Investor's Eye
[January 07, 2014] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q3FY2014 Capital Goods & Engineering earnings preview -
Apart from Bharat Heavy Electricals Ltd (BHEL), most companies under our coverage to report a double-digit revenue growth for Q3, but margin pressure would restrict the growth in earnings to 6% (excluding BHEL). -
The book/bill ratio level of 2.4x is not so comfortable (below the historic average); the management commentary on the business outlook would be keenly watched. -
The recent rally in capital goods stocks in the hope of a recovery of the sector and negative surprises may lead to sharp corrective reaction; prefer Larsen & Toubro (market leader to gain first from recovery) and Kalpataru Power Transmission Ltd (based purely on its valuation and relatively better order book). Q3FY2014 Power earnings preview -
Capacity utilisation of thermal power plants remains at sub-optimal levels due to coal supply issues and weak demand environment, merchant power tariff at subdued levels in winters. -
Decline in energy deficit should be taken with a pinch of salt; it is more because of the lower demand than higher supply. -
Calcutta Electricity Supply Corporation Ltd (CESC), our top pick among the power generation companies, expected to report healthy Q3 results and has re-rating triggers in terms of turnaround of retail business (Spencer's) and strong performance of its subsidiary, Firstsource Solutions Ltd (FSL). We also have a positive stance on PTC India.
VIEWPOINT Britannia Industries Ahead of the pack Key points -
Strong H1; Q3 looks equally promising: During H1, Britannia Industries Ltd (Britannia) reported a healthy double-digit growth in revenue and the operating profit margins (OPM) surged by close to 10% from its earlier trend of 5-6%. We expect the strong performance to continue in the second half of the fiscal as well. In Q3FY2014, the revenues are expected to increase by around 14% year on year (YoY; driven by a mix of volume and value growth), and with the OPM being sustained at around 9% the profit after tax (PAT) is expected to grow by 64.9% YoY to Rs94.0 crore during the quarter. -
Captive production to increase penetration and control distribution costs: One of the key growth strategies going ahead is to manufacture most of its products in-house. Britannia has spent about Rs300 crore in last two years to increase its manufacturing base, which was earlier predominantly outsourced. Recently the company has set up its first bakery products unit at Jhagadia (in Gujarat) to cater to the western region. Also, the company has set up its own manufacturing facility in Bihar and Odisha to strengthen its position in the eastern region. Setting up of its own manufacturing unit will not only help in decentralising the distribution activities in the domestic market, but would also result in better cost savings at an operational level. Decentralisation of the manufacturing facilities will help to consolidate regional distribution costs and hence control overall logistics cost. Going ahead, it is planning to set up one more facility in Tamil Nadu, which will take its total number of owned manufacturing unit to 12 (which will take care of 50% of company's owned production). -
Change in top management, better operational results started flowing in: With Varun Berry joining the leadership team in January 2013, Britannia's core focus is likely to be enhanced on increasing penetration and on the introduction of new products. The company is targeting around 7-8% of its revenues from innovations per annum in comparison to about a 4% contribution to the revenues in recent years. Also, as Mr Berry has a vast experience in the snack segment, it might lead to a gradual building of the snack portfolio over the period of time. -
Focus on enhancing reach in rural markets: With strong monsoons, better agricultural production, higher minimum support prices (MSP)'s along with the upcoming elections, the fast moving consumer goods (FMCG) companies have enhanced their focus on opportunities emerging from better demand from rural India. Britannia also started selling most of its biscuit brand (including Good Day and Marie) at lower price points (popular price point of Rs5) to get better sales from the rural market. -
Valuation-strong growth in tough environment could further re-rate the stock: Though the stock has given strong returns of 36% and outperformed its peers in the FMCG sector in past six months, there is scope for a decent upside from the current level in view of better growth prospects, strong earning visibility and relatively attractive valuations. At the current market price the stock is trading at 28.5x its FY2014E Bloomberg consensus earnings per share (EPS) of Rs31.7 and 24.4x its FY2015E Bloomberg consensus EPS of Rs36.9.
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Regards,
The Sharekhan Research Team | |
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