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Thursday, 26 November 2015

F N A November 26, 2015

Sharekhan's Fundamental News and Analysis


November 26, 2015

ALERT: Bihar government announces ban on sale of Alcohol effective from April1, 2016 – negative for United Spirits, Radico Khaitan, Globus Spirits and other alocohol manufacturing companies


TOP NEWS

ALERT: Hero Motocorp: Bain Capital intended sale of 29.8 lakh shares of Hero Moto in open market to raise Rs760 crore – Negative; leads to supply hangover in stocks

Cong softens stand after govt assures discussion on its GST concerns – Positive for logistics, white goods, FMCG  stocks

Alert: South Korea finds emission cheating in Volkswagen Tiguan model, orders recall of 125,522 Volkswagen vehicles: Sentimentally negative for Motherson Sumi
South Korea said its own testing showed that Volkswagen AG intentionally manipulated a diesel emissions device in vehicles with an older engine, and ordered the recall of 125,522 cars. South Korea is the first country after the United States to announce measures based on its own testing to address the diesel emissions scandal that has engulfed Europe's biggest auto manufacturer. South Korea's environment ministry said it ordered Volkswagen Korea to submit a recall plan by Jan. 6, 2016, and also fined the unit 14.1 billion won ($12.31 million).

Sun Pharma: Management clarified that company has cancelled plans to invest in Wind energy in US, sentimentally positive  
Sun Pharmaceutical Industries Ltd has informed that some of the Company's subsidiaries were contemplating an investment in a wind energy project in the US. Subsequent to a further evaluation, these subsidiaries have decided not to proceed with this potential project. Our View: In the last one week it was largely reported in the media that, Sun Pharma is planning to invest around $225 mn in Wind energy in US through its subsidiary for tax benefits, however unrelatable area of investment was taken negatively by the investors, so after management clarification of not procedding with the investment is sentimentally positive for the stock.

Alert:  US FDA warns Dr Reddy's Laboratories of ban if flaws are not fixed – Negative; raises risk f import alert and also resolution could get prolonged.
Warning letter released by USFDA on given to Dr Reddys was strongly worded and indicates that the resolution would require third party intervention and so could get prolonged to around two years now. Moreover, the contents of letter also raises risk of import alert from the three plants now. We advise to stay away from the stock as it could languish over the next 18-24 months.

Lupin Receives FDA Approvals for Generic Loestrin Fe 1/20 and Loestrin 1.5/30 Tablets – Positive Read thru.
Lupin Receives FDA Approvals for Generic Loestrin Fe 1/20 and Loestrin 1.5/30 Tablets. Lupin’s US subsidiary, Lupin Pharmaceuticals Inc. shall commence promoting the product in the US shortly. Lupin's Blisovi Fe 1/20 Tablets and Blisovi 1.5/30 Tablets are the AB rated generic equivalent of Warner Chilcott's Loestrin Fe 1/20 Tablets and Loestrin Fe 1.5/30 Tablets and are indicated for the prevention of pregnancy in women. Loestrin Fe 1/20 had US sales of USD 139.7 million (IMS MAT September 2015) while Loestrin Fe 1.5/30 had US sales of USD 55.5 million (IMS MAT September 2015). Positive development as lupin has strong presence in oral contraceptive segment in US.

ITC - Restructuring at top level management (elevation of executive to top roles); move that’s open race for chairmanship post retirement of Mr.YC Deveshwar – positive from long term perspective as focus is to improve the growth prospects of Non-cigarette FMCG business

Gadkari wants to build 100 km of national highway per day – Positive for IRB Infrastructure, L&T, IL&FS Transportation, Ashoka Buildcon, Sadbhav Engineering, Gayatri Projects, KNR Construction among others
Byoed at construction of 18 km of national highways per day, the government is on target to build 30 km of highway per day by March, the minister’s unofficial target is to construct 100 km a day, as the country needs to expand the national highways coverage to 150,000 km from 90,000 km across the country.

