>HERO MOTO CORP: “Margins weak, maintain Neutral”

Volume expansion and price hikes leads to strong revenue growth
Hero MotoCorp has reported 11% yoy volume growth in Q3 FY12 and had taken a price hike of ~Rs700-1000 per vehicle in October resulting into 17% yoy and 4% qoq growth to Rs60.3 bn. The company has been consistently putting up a strong show by selling ~5.3-5.4 lakh units per month and has won ~2% market share in the quarter. Going forward, with domestic motorcycle industry showing signs of weakening, we expect Hero to feel the heat in the wake of strong competition from Honda, which is aggressively expanding its capacities. With three new launches expected this year from Hero in the form of 110cc Passion XPro, Ignitor 125cc and a scooter Maestro, and the recent launch of Impulse, we slightly increase our FY12E/FY13E volume expectations at 15%/10% respectively from 14%/9%. We do not see a significant scope for realizations to grow in wake of competition as market share retention will be the main aim.


Margins below our expectations as staff cost rise & rupee depreciates 
In spite of commodity prices going down, Hero was unable to fetch the benefits of the same in this quarter, as rupee has depreciated significantly vis-à-vis Japanese yen. Since Hero imports ~17% of RM from Japan, this impact was felt a bit too much. Also, employee costs increased 11% qoq, due to wage hike taken in August getting reflected in this quarter. Excluding royalty, margins came in at 15.6%. However, we consider royalty in other expenses, due to which our EBITDA margins came in at 11.9% considering royalty outgo of Rs2280 mn which has increased over the previous quarters due to yen appreciation. Margins have come below our expectations. Going forward, we expect HMCL to post improving margins of 12.1%/13.2% in FY12E/13E as commodity prices start showing their impact as rupee has started showing some strength vis-à-vis foreign currencies.


Outlook and valuation
In view of good show in the domestic markets and increasing the market share, we have slightly increased our volume estimates. We believe new launches also will support the domestic growth of Hero. However, rapid expansion of Honda and overall slowdown in the 2wheeler market will arrest a strong growth in market share, due to which we believe the volumes will not grow above 10% in FY13E. On margin front, we are maintaining our margin estimates as we believe FY 13 will show margin improvement of up to 100bps as raw material prices are slowing down, but at the same time, low price new launches will lead to an adverse product mix, thus capping realization growth. We value the stock at 14x times FY 13E EPS of Rs142.5, due to its market leadership position and domestic strength. Due to expectations of slightly better domestic volume performance, we are increasing our target price to Rs 1996. At CMP of Rs1945 we see a very limited upside of 3%, due to which we reiterate our Neutral rating on the stock.




RISH TRADER

>SUZLON ENERGY- World’s 3rd largest wind turbine manufacturer : Indian Operations (Suzlon Wind) & REpower (Europe Operations)

Suzlon Energy Ltd (SEL), with manufacturing capacity of 6GW in India, China, Germany and USA is the world’s 3rd largest wind turbine manufacturer. The company enjoys10% market share globally and more than 50% market share in India.


• SEL is the one of the low cost producer of wind turbine in the world, with cost of production of per MW of 1.32mn euro as compared to world average of 1.8mn euro in FY11.


• Due to the ongoing volatile growth in developed economics, the company has diverted its focus on emerging markets like BRICS countries. As on Q2FY12, the Suzlon Wind order book comprised of 96% of domestic order as compared to 80% in the same quarter last year. SEL through its fully owned subsidiary REpower, supplies wind turbine to Euro zone. As on Q2FY12, the subsidiary has an order book of USD 4.1bn, giving an earning visibility for the next two years.


• The management is confident of turning around the operating performance of the group by taking initiatives like focusing on high revenue and margin markets, reduction in COGS and lower CAPEX. For FY12, the management has given top line guidance of Rs. 240 – 260bn with EBIT margin of 7-8%.


• In Q2FY12, the company has fully acquired its German subsidiary REpower, which has cash and cash equivalent balance of Rs. 11bn as on FY11. This huge cash reserve will help in reducing the group leverage position in future.


• The concern for the company could be the highly leveraged balance sheet, lower order book from USA & Euro Zone, depreciating rupee against USD/ Euro and competition threat from Chinese manufactures.


