No growth recovery in sight, says Nomura

Demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, says Nomura Economics Research

Nomura Economics Research has observed the following trends in inflation, growth recovery and government spending based on activity, survey and fiscal data that have been released in the last week:


  • Core inflation is likely to moderate: The output price index of India’s manufacturing PMI (Purchase Manager’s Index) fell sharply to a near two-year low of 52.9 in October 2012 from 56.8 in September 2012. Since this is a good lead indicator of WPI (wholesale price index) core inflation (manufactured ex-food), it suggests that core inflation should moderate from November 2012, observes Nomura.


  • No clear growth recovery in sight: The manufacturing and services headline PMI numbers were stable in October 2012, but their output components fell further. There is no strong correlation between the quarterly PMIs and quarterly GDP, but the longer-term trends are similar. As such, demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, warns Nomura.


  • Government belt-tightening is on: Government spending rose by a paltry 1.4% y-o-y (year-on-year) in September 2012 compared to 20% in the April-August 2012 period. Spending has remained under control in October 2012(as suggested by rising government cash balances, based on Nomura’s estimates). This is unsurprising as tax revenues are likely to be much lower than budget estimates and the only levers available to the government are its asset sales and to contain spending. Nomura’s FY13 (year ending March 2013) fiscal deficit estimate is 5.8% of GDP against the government’s revised target of 5.3%. If this crash diet continues, the fiscal deficit could be marginally lower than Nomura’s estimates, but it is still not likely to fall below 5.5% of GDP.


Marico reports disappointing second quarter results

International business revenues were +15%, with constant currency growth of 3%, and this was disappointing, according to Nomura Equity Research

Fast moving consumer goods major Marico Industries has announced disappointing second quarter results and the key numbers from Q2FY13 have been analysed by Nomura Equity Research in its Quick Note. Net sales grew 19% y-o-y (year-on-year) and were largely in line with Nomura’s expectations. Domestic consumer business revenues were + 19% y-o-y. International business revenues were + 15%, with constant currency growth of 3%, and this was disappointing.


Overall volume growth was 14% with organic volume growth of 9% (excluding the recently acquired Paras brands). Volume growth for Parachute was 9%, value-added hair oils were 20%, and Saffola was 6%. These percentage figures have been computed by Nomura.


Kaya Business reported revenue growth of 38% in constant currency terms, which was 25%. SSSG (same store sales growth) was 10%.


Gross margins expanded 634 basis points. This was largely in line with Nomura expectations. EBITDA at Rs1.5 billion was 9% below Nomura estimates. EBITDA margins at 13% expanded 150bps y-o-y primarily due to higher gross margins. Nomura was expecting EBITDA margins of 14%. This was a key negative surprise. Net profit at Rs889 billion was 22% below Nomura estimates and 17% below street expectations.


Apart from the above figures, Nomura has obtained feedback from a conference call with Marico management. The key observations are:

  • Organic volume growth in the consumer business was 10%, where slowdown in Saffola had a significant negative impact. Parachute volumes grew by 7% during the quarter, in-line with its near-term average.
  • The slowdown in volume growth includes an impact from the slowdown in the CSD (canteen sales department) channel. The company does not expect a quick turnaround in this channel, where overall value growth was down 2% y-o-y during the quarter. Increase in A&P (advertising and promotion) spending was driven partly by increased spend on the organic domestic business, as well as on account of significant spend on Paras brands. For the full year, the company guided for an A&P-to-sales ratio of around 12.5%, in-line with previous expectations.
  • Interest cost during the quarter was up by around 60% on account of acquisition cost for Paras brands. The company guided for quarterly interest cost to be in the range of Rs150-160 million in the next few quarters.
  • Paras brands delivered revenue of Rs460 million during the quarter for growth of 28% y-o-y. The company has guided for sales of Rs150 million per month from these brands, which is a positive. There is an opportunity to gain share in the three segments of deodorants, hair gels and hair serum in the medium term. The company is also investing money to fill distribution gaps, which should have a positive impact on revenue growth.
  • Sales in rural areas have been faster than urban areas for the company. It will continue to invest behind growing its rural business, which should be a medium-term positive driver.
  • Overall, there has been some softness in volume growth particularly in the Saffola franchise, where the company is looking at a rebound back to 10% volume growth over the next couple of quarters. The input cost environment remains favourable for the company, which is a positive.


Given the slowdown in volumes and valuations at around 25 times FY14F, Nomura believes that the Marico Industries stock is fairly valued at current levels.


Wipro’s second quarter performance marked by flat volumes and weak hiring

Flat volumes, muted guidance and weak hiring were uninspiring in Wipro’s second quarter performance, according to Nomura Equity Research

Wipro’s second quarter results lacked growth diversification and did not provide any convincing indication of lag reduction versus its peers. This is despite a continued uptrend in sales investments (up 25% y-o-y—year-on-year). The lack of diversification was evident, according to an analysis by Nomura Equity Research.


Any hopes of a near-term rebound in revenue growth might be premature. The stock appears fairly valued at around13 times FY14F. These are the observations of Nomura on overall future performance:


Nomura says that Wipro’s 2Q results were in line, with US dollar revenue growth of 1.7% (versus estimates of 1.8% q-o-q quarter-on-quarter). Net profit was at Rs16.1 billion (versus estimate of Rs16.7 billion). Margins surprised positively, down 30 basis points q-o-q to 20.7% (versus estimates of 20.1%) led by blended pricing improvement of 1.2% q-o-q. However, flat volumes, muted guidance (1.2-3.2% q-o-q) and weak hiring (1.5% q-o-q) were uninspiring.


According to Nomura, growth diversification is not yet visible.  The lack of diversification was evident across:

Clients: With 8%+ q-o-q growth in top 10 clients versus no growth in the non-top 10.

Verticals: With BFSI & energy (42% of revenues) growing by 5.5% q-o-q vs rest of verticals down 1% q-o-q.

Services: With IMS, BPO and business analytics (39% of revenues) growing by 3.6% q-o-q vs rest of services up at 0.6% q-o-q. Any hopes of a near-term rebound in revenue growth might be premature.


Nomura has listed the 2QFY13 results highlights of Wipro as follows:


IT services US dollar revenue growth of 1.7% q-o-q was below our expectation of 1.8% growth (versus Infosys’ 2.6% and TCS’ 4.6% for the same quarter).

In constant currency terms, revenue growth in IT services was 1.3% q-o-q, in line with the company’s guidance of 0.3-2.3% q-o-q growth.

Volume growth in global IT services was 0.2% (compared with 4.9% at TCS and 3.8% at Infosys).

Wipro has guided q-o-q revenue growth of 1.2-3.2% for IT services for 3QFY13F, which is lower than Infosys’ 3.7% implied revenue growth guidance (after assuming even growth across 3-4QFY13F).

Growth at two of its four focus verticals—namely BFS (4% up q-o-q) and energy and utilities (8% up q-o-q)—was stronger than the overall company growth rate. Healthcare declined by 4% q-o-q, while retail with 1.4% q-o-q growth and media and telecom with 1.3% q-o-q decline had muted performance.

Among geographies, US grew by 1.4% q-o-q, Europe by 2% q-o-q and Asia-Pacific by 5.1% q-o-q. Japan was down by 11% q-o-q.


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)