INVESTMENT CALLS

Sensex Review - Q2FY16: H1 earnings weak but H2 to look much better
·         Earnings soft as expected; ex global cyclical growth appears reasonable: In Q2FY2016, the aggregate earnings growth for the Sensex companies (BSE-30) remained soft (down 2% year on year [YoY]) due to a slow pace of economic recovery and domestic demand coupled with pressure on global cyclicals (global commodity companies, ie metals and energy). However, excluding global cyclical (ex metals, energy and Tata Motors), the earnings showed a decent growth of 7% compared with Q2FY2015.
·         Earnings breadth relatively better:  The earnings breadth was relatively better as 20 out of the 30 Sensex companies showed a growth in earnings year on year (YoY) with 12 showing a double-digit growth. There was a mixed set of surprises as heavyweights like Zee Entertainment Enterprises Ltd (ZEEL), Dr Reddy’s Laboratories (DRL), State Bank of India (SBI), Tata Steel, NTPC  and Reliance Industries Ltd (RIL) delivered a positive surprise whereas Tata Motors (a one-off loss of Rs2,650 crore), Bharat Heavy Electricals Ltd (BHEL), Larsen and Toubro (L&T), Lupin, Sun Pharmaceutical Industries (Sun Pharma) surprised negatively. From a sectoral perspective, the financials and information technology (IT) services companies registered a double-digit growth while capital goods and pharma companies disappointed the most with their earnings performance.
·         Revenue momentum remains slack, margin expansion a silver line: The revenue growth has remained in the negative territory for the past few quarters (down 6% in Q2FY2016 for the Sensex companies) reflecting weak underlying demand. Barring the IT and financial companies, the top line growth of most of the sectors remained in low single digits or negative. Going ahead, the lag effect of a decline in the interest rates and the implementation of the Seventh Pay Commission’s recommendation remain the key enablers of a demand recovery over the medium term. The EBITDA margin improved by 48 basis points (BPS; YoY) which along with a lower interest cost supported the earnings.
·         Bracing for sub-10% earnings growth in FY2016; hopes pinned on H2 performance: The Q2FY2016 earnings season saw the consensus earnings estimate for the Sensex being downgraded by about 2%, implying a growth of 7-8% in FY2016 and of 18-20% in FY2017. Sectors like industrials and global cyclicals saw a higher downgrade compared with IT services and pharma while energy saw a marginal upward revision in the earnings estimates. Going ahead, hopes are pinned on the H2FY2016 performance led by a gradual improvement in the consumer demand (led by low inflation, a dip in interest rates) along with a low base effect (H2 of FY2015 was exceptionally weak).
·         Outlook–policy push and reasonable valuations: Of late, the government has initiated several executive-led reforms (revival of distribution companies, increase in foreign direct investment [FDI] in multiple sectors) and is trying to push the Goods and Services Tax (GST) bill in the upcoming session of the Parliament, reflecting its intention to shift focus to policy activism. The Sensex is trading at reasonable valuation (14.5x FY2017E earnings) even after factoring in the significant earnings downgrades it has suffered over the past six to eight months.

OTHER NEWS

ITC - Restructuring at top level management (elevation of executive to top roles); move that’s open race for chairmanship post retirement of Mr.YC Deveshwar – positive from long term perspective as focus is to improve the growth prospects of Non-cigarette FMCG business
Mr.YC Deveshwar, Chairman of ITC, elevated executives to greater roles in a move that could widen the field of possible successors to his post. Sanjiv Puri, who is going to be director of the fast-moving consumer goods (FMCG) business including cigarettes from next month, has also been given additional responsibility for the paperboard, paper, packaging and printing businesses from January 2016. Deveshwar elevated B Sumant, chief executive of the cigarette business and non-cigarette FMCG trade marketing and distribution, as president of the entire FMCG business. Mr.Hemant Malik was elevated as chief executive for both cigarette and FMCG distribution, in line with the theme of promoting younger people to top posts. Mr.Malik was earlier chief executive for the tobacco business. 

Berger Paints and Nippon Group to strengthen joint venture – positive read through for Berger Paints
Berger Paints and the Nippon group of Japan had agreed to strengthen their 49:51 joint venture for manufacture of coatings for plastic substrates — BNB Coating India Pvt Ltd. Both have now entered into a “non-binding understanding” to transfer some of their existing automotive paints businesses to the joint venture “at agreed values. While Berger would transfer its three- and four-wheeler paints business (passenger cars and sports utility vehicles), Nippon Paints (India) Pvt Ltd would transfer its four-wheeler paints business (other than commercial vehicles, auto parts, and ancillaries) to BNB Coating.

Nestle India - Government Wants More Tests to be done on Maggie – sentimentally negative for Nestle India
Even after being relaunched successfully in the domestic market, Nestle India’s Maggi noodles still seem to be in trouble due to a pending case against the company in the apex consumer court. The government told the apex consumer forum which is hearing its Rs.640-crore class action suit against Nestle India that it would like to test 31 more samples of Maggi instant noodles.

TCS: Sign a strategic agreement  with Gfi informatique to Accelerate smart cities programs in France
TCS announced a strategic partnership agreement on smart cities to meet the requirements of digital initiatives in public transportation, water, and energy and accelerate the adoption of digital technologies in France’s fast-growing and innovative smart cities market. Gfi Informatique and Tata Consultancy Services will offer the Intelligent Urban Exchange (IUX) advanced analytics solution developed by the TCS Digital Software & Solutions (DS&S) Group.  The TCS IUX software solution leverages real-time and historical data to close the loop between citizen and city needs and the supply of services, such as  transportation, water and energy. The contract is a culmination of DS&S Group’s knowledge of the global smart city market – a $1.6 trillion dollar opportunity by 2020 – and Gfi’s trusted relationships with local public sector organizations to provide system integration and localization in France.  

