VST Tillers & Tractors Expect a healthy performance; Buy :: Anand Rathi

VST Tillers & Tractors
Expect a healthy performance; Buy
Key takeaways
3QFY14 should continue the 1H trend. While tractor industry sales were
robust in 1H, power tillers also displayed a good trajectory in 1H. Consequent
on 24.1% yoy estimated volume growth, we expect 26.8% yoy revenue
growth to `1.6bn. Our EBITDA margin expectation is 17.9% (up 200bps
yoy, up 10bps qoq). We expect EBITDA to grow 42.6% yoy, to `279m. We
expect `178m in profit, a 37.4% yoy growth (stable qoq).
Per-unit parameters to improve yoy. We expect realisations to be 2.2%
higher yoy, while the contribution per unit is expected to be 9.9% higher yoy.
While the base is no longer low as it was in 2Q, we expect EBITDA per
vehicle and profit per vehicle to be 14.9% and 10.7% higher yoy.
Long-term outlook good. More than 50% of cultivated land is less than
four hectares (of this ~42% is less than two hectares). Nearly 83% of
operational landholders are marginal or small farmers, who own less than two
hectares. This trend augurs well for the company.
Our take. Lower offtake of tractors and power tillers hit 2QFY13
performance. While 2HFY13 was better, 1HFY14 has marked a return to
robust volumes. The management targets over 20% growth in FY14 (we
estimate 25% and 22.5% growth for power tillers and tractors respectively).
Demand for tractors is expected to be good, despite the company facing
problems on sourcing a few components. In 3Q, power-tiller sale could be hit
by adverse weather conditions in a key market. However, we are optimistic
for the long term and maintain a Buy. The stock currently trades at 7.3x
FY15e.
Risks. Intense competition, change in government policies, adverse weather
conditions.

Don’t fall for traditional plans :: Business Line

The new regulation has not capped charges and the traditional plans continue to be costly.

While the market-linked plans of insurance companies were refurbished long ago, traditional plans, which offer assured returns, continued to have features that were loaded against the investors.

The Insurance Regulatory and Development Authority (IRDA) has tried to address this by coming up with a new set of regulations for traditional plans. The deadline for insurers to comply with these rules passed on New Year ’s Day.

Most insurers have re-launched their old products in the last two weeks based on the regulator’s mandate. But traditional insurance plans are still far from a mouth-watering proposition for investors.

Yes, you may be shelling out less to the agent and getting a higher surrender value if you hop off midway. But despite these changes, these plans remain high-cost investments.

What has changed

The new guideline has improved the surrender value under traditional insurance policies. Now on, the first year premium paid will also be counted in surrender value calculation, and, policies of term less than ten years, will acquire surrender value after the second year itself. It also limits agent commissions both on long term and short term policies.

It has been mandated that revenues from online sales and through other direct channels, will have no commissions and that the benefit here will have to be passed on to the customer. There are also stipulations on minimum sum assured under a policy, reinforcing the point that these products are essentially insurance policies.

Higher Commissions

For traditional plans such as endowment and moneyback policies, around 35 per cent of your first year premium (on policies where premium payment term is 12 years or more) will now flow to the agent. Compared to Unit-Linked Plans which pay 5-12 per cent of the premium in the first year as agent commission, the charges in traditional plans still look excessive.

Commissions need to be trimmed further to improve effective returns meaningfully. Also, there is no cap on total charges under a traditional plan unlike in ULIPs. In unit-linked plans, the investor can be sure that the insurer will not take away more than 2.25 per cent of returns, as this is maximum allowed difference between gross and net yield under the regulation.

The best of traditional products even now may give you just 5-6 per cent returns, with outer limits depending on bonus declaration.

Surrender to pinch

If an agent tells you that lock-in requirements on traditional polices have been relaxed, don’t fall for it. Surrendering a traditional plan in its initial years will still be a costly affair. Earlier, the surrender value amounted to 30 per cent of the premiums paid till date, excluding the first year premium.

Now it is 30 per cent of total premiums paid. For example, if you paid Rs 1 lakh for three years, your surrender value in the fourth year will be Rs 90,000 now against Rs 60,000 earlier.

A policy of term less than 10 years will acquire surrender value after the second year and one of policy term over 10 years, will acquire surrender value after when three year premiums have been paid.

Higher cover

IRDA has also asked insurers to ensure higher sum assured under traditional insurance plans.

For a 45-year-old person, the minimum sum assured now has to be 10 times the annual premium and for someone above this age, the minimum sum assured has to be seven times the premium. Now, though this ensures a higher risk cover, the costs attached are also high.

