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| Summary of Contents | SHAREKHAN SPECIAL Q2FY2015 earnings review
Notwithstanding moderation of earnings growth in Q2, an improving macro-economic scenario supports consensus view of a strong recovery in earnings going ahead Earnings growth of Sensex moderated in Q2; better trend in broader market: The aggregate earnings of the Sensex companies moderated to 6.4% in Q2FY2015. The performance was below expectations of a ~10% growth over Q2FY2014 and well below the healthy double-digit growth reported in the previous four quarters. The sub-par performance was largely contributed by a much weaker than expected performance of Tata Motors; excluding the numbers of Tata Motors the Q2FY2015 results were in line with expectations in spite of a poor performance by public sector heavyweights like Coal India, Bharat Heavy Electricals Ltd (BHEL) and State Bank of India (SBI). On the positive side, there are distinct signs of an improving trend in the performance of many companies outside the BSE500 Index, namely the companies from the chemical, auto ancillary and certain pockets of the engineering and capital goods sectors. Margins remained flat; soft commodity prices boost outlook for margins: The aggregate operating profit of the Sensex companies grew by 5.5% with the aggregate margin largely stable at 18.3% (ex banks) as compared with Q2FY2014. Companies from the pharmaceutical (pharma), telecommunications (telecom) and capital goods sectors saw an increase in their margins while those from the information technology (IT), energy and metal sectors saw a decline in their margins. Going ahead, a decline in inflation, softening of the global prices of commodities (especially crude oil), cost rationalisation and the benefits of operating leverage should boost the margins at the aggregate level. Consensus estimates fined-tuned downwards; hopes pinned on a strong recovery in FY2016: After the Q2FY2015 results, the consensus earnings estimates for FY2015 and FY2016 have been revised downwards by 0.5-1.0% each for the Sensex. However, the consensus is still building an expectation of a strong recovery in the earnings growth in FY2016 (of close to 20% earnings growth over FY2015). We believe that the government would have to fast-track some of the key pending policy initiatives to meet the Street's expectations of a recovery of earnings growth in FY2016. Consequently, the Street would keenly wait for the passage of some important bills (namely the insurance bill, the amendment to land acquisition bill and the Goods & Services Tax bill) in the winter session of the Parliament. Valuations supportive; view constructive (multi-year rally ahead): Notwithstanding the weaker than expected earnings growth in Q2FY2015 driven by the weak performance of a few heavyweight companies, there are clear signs of an economic recovery-driven boost to corporate profits going ahead. The softening of commodity prices, sharp moderation in inflation and easing of bond yields are major positive macro developments of the past few months that are driving the re-rating of the valuation multiples. Consequently, we retain our positive stance on interest rate-sensitive sectors (auto, auto ancillaries, banks & financials) and recommend increasing exposure to the cyclical sectors like engineering and industrials. In terms of valuations, the Sensex trades at 16.0-16.5x one-year forward earnings (close to a 7-8% premium over the long-term average multiple). We remain positive on equities as an investment class, given the expectations of a sustained multi-year rally over the next few years.
SECTOR UPDATE Q2FY2015 Retail earnings review
Muted quarter; stay selective Key points - Barring jewellery players (Titan and Tribhovandas Bhimji Zaveri [TBZ]), the overall revenues of the retail players grew at an average rate of 16%. Titan and TBZ posted a strong revenue growth of 54.3% and 31.7% year on year (YoY) respectively owing to the forced closure of gold deposit schemes that resulted in revenue bookings. An increasing clout of the online retailers had an impact on the profitability and on the revenues too in certain cases (eg Kewal Kiran Clothing Ltd [KKCL] and Raymond) as despite a presence on the online platform, players refrained from offering heavy discounts.
- The overall retail companies in our universe saw their revenue growth averaging at 19-20% YoY. Titan outperformed in revenue growth terms with a top line growth of 54.3% YoY, followed by Page Industries (up 36.5% YoY) and TBZ (up 31.7% YoY). Himatsingka Seide's revenues declined by 7.9% (its European revenues down 34% YoY and US revenues down 2.8% YoY) while Jubilant FoodWorks' revenue growth of 14.8% YoY was a result of new store additions, as the same-store sales growth continued to decline for the third consecutive quarter (down 5.6% YoY during the quarter).
- Margin compression was witnessed across the board owing to various reasons ranging from raw material pricing pressure to increased overheads. Relaxo Footwear, Himatsingka Seide and Shopper's Stop witnessed margin improvement YoY. Going forward, retail players express optimism and confidence with regard to demand, with end-of-season sales and improving consumer sentiment.
- Taking cognisance of the improving sentiment and the demand environment, we believe that players with strong consumer connect and brand equity, deep distribution reach (employing a judicious mix of online as well as store presence) and robust balance sheet are likely to emerge as winners in the next 12-18 months. Their volumes would improve and they would experience operating leverage which would result in a disproportionate growth in their earnings. From our stock universe, we continue with our bullish stance on Relaxo Footwear. In the soft coverage space, we hold a positive stance on Titan, Arvind, and V-mart Retail.
| | 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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