Saturday, June 9, 2012

>The Seven Great Myths of an Indian Collapse

Myth #1 – The credit bubble

Myth #2 – The investment collapse

Myth #3 – Disappearing growth

Myth #4 – Out-of-control inflation

Myth #5 – A cost of capital crunch

Myth #6 – The mountain of dollar borrowing

Myth #7 – The end of the rupee

To read report in detail: INDIAN COLLAPSE

>REPO RATE: Expect a 25bp repo rate cut on 18 June 2012

We now expect a 25bp repo rate cut on 18 June due to (a) weaker-than-expected real GDP growth of 5.3% y-o-y in Q1 2012, belying our and the Reserve Bank of India's (RBI) view that growth had bottomed in Q4; (b) despite rising headline WPI inflation, core WPI (non-food manufactured) inflation has continued to moderate, which suggests that pricing power has declined (India: Pricing power continues to fall, 15 May 2012); we expect a further moderation in core inflation in May (data due on 14 June); and (c) Brent oil prices have fallen to around USD100/bbl, more than offsetting the drag from INR depreciation. We assign a 20% probability to a 50bp rate cut at the June meeting. While sluggish growth, low core inflation and weak policy rate transmission argue for a more aggressive 50bp rate cut, our base case is a 25bp rate cut due to elevated headline inflation (primarily due to persistently high food inflation).

We do not expect a cash reserve ratio (CRR) cut on 18 June as liquidity is closer to the RBI's comfort zone and open market operations can be used to address the liquidity mismatch. Moreover, the CRR at 4.75% is close to the all-time low of 4.50% and needs to be kept ready as an emergency buffer to inject liquidity if conditions worsen.

We see upside risks to headline inflation in the coming months. However, the continued moderation in core inflation along with another weak GDP print in Q2 2012 (due 31 August) will likely prompt the RBI to accord a higher priority to growth. As such, following the expected 25bp repo rate cut at the June meeting, we anticipate another 25bp cut in H2.

In our view, interest rate cuts are only a quick fix to growth. The current slowdown in growth is largely a payback from continued fiscal excesses and reflects slow government decision-making over the past year (See: India: Make or break, 2 May 2012). Real effective exchange rate depreciation has already started to ease monetary conditions. As such, the current Indian stagflationary environment needs tight fiscal policy to create a more stable macro backdrop. We see two issues with cutting interest rates. First, in the current tight liquidity environment, the transmission of policy rate cuts may be delayed and sub-optimal. Second, and more importantly, when inflationary expectations are in double-digits and potential growth is at risk of falling below 7%, it will not take much for inflationary pressure to rear its head. Without concomitant fiscal tightening, loose monetary policy will likely fan inflation and lead to greater macroeconomic instability down the road.

To read  report in detail: RATE CUTS

>DABUR: Launch of ‘Dabur Uveda Sunblock Cream SPF 30’

Targeting premium growth

With the launch of ‘Dabur Uveda Sunblock Cream SPF 30’, Dabur has entered the sun‐protection market (~INR2.4bn, growing at a healthy growth rate). The new launch is a premium product and indicates Dabur’s focus on its skin care portfolio, offering protection against UV radiation and aiding skin lightening. Also, it has a unique water‐resistant formula. We believe that marked step‐up in new launches in FY13 and funneling gross margin expansion to ad spend are likely to aid volume growth for Dabur. Re‐iterate ‘BUY’ on the stock as it has corrected 9% post Q4FY12 results, in spite of improving volume growth (9.5%, 8% and 5% in Q4FY12, Q3FY12 and Q2FY12 respectively).

Increased focus on skin care portfolio
Dabur has ventured into the sun‐protection market with the launch of Dabur Uveda Sunblock Cream SPF 30. It also has a unique water‐resistant formula that offers better protection even after being exposed to water due to swimming, sweating or rain. The product is offered with existing Uveda range in Delhi, Maharashtra, Punjab, Bangalore and Hyderabad in modern trade outlets and with Beauty Advisors.

Well‐positioned in high‐growth segment
Sun‐protection market (~INR2.4bn), a small segment of the total skin care market (~INR34bn), is witnessing humungous action with players like VLCC, Nivea and others introducing a range of products to leverage the untapped potential. Dabur’s Uveda Sunblock Cream SPF 30 is priced at INR175 per 50g, at a premium to other ayurvedic sun‐block offerings by unlisted players like Himalaya (INR175 per 100ml), Shahnaz Hussain (INR110 per 80g), Lotus Herbals (INR131 per 50g) and VLCC (INR295 per 100g).

The new launch will infuse freshness into skin care portfolio (which witnessed pick up in Q4FY12 growing at ~18% YoY post slowdown in past months).

Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on Dabur. At CMP, the stock is trading at 24.3x and 19.8x FY13E and FY14E respectively. We reiterate ‘BUY’ on the stock and recommend ‘Sector Outperformer’ rating on a relative return basis.

To read report in detail: DABUR

>ITC: Cigarettes - Steady profit growth in a pricing-driven quarter (JEFFERIES)

4Q12 was yet again a pricing-led quarter for cigarettes, with lower volume growth (<5% YoY) but much stronger margins (+210bps YoY) - clear evidence of ITC's pricing power and unique cost structure. We see the price-volume trend diverging further in FY13, post the sharp excise duty hikes, but expect overall segment profit growth to remain intact at 19%. Maintain Buy.

