Saturday, August 29, 2009


Early signs of weak monsoon impact

FMCG sales grow 12.7% in July, much below trend
July sales growth of 12.7% is lower than the last six month trend of high-teens growth. Most companies showed a MoM decline. We believe this could be early indication of a weak monsoon impacting top-line growth for FMCG and we will watch out for the sales growth trend in coming months. Tata Tea, Godrej and P&G continue to do well. Nestle, Colgate, Marico and Dabur showed average performance. HUL, Nirma and Britannia disappointed with mid-to-low-single-digit growth in July.

HUL - Sales gr slows down further to 7% vs. 13% over last yr
Initiatives taken by HUL to improve sales growth are yet to show positive results, as sales declined for fourth straight month. Volume growth remains negative for Soaps, Laundry, Toothpaste, Tea and Coffee. Fastest-growing categories in terms of value growth were Laundry, Skin Care and Shampoos, while Tea and Ketchups had single-digit growth. Sales declined in July for Soaps, Coffee and Toothpaste.

HUL – Market share trend was a mixed bag
July was a mixed bag, with Laundry, Shampoos, Tea and Ketchups showing gains, while Soaps, Toothpaste, Skin Care and Coffee continued to lose market share. Over last one year, HUL has lost market share across all key categories – Soaps (570bps), Detergents (210bps), Shampoos (10bps), Toothpaste (220bps), Skin Care (420bps), Tea (260bps), Coffee (770bps) and Ketchups (160bps). We believe volume gr and market share recovery will be slow and expensive for HUL.

Nestle – sales growth weakens sharply
Sales growth decline continued for Nestle and growth in July was 12%. This is significantly lower than AC Nielsen reported YTD sales growth. Market shares showed mixed trends with gains in Coffee and Chocolates, while Noodles and Ketchups lost share. The trend over the last 12 months has been negative, with gains in Coffee, but declines in Chocolates, Noodles and Ketchups.

Colgate – sales gr holds up, with mixed market share trends
July sales grew 10%. Colgate was one of the two companies to show MoM improvement in sales gr. Market share trends were mixed with Toothpaste gaining 30bps but Toothbrush lost 40bps and Toothpowder lost 90bps in July. Toothpaste is running at all-time-high market share and further improvement looks difficult.

Dabur – sales gr stable, with positive market share trends
July sales grew 10%, marginally lower that growth reported by AC Nielsen for last one year. Market shares improved for Shampoos and Toothpaste, but there were declines in Toothpowder and Chyawanprash. Over the last one year, Dabur has gained market share in Toothpaste (90bps) and Shampoos (90bps), but lost shares in Chyawanprash (470bps) and Toothpowder (130bps).

To see full report: FMCG SECTOR


AGM Highlights – Proxy On Global Generics – Stay OW

What's new: We attended Cipla AGM, a once-a-year management interaction platform. Bottom line, Cipla’s capex (Rs20 bln in F07-09), quality drug filings (7000 in 180 countries), and marketing tie-ups offer good midterm growth visibility and a sustained high ROE.

Management appeared optimistic about growth prospects and agreed that it can potentially double sales again in the next 4-5 years. For FY10, it targets a top-line range of Rs55-57 bln (implying 10-14% growth) and believes it can better its F09 earnings (adjusted for Rs2.3 bln forex losses). Management is concerned about drought conditions in India. Company appears
excited about HFA inhaler opportunities.

Where we differ: To us, the guidance appeared conservative, as it has been for the last 3 years. Cipla’s single location largest capex to date, Indore SEZ (Rs6 bln invested, another 2 bln to go), is the leading indicator of growth ahead with asset turnover of 2-3x (commercial production begins in F1Q11). In particular, we like depth in Cipla’s portfolio which includes HFA inhalers, steroids
hormones, concology, NDDS combination drugs

HFA Inhalers–Approvals Possible in 2010: Though frustrated with the long regulatory process spanning 3-4 years, management thinks the company is likely in the last lap and approvals are possible in 2010. In particular, the company was excited about salbutamol combination and formetrol combination products, and mentioned that these could be ‘game changers’, subject to the (extent of) competition.

We remain comfortable with the OW rating. In our opinion, impending fund raising (5% dilution,
management was comfortable with current valuations to dilute) is an overhang and opportunity to buy.

To see full report: CIPLA


Seasonality, weak demand hit pricing

We interacted with cement dealers and marketing personnel of cement firms, across regions and brands, to understand the demand-supply scenario, pricing trends and short-term outlook.

