Thursday, October 11, 2012

>Manmohan’s Tryst With Reforms

PM redeems his pledge to revive animal spirits, not wholly or in full measure, but very substantially

Slowing revenue growth but rebound in EBITDA and net profit growth: Revenue growth of Nifty companies is expected to fall to a ten-quarter low of just 13.4% YoY (the previous time it had fallen lower than this was in Q3FY10 at 9.9%). Revenues excluding Oil & Gas are expected to fall at 10.5%, again a ten-quarter low. EBITDA growth, on the other hand, is expected to bounce back strongly by 12.4% YoY (excluding Oil & Gas by 14.5% YoY). Similarly, PAT growth will bounce back by 16.4% YoY (excluding Oil & Gas by 16.4% YoY). Moderation in input price inflation on a YoY basis and strengthening of rupee leading to near-absence of foreign exchange losses has been responsible for this uptick in net profit growth. Revenue and PAT growth for all the companies under PL’s coverage universe are expected to grow YoY by 12.4% and 2.9%, respectively and de-grow QoQ by 0.1% and 7.5%, respectively. EBITDA margin (excluding BFSI) is expected to decline YoY by 1.01% and 0.08% QoQ. Corporate India continues to encounter headwinds in the form of slowing demand due to uncertainty in macro-environment and high interest rates.

Strong performance from Cement, Pharmaceutical and Banking & Financial Services sectors: Strong growth in realizations offsetting a tepid volume growth, observance of strict discipline by various players in the sector helping to maintain prices, healthy balance sheets and lower leverage levels due to strong cash flow generation will lead to a stellar performance by cement companies. Strong growth in the US, better operational performance and boost provided to net profits due to expected forex gains on hedges & foreign loans due to favorable currency movements will underpin pharmaceutical sector’s earnings. It is a story of contrasting halves in the Banking & Financial sector. Private Banks and NBFCs would report strong operating performance helped by easing of wholesale rates and retail asset quality holding up well. PSU Banks, on the contrary, will be impacted by muted loan growth and continuing pressure on slippages in bad & restructured asset book. Banks with overseas exposure could see contraction in their international book due to 5% rupee appreciation during the quarter.

Metals, Power, Construction and Real Estate continue to be laggards: Deteriorating global demand environment raising downside risks to spreads, weak domestic demand and excess supply in the domestic market will put pressure on earnings in metals sector. Power sector will continue to reel under increased fuel and interest costs causing delays in execution. Rising debt levels would continue to strain balance sheets and raise questions on viability of some power projects. No significant pick-up in order inflows, earnings impacted due to large interest burden as a result of high debt levels and no improvement in working capital cycle will put pressure on construction sector. Challenging macro-economic environment with no respite from high interest rates and no significant drop in prices impacting buyer affordability will continue to impact the performance of the real estate sector.

To read report in detail: INDIA STRATEGY


  • Overall
  • Government
  • Household
  • Financial 
  • Non financial 

To see presentation:  WORLD DEBT GUIDE

>GRASIM INDUSTRIES: Global fiber consumption in a new mega-trend

Grasim’s growth profile to witness a marked change, led by VSF business We expect Grasim’s VSF business to drastically alter Grasim’s growth profile. Unlike its past performance, which was largely dominated by the cement business, we expect its VSF business to meaningfully contribute to earnings, going ahead. Grasim’s standalone VSF revenues grew at tepid pace of 9.6% CAGR over FY08-12 on the back of severe capacity constraints restricting volume growth to 3.6% CAGR. However, with Grasim’s VSF capacity expansion (~50% of current capacity) nearing completion, we see its standalone financials witnessing a dramatic shift in growth profile.

Global fiber consumption in a new mega-trend- 9% CAGR in VSF demand Over the last decade, global fiber demand has grown at a 4% CAGR, higher than the 3% CAGR registered in the decade earlier. During 1990-2000 period, synthetic fibre manufacturers, on the back of lower crude oil prices and significant spare capacity, reduced prices and gained market share. Consequently, synthetic fibres registered demand CAGR of 7% over 1990-2000 while MMCF and cotton saw negative growth. However, global fiber consumption over the last decade has undergone a dramatic change with a shift in favour of Man Made Cellulosic fibers (MMCF) like viscose (VSF) driven by 1) rising demand for cellulosic fiber and 2) stagnant cotton production failing to meet incremental cellulosic fiber demand. This is evident from the 6.8% growth in VSF
demand (VSF+Filament+Tow) over the last decade. In fact, over the last 5 years, this shifting trend in favour of MMCF has gained further pace with VSF demand registering a steeper 9% CAGR over CY06-11, clearly outpacing growth in cotton (CAGR of 0.3%) and significantly higher than the 4.9% CAGR in synthetic fibers.