Cigarettes - Steady profit growth in a pricing-driven quarter: Cigarette revenues grew 11% YoY, slightly below expectations although EBIT growth at 20% was in-line. The impact of price hikes (beginning of 4Q) appears to have been higher than forecast on volumes (sub-5% growth, weaker than expected), as well as margins (31%, 140bps above estimates) - both effects offsetting each other. This is yet another indication of ITC's pricing power and cost structure in this business, which allows the company to pass on cost pressures (in the form of higher duties) and keep profit growth intact. We see this trend continuing in FY13 and expect the recent increase in excise duties (c22% YoY per stick on average) to be passed on, with a corresponding impact on volumes (-4% YoY in FY13E). Overall, we make marginal changes to our cigarette segment estimates (revenues and EBIT +2-3%) as most of the excise duty hike was already factored into our estimates.

Other businesses - FMCG losses narrow, capacity constraints in paper: The FMCG segment fared better than expected, as revenues grew in-line (+23% YoY) while losses were a third of our forecast. While improved profitability in the foods segment contributed, we believe a large part of the beat was due to lower ad spends - a trend witnessed in the rest of the industry as well. We do not expect these low levels of media spend to sustain, and keep our forecast for FMCG losses unchanged (Rs1.5bn in FY13E).

The paper segment was weaker in 4Q (revenues +7.4% YoY) mainly on account of capacity constraints and a relatively high base. With new capacity scheduled to contribute in FY13E, we expect revenue growth to recover going forward (+17% in FY13E, vs 13% in FY12). The hotels segment continued to be weak as revenues declined 5% YoY. Weak sentiment combined with increase in supply has likely impacted ARRs. We reduce our forecasts for the hotel segment (FY13E EBIT -9%) given the current run-rate.

We raise our EPS estimates by c3% and roll forward our SOTP-based TP to FY14E. We value the cigarette business at Rs 207/share (25x FY14E, in-line with FMCG peers). Risks a) deterioration in cigarette regulatory environment, b) significantly higher losses in FMCG.

To read report in detail: ITC


Bearing Fruit

Even as Mindtree’s strong EPS growth and out-performance versus consensus expectations (25% EPS beat in 4QFY12) has been a primary stock driver over the past year, a valuation re-rating is yet to fully materialise. The stock trades at 7.7x FY14E EPS, leaving room for further upside, given good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, low consensus estimates. Our FY13E revenue/margin/EPS estimates are 10.4%/81bps/22.7% above consensus estimates while for FY14E they are 10.1%/75bps/25.3% higher, respectively. We assign a Buy rating to Mindtree with a TP of Rs820, implying a PE multiple of 10x FY14E EPS.

Still room for upside; multiple-based upside yet to materialise: Despite Mindtree’s outperformance vs the BSE Midcap Index over the past year, we believe there is room for upside. While strong EPS out-performance versus consensus has driven the stock price, a valuation re-rating is yet to fully materialise. Mindtree trades at 7.7x FY14E EPS, leaving room for upside in light of good revenue growth, improving client metrics, a 23.5% EPS CAGR over FY12-14E, support from a weak rupee and most importantly, still low consensus EPS expectations (FY13 consensus EPS Rs58.7 versus our estimate of Rs72). Improving client metrics drive confidence on the revenue front while a weak rupee is likely to support earnings and also provide headroom for re-investment in the business. Going forward, we expect stock upside to be driven by a multiple upgrade.

Our FY13/FY14 EPS estimates are 22.2%/25.3%, respectively above consensus: In our view, consensus estimates for Mindtree are conservative and do not factor in potentially higher margins on operational efficiency and a weak rupee. Consensus FY13E

EPS estimates are Rs58.7, implying growth of just 8.3% YoY. Our FY13E/FY14 EPS estimates are above consensus estimates by 22.7%/25.3%, respectively. While we expect good revenue growth, we also expect a weak rupee to support earnings, given Mindtree’s greater sensitivity to this factor (over 65% offshore revenue in 4QFY12). Our FY13E/FY14 rupee revenue estimates are 10.4%/10.1% above consensus estimates and margins are 81bps/75bps higher, respectively, driving our well-above consensus EPS forecasts. Going forward, we expect consensus forecasts to inch up, supporting the stock.

Mining focus boosts client metrics, drives confidence on revenue growth: Mindtree’s strategy of focussing on select verticals and leveraging domain expertise to gain client wallet share has paid dividends, and led to annualised revenue/client rising to US$1.7mn in 4QFY12 (US$1.2mn in 4QFY10). This reflects in rise in revenue share from top-10 clients (45.6% in 4QFY12 vs 40% in 4QFY10, 6.1% CQGR). Clients in different revenue buckets have also risen steadily, with US$1mn revenue clients at 77 in 4QFY12 (60 in 4QFY10).

Valuation: Mindtree’s stock trades at 7.7x FY14E EPS. We initiate coverage on the stock with a Buy rating and a TP of Rs820, implying a PE of 10x FY14E EPS.

To read report in detail: MINDTREE