The IBR India Newsletter


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The IBR India Newsletter

  1. 1. The IBR Newsletter NOVEMBER 2012 B R IE F COM M E NTS ON R E CE N T N E W S A NDR E S E A R CH Q2 RESULTS: SLOWDOWN CONTINUES Results of Jul-Sep’12 quarter, which is Q2 for most Indian companies, were not very rosy. Sales growth for the quarter came down to around 12%, margins contracted, taking net profit growth to single digits. This is from research reports of various institutional brokers, who tend to track 100-150 companies. We reproduce some insightful charts from various broker reports. Revenue growth has fallen to low double digits nowSales growth, while not as bad as FY10 in thepost Lehman contraction, is the least in thelast 10 quarters EBITA margins are under pressureBofA Merrill points out that EBITDA marginsare the lowest margins in 8 years
  2. 2. THE IBR NEWSLETTER 30 Nov’12 Profit growth is barely positiveNet profit growth is around 3-4%, barelypositive Healthcare, Consumer Staples post strong earnings growthConsumer non-discretionary sectors did wellon earnings growth, as also IT and 2
  3. 3. THE IBR NEWSLETTER 30 Nov’12 GOING FORWARD: HAS GROWTH TROUGHED OUT?Several opinion makers are beginning to say A few broking analysts are beginning to say that growth trough has beenGDP growth has troughed out. We are not reached. Going forward, there will be a revival. So there are two issues here:convinced. We see continued pain for atleast2 more quarters  Has a trough really been reached?  If yes, but when will growth revive? From Q3, or 2-3 quarters down the line? Firstly, see the trend in GDP dataGDP growth has slowed to below FY09 levels.The market does not seem to recognise thatwe are much more trouble now than in FY09 Source: Microsec Our own view is that this may not be the trough yet. Even if it is, we do not see any revival for the atleast 2 quarters. Why – because we cant see where the revival will come from: Consumer demand? No; Investment demand? No; Government demand? No, again. Once again, check some data Investment demand unlikely to revive for 4 quartersSee the Capex data below. It is clear FY13 willsee a contraction as compared to FY12.Remaining 2 quarters of FY13 are likely to bedown on a y-o-y basis. The first 2 quarters ofFY14 could also be down on a y-o-y basis.Capex needs to pick up 3-4 times for growthto show in first 2 quarters of FY14. This isunlikely to happen. Source: Antique 3
  4. 4. THE IBR NEWSLETTER 30 Nov’12 Slowdown ahead in consumer demandThe charts here are from a Urban ConsumerSurvey by Religare Institutional Research.If we restructure some of the data, we canderive a Consumer Confidence Index. The CCIas per this data slid from around 71 a yearago, to 57 now. While this is still positive (aread above 50 is considered positive), incouple of important chunks, it is lower.Consumers in metros have a CCI of around 50and consumers in high income bracket seemto have a CCI around 48. Source: Religare While the data in this Religare survey is from a small sample of around 900, we agree with its general findings. Consumer demand can only side when inflation is running at close to double digits. When will consumer demand revive? We can’t say, all we can say is, it will certainly contract in the next 1-2 4
  5. 5. THE IBR NEWSLETTER 30 Nov’12 Government demand can only contract Fiscal Deficit (% to GDP) FY08 FY09 FY10 FY11 FY12 FY13EIndia has lost the battle against fiscal deficit -3.1 -4.9 -5.6 -6 -5.9 -6.4 Source: India Business Reports We have been holding this view right since FY10 that Indian government screwed up big time on fiscal deficit. While in FY09 there may have been some ground for a hike in spends, what they did in FY10 was criminal. The government has doomed India to several years of slow growth. Anyway, now, when we are in trouble on growth, the government is not a source of growth. The government is under pressure to control deficit. It budgeted for 5.1% (at the centre), but with revenues below par, deficit will overshoot. So the government will cut expenses, and is hardly likely to drive growth. So where is the growth driver? External factors are our main hope Chanda Kochhar, chairperson of ICICI said last week that, “With the measures that the government is planning, I expect a hockey stick-shaped recovery External triggers may be needed to revive soon”. While is being optimistic about the hockey, she is right about the growth. We expect FY13 GDP growth at government measures. The UPA government is showing some spine on FDI 5.5%, and FY14 around 6.2%. measures, which is good. FDI is can be one reviving factor – both through extra funds, revival of sentiment. Exports can be another source of revival. Exports have shrunk so far in FY13, a reversal will lead to growth 5
  6. 6. THE IBR NEWSLETTER 30 Nov’12 INDIA’S RESTAURANT SECTOR At IBR, we are currently doing research on the restaurant sector. Here are some of our key findings: India’s Restaurant Market 350,000 70.0 300,000 60.0India’s Restaurant market was roughly $24bn 250,000 50.0(Rs 1.21 trillion) market in 2011-12 (Rs Crore) 200,000 40.0 ($bn) 150,000 30.0 100,000 20.0 50,000 10.0 - 0.0 1999-2000 2004-05 2009-10 2011-12E 2014-15P 2019-20P 1999-2000 2004-05 2009-10 2011-12E 2014-15P 2019-20P Source: India Business Reports Restaurant Market - Top Metros (Rs Crore) Restaurant Market - Top Metros ($mn) 7000 1400 6000 1200The top 8 markets represent a market size of 5000 1000 4000 800around $5bn. 3000 600 2000 400 1000 200 0 0 Delhi Chennai Pune Mumbai Hyderabad Kolkata Delhi Kolkata Ahmedabad Chennai Hyderabad Chandigarh Ahmedabad Chandigarh Pune Mumbai Greater Greater  Same store sales have grown at a CAGR of 20% over 2005-10We have several insights here. Contact us to  Domino’s has 3% market share of Delhi’s restaurant marketlearn more about  Coffee chains are struggling to make money. Barista is making operating losses since 6
  7. 7. THE IBR NEWSLETTER 30 Nov’12About India Business ReportsIndia Business Reports (IBR) is an initiative of experienced professionals with comprehensive experience across wide domains – Research, Investment Banking,Private Equity Funding, Consulting, Branding and Marketing. The single minded objective at IBR is to generate insightful reports based on hard facts. Our endeavouris to search for a Big Idea, among seemingly un-connected data points, which has significant strategic relevance. So be it India entry strategies, growth strategies,M&A opportunities or private equity investments, our reports can become a powerful tool in many ways.Our content and expertise is relevant not only for the financial fraternity, but also global MNCs looking to do business with India, and Indian companies looking tofine tune their growth strategies.DisclaimerThis note is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is itsaccuracy or completeness guaranteed. The content in this note is solely for informational purpose and is not a solicitation of offer to buy or sell or subscribe forsecurities or other financial instruments. Nothing in this note constitutes investment, legal, accounting and tax advice. India Business Reports or its owner-partnersaccept no liabilities for any loss or damage of any kind arising out of the use of this 9987474021 7