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| Summary of Contents | RAILWAY BUDGET SPECIAL Rail Budget 2014-15: Grand vision; but lacks specifics Key points - The first railway budget of the Narendra Modi government is focused on course correction, modernisation and development of the railway infrastructure. But the budget speech sounded more like a vision document and seemed to lack clarity on specifics. Thus, it threw up a lot of unanswered questions and perhaps caused disappointment to the stock market.
- The railway budget for FY2014-15 is seen as a curtain raiser to the Union Budget for FY2014-15. As highlighted by us in the pre-budget report, the market would look for concrete and specific proposals. It is time to walk the talk and investors are looking for specific details of the roadmap to achieve the grand vision of development that was very effectively communicated by the Bharatiya Janata Party throughout its election campaign and in its manifesto.
- Having said this, we would like to highlight two points: one, we believe in the government's ability to deliver, though not at a speed that seems to have been built in by certain sections; two, the union budget is likely to be more specific on details related to the proposals to revive the economy and the investment cycle, as well as the way of raising resources for infrastructure development in the country.
- Lastly, the quarterly results could also underscore the fact that the corporate earnings are going to take a few quarters to recover and could further add to volatility in the near term. However, we see pull-backs as healthy and part of a corrective phase in the multi-year rally that the Indian equity market has begun.
SECTOR UPDATE Q1FY2015 Auto earnings preview Key points - The automobile companies (ex Tata Motors) are expected to report a high single-digit revenue growth largely led by the two-wheeler manufacturers. TVS Motor Company and Eicher Motors are expected to be at the top of the pack in terms of growth. An impressive, nearly 30%, increase in the Jaguar Land Rover volumes is expected to fuel another bumper quarter for Tata Motors. Auto ancillary companies too are expected to post a healthy double-digit growth.
- The margins of the original equipment manufacturers (ex Tata Motors) are expected to remain largely flat YoY. TVS Motor Company, Ashok Leyland and Eicher Motors are expected to report a sharp margin expansion. TVS Motor Company (incremental volumes from Jupiter), Eicher Motors (an impressive growth in the motorcycle segment, ie Royal Enfield) and Tata Motors (a strong growth in the Jaguar Land Rover business) are expected to report a 50% plus growth in net profit.
- We continue to prefer Maruti Suzuki and Mahindra & Mahindra in the four-wheeler space. In the two-wheeler space we prefer Hero MotoCorp and TVS Motor Company. In the commercial vehicle industry we like Ashok Leyland and in the ancillary space we like Apollo Tyres and Gabriel India.
Q1FY2015 FMCG earnings preview Key points - Sales volume to remain under pressure, revenue growth would be function of price hikes: The first quarter of FY2015 would not see any major improvement in the sales volume of the FMCG companies with inflationary pressures remaining high and consumer sentiment remaining weak (in both urban and rural markets) during the quarter. Having said that, the volume growth of the key FMCG companies is not expected to drop sequentially but stay in line with that of Q4FY2014. The revenue growth would remain in the range of 12-16% for most in Q1FY2015, largely driven by price increases undertaken in the recent months.
- Higher raw material prices to dent GPM, OPM to remain low: The prices of some of the key inputs continued to move up and are expected to dent the GPM of the FMCG companies in Q1FY2015. Marico would see a decline of close to 700BPS in the GPM due to a spike in the copra prices while Godrej Consumer Products, GlaxoSmithKline Consumer Healthcare, Bajaj Corp and Tata Global Beverages would see a drop of 100-150BPS in the GPM. We might see a cut in the advertisement and other expenditure of the FMCG companies. But overall, we expect the OPM to be lower YoY in Q1FY2015.
- Weak monsoon poses a challenge; budget keenly awaited: With various government agencies predicting a weaker monsoon this year, the outlook remains bleak for the FMCG companies, as inflationary pressure would continue to affect consumer spending. However, it is too early to comment on the monsoon threat, as the July-August rainfall (essential for kharif crop) would be keenly monitored. Also, the upcoming union budget would be keenly monitored, as expectations are the government might increase the tax slab and provide some incentives to the common man to boost consumer spending.
- Remain selective: With more and more investors shifting to industrial and capital goods stocks, the FMCG stocks remain less favoured amongst the investors. Also, most of the FMCG companies are trading at their premium valuation which limits the options in the basket. We like ITC on account of its strong balance sheet and better earnings visibility (a knee-jerk reaction to any adverse tax proposal could provide a better entry opportunity). In the mid-cap space, we like Jyothy Laboratories and Britannia Industries due to a decent upside and expectation of a better operating performance.
Q1FY2015 Cement earnings preview Key points - In Q1FY2015 the aggregate revenues of cement companies under our coverage (active and soft) are likely to show a growth of 10.4% largely supported by a volume growth and a higher blended price realisation due to an improvement in the demand environment. The blended realisations are likely to be higher by 2.5-3.0% especially for companies in the north, west and south.
- Driven by a higher blended realisation per tonne and a better utilisation level, the operating profit margin is expected to firm up by 226BPS on an aggregate basis. But higher interest and depreciation (resulting from the commissioning of new capacities) charges could limit the growth in the earnings.
- Though the cement stocks could correct or consolidate after the sharp re-rating seen in them in the past couple of months, but we see a structural up cycle in the cement sector driven by an improving demand environment and price discipline among cement manufacturers. We have a positive stance on UltraTech Cement, Shree Cement and JK Lakshmi Cement, and see price corrections as an opportunity to accumulate these stocks.
| | 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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