RISK & CONCERN

• Leveraged balance sheet: The company is planning to deleverage its balance sheet by using cash from the 26% stake sale in Hansen Transmissions and also by using the cash from its wholly owned subsidiary REpower. As of H1FY12, the company had total debt of Rs. 134bn as compared to debt of Rs. 121bn in H1FY11. Due to high leverage, the company may find difficulties in raising funds.


• Lower new order: Due to ongoing volatile economic position of developed world especially USA and Euro Zone, the company may find difficulties in getting new order. In Q2FY12, Suzlon Wind, the international orders fell by 65% Y-o-Y to 25MW. Thus the sustained economic downturn in developed countries can adversely affect the company’s performance.


• Increase in international competition: China has added wind energy capacity aggressively for the last three years. Because of better outlook of wind energy, various international players have ventured resulting into competition. SEL may be affected both in domestic and in international markets by losing its market share.


• Lower wind turbine realization: Due to increase in number of players in wind turbine manufacturing, the  capital cost for per MW of wind energy has declined drastically from 1.2mn euro to less than 1mn euro in FY11. This may affect SEL in getting international orders as in most countries the orders are placed through competitive bidding process. SEL’s domestic market is not expected to be much affected because of various import duties.


• Foreign exchange risk: A significant part of SEL’s revenue, costs, assets and liabilities are denominated in foreign currency. Unhedged trade and financial exposure can adversely impact the company’s overall profitability. SEL’s presence across geographies helps in providing natural hedging by offsetting purchase and sales transactions amongst various currencies. Also the company is expected to repay FCCB worth USD 389mn by FY13 as the stock is trading at 70% discount to the conversion price.


To read the full report: SUZLON ENERGY
RISH TRADER

>Stock Market 2011 v/s 2008 Many similarities, but a few differences too and its impact

2011 witnessed the second biggest fall in Indian markets (25%) after 2008, when markets fell 52%. We draw several interesting observations from a comparison of the years, 2008 and 2011. There are several similarities and also a few differences in key elements related to both, stock markets and the macro economy.



2011 v/s 2008 for economy: Slower downturn; sharp recovery unlikely
We compare 2011 macroeconomic situation with that of 2008 on 5 elements: Growth, Inflation & rates, Credit & liquidity, Fiscal scene and External situation. Essentially, 2008 was a period of a sharp economic downturn followed by an equally sharp recovery. In contrast, 2011 has been a slower downhill but signs of firm recovery yet to emerge. Interestingly, in 2008, we had both fiscal and monetary tools available to stimulate revival. Currently, however, we have only one – monetary tool to stimulate growth.




Element #1 Growth slowdown: Sharp then, more gradual now
Real sector indicators including GDP and IIP growth was on a downhill on both the occasions although the fall was sharper in the post-Lehman period.




Element #2 Inflation & rates: Yet to ease, unlike then

• In 2008, inflation had risen quickly in the pre-Lehman period followed by a collapse towards the year-end. In 2011, inflation stayed higher through out the year and is showing some signs of easing only in Nov-Dec.
• Repo rate saw a cycle in 2008, while in 2011, they have on risen so far. Yield curve is very flat in 2011 unlike 2008.

Element #3 Credit & liquidity: Still tight, unlike then

• Bank credit growth was on an upswing pre-Lehman and collapsed subsequently. In 2011, bank credit gradually and continually slowed down.
• Liquidity was moderately stressful followed by significant easing in CY08. In contrast, through out CY11 liquidity has been under severe stress with no signs of easing so far.

Element #4 Fiscal scene: No headroom for stimulus this time

• Fiscal consolidation in 2008 left significant headroom for fiscal stimulus to counter slowdown impact of global crisis. But, unlike in 2008, there is no fiscal flexibility now.
• While G-Sec yields were rising in both 2008 and 2011, higher deficit and stressed liquidity ensured that yields are currently at much higher levels than 2008.

Element #5 External sector: Trade worse, reserves better

• In both CY08 and CY11 exports slowed down. However, deficit came down in the later half of CY08 as trade itself shrank and rupee depreciation helped restore trade balance.
• Current account deficit worsened and forex reserves depleted in CY08. Early signs of the same are visible in CY11 too.
•  Indian rupee depreciated by 19% vs USD in 2011; in 2008, the depreciation was 24%.

