Brokerage firm Sharekhan is positive on Gabriel India in the auto ancillary space on account of likely improvement in demand in 2-wheeler segment in the second half of the ongoing financial year due to favourable monsoon and Seventh Central Pay Commission (CPC) hike. Grasim and UltraTech are among other preferred picks of the brokerage house in the cement space. Sharekhan believes overall demand environment for the cement industry is expected to be favourable post a better south-west monsoon, higher government spending and improvement in retail demand.
Investment Rationale: The OEM segment, which forms 85 per cent of Gabriel India’s (GIL) total revenue, is likely to witness demand improvement in the ongoing financial year. The two-wheeler segment which contributes around 45 per cent to Gabriel India revenue is likely to witness demand pick-up in the second half of 2016-17 on the back of improvement in the rural sentiment due to normal monsoon after two consecutive years of drought. Also, rise in salaries of the government employees following the implementation of the Seventh Central Pay Commission (CPC) recommendations is likely to boost demand. The passenger vehicle (PV) segment is also witnessing traction due to the strong demand for Maruti Suzuki (Vitara Brezza and S Cross) and M&M (KUV1OO) models. Further, the company has received orders for supplies to Maruti Suzuki’s new LCV, which would augment the company’s Commercial Vehicle (CV) segment revenue going forward. Overall, Sharekhan expects the auto ancillary’s OEM segment to report 10 per cent growth in the ongoing financial year ending March 2017. Sharekhan is bullish on Gabriel India shares with a target price of Rs 130.
Cement sector: The earnings of the cement companies under the coverage of Sharekhan grew by 76 per cent year-on-year on the back of lower cost for power and fuel (down 23 per cent YoY) and lower freight (down 6 per cent YoY), which led to over 550 basis points year-on-year expansion in operating profit margin. Cement companies registered a topline growth of around 5 per cent on year-on-year basis. The North India based players such as Shree Cement and JK Lakshmi Cement outperformed their peers owing to strong demand and higher realisations. However, In the southern markets, cement realisations remained under pressure on yoy basis, although volume remained strong. Ramco Cements registered a 57 per cent year-on-year growth in earnings due to lower costs for power and fuel and freight. Profitablility of India Cements slipped due to lack of operating profit margin expansion. The brokerage house beleives overall demand environment for the cement industry is expected to be favourable post a better south-west monsoon, improvement in retail demand and higher government spending. However, the benefit of lower pet coke price may gradually taper off and higher diesel cost may impact margins in the coming quarters. Sustenance of cement prices in North India and revival of prices in the southern region will be the key monitorables going forward. UltraTech Cement and Grasim are among preferred picks of Sharekhan in the cement space.