WEEKENDER REPORT. Macro / political commentary

Transcription

1 WEEKENDER REPORT Macro / political commentary SINCE 1989 Prime Minister Narendra Modi s main national opponents lost control of two states in the recently concluded elections, diluting their ability to thwart legislation that s key to his reform agenda. Congress lost to the BJP in Assam, ending its 15-year rule in the north-eastern state. The Gandhi dynasty s political organization also dropped Kerala and was only ahead in Puducherry. The results of the assembly elections in Assam, West Bengal, Kerala, Tamil Nadu and Puducherry were as good as Modi could hope for: his party only had a real shot of winning in Assam, reflecting its struggles to expand outside of Hindi-speaking areas. After these results, Congress will control outright just six of India s 29 states, down from 15 in Modi s party would hold power in 10 states, with regional parties and unwieldy coalitions leading the rest. BJP has a good working relationship with regional leaders and will seek to woo them to isolate Congress to pass the goods and services tax (GST) and other reforms. West Bengal s Mamta Banerjee, is one of the regional leaders with a swing vote on economic reforms. On Thursday, she reiterated support for the GST even though she has accused Modi s Hindu nationalist BJP of policies that stoke social strife. We have differences in ideology with the BJP which is why we cannot be with them, Banerjee said at a briefing in Kolkata. We will support the GST and anything that benefits people. The two-day visit of Prime Minister Narendra Modi to Iran on May 22 and 23, emerging out of western sanctions over its nuclear programme, is expected to see the two countries cementing ties in areas such as regional connectivity and energy cooperation. The formal signing of the Chabahar agreement, which will allow India access to Afghanistan and central Asian countries via the strategically-significant Iranian port, is likely to take place during the visit. In terms of energy cooperation, PM will pursue his Iranian interlocutor for awarding the Farzad B gas field in Iran, which awaits some domestic clearances. Last year, ONGC Videsh had proposed a $3 billion plan to develop Farzad B, which is estimated to hold initial in-place gas reserves of 12.5 trillion cubic feet. Chabahar port will reduce landlocked Afghanistan s dependence on Pakistan. Sources said India has also started the process of paying back the dues from oil import amounting to over $6 billion to Iran, using European banking channel as demanded by Tehran. Capital market regulator Securities and Exchange Board of India (Sebi) has decided to act on the recommendations of the Special Investigative Team to put more checks on Participatory Notes (P- Notes). The new norms, while ensuring more transparency, will also gradually make the product irrelevant. Earlier whenever there has been an attempt to curb investments via P-Notes, market reaction was too sharp & negative. Hence, this time, Sebi s strategy seems to be avoiding a complete clampdown, but making the product less attractive. Initial verdict on the street is that the steps announced by Sebi will not result in a knee-jerk reaction in the market, but in long term, money coming through this route may be affected as the responsibility of compliance has been largely laid on the shoulders of P-Notes issuers/financial institutions. P-Notes are instruments issued by registered foreign portfolio investors (FPIs) to overseas investors, who wish to invest in the Indian stock market without registering themselves with the market regulator. From the time they were introduced in 1995, the government wants to regulate them. The Reserve Bank of India (RBI) has always been against the idea of P-Notes, raising concern on the hidden identities of investors and multi-layering, which makes it impossible to tell who the actual beneficiary of the investment, is. Foreign investments via this route used to be more than 50% of total earlier, now it is just around 10%. Page 1 / 8

2 Equity market performance Sensex corrected marginally during the past week by 0.7% while mid & small cap indices were down by 1.2% & 1.3% respectively. FMCG was the best performing index closing the week at -0.1% while cap goods fared worst down by 2.3%. ONGC was the top performing stock up by 4.6% while Bank of Baroda was worst performer down by ~13%. Index Value Weekly % FMCG 7,722 (0.1) IT 11,203 (0.1) Metals 7,461 (0.6) Sensex 25,302 (0.7) Auto 18,070 (0.8) Healthcare 15,275 (1.0) Oil & Gas 9,066 (1.1) Mid Cap index 11,023 (1.2) Small Cap index 10,964 (1.3) Bankex 18,740 (1.6) Power 1,799 (2.0) Cap Goods 13,059 (2.3) Stock INR Weekly % Gainers ONGC Dr. Reddy's 3, ITC Yes Bank Maruti Suzuki 3, Losers Lupin 1,505 (5.3) PNB 73 (5.5) Adani Ports 178 (5.6) SBI 171 (7.3) BOB 135 (12.9) Currency, commodity & interest rates INR depreciated by 1% against $ and by 2.4% against whereas it was flat against &. Amongst commodities precious metals corrected during the week while Brent crude gained by 5.5% and aluminium by ~3%. GoI bond yields were largely stable. Currency Value Weekly % INR / $ 67.4 (1.0) INR / INR / 98.5 (2.4) INR / * * per 100 Yen Commodity INR Weekly % Crude (1 barrel) 3, Gold (10 gm) 29,729 (0.5) Silver (1 kg) 39,632 (1.9) Copper (1 kg) Aluminium (1 kg) GoI Bond Yield Weekly % 10-year 7.5% year 7.5% year 7.1% 0.2 Key economic events next week India s wholesale inflation came in at +0.34% YoY against expected number of -0.2%. UK s consumer inflation data was softer at 0.3% YoY, while US was in-line at 0.4% MoM & Euro region too was in-line at -0.2%. Unemployment rate for UK was constant at 5.1%. Next week, Euro region s manufacturing PMI data will be released while UK will report its GDP data. US will report its new home sales data & 1Q GDP data. Page 2 / 8

