Investor's Eye
[October 07, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q2FY2014 Banking earnings preview
Treasury losses and higher provisions to dent earnings Key points -
Earnings likely to be affected by treasury losses, NPA provisions: The net earnings of Sharekhan's banking universe are likely to decline by 12% year on year (YoY), largely contributed by the public sector undertaking (PSU) banks which are expected to report a decline of 26% YoY in their net earnings. On the other hand, the private banks are likely to report ~10% year-on-year (YoY) growth in their net earnings. While the non-performing asset (NPA) provisions are likely to be elevated, the treasury losses (due to a 131-basis-point rise in the benchmark yields in Q2FY2014) are likely to further stress the earnings of the banks. -
Operating performance cushioned by surge in credit growth: The net interest income (NII) of our banking universe is likely to grow at 13.5% YoY (10% for the public sector banks [PSBs]). A pick up in the credit growth during Q2FY2014 coupled with a hike in the base rate by the banks will cushion the operating performance to an extent. However, given the rise in cost of funds of banks due to the tight liquidity and high deposit rates, the pressure on the net interest margin (NIM) persists. -
Slippages, addition to restructured loans to remain elevated: Given the weak macro-economic environment, the asset quality pressure may sustain in Q2FY2014 also. The sharp rise in the corporate debt restructuring (CDR) proposals also suggests that the restructured loans will continue to increase. Despite that the private sector banks are relatively better in terms of the asset quality compared with the PSBs. -
Outlook-challenges ahead; cautious stance retained: Due a sharp rise in the bond yields and the continued asset quality pressures, the Q2FY2014 results are likely to be lacklustre. Though the credit growth has improved in Q2FY2014, its sustainability will be difficult and the asset quality challenges may increase amid the slowing economy. The Reserve Bank of India (RBI)'s hawkish stance on the interest rates is likely to keep the rates high and may stress the NIMs of banks. Therefore, we continue to prefer the private sector banks which are likely to manage the asset quality better and may report a reasonable earnings performance. We maintain our cautious stance on the PSBs largely due to the asset quality issues. From the results perspective, we prefer ICICI Bank, Federal Bank and Bank of Baroda (BOB). Q2FY2014 FMCG earnings preview
Demand outlook turning unfavourable; be selective Key points -
Discretionary categories to remain under pressure: The sustained high food inflation and growing macro-economic concerns will continue to affect the sales of the fast moving consumer goods (FMCG) products (especially the discretionary and premium FMCG categories). However, we expect the low-penetrated (need-based) FMCG categories to maintain the growth momentum in Q2FY2014. We believe that the demand for the FMCG products will be lower in the urban markets in comparison with the rural markets. A better monsoon has boosted the sentiments of the people in rural India. -
Value growth to moderate in Q2: In the absence of price hikes and sustained pressure on sales volume, the revenue growth of most of the FMCG companies under our coverage will be lower in Q2FY2014 compared with that of the previous year (where it was in the range of mid-high teens). We expect Sharekhan's FMCG universe to post a revenue growth of 13.5% year on year (YoY) as against a revenue growth of 16% YoY in Q2FY2013. -
Rupee's depreciation to eat into GPM; higher promotional spends would further dent OPM: 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 about 15% would impact the gross profit margin (GPM) on a sequential basis. Hence, we might witness a sequential drop of 50-150 basis points in the GPM of some of the FMCG companies under our coverage. In addition to this, we expect the advertisement and promotional spends to remain high in Q2FY2014, as the companies continue to focus on improving the sales volume growth in the backdrop of sustained inflationary pressures. Consequently, most of the companies in our coverage (except for Tata Global Beverages Ltd [TGBL] and Jyothy Laboratories Ltd [JLL]) are likely to report some pressure on the operating profit margin (OPM), leading to a relatively lower growth of 11.9% at the profit after tax (PAT) level on an aggregate basis. -
Outlook turns cautious; time to be selective: Despite the expectations of sustained demand from the rural areas, the overall volume growth momentum of the FMCG companies is tapering off. The FMCG companies are increasing their focus on advertisements and promotional schemes to push sales, which puts pressure on the margins (in addition to the cost inflation on the raw material front on account of the rupee's depreciation). However, there are certain niche categories that are likely to report a relatively better and sustained growth in volumes. Consequently, it is better to turn selective. We prefer ITC, JLL, Marico and Bajaj Corp among the consumer stocks under our coverage.
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Regards,
The Sharekhan Research Team | |
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