The 1QFY14 results so far have conspicuously shown some
trends that need to be noticed and considered while updating and executing
investment strategy.
In particular, we would like to highlight the following
trends:
Most consumer companies with
their eyes and ears on the ground have discerned the structural decline in
India’s growth potential. Accordingly, the companies like HUL, ITC, Dabur,
Nestle, IDEA, Bharti, Maruti, Bajaj Auto, Hero Honda, etc. have re-worked their
strategy to shift focus from volume growth to margin protection and
improvement. Price hikes, cost savings, lower promotion spend, better working
capital and inventory management, are
clearly visible.
In our view, with consistent margin improvement and ~3-5%
volume growth, these companies will more than address the valuation concerns,
insofar as currently high P/E ratio is concerned. Moreover, expect payout and
ROEC to increase.
We suggest overweight on consumer companies (FMCG, auto,
telecom).
Most financials have reported
decent growth in income and margins though the asset quality has deteriorated
substantially. The market reaction to their results is a clear indicator that
investors are not convinced about the sustainability of their profitability.
There is obviously more pain to come in following quarters.
We suggest NIL to very low weight on the sector.
The global services businesses
like large IT and pharma have guided a challenging but stable demand and
pricing environment. The improving data in US and EU is fully reflected in
their operational numbers. Besides, lower cost statistics suggests that most of
these companies have appeared to tighten their belt. The cost savings appear
more permanent in nature.
The trend is however not
reflected in many middle and lower rung companies. It is therefore advisable to
keep overweight on top rung IT (TCS, Infosys, Wipro, HCL Tech, Tech Mahindra)
and pharma (Sun Pharma, Lupin, Dr Reddy, and Cipla) companies.
Results of most capital goods,
heavy engineering and infrastructure companies clearly indicate slower order
inflows, intense margin pressure, higher working capital cycle, rise in debt
and financing cost.
However, remarkably positive
commentary about future outlook suggests that many of these companies continue
to be denial mode and therefore may not have taken adequate corrective
measures.
We suggest NIL to very low
weight on the sector.
The commodities results have
also indicated lower demand and margin pressures. Most of these have indicated
lower capacity utilization and cut in capex plans.
We suggest NIL weight in global
commodities and low weight in cement.
Thought for the day
“Wise men speak because they have something to say; Fools because they have to say something.”
- Plato (427-347BC)
Word of the day
Bemused (adj):
Bewildered or confused.
(Source: Dictionary.com)
Shri Nārada Uvāca
Telangana pushed back by 6months.
Is Congress having a rethink?
Or
It just wants to push it closer to election so that full dividend could be reaped!
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