Economy
India’s current account deficit set to worsen again in Q2 2013, says Nomura
 “We expect the current account deficit to widen to 5.5-6% of GDP due to sluggish exports, front-loading of gold demand and a seasonal rise in imports,” said Nomura in its report on the Indian economy
 
After hitting a record high of 6.7% of GDP (gross domestic product) in Q4 2012,
India's trade deficit seasonally improved in Q1 2013, suggesting that the current account deficit (CAD) will narrow to 4%-4.5% of GDP in Q1. However, the trade deficit worsened again to $17.8bn in April. “We expect it to deteriorate further to $20.8bn in May, before showing some improvement in June,” said Nomura in its report on the Indian economy. 
 
According to Nomura, the sharp deterioration in Q2 2013 is partly due to seasonal factors, but it also reflects sluggish exports and the front-loading of gold demand in response to falling prices.
 
The recent fall in gold prices, if sustained, a moderation in CPI inflation and the RBI’s (Reserve Bank of India) restriction on gold imports on a consignment basis by banks should taper investment demand for gold over time—but the immediate reaction to lower gold prices has been higher demand, believes Nomura.
 
According to the brokerage, the current account deficit remains elevated and is expected to worsen to 5.5%-6% of GDP in Q2 2013, after the expected improvement in Q1. This suggests that financing the deficit still remains a concern.
 

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COMMENTS

Haresh Patel

4 years ago

This is a deadly amount of CAD. It means the current account may be negative or completely wiped out in less than 3 years. India's currency is not hard currency so imports may come to screeching halt. If oil imports are affected, it will cause a vicious circle of economic collapse.

PI Industries Q4 revenues up 40% but net profit suffers
Change in product mix and lower capacity absorption at one of its plants meant lower operating and net profit for PI Industries. Despite this, Edelweiss has rated the company as a Buy and values the company at Rs160 per share
 
PI Industries saw its net revenue for the quarter ended 31 March 2013 improve 40% Rs330.37 crore, following a larger share of growth from Custom Synthesis Exports and complemented by steady performance in the domestic business despite the prevalent agro-climactic conditions. Operating profit for the March 2013 quarter grew 11% y-o-y to Rs41.39 crore. Its net profit came in at Rs23.09 crore, higher by 6% y-o-y, giving a basic EPS of Rs1.82 per share. 
 
A closer look into the Moneylife database reveals that the company’s sales figure exceeded expectations as it grew more than its three-quarter y-o-y average growth rate of 37%. However, the company’s operating profit disappointed as it reported only 11% y-o-y growth versus the 42% y-o-y average growth rate. This was due to under-absorption of cost at the Jambusar facility that operated only during the quarter. Product mix and margins from the domestic business were subdued during the quarter. 
 
The funds raised through the QIP route last fiscal have been deployed as outlined by the company towards fresh capital expenditure, retirement of high-cost debt and additional working capital requirement; this has resulted in the improvement of the debt-equity ratio to 0.35 times. 
 
The company intends to launch two molecules under its own registration. According to Edelweiss, the company has guided for 20% and 25% growth in the agri-business and custom synthesis businesses respectively. The order book of the custom synthesis business stood at Rs30.5 crore. Products that were launched in FY2013 will see an appreciable climb in performance in line with growing farmer choice of these products.
 
Commenting on the performance Mayank Singhal, managing director & CEO said, “PI offers a strongly differentiated proposition in the Indian agro-chemical industry. The focus on innovator molecules is demonstrably yielding results. There is a consistent flow of products that are giving us substantive gain in volumes and there is well-paced commercialization of new molecules. Our new Jambusar facility, which has been operational for about a quarter has seen an under absorption of cost. With the operations poised for a robust ramp-up in next two years, we look forward to a commensurate accretion in margins.”
 
Edelweiss has cut its estimates for FY14 to keep in tune with the management guidance and values the company at Rs160 per share and pegged the stock as a ‘Buy’. Their research report stated: “We are positive on PI’s long term outlook due to a strong visibility in custom synthesis order book and a robust pipeline of in-licensed products.”
 

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Redington reports in-line Q2 results; strong growth outlook for H2
Redington management’s guidance implies significant growth in around 35%-40% range in H2FY12F for the India business, says Nomura Equity Research in its Quick Note
 
According to Nomura Equity Research in its Quick Note, Redington India’s Q2 results were broadly in line with estimates at the EBITDA level, but the key positive that emerged from the conference call was a solid outlook of “12-15%” growth at the consolidated level for FY13 (the brokerage estimates 11.9% growth for FY13F currently). The management’s guidance, implies significant growth in around 35%-40% range in H2FY12F for the India business, driven mainly by: 1) iPhone sign up with Apple, where it expects to do around Rs11,000 million in the second half; 2) a pick-up in government orders (the company has a UID-Aadhar project in Q3 which will get executed over the next 2-3 quarters) in the IT business; and 3) a pickup in the Blackberry business, boosted by the launch of Blackberry 10 in January 2013.
 
