Companies & Sectors
India industrial sector earnings will be another washout, says Nomura

In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP model by the end of FY14

With the exception of Gujarat Pipavav Port and L&T to an extent, Nomura Equity Research expects 1QFY14F to be a disappointing quarter for the sector. While GPPV will benefit from a low base last year (the loss of Maersk line to Mundra), L&T will likely benefit from strong order flow growth momentum. Cummins India is likely to report flattish trends despite building in some benefit from currency tailwinds. Crompton Greaves remains a wildcard as quarterly expectations tend to get postponed to the next quarter. Nomura does not rule out a positive surprise from Crompton Greaves, as the stock has already bounced from recent lows and Nomura awaits a fundamental business turnaround for being positive on the stock.


In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP (public-private-partnership)  model by the end of FY14. Key projects include the Rs300 billion of Mumbai elevated rail corridor, Rs400 billion worth power projects and Rs250 billion worth port projects.


L&T intends to enter the European offshore wind sector by utilising its fabrication yards in the hydrocarbons business. Its upstream division already manufactures and installs jackets for oil and gas platforms. With three jacket-fabrication yards in India and Oman and a production capacity of 150,000 tonnes per year, its specialty in offshore design and projects could have vast applications in the offshore wind sector, believes Nomura.


As per a Reuters report, Oman has awarded L&T a contract worth Rial135.6 million ($352 million) for the Batinah road project package 4. L&T is L1 in another three road projects in the Middle East for a total of Rs70 billion including this package.


L&T has announced new orders worth Rs40.57 billion across various business segments, of which Building & Factories were at Rs18.08 billion, Hydrocarbons Rs10 billion, Water & Renewable Energy Rs6.28 billion and the rest spread out between Power T&D and Material Handling.


In a major win for the company, Thermax has announced an Rs17 billion order for design, manufacture and commissioning of nine CBFC high pressure boilers of 500 TPH from a leading petrochemical company.


Law ministry does a U-turn on rescheduling of highway developers’ premium. Earlier, it had said that such a proposal is legally unsustainable. However, it has supposedly asked the finance ministry to look into the issue.


Negative impact likely on primary sales in consumer sector due to the introduction of LBT in Maharashtra
ITC and Emami are preferred picks going into the results season. However, Nomura is cautious on Hindustan Unilever and Jubilant Foodworks
Nomura Equity Research , in its preview of the consumer sector, said, “We expect a quarter of stable earnings performance for 1QFY14F with a consumer sector average net sales growth estimate of around 16% y-o-y and operating margins up around 30 bps(basis points)  y-o-y.” 
The brokerage expects PAT growth of 18% y-o-y during the quarter. Volume growth will continue to remain moderate across the sector, although companies have taken steps to support growth through increased promotions and select price cuts. Nomura has highlighted the likely negative impact on primary sales due to the introduction of the Local Body Tax (LBT) in Maharashtra in 1QFY14F. High level of promotional spend could provide some support to the headline volume growth, but underlying trends will remain stable on a sequential basis at best.
Within the consumer staples space, Hindustan Unilever will again report mid-single digit volume growth with the discretionary parts of the portfolio still under pressure. The soaps and detergents segment of the FMCG major could see very low price/mix impact this quarter on a y-o-y basis. The mid-cap space should report relatively better numbers, according to Nomura. It has put a Buy on Emami going into the results season.
The brokerage believes gross margins should see an improvement on a y-o-y basis across the sector with HPC (home and personal care) companies benefitting from a fall in input prices. However, price cuts and promotions could take away a large part of the benefits. Asian Paints should also see an improvement in gross margins as titanium dioxide prices have corrected significantly on a y-o-y basis. Sector EBITDA margins will likely improve on a y-o-y basis, despite rising A&P (advertising and promotion) expenses. On a sector-wide basis, it expects a 30 bps improvement in A&P expenses in 1QFY14F, which is lower than 4QFY13.
Key things to watch
While margins should improve on a y-o-y basis, competitive intensity has been increasing, particularly in categories such as packaged food, oral care, hair care as well as soaps and detergents. While 1QFY14F should still see an improvement in margins, the trend may not sustain into FY14F, said Nomura in its report.
Positive surprises – ITC and Emami.
Negative surprises – Hindustan Unilever and Jubilant Foodworks.
Hindustan Unilever – 4QFY13 volume growth of 6% y-o-y included some one-offs and the company mentioned the fact that there was a slowdown in the discretionary parts of the portfolio. Nomura believes these issues have continued and the LBT strike in Maharashtra will also have an impact on sales. The company has initiated price cuts and promotions in the soaps and detergents segment, which will have a negative impact on price/mix during the quarter. The company is expected to see an 11% revenue growth during the quarter.
ITC – Nomura expects another stable quarter from ITC, with a 21% y-o-y PAT growth. The cigarette business volume growth should be flat-to-marginally positive, but could surprise on the upside.
Jubilant Foodworks – Same store sales growth (SSSG) to come in at around 10% during the quarter; however, there are risks to the downside given the state of consumer discretionary spend, said Nomura.
Mid-cap consumer staples – Nomura expects companies in the mid-cap staples space such as Godrej Consumer, Dabur, Marico and Emami to report strong revenue growth. However, the key deliverable is volume growth, which saw some slowdown across the space in 4QFY13. Emami is a top pick in this space going into the results season, said Nomura.


