Investor's Eye: Sector Update - Q2FY2015 Auto earnings preview, Q2FY2015 FMCG earnings preview

 

Investor's Eye [October 08, 2014]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE     Q2FY2015 Auto earnings preview   Key points The automobile companies (ex Tata Motors) are expected to report a double-digit revenue growth for Q2FY2015 largely led by an increase in volumes across segments. Aided by a 34% volume growth TVS Motor Company is expected to be at the top of the pack. Ashok Leyland, helped by an increase in volumes, richer product mix and price hikes undertaken during the quarter, is expected to report a strong 25% growth in revenues. Auto ancillary companies (except tyre manufacturers) too are expected to post a healthy double-digit growth for the quarter.  The margins of the original equipment manufacturers (ex Tata Motors) are expected to remain largely flat YoY. Ashok Leyland and Eicher Motors are expected to report a sharp margin expansion. TVS Motor Company and Eicher Motors are expected to report a 50% plus growth each in their net profit. With lump sum royalty payments to Honda Motor Co, Japan coming to an end Hero MotoCorp too is expected to report a 52% growth in the profit. Given the continued momentum in the JLR business, Tata Motors is expected to report a 36% growth in the bottom line.  We continue to prefer Maruti Suzuki in the four-wheeler space and TVS Motor Company in the two wheeler space. In the commercial vehicle industry we like Ashok Leyland and in the ancillary space we like Apollo Tyres and Gabriel India.      Q2FY2015 FMCG earnings preview    Key points Volume growth to remain muted, price hikes to drive double-digit revenue growth: For Q2FY2015, we expect most of the FMCG companies under our coverage (barring Marico) to deliver a low-mid teen revenue growth, which would be largely a price-led growth (Sharekhan's FMCG universe to grow by 15%). The sales volume growth is expected to be muted in most of the consumer good categories (including the personal care and hair care categories). But, the same is expected to be better in comparison to Q1FY2015 on account of an early arrival of the festive season (September-October 2014). We expect the growth in the rural markets to be lower compared with the urban markets, because of the below normal monsoon affecting rural demand for consumer products. Raw materials' prices have declined; benefits would start flowing in from Q3: Some of the key input prices that includes Palm oil and crude derivatives, such as LAB has corrected from its high in the past two months. We expect the benefit of the same to flow in from H2FY2015. In Q2FY2015, we expect the gross margins to marginally improve for some of the companies under our coverage (barring Marico, which can see a decline of over 450BPS in its GPM). The lower advertisement spends and other expenses would aid most of the companies to post a better OPM in Q2FY2015. Outlook - H2FY2015 to be better than H1FY2015: Consumer sentiments (especially in the urban markets) are improving on back of the lowering food inflation and visibility of better macro environment in the near future. This would reflect in revival in volume growth of the FMCG companies from Q4 of the current fiscal. The profitability is expected to improve from H2FY2015 due to reduction in the prices of raw materials. Overall, we expect the performance of the FMCG companies to be better in H2FY2015 than in H1FY2015.  Premium valuations; remain selective: The current valuation of most of the FMCG companies factors in the expectations of a better performance in the coming quarters. Hence, we retain our selective stance and continue to like ITC and Marico in the FMCG space and Cox & Kings Ltd in the discretionary space. 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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