Investor's Eye: Special - Q4FY2014 Auto earnings preview, Q4FY2014 Banking earnings preview, Q4FY2014 FMCG earnings preview

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Investor's Eye [April 04, 2014]  Sharekhan www.sharekhan.com

Summary of Contents    SHAREKHAN SPECIAL   Q4FY2014 Auto earnings preview     Key points Automobile companies (ex Tata Motors) are expected to report another quarter of muted revenue growth in Q4FY2014. We expect the automobile original equipment manufacturers (OEMs; ex Tata Motors) to report a 1.8% Y-o-Y decline in the revenues owing to the lower volumes. The auto ancillary players, especially in the bearing segment, are expected to post a healthy double-digit revenue growth. The margins for OEMs are expected to remain flat on a sequential basis. The commercial vehicle manufacturers, although the bottom line still being in the red, are expected to improve their performance on a Q-o-Q basis given an uptick in the volumes. Eicher Motors (on the back of the motorcycle business i.e. Royal Enfield) and Tata Motors (given the growth in the Jaguar Land Rover business) are expected to report strong results. We continue to prefer Mahindra and Mahindra (M&M) and Maruti Suzuki India Ltd (MSIL) among the stocks in our active coverage. In the two-wheeler space, we prefer Hero MotoCorp and TVS Motor. In the auto ancillary space we like Apollo Tyres and Suprajit Engineering.     Q4FY2014 Banking earnings preview    Key points Within our banking coverage universe, we expect a reasonable 14.4% growth in the net interest income though private banks are expected to report a slightly slower growth in Q4FY2014 vs previous quarters. However, owing to a carry over of the marked-to-market losses on investment, higher employee related expenses and NPA provisions, the earnings of public sector banks (PSBs) may continue to decline on a Y-o-Y basis (down 22% YoY vs a 10% growth expected for private banks). While slippages are likely to stablise (compared with the past quarters), the restructured loans continued to mount owing to a higher restructuring pipeline with the banks. The private banks too are likely to witness some stress on the asset quality though they will continue to maintain an edge over PSBs and a higher provision coverage adds to their comfort.  An expectation of a revival in the economy, favourable election outcome and an extension of the implementation of the Basel-III norms , the banks have outperformed the markets. While challenges remain for the sector, we take a view based on the expectations of a stable government which will to push economic growth and may even resolve the capitalisation issue of PSBs. We are largely positive on private banks though the valuation of about 0.6x FY2016 book value is reasonable for larger PSBs. We prefer ICICI Bank and Federal Bank among private banks, Bank of Baroda (BoB) among PSBs and LIC Housing Finance among NBFCs.      Q4FY2014 FMCG earnings preview     Key points Volume growth moderates in Q4 as well; extent of revival dependent on monsoon: The persistent inflationary pressure and moderation in the demand continued in Q4FY2014. Though the demand is expected to bottom out and gradually revive in FY2015, we believe the extent of the improvement would depend on the monsoon rains. A severe shortfall in the rainfall due to the El Nino effect could keep the demand environment tough for the consumer companies.  Cost pressure and higher promotional spending to affect profitability: The recent surge in the prices of some of the key inputs, such as copra, palm oil, LAB, caustic soda, coffee and milk, would put pressure on the gross profit margin of the FMCG companies in Q4FY2014 (in the absence of any significant price hike). Further, with the advertisement spending remaining high during the quarter, the Q4 margins shall be adversely affected on a Y-o-Y basis.  Remain selective: In view of the demand uncertainties and premium valuation of the FMCG stocks, we retain our selective stance on the sector. We prefer ITC, Jyothy Laboratories and Britannia Industries from the investment perspective.    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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