Prices decline by Rs3-20/bag: The monsoons, sluggish demand and new capacities have caused cement prices to fall by Rs4-5/bag on average and Rs10-20 in select markets. Prices fell in the south by Rs5-15/bag, in central India by Rs10-15/bag, the north by Rs2-3/bag and in Maharashtra by Rs5-20/bag (with a higher decline in Pune).

Seasonality, slow progress in infrastructure projects hit demand: Cement demand, which has been driven by individual housing and pre-election spends on infrastructure, slowed - due to monsoon and sluggish demand from infrastructure. But there are early signs of demand recovery from organized real estate in some markets.

Price moderation and cost inflation could affect near-term financials: While the demand and pricing outlook for the next two to three quarters is cautious, demand-supply dynamics are expected to improve from 4QCY10. The shortterm outlook is negative due to the impact of the monsoon on rural demand and muted urban housing demand, new capacities and cost inflation.

Valuations and view: We will review our estimates to factor-in changes in recent trends. Our current estimates factor in flat QoQ realizations in 2QFY10 and Rs5/bag QoQ decline in 3QFY10. For FY11 our estimates factor-in Rs10/bag decline over the FY10 average. Cement stock valuations are attractive. We prefer companies with strong cost-saving possibilities that are ahead of the curve in adding capacity. Among large-cap stocks, Grasim and UltraTech are our top picks and we prefer Shree Cement, Birla Corp and India Cement among mid-caps.

To see full report: CEMENT SECTOR


Upgrade to Buy: Concerns Abating, Outlook Improving

Upgrade to Buy — Despite the stock’s 27-29% outperformance in the last 2-3 months, we upgrade Aban to Buy (1M) from Sell (3S) with a Rs1,550 TP (was Rs520), driven by a better outlook and yesterday’s positive announcements.

Three key concerns abating — Our Sell rating was premised on 3 key concerns — (i) idle assets, (ii) high leverage, and (iii) E&P capex cuts — which did play out and have materially abated since then. The announcement yesterday of LT contracts for 4 idle rigs at healthy day rates provides us the necessary evidence to substantiate our earlier claim of improving times (see our note titled '1Q Ahead of Estimates – Signs of Improving Times' dated 31 Jul’09) and drives our TP, rating and risk rating upgrade. Debt restructuring (through moratorium on principal) also appears likely, largely precluding bankruptcy. The jack-up market appears to be showing signs of turning around, with crude at US$60+.

Duration and pricing of new contracts +ve — Aban yesterday announced deployment of 3 Deep Driller rigs in Middle East at day rates of cUS$165K for 3 years and 1 Deep Driller rig in Latam for US$120K/day for ~2 yrs. The day rates, esp. on the Middle East contract, are a +ve surprise. While political risks may have discouraged competition permitting Aban to command higher rates, Aban's presence in the region (through Aban VIII and Aban VI) reduces risk.

New TP of Rs1,550 — Key changes to our DCF assumptions: (i) improvement in industry outlook driving higher medium-term cash flows and slight improvement in mid-cycle earnings, (ii) terminal growth rate of 2% (vs. 0%), (iii) roll forward to Mar-10E, and (iv) earnings changes: -50% in FY10E, +19% in FY11E. Given the high debt, our equity value nearly trebles though our EV is up a more modest 46%. Our new TP imputes a 5.3x P/E and 6.7x EV/Ebitda.

To see full report: ABAN OFFSHORE


Hold: Good Q4 but Another Decline in IT Services Headcount

~8% sequential revenue growth led by infra services — HCL Tech reported strong Q4FY09 results – revenues increased ~7.6% sequentially with infrastructure services leading the way with 25.5% growth sequentially. Margin improvement of ~80bps qoq and lower than expected forex losses resulted in net profits increasing ~50% qoq to Rs. 3.1b.

Margins improved ~82 bps qoq — EBITDA margins improved ~80bps sequentially. IT Services margins improved by ~180bps sequentially due to better realizations and utilization rates. BPO and Infrastructure services margins declined sequentially.

Decent growth across segments — HCL Tech reported decent growth across segments – software services revenue growth was 4.5%, which was meaningfully better than peers. Infrastructure services did very well with ~25% sequential growth while BPO did well with ~4% growth qoq.

IT Services headcount declines again — IT Services headcount declined yet again – delivery headcount declined by ~500 employees compared to a decline of ~300 reduction in the previous quarter. Management comments on growth outlook for software services remain a key to focus on.

More details post the earnings call — The strong set of results will likely result in EPS upgrades across the street. The key issues to focus in the earnings call are (a) Demand outlook for IT services given the headcount reduction and (b) Sustainability of margins. The earnings call is at 1730 hrs India time.

To see full report: HCL TECHNOLOGIES