Poor Transparency

A traditional plan, does not disclose where it invests your premiums. Most of the money goes into debt investments with an allocation to equity, but investors would not have any disclosures about the investments until maturity. This is likely to keep investors in the dark about returns until the maturity.

Unlike unit-linked plans , traditional plans also don’t offer monthly declaration of NAV or fund value. The new regulation has not done anything to correct this lacuna in traditional plans.

All you would get is a benefits illustration assuming gross returns of 4 per cent and 8 per centAs mentioned earlier, mixing insurance with investment is a bad idea.

The best option for investors across board is to take a term policy to cover all risks and a medical cover. Select unit linked plans can be looked at if their charges are low and if they have a good track record, with a modest risk profile. While traditional plans may have worked in an environment of low inflation, they may not make the cut in a high-inflation, high-interest rate scenario.

Gabriel India A weak 3Q, but outlook good; Buy :: Anand Rathi

Gabriel India
A weak 3Q, but outlook good; Buy
Key takeaways
Weak OEM sales on low demand. Decline in demand across most auto
segments have weighed down on Gabriel India’s (Gabriel) ytd performance.
After robust growth in past three years in autos (22% CAGR), FY13 was
subdued (at ~3%) with a weak trend expected to sustain in FY14. However,
Gabriel recorded ~3% growth in 1H, and we expect ~7% growth in revenues
in FY14 (expectation of 9.9% in 3QFY14), mainly due to business from new
two-wheeler customers like Honda Motorcycle, Mahindra Two Wheelers. The
proportion of two wheelers in sales has increased from less than 50% in FY13
to ~55% in 9MFY14.
Lower EBITDA. We expect revenue growth of 9.9% yoy to `3.3bn. Our
EBITDA margin expectation is 6.3%, 20bps higher yoy, flat qoq. While
EBITDA is expected to be 13.1% higher yoy, we expect profit of `95m (5.9%
lower yoy).
Our take. Gabriel is focused completely on innovation and raising
productivity, and reducing costs, working capital and overheads. It has also
taken measures to improve the working capital cycle, results of which have
begun to show. Debt reduction is also a focus area for the company, where
results are now being visible. Additions to the customer base, exports and
steady replacement sales are future growth drivers. Despite lower vehicle
demand, Gabriel has sustained a decent, > 6% EBITDA margin, which can
be boosted further by operating leverage and higher contribution from more
profitable segments like exports and replacement. We maintain Buy, with
target of `27 (at PE of 7.25x Mar’15e; current PE is 6.4x FY15e).
Risks. Inadequate price hikes by OEMs, higher commodity prices, prolonged
demand slump.

Motherson Sumi Systems Good performance to continue; Buy :: Anand Rathi

Motherson Sumi Systems
Good performance to continue; Buy
Key takeaways
Domestic performance to be decent. While car sales in India have been
lower yoy, Motherson Sumi Systems is in a position to ably combat this
deceleration through supply for new models, consolidation of vendors by
OEMs and the lower base for Maruti Suzuki. Ytd performance at its India
operations has been good, as exports have been ramped up and plants were
commissioned to meet further demand. We expect standalone revenue to
grow11.3% yoy, to `11.8bn, with adj. profit growth at 12.7% yoy, to `1.4bn.
Steady performance by SMR, SMP. We expect the Europe-centric
companies, SMR and SMP, to maintain trajectories of steadily improving
performances. We estimate SMP’s 3QFY14 EBITDA margin to be 5.8% (up
180bps yoy, lower 20bps qoq) and SMR’s at 8.8% (up 180bps yoy, lower
30bps qoq). Ahead, a recovery in European automotive production may
strongly benefit both these companies.
Consolidated results to be impressive. Consolidated revenues could grow
11.4% yoy, to `74.2bn. We expect 9.5% consolidated EBITDA margin (up
190bps yoy). We expect adjusted profit to grow 54.8% yoy, to `2.2bn (up
0.8% qoq).
Our take. The company is expected to continue marching ahead, aided by
product launches and customer additions, greater synergies from integrating
its European acquisitions and the turnaround of its unprofitable plants.
Launches by OEMs and customer additions would further boost growth. We
retain a Buy, with a target of `208. At our target, the stock would trade at 16x
Mar’15e; at the ruling price, it trades at 14.7x FY15e.
Risks. Sustained slowdown in demand, delay in launches of new models,
currency volatility.

