ET Intelligence Group stocks reco which benefits from rate cutDec 30, 2014
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For the consumer and engineering company, a 50-bps interest cut could boost operating profit by 7-8%. This, on a 10-15% sales growth in the next one year, would ensure close to 20% operating profit growth. Although its first half in FY15 was weak due to low demand in the consumer business — lighting, fans and home appliances — and write-offs in the engineering business, the management is expecting things to gradually pick up and expects a strong FY16.
High debt has been the primary reason for the underperformance of Future Retail's stock in the past two years. Consistent rise in the interest expense for the last few years, along with low demand from urban markets (it derives more than 50% of its sales from cities), was the reason for its declining profits over the last three years. In the past one year, the retailer has done a business restructuring to improve the profitability and equity issuances to lower debt. Reduction in the interest expense and pick-up in urban demand could lead to earnings surge in coming years.
Softer rates could bring big gains for many in India Inc
Tata Communications:High capital expenditure, which includes undersea cables, for setting up voice and data services over the last few years led to company's debt rise significantly. But now with the capex cycle behind, the only fixed cost for the company is the interest expense. While the sales are expected to grow at 10-12% in FY16, lowering interest expense could lead to a significant rise in earnings. In the first half of FY15, interest was 60% of the operating profits. Considering this, a 50-bps cut in interest rates would boost the company's operating profit by 3-4%. The company also plans to bring down its debt through internal accruals.
The company which is primarily in the business of contract manufacturing for global pharmaceutical companies has been grappling with dwindling margins over the last few years. While its sales have been increasing, the benefit has not been visible in the profit due to high expenses, which it has not been able to pass on to customers. Given high interest expenses, a rate cut could give it a marginal relief.
The exhibitor has embarked on aggressive expansion in the last few years, which increased its debt and interest burden. Though high interest expense was never a major concern for the company, given a healthy operating margin of 16%, a rate cut would help the company save on interest cost, which is more than half of the company's EBIT. With a capacity of 454 screens, PVR has 20% of multiplex screens. In the coming quarters, a strong content pipeline in the form of films such as Bombay Velvet, Detective Byomkesh Bakshi, Badlapur, and Piku is expected to ensure high occupancy rates for the multiplex industry. Being the segment leader, it will be the prime beneficiary.
IL&FS Transportation Networks (ITNL) is one of the few geographically well-diversified road companies with presence in 16 states through 27 roads projects. In the past few years, high interest rates and capital-intensive nature of long-drawn projects had inflated its interest expense. However, a rate cut in coming days is likely to ease the company's interest burden which is more than 50% of its EBIT. At present, the company has 12 toll and six annuity projects. Besides this, it has 11 projects across geographies, which are under implementation. This provides strong revenue visibility for three years. Besides, having projects across geographies in India shields company from any execution risk.
The company's revenues are expected to grow at 12-15% in FY16. The earnings are likely to grow even faster as the company will benefit from the fall in the prices of polymer, its major raw material, due to a sharp drop in global crude oil prices. In addition, a lower interest rate would also enhance net margin. Its annual interest cost burden, which jumped 2.6 times between FY09 and FY13, has stagnated in FY14 and FY15 so far, but a sizeable reduction in it would be necessary to improve the company's net profit.
Source: ET News