To read full report: INVESTMENT STRATEGY
RISH TRADER

>Performance of Mutual Funds in CY 2011 & Toppers and Laggards during the year 2011

Overview: Indian stock markets showed disappointed performance during the calendar year 2011 as major factors such as high inflation, growth slowdown, rising interest rates, weak rupee, foreign fund outflows, high commodity prices, emergence of various industry-related scams, euro zone debt crisis, etc dampened the sentiments. The key indices, BSE Sensex ended at 15,544 down 4,965 points or 24.71% while the Nifty ended at 4,646 down 1,488 points or 24.68% compared to the previous year. Consequently, the performance of Indian equity mutual funds was also poor where all the equity categories barring FMCG posted negative returns over the period. However, part of actively managed schemes managed to contain the losses well as their NAVs depreciated less compared to the benchmarks.


Debt: On the debt front, the Repo rate, an interest rate indicator of Indian economy, was increased by 225 bps by the RBI over the year to tame the persistent inflation, to 8.50% at the end of the year 2011. Such elevated level in the interest rates resulted in spike in the yields of short debt instruments like Call, CD and CP, benefiting debt mutual fund schemes which invest predominantly in such instruments. Further, the RBI’s reversal in monetary policy stance on the back of moderation in inflation later towards the end of the year softened the yields of government papers. With softening yields, gilt funds have emerged as the biggest beneficiaries in the last two months of the year. The 10 year G Sec benchmark yields moved to a high of 9%+ level in September and closed up the year by 65 bps at 8.56% on Dec 30, 2011 Vs. its close of 7.91% at the end of the previous year.


Gold: Gold had been one of the top performing assets during last year. Continuing its record-breaking spree, gold galloped to all time highs in 2011 (from USD 1400 levels in 2010 to USD 1900 levels in September 2011) on the back of strong demand in times of economic turmoil and rising inflation. Gold rose 11.65% in USD & 30.74% in INR during the year while brent Crude rose approx 15% and US Dollar Index rose by 1.85%. Nervous investors preferred to park their funds in gold as a safe investment instead of risky assets like equities. Internationally gold prices saw correction later from its all time highs. However, falling INR has acted as a cushion for gold prices in India.


Mutual Fund Industry: As far as Indian Mutual Fund industry is concerned, the Average Assets Under Management of overall mutual funds rose by 0.54% Y-o-Y as of 31st December 2011 to Rs. 6,81,708 crore (AMFI Data). The total net inflows into the industry for the calendar year 2011 period stood at Rs. 36,918 crore while the total net outflow was at Rs 32,164 crore in the corresponding previous year. The industry collected Rs. 1,23,341 crore via new fund offers during the period.


Toppers and Laggards during the year 2011:


Category: Within categories, Gold ETF outperformed others during the year 2011 and posted 30% return. The yellow metal rose 30.74% in INR during the year as investors preferred to invest in gold as a safe investment instead of risky assets like equities. Equity sector - FMCG was the second top performer as it registered 13% of compounded returns during the year 2011. The FMCG index gained 9.53 per cent in 2011. Most of the FMCG companies were able to maintain their margins despite higher raw material prices and a sales slowdown. Equity – Infrastructure was the worst performing category in 2011 where it registered a compound annualized return on -35%. The year 2011 saw Construction & Infrastructure stocks underperforming the broader indices on account of tightening policy rates, muted order inflows across segments (except roads) & rising commodity prices affecting execution and margins. The CNX realty fell by 52% during the last year.


Scheme: Apart from Gold ETFs, ICICI Pru FMCG Fund, Canara Robeco InDiGo Fund and Sahara Short Term Bond Fund were the top performing schemes in the mutual fund industry where they delivered commendable returns of 16%, 15% and 14% of CAGR returns respectively. Active call strategy coupled with trading opportunities in the short term debt instruments spectrum helped income and short term schemes to outperform other schemes. Escorts Infrastructure Fund, HSBC Small Cap Fund and Reliance Infrastructure Fund were the bottom performers among mutual fund schemes as they posted negative returns of 47%, 46% and 45% respectively. The poor performance by the infrastructure sector was primarily driven by a range of sector-specific issues, such as land acquisition, environmental clearances, high interest rate regime and macro-economic factors. On asset weighted average returns basis, Equity Diversified large cap category outperformed the equity diversified midcap category but underperformed the equity diversified multi-cap category on a Year on Year basis. The largecap category posted an average CAGR returns of -23% while the midcap and multi-cap registered -24% and -20% of compounded returns respectively. In 2011, the indices - BSE Midcap index and BSE small cap fell 34% and 43% respectively.


To read the full report: Performance of Mutual Funds
RISH TRADER