Cigarette plants shut by cigarette manufacturers due to uncertainty over
graphical warnings
According to news reports, cigarette majors like ITC and Godfrey Phillips have shut their
cigarette manufacturing units due to uncertainty over the new graphical warnings on cigarette
packs. The new graphical warnings were scheduled to be implemented on Dec 01, 2010.
However, till date no communication has been received from the Health and welfare ministry.
As per news reports, Udayan Lall, director (Tobacco
Institute of India), has said that "Companies making
cigarettes and bidis have been forced to close down
production due to the uncertainty regarding the
warning,". He further said that the companies had
written a letter to the ministry seeking clarity on the
kind of pictorial warnings to be carried on packs,
but no clarity has emerged from the government on
the same. According to Mr.Lall, tobacco companies
were under an impression that the December 2010
timeline for putting pictures of 'Mouth Cancer' on product packs would get pushed back.
ITC's cigarettes volumes during 3QFY11 to be undeterred by the shutdown
After our interaction with the ITC management, we understand that the company was
prepared for such kind of situation and therefore has an adequate inventory of cigarettes in
the market. Our industry sources have also indicated that the cigarette manufacturers have
built up high inventory levels in the market during the past two months to face the uncertainty
in the short term. Hence, we believe that ITC's cigarette sales volumes should not be impacted
due to the shutdown during 3QFY11.
New graphical warnings may have short term impact
Given a situation that the graphical health warning is issued in its planned form in the
recent future, the same is expected to have a short term negative impact on the cigarette
Source - Ministry of Health & Family Welfare
sales as the graphical warnings is a clearer depiction of the infected organ. However, as a
majority of the cigarette consumption (about 60-65%) is in loose form (not in packs), the
magnitude of impact would be low. Further, the cigarette business being of addictive nature
is expected to bounce back.
Continue to believe in the addictive strength of cigarette business -
Maintain BUY
Over the years, cigarette volumes have demonstrated strong resilience to the smoking bans
and the steep price hikes (arising from duty hikes). We, therefore, continue to believe in the
strong addictive pricing power of ITC's cigarette division, and hence, maintain our positive
stance on the company.
At the CMP of INR171, the stock is trading at a PE of 25.7x FY11e and 21.5x FY12e. At
the current levels, we reiterate our BUY recommendation on the stock with an SOTP-based
target price of INR192, providing a 12% upside.
Tuesday, April 20, 2010
Tuesday, April 13, 2010
Escorts -Margin plays hide-and-seek; new fiscal, fresh outlook:: Quant
Escorts -Margin plays hide-and-seek; new fiscal, fresh outlook
India Equity Research I Auto & Auto Ancillaries
Result Update
India Equity Research
Escorts (ESC) reported 10% y-y growth in standalone revenue in 4Q FY10 to Rs6.7 bn, led
by 8.2% growth in tractor volume. FY10 standalone revenue grew by 26.4% to Rs27.6 bn,
primarily led by a 32% jump in tractor volume to 60,086. The construction equipment
segment (ECE) revenue grew by 30% y-y to Rs6.1 bn, leading to FY10 consolidated
revenue growth of 27% to Rs33.8 bn. On the standalone operating margin front, the
company disappointed by reporting a drop of 480bp q-q to 4.9%, led by a sharp jump in
other expenditure due to scattered accounting strategy followed by management. Other
expenditure/sales jumped to 18.1% this quarter against the first three-quarter average
of 12.5%, resulting in a full-year figure of 13.8% at par with the FY09 figure. We revise
our consolidated revenue figure for FY11E and FY12E to Rs37.8 bn and Rs44.8 bn and cut
our operating margin by 90bp and 120bp to 8.4% and 9.1%, respectively. We reiterate
our BUY rating on ESC with a revised 12-month PT of Rs267 (from Rs300) based on 6x
FY12E EV/EBITDA (at a 25% discount to a five-year average traded forward multiple).
In-line revenue; we are factoring in a 15% revenue CAGR during FY10-12E: Standalone
revenue for 4Q FY10 grew by 10% y-y to Rs6.7 bn, led by an 8.2% rise in tractor volume.
For FY10, standalone revenue was up 26.4% to Rs27.6 bn, with tractor volume growing by
32% y-y to 60,086. ECE revenue grew by 30% y-y to Rs6.1 bn, leading to consolidated
revenue growth of 27% to Rs33.8 bn. We expect consolidated revenue to grow at a CAGR
of 15% to Rs44.9 bn in FY12E, led by a 14% volume CAGR in tractors.
Margin plays spoilsport; scattered accounting treatment of other expenditure leading to
lack of relevance of first three-quarter margin: ESC reported a standalone operating
margin of 4.9% this quarter, down 480bp q-q, led by a 630-bp rise in other
expenditure/sales. As per management, scattered accounting of fixed cost elements led to
skewness in other expenditure elements getting accounted in 4Q, although on a y-y basis
other expenditure for FY10 was at par with FY09 at 13.8%. Against a first three-quarter
average other expenditure of 12.5%, the balancing act in 4Q would give us the lack of
clarity on actual operational performance based on the upcoming quarter numbers,
signifying incremental stress to be given to gross margin rather than operating margin. For
FY10, standalone operating margin contracted by 100bp to 8.4%, primarily led by higher
RM costs. At the consolidated level, margin contracted by 110bp to 7.3% in FY10. We are
modelling operating margin levels of 8.4% and 9.1% in FY11E and FY12E, respectively.
