Investor's Eye
[September 16, 2013] | | |
| Summary of Contents
PULSE TRACK August 2013 WPI inflation rises to 6.10% -
The Wholesale Price Index (WPI)-based inflation for August 2013 rose above the market estimate as it inched up to a six-month high of 6.10%. The sequential increase in inflation was largely attributed to the rise in the primary articles, which increased to 11.72% from 8.99% in July 2013. The fuel group inflation was largely stable, though the manufactured goods inflation dipped to 1.90% in August 2013. The inflation rate for June 2013 was revised upwards to 5.16% from 4.86% as per the provisional estimate. The core inflation for August 2013 eased to 1.9% from 2.4% month on month (MoM). -
The primary articles inflation rose to 11.72% from 8.99% in July 2013 on account of an increase in the food articles to 18.18% from 11.91% in July 2013. The inflation in the non-food articles declined to 1.06% from 5.51% in the previous month. The manufacturing inflation dipped by about 90 basis points sequentially from 2.81% in July 2013. The fuel group inflation was largely stable at an elevated level of 11.34%. -
On a month-on-month basis, the WPI reading rose by 1.20% to 177.5 from 175.4 in July 2013. The primary articles index was up by 3.77% to 247.8 led by a 5.30% increase in the food articles index. The fuel group index rose by 1.25% sequentially to 202.3 as the mineral oil index inched up to 224.1 in August 2013. On the contrary, the manufacturing index was stable at 150 as compared with a reading of 150.2 in the previous month. -
For the past two months, the WPI inflation has surprised negatively as it continues to steer away beyond the Reserve Bank of India (RBI)'s comfort level of 5%. While the core inflation has consistently declined, the rising pressure on the food inflation and the exchange rate volatility casts shadow on the inflation outlook for the rest of the year. While one would expect some softening of food inflation after the monsoon season, the volatility in commodity prices (especially crude) and impending fuel price hikes could increase the inflation. The low core inflation also points to a slowdown in the economic activity. Therefore, no major improvement is expected on the macro-economic front in the near term. We expect status quo on rates in the coming RBI's mid-quarter review (September 20), with some more measures to tackle external challenges.
STOCK UPDATE Federal Bank
Recommendation: Buy
Price target: Rs435
Current market price: Rs301 Price target revised to Rs435 Key points -
Federal Bank may tactically benefit from the recent easing of norms for foreign exchange (forex) borrowings by the Reserve Bank of India (RBI; swap rate of 3.5% for foreign currency non-resident [FCNR] deposits and a hike in forex borrowing limit up to 100% of tier-1 capital from 50% earlier with a 100-basis-point discount on the swap rate). Amid tight liquidity and slower growth in domestic deposits, this gives another window to the bank to raise funds at attractive rates and, in our view, should improve spreads. According to the bank's management, the bank has the opportunity to raise $500-550 million of capital and is looking to raise overseas debt in the near term. The bank has a strong non-resident Indian (NRI) client base that can help it to mobilise FCNR deposits, which have become more attractive after the easing of the forex borrowing norms by the RBI. We have maintained our conservative estimates for the bank but expect some upside in the bank's net interest margin (NIM) going ahead. While the asset quality has come under stress in the past few quarters, we expect the stress to be within manageable limits and derive comfort from the bank's high provision coverage ratio (83% in Q1FY2014). We now value the stock at 1x FY2015E book value which leads to a revised price target of Rs435. The stock has corrected sharply and is trading at attractive levels. We reiterate our Buy recommendation on the stock. -
Spreads to improve backed by relaxation of forex borrowing norms: The RBI's facility to swap FCNR deposits (of three years and above tenure) at discounted rates (ie 3.5% vs the market rate of 5.5-6.0%) and the other forex borrowings at 100 basis points below the market rates is likely to improve the spreads. The landed cost of FCNR deposits would be around 8.0-8.5% (LIBOR + 4% interest + 3.5% swap cost) and borrowings will be around 8% (LIBOR + 2% spread + 5% swap cost). Compared with that the domestic deposits are priced at about 9% and hence the bank expects 100 basis points of additional spread from swapping the resources in rupees and lending in the domestic markets. We believe this should be positive for the bank's NIM, though the benefit would depend upon the quantum of resources raised. -
Asset quality pressures manageable, high provision coverage increases comfort: The bank's asset quality has weakened in the past few quarters, in line with the industry's, largely contributed by a few large corporate accounts. However, the slippages from the retail, and small and medium enterprises segments (which together account for 63.7% of the loan book) remain significantly lower. The management had been working towards strengthening the risk management system and lending to better rated corporate. Therefore, we expect the asset quality pressures to be within manageable limits. Further, we derive comfort from the bank's high provision coverage ratio of 83%, which is among the highest in the industry. -
Stock split announced at 1:5: Recently the board of Federal Bank approved the sub-division of equity shares of Rs10 each into five shares of Rs2 each. Consequently, the bank's Investment and Capital Raising Committee has finalised October 18, 2013 for the purpose of sub-division/stock split. -
Valuation attractive, maintain Buy: Federal Bank is currently trading at 0.7x FY2015E book value, a 10-20% discount to peer banks (South Indian Bank, City Union Bank) mainly due to a lower return on equity (RoE). We expect the bank's earnings to grow at a compounded annual growth rate of 6% over FY2013-15. We also expect it to report a return on asset (RoA) of about 1%. In view of the existing weak macro-economic environment and the slower recovery in the bank's RoA, we have revised our valuation multiple downward to 1x FY2015 book value, leading to a revised price target of Rs435. We have a positive view on the stock due to its attractive valuation and the ongoing structural improvement in the bank's liability and asset side (which is positive for RoE). We maintain our Buy rating on the stock.
