Friday, January 6, 2012

>FMCG SECTOR:Potentially strong Q3FY12 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT

We expect a strong quarter from our FMCG universe with topline/EBITDA/PAT growth of 18%/19.5%/20.3% YoY, led by EBITDA margin expansion of 50bps—the first margin uptick in four quarters. Potentially strong Q3 performers include HUVR, ITC, MRCO, BRIT, GCPL, GSK Consumer and CLGT, whereas NEST, APNT, UNSP and Dabur could deliver muted PAT growth. HUVR and ITC remain our top picks, though select mid-caps look attractive as well (MRCO, BRIT, UNSP, GSK Consumer, Emami) in the wake of strong large-cap outperformance.

■ Expect sales growth of 18% YoY: We expect sales to increase by 17.9% YoY for our FMCG universe, led by strong organic numbers from GCPL, BJCOR, MRCO, NEST and BRIT. Volume growth is likely to remain steady with CLGT, MRCO and BJCOR reporting healthy numbers. We expect large-caps HUVR and ITC to report strong topline growth YoY at 16% and 18.5% respectively.

 Operating margins to improve 50bps YoY: The average operating margin for our FMCG universe is likely to expand by 50bps YoY, the first increase in four quarters. Though gross margins would still contract YoY for most companies due to the higher raw material prices, the decline would be limited by a lower base and flattening of input costs QoQ. We expect EBITDA margins to improve the most for CLGT, GCPL, BRIT, HUVR and ITC while a few companies such as Dabur, JYL and APNT will continue to witness YoY declines.

 Key issues to watch for: (1) Any signs that a consumer spending slowdown is denting category volume growth. (2) Pricing action/strategy in highly competitive categories such as shampoos, biscuits and detergents. (3) A&P spending trend post weak H1FY12 spending. (4) Gross margin pressure on a QoQ basis. (5) Product mix shifts across categories. (6) Forex impact.

 HUVR and ITC our top picks: HUVR and ITC remain our top picks in the sector. However, following the strong outperformance of sector large-caps over mid-caps in the last six months, the risk-reward has now turned favourable for select mid-caps. Our preferred picks in the mid-cap space include MRCO, BRIT, GSK Consumer, Emami and UNSP. We remain UNDERWEIGHT on CLGT, NEST, APNT, UBBL and JYL.

To read the full report: FMCG

>CHEVIOT COMPANY LIMITED: Industry of Jute & Jute Products

“Value Play on Jute ”

Investment Rationale
 Cheviot has been around for a number of years now and contrary to market apprehensions about the Jute business, the Kolkata based company has in fact shown a credible performance over the years.

 Cheviot in our view can easily maintain a 50:50 sales mix between domestic and export business and has the flexibility to shift products between the two depending on the demand situation.

 Our belief that the government shall not implement any measures to jeopardise the labour intensive jute industry in Eastern India stands vindicated by the fact that market fears on Jute being a dying product seem unfounded since Jute continues to be an eco friendly product compared to plastic or polyethylene having demand for specific applications.

 This debt free company with a book value of `600 is valued at cash and we believe that given the fact that there is no major capital expenditure needed going forward we expect a minimum 25% dividend payout going forward and this would imply a dividend yield of 6%. Cheviot in our view deserves to trade at 0.75 times book and we recommend a BUY with a one year price target of `450.

 FY"11 was exceptionally good for Cheviot and the company posted an EPS of `63 and even enjoyed pricing power with good demand locally for sacking products as well as robust export demand. While this is not sustainable during the current fiscal, we believe that with the market valuing Cheviot at cash, there is ample upside potential once the management spells out a dividend policy for returning surplus cash to its stakeholders.

Cheviot which operates in a highly labour intensive industry like Jute has been able to hold its fort well over the last many years and the stock trading at 0.4x book has cash and cash equivalent of over Rs1bn which is `220 per share even at current market levels. Further, the company has successfully introduced value-added jute products in its portfolio which enabled them to compete in a very competitive market scenario.

The debt free Cheviot trading at 4x earnings and 0.4x book is valued at cash and we recommend a BUY with a one year price target of `450.