Redington’s consolidated sales at Rs58,597 million (y-y growth of 12.9%) were 7% ahead of Nomura’s expectations driven by solid 21% growth in the overseas business (constant currency growth of 9%) and the result of strong performances at Lenovo, Toshiba and Acer in the Middle Eastern markets. This offset a muted topline in the India business which declined by 3.9% in the quarter (while the IT business grew at 2%, non-IT declined by 16% owing to a 40% decline in Blackberry sales.
 
EBITDA including other income (which is a better metric than EBITDA before other income, as other income includes discounts that Redington gets from vendors) was Rs1.553 million, in line with Nomura’s expectations ofRs1,575 million. EBITDA margin at 2.65% was lower than the brokerage’s expectation of 2.85% owing to relatively lower margins in the India business (the miss was owing to a decline in the higher margin Blackberry business).
 
Profit before tax for the second quarter at Rs1,014 million was in line with Nomura’s estimate of Rs1,019 million. Net income at Rs729 million was ahead of its expectation of Rs66.7 million primarily owing to a lower tax rate of 23.8% compared to Nomura’s expectation of 30%.
 
At the lower end of the management guidance of 12-15% sales growth for FY13 would imply 14-20% growth in H2 (H1FY13 sales growth was 10.3% y-o-y), said Nomura. The management has indicated that India’s contribution in H2 will be around 52% against 46% in H1. Nomura believes the management is suggesting a significant pickup in growth in the India business in the second half (implied growth of around 35-40%) driven by:
Incremental contribution of Rs11,000 million from Apple in the next five months owing to the addition of iPhone (around 35-40% of its distribution agreement with Redington). While this is lower margin than Blackberry, returns are expected to be higher on account of low working capital days (receivable days are around 15 while they get a credit of around 30 days). This essentially suggests that they the company expects the ex-Apple business in India to growth between 11-18%.
Blackberry sales per month picked up from a run-rate of 60,000-70,000 in Q2 as per management to 80,000-90,000 in October. The management is also positive about an expected substantial pick up post the Blackberry 10 launch in January 2013. This, according to Nomura, could mean that the decline will taper off in the second half (ex of a big pick-up in sales post Blackberry 10, current run-rate would suggest a decline of around 18%).
The management indicated that they have a large UID-Aadhar project in Q3 which will get executed over the next 2-3 quarters and should benefit the IT business. Nomura expects the IT business to grow at 15%+ in 2HFY13F.
The implied growth rate for the international business for 2HFY12F is in the range of -3% to 2%, to which Nomura sees upside potential given that the Samsung sales ramp up will be visible in the second half plus Redington has witnessed solid momentum in the Middle Eastern business on the back of strong performances at Lenovo, Toshiba and Acer.
 
Nomura estimates that working capital days came down by at least two days to around 44 days in 1HFY13 versus 1HFY12, driven primarily by a decrease in receivable days by around 11 days. Free cash flow improved significantly in 1HFY13 as it was negative Rs340 million versus negative Rs2,490 million in 1HFY12. Management guided for net debt to come down
or stabilize at around Rs17,000 million (current level at Rs1,8260 million, translates to a net debt/equity of around 1.23x; this is expected to come down to around Rs15,127 million by end-FY13F).
 
Nomura believes that on the back of these numbers, consensus EPS FY13F estimates will likely move up by around 5% and inch towards our estimates, which are currently slightly higher than consensus.
 
The brokerage reiterates its ‘Buy’ rating on India’s largest distributor of IT and electronic products. The potential of the Indian market should be seen in the context of a doubling of the middle-class population in the next 10 years (source: Dell), which is likely to mean increasing average disposable income and should drive IT/electronic penetration rates in
India, said Nomura. The company has end-to-end coverage of the distribution value chain (procurement, warehousing, non-banking financial corporation’s (NBFC) and after-sales services). It has impressive processes in place and a strong conservative management team. 
 
The company has a credible history of managing inventory and credit risk, which the brokerage considers key to success in the distribution business. Average provisions for inventory and receivables were 0.04% and 0.1% over FY08-FY12 for India and overseas business over the same period, respectively. 
 
The current valuation at 7.1x FY14F EPS (8.95x FY13F EPS) is a 39% discount (23% discount on FY13F) to its discount to its six-year average of 11.7x and is an attractive entry point, says Nomura.
 

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