>Macroeconomic Backdrop –Q1 FY13

The RBI is scheduled to conduct its First Quarter Monetary Policy Review on July 31, 2012 and the prevailing macroeconomic conditions are expected to dictate its policy stance with regard to interest rates. Accordingly, this update covers the performance of the Indian economy in FY13 so far in the domestic and external sector.

Domestic Macro-economy

Continuing with lacklustre performance of the last year, industrial production remained subdued in the first two months of FY13; weighed down by negative growth in mining (April and May) and manufacturing (April for entire sector and capital goods in both months) and moderation in productive activity in electricity sector.


The slowdown in industrial activity is due a combination of factors of low consumer, investment and government demand which has been driven partly by a policy of high interest rates to control inflation. While core inflation has moderated to around 5% (from a peak of 8.2% (November 2011) in the last fifteen months), overall inflation continues to remain high with food inflation moving back into double-digits.


To read report in detail: MACROECONOMIC BACKDROP

RISH TRADER

>Styrolution ABS (India)

For 2QCY2012, Styrolution ABS (India) Ltd. (formerly known as INEOS ABS India Ltd.) reported sequentially flat top line at `236cr, 8.2% higher than our estimate of `218cr. EBITDA came in at `14cr, far lower than our estimate of `18cr. Operating margins fell by 357bp sequentially to 6.1% owing to 385bp higher raw material cost. The company reported net profit of `10cr, 40% lower sequentially on the back of poor operating performance.


Persisting short supply coupled with capacity expansion to boost growth
Styrolution has recently expanded its capacity of ABS and SAN. This provides company an opportunity to reap benefits owing to domestic ABS demand supply gap (met by imports) which has persisted for long and continues to exist. In addition to capacity expansion company has come up with many tailor made products taking advantage of ABS’ flexibility of composition and structure, which allows its use in diverse applications.


Outlook and valuation
We expect Styrolution’s revenue to post a CAGR of 14.5% to `1,081cr over CY2011-13E on the back of consistent developments by the company. EBITDA is expected to grow at 18.7% CAGR to `115cr leading to margin expansion of 74bp to 10.6% in CY2013E. Net profit is expected to post CAGR of 23.1% to `82cr in CY2013E. At CMP of `670, stock is trading at PE of 14.4x and EV/Sales of 1.1x for CY2013E. We remain positive on the stock and recommend Accumulate with a target price of `744, based on target PE of 16x and implied EV/Sales of 1.2x for CY2013E earnings.

To read report in detail: STYROLUTION ABS


RISH TRADER

>ITC LIMITED: Ban on gutkha to aid cigarette volumes

FMCG losses declining; margins improve…


ITC’s Q1FY13 results were in line with our estimates with earnings witnessing growth of 20.2%. Cigarettes volume growth was flat on the back of ~15% price hike following the ~20% excise duty hike in the 2012 Budget. Based on our reverse calculations (through excise duty) we
believe there is a marginal de-growth in cigarette volumes. However, we expect cigarettes volumes to pick up in the rest of the year as the ban on Gutkha and Pan in six states would result in a shift in consumption from other tobacco products to cigarettes. FMCG revenues also witnessed 23% increase YoY led by 11-13% volume growth and ~10% price hike in selected products. We expect ITC to take further price hike in cigarettes in H2FY13E and break-even in FMCG business by FY14E; driving revenue and earnings growth, going forward. Maintain HOLD.


FMCG losses slide; cigarette volumes dip
In Q1FY13, FMCG losses declined ~50% YoY on the back of considerable price rise hikes and strong volume growth. However, cigarette volumes were flat due to ~15% increase in prices. We believe that cigarette margins improved led by a dip in raw tobacco prices. Agri business’s
earnings improved 16% YoY led by currency gains from export of raw tobacco. Hotel business earnings were down 50% due to an increase in operating expenditure after the commencement of Chennai property.


Ban on gutkha to aid cigarette volumes
Six state governments have already banned gutkha and pan masala. We believe other state governments would follow suit and implement the ban under the COTPA act. We believe this would shift consumption from other tobacco product to cigarettes hence driving ITC’s volume growth.


Continues to command 2x premium to Nifty
The stock is trading at a 120% premium to the Nifty compared to the historic average of 70% on PE multiples. With strong growth in the FMCG business and sustained margins in the cigarettes business, we believe ITC would continue to command this premium. We have valued the stock on an SOTP basis and maintained our target price of | 270 with HOLD rating.

>BATA INDIA

Sales Growth Below Estimate; Downgrade To Hold 


Revenue growth of Bata India (BIL) slowed to 17% in 2QCY12 compared to 30.6%/22.6% in 1QCY12/CY11, respectively, at Rs5,065mn, 4.1% lower than our estimate. It seems BIL was geared up for slower growth, which is visible from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. Following buoyant performance in CY11/1QCY12, the stock price increased 42.9% over the past six months. Third quarter is generally a weak quarter for BIL due to the monsoon season. In such a scenario further re-rating seems difficult until BIL resumes its earlier growth trajectory. Following limited upside from current levels, we downgrade the stock to Hold from Buy. We maintain our estimates and the TP of Rs1,008 based on 16x CY13 EV/EBITDA. 


Slower pace of growth: BIL opened 108/145/61 stores in CY10/CY11/1QCY12, which drove its revenue up by 22.6%/30.6% in CY11/1QCY12, respectively. Compared to 68/145 new outlets in 1HCY11/CY11, BIL has opened over 100 outlets in 1HCY12. However, with high base and lower demand, tentatively due to the monsoon season as per the management, revenue growth moderated to 17% in 2QCY12. Inventory days increased to 108 in CY11 from 99 in CY10 on account of lower demand and aggressive expansion in 4QCY11. However, BIL appears to be prepared for lower growth which can be seen from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. We expect the valuation to be capped until BIL resumes its high-growth trajectory. BIL incurred a capex of Rs34mn in 1HCY12, mainly to increase retail outlets. 


Better gross margin drove operating margin: BIL witnessed a drop in gross margin from 3QCY11 to 1QCY12, and even after that it was able to report better operating margin due to lower employee costs. However, with a better product mix, BIL was able to improve its gross margin by 99bps to 51.5% in 2QCY12, which led to a 86bps increase in operating margin. Following aggressive expansion, lease rent as a percentage of sales increased by 213/186bps to 10.6%/9.1% in 1QCY12/1HCY12, respectively. It would be difficult for BIL to improve operating margin from the current levels if the pace of revenue growth moderates in 2HCY12. 


Valuation: We expect the valuation of BIL, which trades at CY13E P/E of 23.5x and EV/EBITDA of 14.3x, to be capped until revenue growth resumes its earlier trajectory.
RISH TRADER