The domestic markets are expected to edge higher following positive opening across most of the Asian markets. Domestic equities ended with modest gains after WPI inflation dipped to 6.6% in January, its lowest level in more than two years. Global cues turned weak. European markets marginally declined following Moody's continual pessimism over the euro zone. Continuing its negative stance, Moody’s downgraded six eurozone nations. In addition, traders became increasingly cautious about the hurdles to a resolution to the Greek debt crisis. Amid concerns in Europe, US bourses displayed similar weakness and ended on a flat note.
On the domestic front, investor sentiment has firmed up considerably. Core inflation (non-food manufacturing) has declined for the second consecutive month, suggesting a strong case for monetary easing. Amid positive developments, the markets may hold strong breadth for some more time. Nonetheless, it will be watchful from here in that markets wait for the economy to indicate recovery that equities have partly factored in. The markets will closely track the pace of policy reforms. In addition, developments across the Eurozone will also offer directions to the markets.
Markets Today
The trend deciding level for the day is 17,827 / 5,407 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,912 – 17,975 / 5,437 – 5,457 levels. However, if NIFTY trades below 17,827 / 5,407 levels for the first half-an-hour of trade then it may correct up to 17,764 – 17,679 / 5,387 – 5,357 levels.
WPI inflation eases to 26 month low of 6.6%; manufacturing inflation also comes down on expected lines
Wholesale price-based inflation for January 2012 eased to 6.6% yoy, falling from 7.5% yoy levels registered in December, 2011. Inflation levels of November 2011 were revised upwards from 9.1% to 9.5%. January2012 inflation levels of 6.6% yoy were slightly above Bloomberg estimate of 6.7%. Core (non-food manufacturing) inflation – which the RBI tracks closely – came in at 6.5% yoy as against 7.5% in December 2011.
Primary articles inflation came in at a low 2.3% yoy, ~82bp lower than the 3.1% yoy witnessed in December 2011 (a significant decline of 665bp over 8.2% yoy registered in November 2011). Food articles inflation fell into the negative territory (negative 0.5% yoy compared to 0.7% yoy in December, 2011 and 8.3% yoy in November, 2011) for the first time since the inception of the new base year (2004-05). Non-food articles inflation, which was as high as 18.2% yoy in August 2011, declined to 0.6% yoy (1.5% yoy in December 2011). However, over December 2011, non-food articles index rose by 2.4% mom (annualized growth of 28.2%) on account of higher prices of gaur seed, flowers, logs and timber, soyabean and groundnut seed and linseed amongst others. Inflation for minerals rose at a faster pace of 24.8% yoy compared to 21.9% yoy in December 2011.
Fuel and power inflation continued to be high at 14.2% yoy (average of 14% over the past six months), though which can be partly attributed to the sharp rupee depreciation. Within fuel and power, while both coal and mineral oil registered growth of 0.1% and 0.2%, respectively, electricity index remained unchanged.
Manufactured products, which have a weightage of ~65% in the overall WPI inflation, eased to 6.5% yoy from 7.4% yoy levels in December 2011 (average of 6.4% over the past two years). The mom growth in manufacturing index was reasonably high at 0.4%, leading to annualized growth of 5.1%. Manufacturing articles inflation was driven by higher prices of groundnut oil, gur, and mustard and rape seed oils. On the other hand, inflation in processed prawn, sugar and tea dust (blended) moderated vis-à-vis December 2011.
The spread between primary articles and manufactured products inflation, which was as high as 13.1% at the start of CY2011, remained in the negative territory (negative 4.2%) for the second consecutive month.
Consequent to the monetary tightening over the past one year, WPI figures, led by a substantial drop in food inflation, are at a 26-month low of 6.6% yoy (as of January 2012). Manufacturing products inflation, which had remained stiff at 7.4% yoy in December 2011, eased along expected lines to 6.5% yoy for January 2012. With manufacturing inflation coming in higher than the primary inflation for the second consecutive month, after a long spell of lagging it, in our view likely indicates that a large part of pass-through of primary inflation is already done with. Hence, in-line with food inflation, we expect manufacturing inflation to cool off further in the coming few months. If there is a consistent decline in overall WPI, including manufacturing inflation on these lines, in our view the RBI would then consider more decisive signaling through repo rate cuts as well (unlike just the CRR cut in the last monetary policy), possibly from April 2012.
3QFY2012 - Result Reviews
Tata Motors
On a consolidated basis, Tata Motors (TTMT) reported and impressive 44% yoy (25% qoq) growth in top-line to Rs.45,260cr aided by 42% yoy (29% qoq) growth in JLR revenues. JLR performance was driven by 36.7% yoy (26.9% qoq) increase in volumes and 4% yoy increase in net average realization. Volume performance at JLR continues to be driven by significant growth in China and Russia, where volumes grew by 81% and 34% yoy, respectively. Operating margins surprised positively as it expanded by 81bp yoy (264bp qoq) to 15.1%. Margin expansion was led by JLR, while India business continued to be under pressure. JLR EBITDA was up 38% yoy (50% qoq) to GBP682mn, with EBITDA margin at 18.2% (up 260bp), led by strong volume performance (Evoque, Jaguar XF 2.2), favourable forex and richer geography mix. Standalone EBITDA margin remained weak at 6.4%, down 380bp yoy (40bp qoq) on commodity inflation, higher discounting and marketing spends in PV business. Consolidated net profit surged 40.5% yoy (81.4% qoq) to Rs.3,406cr. The stock rating is currently under review. We shall revise our estimates and release a detailed result note soon.