J. P Morgan - Government Expenditure and Equity Connect

Indian Equities Government Expenditure and Equity Connect

· Sectors with expected earnings support outperformed last week

· Earnings season started with the trend of positive surprise for the global sector and disappointment for local

· Disappointing growth indicators continue; the last leg of faster policy clearance starts

· Outlook on agri-inflation seems to have improved

· FIIs turn marginal sellers of equities; Suuti stake sale expected to support INR

· The best three consecutive years of equity performance since 1991 coincided with the slowest growth in Government expenditure

Caution rules. Last week’s surprises were on expected lines from a macro perspective. Growth indicators disappointed. Earnings season started with a beat from the global sector companies and a miss from domestic sector companies. The net effect was Sensex ending flat supported by global sectors and Consumer Staples. Domestic cyclicals and high beta names underperformed for the second consecutive week. The week ahead is expected to be more eventful with an important inflation print and quite a few important earnings reporting by TCS, Reliance, ITC, Wipro, HDFC Bank.

PMI services dips, IP declines. Growth moderation seems to be broadening to services and consumption. December PMI services fell to 46.7 vs. 47.2. November IP declined 2.1% oya led by a sharp moderation in the Consumer durable segment. For the festive quarter (October to December), car sales declined 6% oya Two-wheeler sales were relatively higher and increased 10% oya. Government’s final attempt before the national election seems to be accelerating but the real impact will have to wait, in our view. Government approved POSCO’s long pending environmental clearance last week.

Agri-inflation outlook improves. Inflation indicators, especially linked to agriculture, suggest lower inflation prints ahead. Besides the sharp correction in vegetable prices, MCX Agri commodity spot index has corrected 9% over the last quarter. Sowing in Rabi crop has increased 5.5% oya and is expected to keep fundamental price rise under check. Consensus expectation of today’s CPI print is 10.1% oya. Also, Friday’s disappointing non-farm pay roll in the USA did result in a meaningful 11 bps softening in US ten year yield to 2.86%. In India, one year swap curve currently is 8.40% vs. the current Repo rate of 7.75%.

Suuti support for divestment program. Last week, the Union Cabinet cleared the hurdle for the Suuuti stake sale. Suuti has stakes in ITC, Axis Bank and L&T. Higher dividends from large PSUs are also expected to support Government’s funding gap.

Quarterly earnings starts. 3Q earnings started on a positive note with Infosys surprising positively. Infosys management reiterated that global growth is improving. Indusind Bank, on the other hand, disappointed on NPAs. One of the most important trends in the corporate earnings would be margin performance as outlook on revenue growth acceleration remains muted. Analysts’ expectations on the margin front seem to be stabilizing. We highlighted in our earnings preview note (3QFY14 Earnings Preview: Global Lift; dated 8 Jan 2014) that excluding Cement, most industries are expect to report an improvement in EBITDA margin compared to last year.

FIIs turn sellers, mutual funds witness subscription into equity schemes. FII were marginal sellers of Indian equities in the Cash market (US$ 61mn) last week. India was an exception as most other markets saw net inflows, led by Korea and Taiwan. The impact of a weak US payroll data on near-term flows remains to be seen. EMBI spreads did widen by a marginal 10 bps last week. At home, DIIs were marginal sellers. Mutual funds led the selling. Interestingly, for the second consecutive month, we saw net subscription into equity schemes. Retail selling pressures could be abating. Last calendar year, we saw five months of net subscription.

Government spending and equity market connect. The concerns on India’s twin deficit and adverse impact on equity performance has increased over the last three years. The Finance Minister surprised markets positively by with a lower-than-budgeted fiscal deficit last year (4.9% vs. 5.2%). For the current year, indications are that the budgeted target of 4.8% won’t be breached. There are valid concerns that a cut in the “non-plan expenditure” is likely. A sharp cut in expenditure when growth is already weak won’t be supportive of earnings outlook here. How does a reduced growth in Government expenditure influence equity performance? See below a few relevant points:

· Government expenditure increase has averaged 12.7% oya over the last two decades vs. an average nominal GDP growth of 14%. This has resulted in a lowering of expenditure as % of nominal GDP from 18.2% to 15.1% during the period.

· The relative size of revenue expenditure pie has increased while that of capital expenditure has reduced. The trend is arguably not so encouraging at the current stage of India’s economic development. This combined with lower private sector capex is a risk for India’s potential growth rate.