To read the full report: CHEVIOT COMPANY

>ELDER PHARMACEUTICALS LIMITED: Well-known brands in the domestic market, Shelcal, Chymoral, Eldervit, Formic-O & Somazina

We expect EPL to report 24%CAGR in net sales and 28% CAGR in net profit over the next three years. With its presence in high growth niche therapeutic segments and excellent brand recall, the company is likely to derive higher than market growth. EPL has plans to add over 1,000 MRs in the domestic market in the next two years to cover additional geographies and doctors. It has plans to enter into CVS and anti-diabetic segments. EPL has established a manufacturing facility in Bulgaria to cater to European, CIS and Russian markets. We initiate
coverage on the company with a Buy rating and Target price of Rs462 with 34% upside from the current level.

 Strong brands: EPL markets some of the well-known brands in the domestic market, Shelcal, Chymoral, Eldervit, Formic-O, Somazina etc. These brands are market leaders in their respective segments and are likely to drive future growth.

 Margins to improve from FY13 onwards: The company’s EBIDTA margin is expected to decline in FY12 due to the integration of low margin business of its subsidiaries Neutra Health, UK and Biomeda, Bulgaria. We expect the margin to improve from FY13 onwards following the breakeven of these subsidiaries.

 New products to drive growth: We expect EPL to benefit from new product introductions in the domestic market. The company has a pipeline of 36 new products across various therapeutic segments. These are likely to drive future growth.

 In-licensing deals: EPL has over 25 in-licensing deals and derives 6% of its revenues from in-licensing product sales. The company’s patent non-infringing strategy makes it the most preferred partner with MNC pharma companies.

 Strong financials: We expect EPL to report 24% CAGR in revenues, 23% CAGR in EBIDTA and 28% CAGR in net profit over next three years.

 Valuation: At the CMP of Rs346, the stock trades at 8.4x FY12E EPS of Rs41.1and 6.7x FY13E EPS of Rs51.3. We initiate coverage on the company with a Buy rating for the scrip with a target price of Rs462 based on 9x FY13 EPS with an upside of 34% over CMP.

To read the full report: EPL

>Strategy: Lengthening Shadow

Global Economy: On thin ice

  • EU economies would see recessionary conditions persisting although ECB’s incrementally aggressive approach lessens the likelihood of an event risk materialising.
  • US macro data has improved to an extent, but lead indicators point towards a weak growth. Slowdown is spreading to EMs including China; 2012 to see growth taking precedence over inflation in policy actions across the region.

Indian Economy: More than a normal business cycle slowdown
  • Policy paralysis, fiscal slippages, monetary tightening and uncertain external environment are weighing heavily on the investment cycle. Rate cuts alone would not be adequate to engineer a turnaround.
  • Current macro decline is fashioned on the lines of 1992 slowdown even though the economy is better placed on vulnerability indicators. In our base case, FY13 GDP growth is likely to be ~7% but may slip to ~5.8% in a bear case scenario.
  • Two key measures, fiscal consolidation & de-bottlenecking of coal production, can help kick start the investment cycle.

Markets: Concerns persisting, still favoring defensives
  • Earnings trajectory continue to face headwinds. Our base case Sensex for is INR1,261, already downgraded by over 10%, with the risk of further downgrades looming large. However, our bear case estimates put earnings at INR1,143 (GDP growth at 5.8% and USD-INR at 52).
  • On an absolute basis, valuations seem fair and below long term averages. But compared to peers in ‘BRICS’, India is still expensive as FY13 numbers face the risk of further downgrades.
  • Given this fragile outlook, the Sensex is likely to be range bound between 14,000-17,000.
  • Key themes to play: (a) weak rupee to support earnings in export oriented sectors (maintain OW on pharma , move IT to EW from UW) (b) domestic demand remains healthy (maintain OW on consumer sector) and (c) no immediate visibility on revival of capex (move industrials to UW).
  • Model portfolio: Outperformed Nifty by 200bps in CY11; since CY09, outperformance has been by ~400bps.

To read the full report: STRATEGY