Investor's Eye: Update - Q4FY2014 FMCG earnings review, Q4FY2014 Pharma earnings review, Q4FY2014 Retail earnings review

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Investor's Eye [June 10, 2014]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE   Q4FY2014 FMCG earnings review     Key points Q4FY2014 was yet another quarter of a dismal operating performance from the FMCG companies. The volume growth of the FMCG companies under our coverage remained under pressure and a higher input cost and increased advertisement spending affected the profitability of most companies. Beating the trend were companies such as Marico, Jyothy Laboratories, Dabur India and Britannia Industries, which managed to post a reasonably better operating performance despite a weak demand environment and rising input cost pressure.  We don't expect the demand environment to revive in the near future unless the new government manages to control the inflation rate and improve the macro environment. The monsoon (June-September 2014) will be the key decisive factor for the government to initiate steps to curb inflation in the near future. Any cut in the excise duty on the manufacturing of FMCG products in the upcoming union budget would act as a breather for FMCG companies in a slow demand environment.  Along with the uncertain demand environment, the premium valuations and shift to industrial sectors make the FMCG space unattractive at the current juncture. Having said that, we have a positive stance on ITC in the large-cap FMCG space from a longer-term perspective while Jyothy Laboratories remains our top pick in the mid-cap space (due to better visibility of its earnings and a decent upside to its stock price from the current level). In the non-coverage space we continue to like Britannia Industries.     Q4FY2014 Pharma earnings review      Key points Most of the pharma companies in our universe delivered a strong performance during Q4FY2014 on the back of a surge in sales in the US market and a revival of growth in the Indian business. On an aggregate basis, these players reported a 28% rise in net sales, a 327-BPS expansion in the OPM and a 53% growth in the earnings during the quarter. While most of the players reported better than expected numbers for the quarter, players like Aurobindo Pharma, Sun Pharma and Torrent Pharma surprised us positively. The disappointment came from Divi's Labs and JB Chemicals. We expect the performance of the pharma players to moderate in the subsequent quarters because: (a) exclusivity on key products like Cymbalta would expire; (b) integration of the newly acquired entities by the key players would affect the operations in the short term; and (c) the rupee would appreciate against the major international currencies. We keep a neutral stance on the sector and recommend going selective on quality pharma stocks. Our preferred picks are: (a) Cadila Healthcare (aggressive product build-up in the US market); (b) Aurobindo Pharma (focus on niche segments; integration of API units of Actavis; (c) Lupin (focus on niche segments); and (d) Torrent Pharma (integration of the branded business of Elder Pharma). In this report we have also revised the price target of Dishman Pharma to Rs146 on roll-over of the stock's valuation to the FY2016 estimates while maintaining our Buy rating on the stock.      Q4FY2014 Retail earnings review   Key points The Q4FY2014 performance of our retail universe was mixed. Players like Page Industries, Arvind and Relaxo Footwear posted a strong overall performance in revenues as well as margins while players like TTK Prestige and Jubilant Foodworks continued to witness a muted demand (the same-store sales growth declined by 3.4% YoY), resulting in operating deleverage and thereby a lower profit. The jewellery makers (Titan Industries and Tribhovandas Bhimji Zaveri) continued to experience a double whammy of slow demand and regulatory hit, though Titan Industries' watch business posted an encouraging volume growth. Across the board (including various categories of consumer discretionary items like apparels, jewellery, footwear, quick service restaurants), players echoed optimism and confidence for future and mentioned that the worst phase for the consumer discretionary demand seems to be behind. Hence these companies are expecting a good growth ahead. Further, we also expect a positive development, ie a relaxation of the gold curbs (in the form of a reduction in the customs duty; a relaxation of the 80:20 gold export-import norm) for which a start has already been made by the RBI, which has restored the gold on the lease model.  Taking cognisance of the improving sentiment and the demand environment, we believe that players with strong consumer connect and brand equity, deep distribution reach and robust balance sheet are likely to emerge as winners in the next 12-18 months. Thie 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 Footwears and hence have raised our price target to Rs430 on the stock. In the soft coverage space, we hold a positive stance on Titan Industries, Arvind and TTK Prestige. 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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