*Investor's Eye*
[April 12, 2007] Please see the attachment for details
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*Summary of Contents *
*PULSE TRACK*
-
February 2007 IIP in line with market estimates
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*SHAREKHAN SPECIAL*
*Q4FY2007 FMCG earnings preview*
Key points
- Backed by a pick-up in rural demand, the fast moving consumer goods
(FMCG) sector has seen the volume growth getting better every quarter. The
revenue growth for the current quarter is likely to be driven by volume
growth as well as improved pricing power.
- Rising input prices is a concern for the industry. Palm oil prices
have increased by around 20% in the last three months but LAB prices
continue to remain steady. Price increases as well as cost savings would
help the companies to maintain their margins.
- We expect the profit of Hindustan Lever Ltd (HLL), the market leader
in the segment, to grow by 18.8% year on year (yoy) backed by a strong
growth in the home and personal care (HPC) segment and price increases in
key products. We expect the margin to improve from 11.8% in Q1CY2006
to 12.8% in Q1CY2007, which would be primarily due to the price hikes
taken in many of its products as well as improved product mix.
- ITC's profits are expected to grow by a strong 24% yoy. We expect
the growth to be broad-based with the magnitude of losses in the non-FMCG
business coming down. The imposition of the value-added tax (VAT) is having
a dampening effect but we believe any decline is a good opportunity to buy.
- The long-term potential of this sector appears favourable with
higher disposable incomes and increased spending. We believe with strong
free cash flows, high return on capital employed (RoCE) and sustainable
growth the sector still looks attractive.
------------------------------
*STOCK UPDATE*
*Bharat Heavy Electricals *
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
*NTPC capex plan augurs well for BHEL *
Key points
- The near-term order flow for Bharat Heavy Electricals (BHEL) is
expected to be robust in view of the ambitious capacity addition plans of
the power utilities, especially National Thermal Power Corporation (NTPC).
NTPC has announced its provisional results and plan for the next ten years
where it plans to increase its capacity by 22,000 megawatt (MW) during the
11th Five-Year Plan and by 25,000MW in the 12th Five-Year Plan, taking its
total capacity to over 75,000MW from 27,404MW at present. NTPC, which had
awarded contracts for 3,600MW last year, has already placed orders for
projects with aggregate capacity of about 11,300MW.
- More importantly, NTPC's capital expenditure (capex) budget of
Rs12,792 crore for this fiscal is 63% higher than last year's Rs7,820 crore.
Four straight years of 100% realisation on its billing has clearly improved
its cash flows and strengthened its finances considerably. NTPC had free
cash of about Rs12,000 crore as on December 31, 2006, hence the capex budget
looks quite achievable.
- Furthermore, over the next 18-24 months, we expect the other power
utilities to award projects worth around Rs76,000 crore for around 38,000MW
of capacity.
- Over half of the total orders to be awarded in the next 18-24 months
are in the category of 250/500MW units, where BHEL is extremely competitive.
So far BHEL has not lost a single 500MW project in India, despite
competition from Russian, Korean and Chinese companies. NTPC as well as the
state utilities award many of the 500MW orders to BHEL on a negotiated
basis. Thus, it is highly likely that BHEL may bag around 19,500MW, or
Rs39,550 crore, worth of new orders.
*Regards,
The Sharekhan Research Team* myacco...@sharekhan.com
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