Strategy (LIC – India’s largest financial institution): LIC is India’s largest financial institution with assets of more than US$200bn. It owns 15% of government securities and 5% of India’s market cap. However, a sharp decline in financial savings has resulted in a sharp slowdown in its premium income. This coupled with increased surrender of policies has resulted in a 20% decline in LIC’s net investments during FY10-12. However, despite the slowdown, LIC has largely maintained its market share in the life insurance market.
ITC (Lower sales due to one-offs, BUY): ITC reported net profit growth of 18%, in line with our estimate. While net sales of cigarettes at 7.1% seems disappointing, it was due to one-off in the base; adjusted for this, cigarettes net sales growth would be 11.4%. Total expenses for the cigarettes division was down 8%, which enabled segment Ebit growth of 18%. In Q2, ITC will benefit from the increase in goldflake 69mm price, which would push up gross sales by 2%. Moreover, national rollout of 64mm would help improve volume growth from -2% in 1QFY14. Maintain BUY, target price Rs.375.
Maruti Suzuki (In-line quarter; outlook reasonably stable, BUY):
- Maruti’s 1Q operating results were in line with our estimates. Gross margin improved 180bp QoQ driven by currency. However, operating expenses rose 200bp due to deleverage (volumes down 22% QoQ). Ebitda margin dropped 20bp to 11.4% in line with our estimate. Other income almost doubled YoY and drove the 13% PAT beat.
- Maruti’s domestic dispatches fell 7% YoY but retail volumes were flat-to-up marginally. The management retained its FY14 growth guidance of 0-5%. We believe export momentum will pick up (12-15% growth in 2Q-4Q) after country-specific issues led to a 35% decline in 1Q.
- Given the recent sharp depreciation in INR, we do not expect incremental currency benefits from here on. We expect increase in discounts on diesel vehicles to be offset by benefits of operating leverage as volumes ramp up from the seasonal low of 1Q.
- We cut our EPS estimates by 5-6% due to a slight cut in volume and margin estimates and a higher tax rate. We cut our TP from Rs1,920 to Rs1,800, based on 14x FY15 EPS. Retain BUY.
GAIL (India) (Regulatory risks continue to weigh on earnings, REDUCE): GAIL’s Ebitda and PAT were significantly below estimates on a weak LPG business performance. GAIL faced a shortfall in KG D6 gas for its LPG business, which it replaced with LNG imports. With higher input cost and flat subsidy burden YoY, the LPG business recorded an EBIT loss. We maintain our view that regulatory uncertainty will continue to weigh on GAIL’s earnings amid risks of higher gas prices and cut in APM gas allocation. We expect GAIL to report flat EPS over FY14-15ii. Maintain REDUCE.
Sesa Sterlite (Sterlite 1Q: Soft quarter, REDUCE): Sterlite’s 1Q PAT at Rs9.3bn (-52% QoQ; -22% YoY) was 11% above our estimate on higher other income. Power sales volume is expected to improve in the coming quarters on increase in PLF and better evacuation. However, the impact on consolidated earnings would be meagre. The Madras HC has approved the merger of Sesa and Sterlite and the management awaits a verdict on the appeal filed by a shareholder against Bombay HC’s approval. Despite reasonable valuations, we retain our negative stance due to challenges in the aluminium business and non-fungibility of cash. Retain REDUCE.
ACC (Better-than-expected 2QCY13, REDUCE):
- ACC’s 2QCY13 results were above our estimates led by better-than-expected volumes and realisation. Cement volumes increased 1% YoY against our expectation of 2% decline and reduction in cement realisation narrowed to 4.5% YoY against our expectation of 6% decline. These factors supported performance for the quarter.
- Net sales declined 4% YoY to Rs28bn against our expectation of Rs27bn. Although Ebitda was down 31% YoY to Rs4.3bn because the company lagged in passing on costs due to subdued industry volume growth, it was higher than our expectation of Rs3.6bn.
- Decline in PAT was lower than expected at 37% YoY to Rs2.62bn as against our expectation of 40% decline to Rs2.49bn owing to better operating performance during 2QCY13.
- We expect subdued profitability in 3QCY13 because a strong monsoon would result in reduced prices. We expect sequential improvement in profitability from 4QCY13 onwards for the industry and ACC; we maintain our REDUCE rating on the stock due to stretched valuations.
United Phosphorus (In-line results, stable outlook, ADD): United Phosphorus (UPL) reported overall in-line 1Q FY14 earnings, with a 23% sales decline in North America offset by double-digit growth across other regions. Ebitda margin increased 90 bps YoY and working capital and debt remained under control. We adjust our estimates slightly, upping FY14-15ii EPS by 5-6% to Rs19.0-20.5 on lower interest expense. Although longer-term risks remain, undemanding valuations, reasonable growth momentum, and an improved balance sheet should help support the stock in the near term.
Corporate Front Page:
- Wockhardt has appointed a US-based consultant for its Waluj facility to address quality issues raised by the US Food and Drug and Administration. (BL)
- GAIL (India) Ltd may abandon the Tamil Nadu portion of the Kochi-Koottanad-Bangalore-
- Jet Airways has responded to concerns raised by the Foreign Investment Promotion Board (FIPB) on its proposed stake sale to Etihad, in an attempt to persuade the apex inter-ministry to clear the proposal. The FIPB, which has circulated the response of Jet Airways to stakeholder ministries, will consider the proposal on Monday, along with Sebi’s views on the deal. (ET)
- Standard & Poor’s Ratings Services revised its outlook on Tata Motors to stable from positive and affirmed its BB long-term corporate credit rating. It also affirmed the BB long- term issue ratings on the company’s senior unsecured notes. (BS)
- The SEBI is examining the terms of the agreement between Ambuja Cements and Holcim to ensure that interests of minority shareholders are protected. (ET)
- Dewan Housing Finance Corporation purchased DLF’s 74% stake in life insurer DLF Pramerica Life Insurance Company for Rs2.20bn. (ET)
- Wipro Chairman Azim Premji said the US market seemed much better than what it was three to four months ago, reinforcing the positive outlook reported by information technology companies. He, however, said the Indian market continued to be a concern. (BS)
- Intensifying its drive against firms sitting idle on mines, an inter-ministerial group has recommended serving explanatory memos to allocatees of 21 captive coal blocks, including companies like Coal India, NTPC, Tata Steel and Reliance Power for slow progress in developing these mines. (ET)
Economy Front Page:
- Domestic oil production in the April-June quarter declined 1.4% against the same period last year, while natural gas production dipped 17.6% year-on-year. In June, crude oil output dropped marginally by 0.6% year-on-year. (BL)
- The Reserve Bank of India conducted the auction of cash management bills, most of which got subscribed at high-cut off yields. (BS)
- Mauritius is mulling measures to allay India’s concerns over the misuse of the bilateral tax avoidance agreement between the two nations by third country investors. The measures could include listing in Mauritius bourses for companies that are using the country to invest in India. (ET)
- The government has instituted a committee to plug loopholes in the manufacturing practices of the auto industry to check the authenticity of its quality parameters following the increasing number of technical snags and recalls. (ET)
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