Investor's Eye: Update - Cipla; Sector Update - Q1FY2015 FMCG earnings review

 

Investor's Eye [August 18, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Cipla Recommendation: Hold Price target: Rs495 Current market price: Rs470   Strong Q-o-Q growth instills confidence, price target upped to Rs495; but Hold    Key points  Cipla reported a weaker performance in Q1FY2015, as reflected in a moderate 8% growth in net sales, a 754-BPS decline in the OPM and a 39% drop in the adjusted PAT. On a Y-o-Y basis the Q1 performance was weaker mainly because of a high base and the rationalisation process that is being implemented in different regions.  Excluding the one-offs, the underlying sales growth stood near 15% during the quarter. The company also witnessed a stronger traction on a Q-o-Q basis, as reflected in an 8% growth in sales, a 370-BPS expansion in the margin and a 13% growth in the net profit.  A healthy 17% growth in the Indian formulation market, winning of a new tender in South Africa, cutting of the working capital cycle by 20 days and the launch of two key products in Europe were a few positives of the quarter.  The management has maintained its growth guidance of "mid-teen" sales growth and over 20% OPM for FY2015 which indicates H2FY2015 shall be stronger. We maintain our estimates but raise the price target by 5% to Rs495 (20x FY206E EPS). However, owing to a limited upside from the current levels, we downgrade our rating on the stock to Hold.     SECTOR UPDATE     Q1FY2015 FMCG earnings review   Key points The volume growth of the FMCG companies remained muted in Q1FY2015 as well, though the pressure on the sales volume is showing signs of easing out. The relatively smaller companies (like Bajaj Corp) reported a low single-digit decline in volumes in Q1FY2015 (compared with a double-digit dip in the previous quarter). On the other hand, FMCG companies with a strong product portfolio and extensive reach, like HUL, Marico and Britannia Industries, reported a higher than expected growth in sales volume during the quarter.  Despite the firming up of raw material prices, the margins of most of the companies under our coverage were largely stable barring ITC (where the profitability of some non-cigarette businesses was quite weak).  In terms of outlook, Q2FY2015 is likely to see a higher consumer offtake due to an early arrival of the festive season (falling in the period of August-October 2014) and an increase in the promotional spending by the FMCG companies. Further, if food inflation eases out substantially in the coming months, we might see an improvement in consumer sentiment and a consequential uptick in the demand environment.  Despite signs of easing pressure on sales volume and expectations of a better performance in H2FY2015, the premium valuations of the FMCG companies make the FMCG counter unattractive. However, we continue to have a positive stance on stocks like ITC, Marico and Jyothy Laboratories in view of the good visibility of their earnings in the long run.  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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