IndusInd Bank’s net profit up 41.7% in 1QFY14

Nomura believes that the IndusInd Bank's expanding branch network, increasing branch density, increasing ticket size of SA deposits and deposit productivity should help drive the bank’s growth

IndusInd Bank reported 1QFY14 PAT growth of Rs3.35 billion, up 41.7% y-o-y versus Nomura Equity Research’s estimate of Rs3.08 billion. The PAT beat largely came in on account of better-than-expected non-interest income and lower operating costs. IndusInd Bank used its robust trading gains of Rs1 billion in this quarter to set aside floating provisions of Rs500 million, thereby increasing its provision coverage to 80% from 70% q-o-q.

Net interest income of Rs6.8 billion (up 2.8% q-o-q and up 40.4% y-o-y) was in line with the brokerage’s expected Rs6.75 billion. Net income margin (NIM) expanded marginally by 2 basis points (bps) q-o-q on the back of 27% y-o-y loan growth. Improvement in NIM was largely due to a 6 bps q-o-q decline in cost of funds compared with a 4 bps q-o-q decline in yield on assets and a 330 bps q-o-q increase in the credit-deposit ratio. Nomura expects expansion in NIM to 3.59% in FY14F compared with 3.43% in FY13.


Non-interest income came in very strong at Rs4.7 billion (up 48% y-o-y), helped by proprietary trading gains (111% y-o-y growth) and 26% y-o-y growth in core fees.


According to Nomura, IndusInd Bank will continue to benefit from the momentum in the CASA (current account savings account) deposit base built up over the past few quarters. It expects the bank to inch up its CASA ratio to 33% by FY14F (from 30% currently), driven by relatively stronger growth in savings deposits than current a/c deposits. The brokerage believes that the bank's expanding branch network, increasing branch density, increasing ticket size of SA deposits and deposit productivity should help drive this growth. Backed by CASA momentum, IndusInd Bank is expected to clock loan growth of 27.3% y-o-y in FY14F, much ahead of the expected system average growth in FY14. CASA momentum should help the bank maintain its margins in the year ahead.


Another positive to note is despite a macro-related slowdown in the CV cycle, the bank has done well to contain its credit costs at 55bps in FY13 compared to 47bps in FY12. Nomura is budgeting in LLPs of 60 bps for FY14F. Owing to these multiple levers, the brokerage has raised its FY14F earnings and maintains a Buy recommendation and has increased its target price to Rs580.


Nomura has raised its target price to Rs580 from Rs520 on an increase in its earnings estimates and roll-forward BV to 1-year forward. IndusInd Bank currently trades at 2.8x the average FY14F/FY15F ABV of Rs178 and 15.7x avg. FY14F/FY15F EPS of Rs31.6. Nomura’s target price implies 3.3x average FY14F/FY15F ABV and 18.6x average FY14F/FY15F EPS for FY14F adjusted RoE of 18.6%.


According to Nomura, IndusInd Bank’s loans grew 27% y-o-y compared to its expected 29.1%, with the consumer finance book growing 24.5% y-o-y and the corporate book growing 28.8% y-o-y. The brokerage believes that the bank will grow its loan book by 27.3% in FY14F, driven by 28.7% y-o-y growth in the retail segment compared with 26% growth in the corporate segment.


Deposits grew 23.5% y-o-y as the bank registered strong savings account deposit growth of 53.9% y-o-y. Current account deposits were relatively weak, declining marginally q-o-q CASA ratio improved q-o-q to 30% from 29.3%. This momentum is likely to continue, thus further supporting margins for the bank. Nomura expects the bank to end FY14F with a CASA ratio of 33.0% and 34.3% in FY15F.


Loan loss provisions (LLPs) came in at Rs939 million versus Nomura’s forecast of Rs491 million. This includes a floating provision of Rs50 million made by the bank to increase its provision cover to 80% from 70% in the previous quarter. Gross non-performing loan (GNPL) ratio increased to 1.06% from 1.03% and net non-performing loan (NNPL) ratio improved to 0.21% from 0.31% in the last quarter.


Total CAR was 14.85% under BIS-3 guidelines, with a Tier-1 ratio of 13.5%. Nomura believes asset quality for the bank will remain stable and will likely be able to contain its fresh delinquencies at the current run rate.


The brokerage is expecting delinquencies of Rs5.4 billion in FY14F compared with Rs5.3 billion in FY13. However, it expects higher LLPs of 60 bps in FY14F (55 bps in FY13) as the management has guided towards increasing its provision cover by making floating provisions whenever non-interest income permits.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)