ä Strong realisations continue to bolster topline by 86.1% yoy
ä Rising raw material costs lead to a 520bps yoy drop in OPM
ä GPIL plans to sell higher amount of sponge iron than billets in the next two quarters
ä Iron ore mining expected to start in Q3 FY09, earlier than expected
ä The company announces a buyback at a price not exceeding Rs135 per share
Q2FY2009 earnings review – Key points
-The Sensex’ earnings (adjusted for the one-time items) grew by nearly 10.1% in Q2FY2009 on the back of the strong performance of the financial service companies (earnings up 30% year on year [yoy]), telecommunications (telecom) companies (earnings up 28% yoy) and capital goods companies (earnings up 18% yoy). However, the Sensex (excluding the oil companies) saw an earnings growth of 13.4% yoy during the quarter and the same is ahead of our estimate of a 10.1% earnings growth for the quarter.
-Notably, the revenue growth for the Sensex companies (ex-oil and banking companies) was healthy at 28.3% yoy. However, the same could not translate into an equally good operating performance largely due to a 228-basis-point contraction in the operating profit margin (OPM) and a higher capital cost. The margins in most sectors were affected by the rising input cost, employee cost (especially provisions for wage hikes by the public sector undertakings [PSUs] as per the Sixth Pay Commission’s recommendations) and a steep spike in the cost of power & fuel (both coal and oil). The margin contraction was more pronounced in case of automobile, cement, real estate (read DLF), pharmaceutical, cement and oil & gas sectors. On the other hand, metal and information technology (IT) companies registered an expansion in their EBITDA (earnings before interest, tax, depreciation and amortization) margin on an annual comparison basis.
-In terms of a strong performance, telecom and banking sectors positively surprised the markets. The telecom companies have proven their ability to grow in spite of a worsening economic environment whereas the banking sector has reported a higher than expected credit growth, healthy margins and a buoyant growth in the fee-based incomes (in case of the private sector banks).
-Though the second quarter’s earnings growth is ahead of expectations, the signs of stress are quite evident. The utilisation rates have declined in key manufacturing sectors and the working capital cycle is deteriorating. In addition, the management commentary indicates possible delays in the investment/expansion plans of companies on account of the difficulty in mobilising fresh capital (both equity and debt) and the worsening demand environment. Despite the recent easing of the macro challenges (in terms of lower commodity prices and a reversal in the interest rate cycle), the earnings growth momentum could decelerate further in the coming quarters.
-The second quarter results season witnessed a sharp downward revision in the earnings estimates for the Sensex companies. Now the consensus earnings per share (EPS) estimate for FY2009 stands at Rs933, sharply down from Rs972 at the beginning of the results season. For FY2010 also, the consensus EPS estimate for the Sensex has been reduced by 4.6% to Rs1,076. As anticipated, the main culprits are the metal stocks and Reliance Industries. In view of the collapse in the commodity prices and the sharp deterioration in the demand outlook, analysts have cut the FY2009 and FY2010 estimates for the metal stocks like Hindalco Industries, Tata Steel and Sterlite Industries by 40-60%. Tata Motors is another company that has seen a massive downward revision in its earnings estimate because of its sliding domestic sales and the worsening outlook for its international operations (especially Jaguar and Land Rover [JLR]).
-After the sharp downward revision in October, the compounded earnings growth estimate for the Sensex stands at around 12-13% vs 20-22% in the beginning of the year. In fact, the Sensex’ compounded earnings growth estimate for FY2008-2010 would drop to single digits if one were to exclude the incremental earnings from the commissioning of Reliance Petroleum Ltd (RPL)’s refinery and the production of gas at the Krishna-Godavari Basin of Reliance Industries in FY2010. After the steep revision in the earnings estimates for India Inc over the past nine months, most of the negatives already seem to be factored in the estimates. Hence, there is perhaps limited scope for another round of serious earnings downgrades in future. Currently, the Sensex trades at 10.5x FY2009 and 9.2x FY2010 estimated earnings, which is close to its historic low level.
This note analyses the equities moves in October 2008 by Mutual Funds having month-end equity corpuses of more than Rs.
3,000 cr (except Fidelity Mutual Fund whose portfolio for October 2008 was not available).
The source of data for this
analysis is NAV INDIA, who in turn takes into account the monthly-declared portfolios of the respective schemes wherever
available (excluding offshore funds, FMPs and new fund offers).
Summary:
In Oct 2008, Indian mutual funds registered their sharpest monthly fall in assets in at least a year, dragged by the stock market meltdown and heavy redemptions. This is the second consecutive monthly fall for mutual funds. The October drop seemed muted considering the heavy fall in the equity markets and redemptions in money market or liquid mutual funds, where banks and companies park their surplus money. The combined average assets under management (AUM) of the 35 fund houses in the country saw an erosion of over Rs 97,000 crore and dropped to Rs 4,31,901.42 crore at the end of October. Reliance Mutual Fund continues to be the top fund house in the country with HDFC MF and ICICI Prudential following it.
