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Indian Midcaps -In the pink of health?
Our analysis of the 3QFY11 results of 1700+ companies (
shows that sales growth remains high and cost pressures have begun to
stabilise, helping profit growth. Net profits grew by a healthy 20% YoY, down
slightly from 22% in 2Q. Sequentially, net profits increased 5% - in line with
sales. Interest costs and depreciation have increased sequentially for the last
three quarters, albeit depreciation at a slower pace than sales, suggesting
that there is a modest recovery in investments. Staff costs have risen 24%
YoY and 4% QoQ, pointing to an employment recovery. Among the major
sectors, financial led on YoY top line and bottom line growth. The sector alone
contributed more to YoY net profit accretion than all others combined.
Over the past three months, the CNX midcap index has underperformed
Sensex by 9% and seen earnings downgrades. Its PE discount has widened to
23% from 10-11% in August 2010. The discount is now higher than the long
term average of 20% , though well below the 40% seen in 1HCY09.
Topline growing at 21%; raw materials jump 26%
‰ Net Sales for 3QFY11 for the mid-cap universe increased to Rs2.47tn from Rs2.36tn
in 2QFY11. Net sales were at their highest level in eight quarters (+5% QoQ).
‰ In the ex-Oil & Gas and financials segment, sales increased 4% QoQ (+19% YoY)
as it mirrored the larger mid-cap universe.
‰ Raw materials costs were up by 22% but only 3% QoQ to 46% of revenue (up
15bps YoY, down 93bps QoQ), while power costs rose 5% QoQ and staff costs 4%
QoQ. In ex-Oil and Gas and financials, raw materials cost rose 22% YoY.
EBTIDA margin at 25.4%; up 38bps YoY, 91bps QoQ
‰ EBITDA margins for the entire midcap universe came in at 25.4%; more than
recovering the slippage seen in 2QFY11.
‰ In ex-Oil & Gas and financials, EBTIDA margins rose 51bps QoQ to 13.8% in
2QFY11 but were down 29bps YoY. The YoY drop was led by rising material costs.
‰ A 24% YoY (4% QoQ) rise in staff costs suggests wage hikes and a hiring recovery
Net profit growing 20%; sector performance mixed
‰ Net profit at Rs192bn, grew 20% YoY, decelerating slightly from the 22% in
2QFY11. Sequentially, profits increased 5% - in line with sales.
‰ Net margin held at 7.8% - nearly flat on a QoQ and YoY basis
‰ Net profit grew 14% YoY in the ex-oil and gas and financials universe (+8% QoQ)
as the net margin fell 27bps YoY and rose 21bps QoQ.
‰ At a sector level, financials has been the strongest drivers of aggregate and bottom
line growth. Consumer cyclicals have seen momentum moderate after a few
exceptionally strong quarters.
‰ We expect loan growth and margins for banks to come under pressure (see our 3Q
Banking results review published yesterday).
‰ Within the mid cap space, the financial performance at the size extremes (US$1.5-
2.5bn and sub US$200m) has been better than the middle (US$0.5-1.5bn) in
3QFY11, influenced by the sector distribution.
CNX Midcap underperforms the Sensex
‰ The CNX midcap has underperformed largely in line with the Sensex on a 1 month,
3 month, 6 month and twelve month basis with the outperformance between JanSep 2010 being offset by underperformance since then as the midcap index has
seen earnings downgrades.
‰ At 13xFY11 earnings, CNX midcap is at a 26% discount to Sensex (31% on FY12
PE), and is also trading at a substantial discount in terms of price to book.
‰ The PE discount has widened ~8% over three months and is now higher than the
long term average, although still short of the levels seen in 1HCY09.
‰ Whilst a risk of further widening in the discount remains, we believe that this is a
good opportunity to consider positions in midcaps with a strong franchise, clean
track record and quality management and/or stocks which have been beaten down
but business fundamentals remain intact.
‰ Our key picks are: Sobha Developers, Torrent Pharma, Yes Bank, Thermax, Ashok
Leyland, HT Media, Dish TV, Shree Renuka Sugars, Titan, Bharat Forge and Jet
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Midcaps -In the pink of health?