VSF demand outlook remains optimistic –Expect 8% CAGR over 2010-15E Though global fibre demand is expected to witness slower growth over medium term as compared to last decade, the fact that resource constraints will continue to hamper cotton production (cotton is estimated to grow at a CAGR of ~1.5% over 2010-15) means that even a 3% CAGR for global fiber demand over 2010-15, (as compared to CAGR of 4% in 2001-2010) could result in an 8% CAGR for VSF demand.

To read report in detail: GRASIM INDUSTRIES

>MADRAS CEMENT: Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA

Strong Growth delivered in FY12 & Encouraging Return Ratios. The company has registered a strong financial growth in FY12. It’s Net sales increased by 24% to INR3278 crore and PAT improved by 82% to INR386 crore. Its EBITDA margin also improved from 24.6% to 29.3%. ROE of the company came at 20.4%. Its total D/E ratio also came down marginally from 1.1 to 1.0. Madras cement’s financial ratios are strong and are very much in line with top cement players like Ultratech Cement, ACC and Ambuja Cement.

Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA to add to Topline once the demand improves: Madras Cements has completed the capacity expansion of its cement plant of 2MTPA (million Tonnes Per Annum) capacity at its Ariyalur plant in Tamil Nadu to increase the total capacity from 10.49 MTPA to 12.49 MTPA. This capacity expansion will help in increasing its topline and meeting the demand which is expected to improve after the monsoon departure and government’s thrust on infrastructure revival. Also the company is expected to add another 45MW of captive power taking its total captive power capacity to 157 MW which will further reduce its power cost.

Pick up in Cement prices by INR25-30 per bag after the monsoon season: Cement prices in the Andhra Pradesh market have started to pick up after the correction witnessed in the earlier 3 months time. Prices of cement have gone up by INR25-30 per bag of 50 kg in AP in October after hovering around a level of INR230-240 per bag. Cement companies, which have been going through a bad patch, see not just a recovery of prices, but growth with demand increasing, as the monsoon season is just over and construction movement is showing signs of improvement.

To read report in detail: MADRAS CEMENT

>SANOFI INDIA: Acquisition of UMPL business

Sustainable growth
Sanofi India (SIL) is a leading MNC pharma company with strong product portfolio in the domestic market. Five of its ten major brands are growing faster than the market and are likely to drive future growth. Three of the company’s major brands contribute 23% of total revenues. In Nov’11, SIL acquired the generic neutraceutical formulation business of Universal

Medicare Private Limited (UMPL) for Rs5.61bn. Thebacquisition would result in a sustainable growth. SIL is unlikely to get majorly impacted by National Pharmaceutical Pricing Policy (NPPP). We initiate coverage on the company with a Buy rating and target price of Rs2,729 based on 24x CY14 earnings.

Strong product portfolio: As per IMS-MAT June’12 data, ten of the company’s brands appear in the list of top 300 products. The top 10 brands contribute ~51% of its revenues. We expect these brands to drive the future growth.

Acquisition of UMPL business: In Nov’11, the company acquired 40 neutraceutical brands of UMPL for Rs5.61bn. These brands had sales of Rs1.1bn in FY11. The acquisition was made at 5.1x of their revenues. With this acquisition, SIL has entered into the OTC segment. We expect these brands to deliver higher growth from the marketing thrust from SIL.

No major threat from NPPP: Currently, four major products of SIL are under price control. Under the NPPP provisions Amaryl M and Clexane would be under price control. However, if the combinations with NLEM drugs are excluded, Combiflam and Amaryl M would be outside the purview of price control.

Debt-free cash rich company: SIL continues to be a debt-free company even after the Rs5.61bn acquisition of UMPL business in Nov’11. The company had cash of Rs2.34bn (Rs102 per share) as on 31st December’11. We expect SIL to continue the debt-free status due to the descent cash flow from operations.
Initiate coverage with a Buy rating: We expect SIL to report 18% CAGR in revenues and 19% CAGR in net profit over next 3 years from the strong growth of its brands in niche therapeutic segments and acquisition of UMPL business. At the CMP of Rs2235, the stock trades at 25.3x CY12E EPS of Rs88.3 and 19.7x CY13E EPS of Rs113.7. We initiate coverage on the company with Buy rating and target price of Rs2,729 (based on 24x CY13E EPS of Rs113.7) with a 22.1% upside over next 12 months.