BGR Energy has bagged new orders worth Rs. 300 crore from Transmission Corporation of Telangana Ltd for construction of 400/220 kV substation at Julurupadu in Khammam district and construction of 400/220 kV AIS Substation at Nirmal in Telangana.  – Positive for BGR Energy (News came during market hours)

NBCC has bagged Rs 5,828 crore redevelopment project from AIIMS, involving construction of 3,000 flats in 2-3 years of time – Positive for NBCC (News came during market hours)

I G Petrochemicals has entered into JV through its wholly owned subsidiary IGPL (FZE) with M/s. Dubai Natural Gas Co. Ltd., UAE ("DUGAS") for the manufacturing of Maleic Anhydride with a capacity of 45,000 MTPA. IGPL will have exclusive rights to market this products. The products will be sold in middle east and India with a view to expand to other markets like Europe later on.

DLF promoters buy 23,00,000 shares – Positive for DLF
DLF’s promoters have bought 23,00,000 shares of the company through open market transactions for nearly Rs25 crore raising their stakes to 75% between 23-24 November. The development is positive for DLF.

BGR Energy has secured new orders worth Rs.300 crore, taking the total order book in hand to about Rs.8374. The orders include construction of two substation contracts from state utility Transmission Corporation of Telangana (TSTRANSCO) on turnkey basis. Positive read thru (news on market hour, last trade).
TAPI gas pipeline connecting Turkmenistan, Afghanistan, Pakistan and India will start from December 13.
Delhi's private power distribution units of BSES and Tata Power want to join the debt-recast package announced for state utilities arguing that cheaper debt under the scheme will help them cut tariffs. This development indicates package announced could get attention of several other SEB’s.
Urea maker SPIC in consolidation mode
Urea manufacturer Southern Petrochemical Industries Corporation (SPIC) is looking at a phase of consolidation with sustained operation. Company has 6 lac tonne urea manufacturing unit in Tuticorin which is operating to full capacity. The policy relating to use of naphtha as a feedstock is in place till natural gas is made available. So, the unit can operate unhindered till the availability of gas. As per company urea unit working to capacity, SPIC can look to a “steady state profit” in the coming financial year.

Bank of Baroda to refinance six stressed accounts—negative readthru
Bank of Baroda(BoB) plans to refinance its stressed corporate accounts and change management in certain cases whereby the bank, will infuse Rs 708 crore to refinance six corporate accounts ( Uttam Galva, Bhushan power& steel, Bajrang power, GMR, Adani Power), under refinance scheme popularly called 5/25. It will also undertake Strategic Debt Restructuring (SDR) in three corporate accounts including Electrosteels, Parekh Aluminium, Monnet Ispat (overseas account).  While these are the stressed accounts at the moment, the RBIs refinance scheme (5/25)  allows banks to refinance the loans over longer tenure and no provision is required; hence there will be no significant financial impact in near term on these accounts.
Indian Railways is working on above Rs 1 lakh crore to upgrade its safety and signal upgrades-Positive for railways signaling companies:
Indian Railways (IR) is working on a proposal to create a mega fund called Rashtriya Rail Sanraksha Kosh (RRSK), with a corpus of above Rs 1 lakh crore to upgrade its creaking infrastructure. The fund would be used to eliminate level-crossings, install collision avoidance systems, as well as for track renewal and signal upgrades. Positive read thru for companies like L&T, Kalindee Rail, Kernex Microsystem, KEC International and Kalpataru power.

As per media reports, Reliance Communications close to finalizing a deal to sell entire stake in Reliance Infratel, the deal values Reliance Infratel at around Rs 22,500 crore. According to the news piece, Reliance Infratel deal likely to be announced within 10 days.

Idea Cellular: Enters into agreement with Videocon for acquiring 4G airwaves in Uttar Pradesh (West) and Gujarat  for Rs3310 crore,  the deal seems expensive but it is strategically important  for Idea Cellular to improve its 4G footprints with impending launch from Reliance Jio and aggressive push from Bharti Airtel
Idea enters into agreement with Videocon for acquiring right to use spectrum, agreement for transfer of right to use spectrum for Gujarat & UP (West) circles, acquire right to use 1800 MHz spectrum from Videocon until 2032. The aggregate consideration for right to use spectrum transaction at Rs 3,310 crore , Idea will take over outstanding deferred payment liability of Videocon payable to Department of Telecommunications for Gujarat & UP (West) circles . Idea will use acquired spectrum to launch 4G (LTE) mobile broadband services in Gujarat & UP (West).

Lumax Auto: Signs JV W/Italian Co Sipal To Enter Into Indian Aerospace & Defence Sector, Lumax Auto will Hold 51% Stake In JV With Sipal

Just Dial  to buy back 10.6 lakh shares at Rs 1,550/share on a proportionate basis via tender offer, record date is December 4th 2015


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