Jaiprakash Associates
For 3QFY2012, Jaiprakash Associates (JAL) reported in-line performance on the revenue front but better-than-expected numbers on the EBITDAM and PAT level. On the top-line front, the company’s revenue increased by 12.1% on a yoy basis to Rs.3,305cr, which was exactly as per our estimate. The cement segment reported growth of 37.2% yoy; however, construction and real estate revenue declined by 1.7% and 27.6%, respectively, on a yoy basis. Blended EBITDA margin came in at 24.7%, down 400bp yoy and ahead of our expectation of 21.2%. The construction and real estate segments, with margins of 29.8% and 47.9%, respectively, led to good show on the margin front. Interest cost stood at Rs.448.5cr, up 32.6% yoy 10.8% qoq and marginally higher than our estimate of Rs.425.1cr. Depreciation cost came in at Rs.202.2cr, up 31.1% yoy and 14.8% qoq and higher than our estimate of Rs.184.9cr. The bottom line came in at Rs.205.0cr, a decline of 11.9% yoy and higher than our estimate of Rs.69.5cr due to high other income. Other income during the quarter jumped from Rs.3.0cr in 3QFY2011 to Rs.120.1cr in 3QFY2012, resulting in better-than-expected earnings performance. We maintain our Accumulate rating on the stock with an SOTP target price of Rs.88.
HDIL
HDIL announced its 3QFY2012 numbers. The company’s net sales declined by 8.8% yoy to Rs.423cr (Rs.463cr). EBITDA declined by 43.4% yoy to Rs.157cr (Rs.278cr), largely due to a decline in revenue and margin compression. EBITDA margin declined by 1,998bp yoy to 37.2% (59.9%), mainly due to increased cost of construction, up 24.2% of net sales in 3QFY2012 vs. 18.3% of net sales in 3QFY2011 and project interest, which increased to 33.4% of net sales in 3QFY2012 vs. 25.0% of net sales in 3QFY2011. Adjusted PAT declined by 31.7% yoy to Rs.156cr (Rs.228cr), while margin declined by 1,238bp yoy to 36.9% (49.2%). We will be coming out with a detailed report post management interaction. We currently have a Buy rating on the stock with a target price of Rs.115.
IVRCL
IVRCL reported a disappointing set of numbers for 3QFY2012, with lower-thanexpected performance on all fronts. The company’s revenue declined by 15.1% yoy to Rs.1,203cr and was below our estimate of Rs.1,374cr. On the EBITDA margin front, the company posted dismal margin of 7.9%, a dip of 200bp yoy against and below our estimate of 9.2%. Interest cost came in at Rs.66.1cr, an increase of 11.6% yoy/1.3% qoq. On the earnings front, IVRCL reported an 84.0% yoy decline to Rs.6.8cr, against our estimate of a 46.5% decline. This was on account of poor performance on the revenue and margin front and interest cost burden. We would come out with a detailed note post the conference call. Currently, the target price and rating are under review.
Simplex Infra
For 3QFY2012, Simplex Infra’s (Simplex) numbers came above our and street expectations on revenue and earnings front and marginally lower at EBITDAM level. On the top-line front, Simplex reported robust growth of 36.7% yoy to Rs.1,594cr, higher than our estimate of Rs.1,348cr (consensus Rs.1,145cr). EBITDAM dipped by 120bp yoy to 8.0% for the quarter, marginally lower than our estimate of 8.6%. Interest cost came at Rs.55.0cr a yoy/qoq jump of 52.0%/7.6% and in line with our estimate of Rs.54.3cr. PAT declined by 22.3% yoy to Rs.18.0cr, above our estimate of Rs.13.6cr (consensus Rs.14.9cr). Better-than-expected bottom-line performance was due to robust revenue growth. At the end of the quarter, the company’s order book stood at Rs.14,442cr (2.9x FY2011 revenue). Simplex had order inflow of Rs.1,018cr for the quarter. We maintain a Buy on the stock, with a Target Price of Rs.233.
Graphite India
Graphite India Limited (GIL) announced its 3QFY2012 numbers. The company’s net sales increased by 29.2% yoy to Rs.436cr (Rs.337cr). The graphite segment, which contributed around 85.6% to the total revenue, registered strong growth of 27.1% yoy to Rs.373cr (Rs.294cr), while the steel segment managed a 15.8% yoy increase to Rs.30cr (Rs.26cr). EBITDA increased by 21.1% yoy to Rs.89cr (Rs.73cr), largely due to higher revenue. EBITDA margin declined by 137bp yoy to 20.3% (21.7%), mainly due to higher raw-material cost, which increased to 42.6% of net sales in 3QFY2012 vs. 40.2% of net sales in 3QFY2011. PAT increased by 27.1% yoy to Rs.56cr (Rs.44cr). Despite a 137bp OPM contraction, PAT margin only declined by 21bp yoy to 12.9% (9.1%) due to lower tax provision and higher other income. Tax rate declined to 32.1% of PBT in 3QFY2012 vs. 33.2% of PBT in 3QFY2011, while other income increased by 96.8% to Rs.7cr in 3QFY2012 vs. Rs.4cr in 3QFY2011.We will be coming out with a detailed report post management interaction. We continue to maintain our Buy view on the stock with a target price of Rs.102.
Economic and Political News
- Oil Minister rules out deregulation of diesel prices
- GoM to decide today on stake sale of ONGC, BHEL
- TRAI for 74% cap on foreign holding in telecom towers
- Government set to slash further subsidy on non urea fertilizers like DAP and
MOP for FY13
Corporate News
- Nasscom pegs 11-14% growth in Infotech, ITeS exports in FY13
- RIL's KG-D6 output may fall to 27 mmscmd next fiscal
- Bihar government approves Ultratech's proposal for grinding unit
- BSES gets Rs.5,000cr IDBI Bank loan to pay dues
- Orissa halts operations at SAIL iron ore mine
- Tata Power to invest US $125mn in Indonesian project
- Lanco to raise US $750mn for power biz
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