI's decision on interest rates going forward. Activities of foreign investors will also remain in focus, especially after the Fed reduced its monthly bond-buying program for the second time. 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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