PULSE TRACK
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February 2007 IIP in line with market estimates
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.