3 Date Event Forecast Previous Europe Monday, May 23, 2016 Manufacturing PMI (May) Thursday, May 26, 2016 UK GDP (1Q; YoY) 2.1% 2.1% US Tuesday, May 24, 2016 New home sales (Apr; MoM) 2.0% -1.5% Friday, May 27, 2016 GDP (1Q: QoQ) 0.9% 0.5% Earnings calendar Date Company Date Company Monday, May 23, 2016 BPCL Thursday, May 26, 2016 Tata Chemicals Tuesday, May 24, 2016 Colgate Thursday, May 26, 2016 United Spirits Tuesday, May 24, 2016 Tech Mahindra Friday, May 27, 2016 Canara Bank Wednesday, May 25, 2016 Bajaj Auto Friday, May 27, 2016 IOCL Wednesday, May 25, 2016 Larsen & Toubro Friday, May 27, 2016 SBI Wednesday, May 25, 2016 Tata Steel Saturday, May 28, 2016 Coal India Thursday, May 26, 2016 ONGC Saturday, May 28, 2016 Jubilant Foodworks Sector / company specific news NTPC and Coal India have signed an agreement to form a Joint Venture Company (JVC) to take up the revival of fertilizer plants of Fertilizer Corporation of India (FCIL) located at Sindri and Gorakhpur by setting up an ammonia urea plant at each location. Both the companies will hold an equal share in the proposed JVC. NTPC is an Indian central Public Sector Undertaking (PSU) under the Ministry of Power, Government of India, engaged in the business of generation of electricity and allied activities. The company also undertakes consultancy and turnkey project contracts that involve engineering, project management, construction management and operation and management of power plants. Aban Offshore has received a termination notice from PEMEX purporting to exercise its contractual right to terminate the charter for the Jack-up Rig 'Deep Driller1' belonging to a wholly owned step down subsidiary of the Company effective June 01, 2016, approximately 3 months prior to its original expiry. Aban Offshore is engaged in the business of providing offshore drilling and production services. The Company's operating segments include offshore oil drilling and production services, and wind power generation (Wind energy). SRF is reportedly planning to spend Rs 3,500 crore over the next four years, 70% of which would go into its fast-growing chemicals business, to cater to rising global demand. The company will use internal resources to fund the planned investment as the company generates about Rs 1,000 crore of free cash flows every year. SRF is a leader in refrigerants, engineering plastics and industrial yarns in India. The company also manufactures polyester films and fluoro specialties. Besides India, SRF has a presence in Dubai, South Africa and Thailand. Axis Bank, India's third largest private bank, has launched India's first multi-currency, cobranded forex prepaid card that facilitates both international and domestic usage while rewarding customers with unlimited miles on every spend. The bank has partnered with Miles & More, Europe's leading frequent flyer and awards programme, to introduce the 'Miles & More Axis Bank World Traveller Card'. The card is powered by MasterCard's contactless chip security, offering Page 3 / 8

4 customers easy and safe access to 30 million merchant outlets across the world. Axis Bank and non - Axis Bank customers can avail the card and load up to 17 currencies to avoid the hassle and risk of carrying multiple currency note variants. State-owned Indian Oil Corporation (IOC) has hiked Petrol prices by 83 paise per litre & Diesel prices by Rs 1.26 per litre with effect from the midnight of May 16/ May 17, The price of petrol in Delhi has become Rs a litre, while diesel has become Rs a litre. The current level of international product prices of petrol & diesel & the rupee-us Dollar exchange rate warrant increase in price of petrol & diesel, the impact of which is being passed on to the consumers with this price revision. IOC is the largest enterprise in the country & the foremost ranked Fortune Global 500 Company in India & has presence in the complete hydrocarbon value chain from downstream refining & marketing, pipeline transportation, Petrochemicals, E&P & Gas Marketing. Muthoot Finance has raised Rs 528 crore through retail issuance of non-convertible debentures (NCDs) in the current financial year till May 6. The funds will be mobilised for expansion, support working capital requirements and other general corporate purposes. Muthoot Finance is the largest gold financing company in India in terms of loan portfolio. The company is a Systemically Important Non-deposit taking NBFC headquartered in the southern Indian state of Kerala and with its corporate office in New Delhi. Dolphin Offshore Enterprises (India) has bagged contract worth $3.99 million from ONGC for underwater structural repair of HC platform in Heera Field. The duration of contract is 240 days from 16th October, The company has signed a charter party agreement with Sanat Gostar Kish Co (SGK) for deployment of the vessel E. Francis and Diving personnel in the Middle East. This vessel was hired by the company from a company in the Middle East. The contract value is $ 7 million (approximate) and the contract duration of the charter hire is 200 days. Dolphin Offshore Enterprises (India) is a leading provider of underwater services to the Indian oil and gas industry. Future outlook As earnings season comes to an end, the remaining results would impact the market movement. Additionally as May ends, market participants may look at the onset of monsoon to determine how the markets moves forward. Sensex Chart 30,000 28,500 27,000 25,500 24,000 22,500 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Page 4 / 8