SECTOR UPDATE FMCG Its raining offers and new products this monsoon Key points -
Rupee's depreciation to put pressure on margins: The raw material prices have remained mixed. Though the prices of some of the key raw materials are lower on a year-on-year (Y-o-Y) basis, the rupee's depreciation of above 10% has led to higher import prices for some of the key inputs. The palm oil prices are lower on a Y-o-Y basis by ~15%, but the rupee's depreciation has negated the impact of lower palm oil prices. The higher palm oil prices would have an impact on the margins of Hindustan Unilever (HUL) and Godrej Consumer Products Ltd (GCPL)'s soap segment. The average copra prices are higher by 20% year on year (YoY) and by 10% on a sequential basis. This will definitely have an impact on the margin of Marico as copra constitutes 40% of its key inputs. The lower kardi and rice bran oil prices (almost 20%) would help in mitigating the impact of higher copra prices to some extent. The raw tea and coffee prices are expected to remain lower on a Y-o-Y basis due to a better production in the coming months. This is positive for Tata Global Beverages Ltd (TGBL)'s consolidated profitability and the margin of HUL's beverage segment. -
Promotional add-ons and freebies continued in the market: Our channel checks suggest that the fast moving consumer goods (FMCG) companies continued with promotional offerings and freebies to attract consumers in the current environment of economic slowdown and high food inflation. HUL continued its promotional offerings in the soap and detergent segment while GCPL has made offerings in selected soap brands. Also, HUL and Procter & Gamble (P&G) continued their promotional offerings in the detergent segment to maintain their position in the segment. Large promotional offerings were seen in the competitive segments such as soaps, detergents and oral care. The promotional offers in the toothpaste category were largely due to the foray of P&G in the domestic toothpaste market. -
Personal care continues to see addition of new products: The FMCG companies are striving hard in their drive to improve offtake of the premium products. As consumers cut back spends, companies are redrawing their strategies to keep shoppers' interest alive in the premium and discretionary categories, the segments that have borne the brunt of the slowdown. From pushing low-unit packs of premium products (HUL's Pears and Dove of 50g each available at Rs20 and Rs22 respectively) to packing multiple benefits into brands, to simply bringing down price points and driving offers (refer to latest promotional offers and freebies table below), the FMCG companies are doing whatever it takes to get consumers to pick-up their products. Hence, we continue to see new product launches/variants in July-August 2013. The large innovations were seen in the personal care and oral care space in India (refer to new product/variant launches table below). HUL continues to be aggressive in launching new products/variants in the domestic market. -
Rural consumption-key growth driver: The cumulative seasonal rainfall during June 1 to September 4, 2013 for the country as a whole was 804.4mm, which is 8% above normal rainfall of 741.7mm. The better monsoon was positive for the kharif season 2013-14. The sowing of kharif crops has increased by ~7% in 2013-14. The higher agriculture production along with a better agri income due to an increase in the minimum support prices (MSPs; were up in the range of 15-50% YoY for the key agri products) will really boost the rural income and consequently result in a better rural demand for the FMCG products in the coming quarters. -
Outlook and view: The sustained high food inflation and growing macro-economic concerns will continue to affect the sales of the FMCG products (especially the discretionary and premium FMCG categories). We expect the low-penetrated (need based) FMCG categories to maintain the growth momentum in the coming quarters. The rural demand for FMCG products is expected to be strong, while the urban demand is expected to be muted. The rupee's depreciation against the dollar would put pressure on the margins of some of the FMCG companies. Maintaining our selective preferences, we continue to like ITC in the large-cap FMCG space and Bajaj Corp, Jyothy Laboratories Ltd and TGBL in the small- to mid-cap FMCG space.
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Regards,
The Sharekhan Research Team | |
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