· Government expenditure and equity market performance do not show a statistically significant linkage. But the impact of government expenditure on inflation, rates and financial savings available for the private sector makes it “qualitatively” a significant driver for broader growth and also for equities.Interestingly, the best three years of equity performance over the last two decades – FY04 to FY07 – also witnessed the lowest three-year average growth in Government expenditure. Of course there were other drivers also supporting the strong performance of equities. That was a phase of buoyant corporate confidence and higher investment activity. The next government will have a challenging job of reviving growth through increased private sector investments.

Figure 1: Government expenditure and Sensex return

Source: CMIE

Figure 2: Capital expenditure as % of total Government expenditure

Source: CMIE

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5 important steps to become debt-free!

It may be difficult, but certainly not impossible!

It is true when people say that the youth today are far more indebted unlike their parents. Our parents did not believe in taking loan. But gone are those days. Today, availability of debt affects the decision of everything you buy. It is good to take a loan to buy certain things, but you should not yield to temptations to an extent where you are way too embroiled in it and don't know how to get out of it.

That said, it is not impossible! Where there is a will, there is a way.

Follow these five basic steps to get out of debt trap:

1. Reduce expenses

All the money you earn in your life should be diverted towards clearing your debt. That should be your priority till you clear your loans.

Newspaper advertisements will bombard you with attractive offers on vehicles, foreign tours, jewellery and other such luxuries. But don't yield to the temptation. Stick to your goal like a horse with a blinker.

2. Consolidate your loans

Anant Ramgopal, a Hyderabad-based techie had borrowed about Rs 3 lakh from his father to manage the bridge funding when he bought his flat. He had also taken a personal loan and borrowed some more from his uncle.

"A year after I bought the house, I took a top up loan on my home loan, cleared all the other loans and consolidated them," he said. This reduced his interest burden and cleared three different loans.

Vinati Organics - Visit Note - On growth path: Centrum

On growth path



We recently met the management of Vinati Organics (VOL) to get the
latest update on current performance and future potential. The
management is optimistic on future prospects of the company. VOL
derives over 84% of its revenues from isobutyl benzene (IBB) and
2-acrylamido-2-methylpropane sulfonic acid (ATBS). The company is the
largest manufacturer of these products globally. VOL derives ~80% of
its revenues from exports and has benefited by ~15% depreciation of
rupee in H1FY14. The management has identified ATBS as the major
growth driver. It has indicated revenue growth of 20-25% and EBIDTA
margin of 20-22% for FY14. VOL intends to become debt-free in 2017.
Key risks would be lower demand for IBB and ATBS and appreciation of
rupee against the dollar.

$ Major dependence on IBB and ATBS: VOL receives ~84% revenues from
IBB and ATBS and hence is heavily dependent on these two products. The
company is the global leader for IBB and ATBS and derives ~80% of its
revenues from exports. It has backward integrated in the manufacture
of isobutylene (IB), which is the raw material for IBB. VOL sources
major raw materials benzene and toluene from local manufacturers. As
these raw materials are derived from crude, prices are linked to
import parity.

$ Attractive margins: The management expects EBIDTA margin in the
range of 20-22%. VOL reported EBIDTA margin of 20.6% in H1FY14. ATBS
commands higher margin than IBB and with higher production of ATBS,
overall margins are likely to improve. VOL’s material cost is linked
to crude price and hence is subject to wide fluctuations. Moreover,
the company derives ~80% revenues from exports and hence is affected
by foreign currency movements. VOL benefited from ~15% depreciation of
rupee against the dollar in H1FY14. It has backward integrated in the
manufacture of IB and hence has better margins than competitors.

$ Renowned customers: VOL derives over 80% revenues from export to 22
countries. It exports to global customers including BASF-Germany,
Perrigo-China, Nalco, Clariant Chemicals, Dow Chemicals, Lubrizol,
Ciba, Rohm and Hass, Akzo Nobel etc. for a wide range of applications.
The company’s domestic customers include, Shasun Chemicals, Pashupati,
Thermax, Indian Acrylic, UPL, Gharda Chemicals, Meghmani Organics etc.
 The company is expanding its customer base. With the introduction of
new products, it is likely to add new customers.

$ Valuations and risks: At the CMP of Rs219, the stock trades at 15.8x
FY13 EPS of Rs13.9 and 15.4x FY14 annualised EPS of Rs14.3. The stock
is fairly priced at the current valuations. VOL’s share price has
appreciated over 100% in the last two months. Key risks include
slowdown in demand of its major products IBB and ATBS and appreciation
of rupee against the dollar. The company has $29mn (Rs1.8bn) exposure
to foreign currency borrowings and hence is affected by forex
losses/gains every quarter.



Thanks & Regards