5 Weekender Stock Idea GlaxoSmithKline Consumer Healthcare Ltd. (Buy; Price: Rs.5,816; Target: Rs.6,800; Upside: 17%) Shareholding Stock performance Key data Category Stake Perf. 1M 6M 1Y Particulars FY15 FY16 FY17e FY18e Promoter 72.5% Company -3.3% -1.2% -8.3% P/E (x) Institutions 12.7% Sensex -2.1% -2.2% -9.0% EPS growth -14% 18% 12% 12% Non-institutions 14.8% FMCG -2.7% -3.6% -1.8% ROE 28% 28% 27% 26% Govt. 0.0% Dividend yield 0.9% 1.1% 1.3% 1.5% Background GlaxoSmithKline Consumer Healthcare Ltd. (GSK-CH, mkt. cap Rs.24,450 crs) is a leading consumer company in India. Its parent is GalxoSmithKline UK. It is India s leading health food drink manufacturer. Investment Argument Strong brand portfolio GSK-CH has a very robust portfolio of brands in India. Its flagship brand is Horlicks in the health food drink (HFD) category. Other brands in nutritional category are Boost, Viva, & Maltova. It also sells prominent brands like Crocin, Eno, Iodex & Sensodyne. Market leader in health food drink segment GSK-CH is the market leader in the health food drink category in India. Horlicks is the leading brand in the category and itself commands market share of 47%. Along with the other brands like Boost, Maltova & Viva the company has market share of >50% in the category. Recently the company has introduced premium version of Horlicks Growth+ which helps kids in age range of 6-9 years to grow. The product is based on patented technology. Under-penetration in HFD segment GSK-Ch is the market leader but on an overall basis, HFD as a segment has only 40% penetration in India. Thus, it provides large headroom for growth although there is strong competition not only from competing HFD brands but also from other categories like nutritional biscuits, cereals, oat meals etc. Hence the company is pushing promotional activities to increase penetration. It has introduced Horlicks product in sachet packaging and also rationalized the price points so that consumers can easily try the product. We believe this is a good strategy to acquire new customers who can become loyal customer in the long run and move up the value curve. Robust financials The company has grown its revenues & EBITDA at a CAGR of 16% from CY05 till FY16. FY16 has seen flat revenue growth on YoY basis as the product is of discretionary nature and also the company derives ~1/3 rd sales from rural areas which have been impacted due to 2 consecutive draughts. But the company is undertaking promotional measures, as discussed above, to drive penetration & growth. Along with the expectation of good monsoon and measures undertaken by the company we expect growth to recover gradually. All along, the company has maintained strong EBITDA margin profile. In FY16 the company has clocked its best EBITDA margin in the last decade. It continues to be a net cash company with dividend payout ratio of 40% and ROE of 27-28%. Page 5 / 8

6 Chart 1: Revenue growth 25% 21% 20% 20% 22% 15% 15% 15% 12% 11% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 FY14 FY15 FY16 0% Chart 2: improving EBITDA margin profile 19% 19% 17% 18% 15% 16% 16% 18% 18% 18% 17% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 FY14 FY15 FY16 Investment valuation We like GSK-CH for its leadership position in HFD category and the initiatives that the company is taking to improve penetration bode well for future growth. It has strong margin profile, healthy balance sheet, good dividend payout, lean working capital cycle & healthy return ratios. At current price of Rs.5,816 GlaxoSmithKline Consumer Healthcare Ltd. is trading at 28.2x FY18e earnings. We recommend buying GlaxoSmithKline Consumer Healthcare Ltd. with a target price of Rs.6,800 implying an upside of 17% from the current price. Page 6 / 8

7 Income statement & balance sheet data & ratios INR crs FY15 FY16 FY17e FY18e Ratios FY15 FY16 FY17e FY18e Sales 4,308 4,309 4,740 5,214 EBITDA margin 16.9% 19.3% 19.0% 19.0% EBITDA PAT margin 13.5% 15.9% 16.3% 16.7% Net Profit Dividend payout 40% 40% 41% 41% Networth 2,113 2,446 2,848 3,299 RoCE 22% 41% 39% 38% Fixed assets Net Debt / Equity -17% -106% -106% -106% Capital employed 4,054 2,571 2,986 3,451 Working capital (days) Net Debt ,587-3,020-3,491 Company price chart Page 7 / 8

8 Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report & the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company Happy investing & have a good weekend! THANK YOU Disclaimer: This report has been prepared by Securities Pvt Ltd. The information & opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information & opinions are subject to change without notice. This document is for information purposes only. Securities Pvt Ltd. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail &/or its attachments. Securities Pvt Ltd., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares & bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) research@lmspl.com, LMSPL Network : Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana), Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai Follow Us On: Page 8 / 8