In lieu of the declining AUMs of the fund houses, last month the Reserve Bank of India had decided to inject Rs 20,000 crore through short-term lending route to help the mutual funds meet their liquidity needs and overcome redemption pressure At the end of October, investors redeemed funds worth Rs 46,793 crore, with maximum of withdrawals coming in fixed income plans. The redemptions in mutual fund schemes have been on the rise in the current fiscal, and in September they had witnessed withdrawals to the tune of Rs 45,655 crore. Fixed income plans, with assured returns annually, saw a maximum pullout of Rs 52,820 crore as on October, followed by equity funds investing in stocks worth Rs 706 crore. Fixed maturity plans have witnessed panic redemption in October on concerns about the credit quality of debt papers held by these schemes. Also, Gilt funds, which invest in government securities, and Gold Exchange Traded Fund saw inflows of Rs 3,725 and Rs 140 crore, respectively. Gilt funds are mutual fund schemes floated by asset management companies with exclusive investments in government securities. Within equity AUM, Reliance, UTI, HDFC saw the largest fall. However in terms of percentage, ICICI Prudential saw the maximum fall. During Oct 2008, Software stocks were in favour as defensive buys, while Banks-Private, Metals, Refineries, Electric Equipment and Contracting stocks got sold off. At micro level, buying was seen in HDFC Bank, Infosys, TCS and United Spirits among others.
-Contributed by a blogger
Metal companies in Q2 FY09 reported strong numbers, led by higher steel realisations and better than expected revenue from by-products in non-ferrous companies. In our coverage universe of eight companies, except NALCO, all the companies registered inline or higher than expected topline numbers. Steel realisations in Q2 FY09 were higher ~10% qoq despite price freeze announced by the companies in Q1 FY09. Steel producers’ OPM remained under pressure due to the impact of higher coking coal used (contract prices were up 200%). Bottomline of most of the steel companies were impacted by MTM forex losses on their foreign currency loans. The credit crunch in global markets led to a sudden drop in demand for the metal. This in turn led to a rise in finished goods inventory by the end of September. Non-ferrous companies’ topline and PAT were aided by higher than expected revenue from its by-products. Most of the non-ferrous companies’ OPM were under pressure on account of higher coal and power costs.
By India Infoline Research
Tags: Add new tag
In September 2008, India’s cement consumption grew 9.6% yoy, a sharp contrast to the weak performance in the previous month. However, the strong consumption growth is unlikely to sustain in coming months as the real estate market (largest consumer) in North and Central region continues to weaken. South market witnessed strong demand supporting firm pricing (up 4.7% yoy) in the region. However, prices might correct in the upcoming monsoon season. International coal prices and freight cost have come off significantly from their peaks but the sharp rupee deprecation of 6.3% during the month neutralizes the beneficial impact to an extent. The key concern remains the weakening cement demand due to a dip in construction and infrastructure activities in the country. We believe that cyclical downturn will start impacting realization sooner than later, leading to further contraction in margins of cement manufacturers. This could lead to de-growth in earnings for many industry players.
ä Rebound in consumption growth; Central and South region outperform
ä Contradictory pricing trend emerge; realizations remained robust in South
ä Capacity utilization improves mom but remains lower yoy
ä Key performers were players who have recently added capacities
ä Coal prices cool from peak; freight index falls to the lowest levels since 2002.
All-India cement figures
|
(mn tons) |
Sep-08 |
Sep-07 |
Aug-08 |
yoy growth (%) |
mom growth (%) |
YTD’08 |
YTD ’07 |
yoy growth (%) |
|
Production |
13.86 |
12.76 |
13.16 |
8.62 |
5.32 |
132.08 |
122.76 |
7.59 |
|
Dispatches |
13.87 |
12.65 |
13.19 |
9.64 |
5.16 |
131.86 |
122.37 |
7.76 |
|
Consumption |
13.54 |
12.36 |
12.91 |
9.60 |
4.89 |
129.98 |
119.24 |
9.01 |
|
Cap Utilization (%) |
81.43 |
88.49 |
77.30 |
- |
- |
90.05 |
88.49 |
- |
By India Infoline Research
Performance of most companies in our universe was in line with our expectations during Q2 FY09. All companies recorded double digit revenue growth led by strong volume growth across segments. However, operating margins remained under pressure due to a sharp rise in raw material prices. Over the past month, most of the key raw material prices like LAB, crude oil and palm oil have started correcting and are expected to ease the margin pressure in the coming quarters. Food companies though, are likely to continue to witness margin pressure on account of firm agri commodity prices. Most players have taken measures like price hikes and reduction in pack sizes to mitigate cost pressures. We continue to remain positive on the sector with ITC and Marico as our top picks.
Valuation summary
|
Company |
CMP |
EPS (Rs) |
P/E (x) |
||
|
|
(Rs) |
FY09E |
FY10E |
FY09E |
FY10E |
|
Britannia |
1,176 |
95.9 |
111.8 |
12.3 |
10.5 |
|
Colgate |
378 |
20.2 |
23.6 |
18.8 |
16.0 |
|
Dabur |
88 |
4.5 |
5.3 |
19.8 |
16.7 |
|
GLSM* |
571 |
43.5 |
49.1 |
13.1 |
11.6 |
|
Godrej CP |
104 |
6.8 |
8.1 |
15.2 |
12.7 |
|
HUL* |
238 |
9.6 |
11.3 |
24.9 |
21.0 |
|
ITC |
170 |
9.2 |
10.7 |
18.5 |
15.9 |
|
Marico |
51 |
3.0 |
3.8 |
16.6 |
13.4 |
|
Nestle* |
1,417 |
58.6 |
70.2 |
24.2 |
20.2 |
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