Consolidated ROCE improves to 10%; expect it to improve to 16-18% in FY12E: ESC
reported a ROCE of 10% in FY10, primarily led by improved capital intensity through higher
tractor volume. We believe, on the back of requirement of nominal capex in FY11-12E and
scope of improvement in margin, ESC can generate free cash flow to the extent of Rs6 bn
on a cumulative basis between FY11-12E along with driving the ROCE up to 16-18% levels.
Re-iterate BUY with revised 12-month PT of Rs267 (Rs300 earlier): We re-iterate our BUY
on ESC with a revised 12-month PT of Rs267 based on 6x FY12E EV/EBITDA (based on
target multiple at 25% discount to 5-year average traded forward multiple). At our target
price we expect ESC to trade at 10.6x FY12E earnings on the back of expected 42%
earnings CAGR between FY10-12E. Inability to improve tractor market share, improve
margin in core agri machinery business along with ECEL are the major risks to our
estimates and in turn our price target.
India Equity Research I Auto & Auto Ancillaries
Result Update
India Equity Research
Escorts (ESC) reported 10% y-y growth in standalone revenue in 4Q FY10 to Rs6.7 bn, led
by 8.2% growth in tractor volume. FY10 standalone revenue grew by 26.4% to Rs27.6 bn,
primarily led by a 32% jump in tractor volume to 60,086. The construction equipment
segment (ECE) revenue grew by 30% y-y to Rs6.1 bn, leading to FY10 consolidated
revenue growth of 27% to Rs33.8 bn. On the standalone operating margin front, the
company disappointed by reporting a drop of 480bp q-q to 4.9%, led by a sharp jump in
other expenditure due to scattered accounting strategy followed by management. Other
expenditure/sales jumped to 18.1% this quarter against the first three-quarter average
of 12.5%, resulting in a full-year figure of 13.8% at par with the FY09 figure. We revise
our consolidated revenue figure for FY11E and FY12E to Rs37.8 bn and Rs44.8 bn and cut
our operating margin by 90bp and 120bp to 8.4% and 9.1%, respectively. We reiterate
our BUY rating on ESC with a revised 12-month PT of Rs267 (from Rs300) based on 6x
FY12E EV/EBITDA (at a 25% discount to a five-year average traded forward multiple).
In-line revenue; we are factoring in a 15% revenue CAGR during FY10-12E: Standalone
revenue for 4Q FY10 grew by 10% y-y to Rs6.7 bn, led by an 8.2% rise in tractor volume.
For FY10, standalone revenue was up 26.4% to Rs27.6 bn, with tractor volume growing by
32% y-y to 60,086. ECE revenue grew by 30% y-y to Rs6.1 bn, leading to consolidated
revenue growth of 27% to Rs33.8 bn. We expect consolidated revenue to grow at a CAGR
of 15% to Rs44.9 bn in FY12E, led by a 14% volume CAGR in tractors.
Margin plays spoilsport; scattered accounting treatment of other expenditure leading to
lack of relevance of first three-quarter margin: ESC reported a standalone operating
margin of 4.9% this quarter, down 480bp q-q, led by a 630-bp rise in other
expenditure/sales. As per management, scattered accounting of fixed cost elements led to
skewness in other expenditure elements getting accounted in 4Q, although on a y-y basis
other expenditure for FY10 was at par with FY09 at 13.8%. Against a first three-quarter
average other expenditure of 12.5%, the balancing act in 4Q would give us the lack of
clarity on actual operational performance based on the upcoming quarter numbers,
signifying incremental stress to be given to gross margin rather than operating margin. For
FY10, standalone operating margin contracted by 100bp to 8.4%, primarily led by higher
RM costs. At the consolidated level, margin contracted by 110bp to 7.3% in FY10. We are
modelling operating margin levels of 8.4% and 9.1% in FY11E and FY12E, respectively.
Consolidated ROCE improves to 10%; expect it to improve to 16-18% in FY12E: ESC
reported a ROCE of 10% in FY10, primarily led by improved capital intensity through higher
tractor volume. We believe, on the back of requirement of nominal capex in FY11-12E and
scope of improvement in margin, ESC can generate free cash flow to the extent of Rs6 bn
on a cumulative basis between FY11-12E along with driving the ROCE up to 16-18% levels.
Re-iterate BUY with revised 12-month PT of Rs267 (Rs300 earlier): We re-iterate our BUY
on ESC with a revised 12-month PT of Rs267 based on 6x FY12E EV/EBITDA (based on
target multiple at 25% discount to 5-year average traded forward multiple). At our target
price we expect ESC to trade at 10.6x FY12E earnings on the back of expected 42%
earnings CAGR between FY10-12E. Inability to improve tractor market share, improve
margin in core agri machinery business along with ECEL are the major risks to our
estimates and in turn our price target.
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