Our analysis of the 3QFY11 results of 1700+ companies (
shows that sales growth remains high and cost pressures have begun to
stabilise, helping profit growth. Net profits grew by a healthy 20% YoY, down
slightly from 22% in 2Q. Sequentially, net profits increased 5% - in line with
sales. Interest costs and depreciation have increased sequentially for the last
three quarters, albeit depreciation at a slower pace than sales, suggesting
that there is a modest recovery in investments. Staff costs have risen 24%
YoY and 4% QoQ, pointing to an employment recovery. Among the major
sectors, financial led on YoY top line and bottom line growth. The sector alone
contributed more to YoY net profit accretion than all others combined.
Over the past three months, the CNX midcap index has underperformed
Sensex by 9% and seen earnings downgrades. Its PE discount has widened to
23% from 10-11% in August 2010. The discount is now higher than the long
term average of 20% , though well below the 40% seen in 1HCY09.
Topline growing at 21%; raw materials jump 26%
‰ Net Sales for 3QFY11 for the mid-cap universe increased to Rs2.47tn from Rs2.36tn
in 2QFY11. Net sales were at their highest level in eight quarters (+5% QoQ).
‰ In the ex-Oil & Gas and financials segment, sales increased 4% QoQ (+19% YoY)
as it mirrored the larger mid-cap universe.
‰ Raw materials costs were up by 22% but only 3% QoQ to 46% of revenue (up
15bps YoY, down 93bps QoQ), while power costs rose 5% QoQ and staff costs 4%
QoQ. In ex-Oil and Gas and financials, raw materials cost rose 22% YoY.
EBTIDA margin at 25.4%; up 38bps YoY, 91bps QoQ
‰ EBITDA margins for the entire midcap universe came in at 25.4%; more than
recovering the slippage seen in 2QFY11.
‰ In ex-Oil & Gas and financials, EBTIDA margins rose 51bps QoQ to 13.8% in
2QFY11 but were down 29bps YoY. The YoY drop was led by rising material costs.
‰ A 24% YoY (4% QoQ) rise in staff costs suggests wage hikes and a hiring recovery
Net profit growing 20%; sector performance mixed
‰ Net profit at Rs192bn, grew 20% YoY, decelerating slightly from the 22% in
2QFY11. Sequentially, profits increased 5% - in line with sales.
‰ Net margin held at 7.8% - nearly flat on a QoQ and YoY basis
‰ Net profit grew 14% YoY in the ex-oil and gas and financials universe (+8% QoQ)
as the net margin fell 27bps YoY and rose 21bps QoQ.
‰ At a sector level, financials has been the strongest drivers of aggregate and bottom
line growth. Consumer cyclicals have seen momentum moderate after a few
exceptionally strong quarters.
‰ We expect loan growth and margins for banks to come under pressure (see our 3Q
Banking results review published yesterday).
‰ Within the mid cap space, the financial performance at the size extremes (US$1.5-
2.5bn and sub US$200m) has been better than the middle (US$0.5-1.5bn) in
3QFY11, influenced by the sector distribution.
CNX Midcap underperforms the Sensex
‰ The CNX midcap has underperformed largely in line with the Sensex on a 1 month,
3 month, 6 month and twelve month basis with the outperformance between JanSep 2010 being offset by underperformance since then as the midcap index has
seen earnings downgrades.
‰ At 13xFY11 earnings, CNX midcap is at a 26% discount to Sensex (31% on FY12
PE), and is also trading at a substantial discount in terms of price to book.
‰ The PE discount has widened ~8% over three months and is now higher than the
long term average, although still short of the levels seen in 1HCY09.
‰ Whilst a risk of further widening in the discount remains, we believe that this is a
good opportunity to consider positions in midcaps with a strong franchise, clean
track record and quality management and/or stocks which have been beaten down
but business fundamentals remain intact.
‰ Our key picks are: Sobha Developers, Torrent Pharma, Yes Bank, Thermax, Ashok
Leyland, HT Media, Dish TV, Shree Renuka Sugars, Titan, Bharat Forge and Jet
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