State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs950
Current market price: Rs884
Weak operating performance
Result highlights
- State Bank of India's (SBI) adjusted net interest income (NII) grew by only 0.6% year on year (yoy) in Q3FY2006 as the total earning assets (advances plus investments) declined due to the redemption of India Millennium Deposits (IMDs).
- The adjusted operating profit declined by 44.8% yoy due to the lower NII and the lower other income. Consequently the adjusted net profit also declined by 34.0% yoy.
- At the current market price of Rs884 the bank's stock is quoting at 7.5x its FY2007E stand-alone earnings per share (EPS) and 1.2x its consolidated book value. We maintain our Buy recommendation on SBI with a price target of Rs950.
Crompton Greaves
Recommendation: Buy
Price target: Rs1,008
Current market price: Rs880
Price target revised to Rs1,008
Result highlights
- The revenues of Crompton Greaves (Crompton) grew by 37.3% in Q3FY2006 to Rs647.9 crore. The growth was achieved on the back of the strong performance of power systems (revenues up 60.6%) and consumer products (revenues up 21.5%).
- The operating profit margin (OPM) improved by 90 basis points year on year (yoy) and by 140 basis points quarter on quarter (qoq) to 10.9%. The OPM improved owing to the benefit of operating leverage during the quarter.
- The power system and consumer product divisions were the key drivers of the company's good performance in Q3FY2006. The profit before interest and tax (PBIT) margin of these divisions improved by 250 basis points and 60 basis points yoy to 9.7% and 8.8% respectively.
- The net profit (before exceptional) of Crompton grew by 73.3% yoy in the quarter to Rs54.7 crore. There was an extraordinary expense of Rs11.5 crore on account of a voluntary retirement scheme (VRS). Adjusting for the same, the profit after tax (PAT) grew by 36.8% yoy to Rs43.2 crore, in line with our estimates.
- Its subsidiary, Pauwels, reported a strong performance in the quarter with a profit before tax (PBT) of Rs19.8 crore. Its PBT as a percentage of sales also increased sharply by 300 basis points to 4.3%.
- The current consolidated order backlog of Crompton stands at Rs2,950 crore (including Pauwels' order book of Rs1,450 crore) and is equivalent to 1x the FY2005 consolidated revenues.
- Crompton is currently trading at 14.0x FY2008E consolidated earnings. A healthy compounded annual growth of 44% in the earnings over the FY2005-08 period, the strong visibility of the earnings and the improving financial ratios of the company make the stock an attractive investment. We maintain our Buy recommendation on the stock and roll over our earnings multiple to FY2008E with a price target of Rs1,008, discounting the FY2008E consolidated earnings by 16x.
Orient Paper and Industries
Recommendation: Buy
Price target: Rs335
Current market price: Rs250
Strong pick-up in cement and paper businesses
Result highlights
- Orient Paper and Industries Limited (OPIL) recorded revenues of Rs207.7 crore in Q3FY2006, a growth of 19.5% year on year (yoy), aided by the cement as well as paper divisions. The cement and paper divisions registered a top line growth of 28.1% and 8.1% respectively.
- The operating profit, however, increased by 112.2% to Rs24.3 crore due to margin expansion. The operating profit margin (OPM) improved from 6.6% in Q3FY2005 to 11.7% in Q3FY2006. The OPM was primarily driven by the improvement in the performance of the cement division which is back on its growth trajectory.
- The profit before tax (PBT) during the quarter increased by 425% to Rs9.8 crore yoy. However, the net profit increased by 72.9% in Q3FY2006 to Rs5.84 crore, primarily due to the deferred tax to the tune of Rs3.28 crore (as compared to the deferred tax write back of Rs1.5 crore in Q3FY2005). We, therefore, believe the numbers should be viewed on a PBT basis to get a clear picture about the performance of the company.
- OPIL has registered a PBT of Rs17.3 crore in M9FY2006, as compared to our FY2006 estimate of Rs25.7 crore. We expect the company to achieve our FY2006 numbers as we expect Q4FY2006 to be better than Q3FY2006.
- OPIL trades at 10.5x its FY2007 earnings and FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation (EV/EBIDTA) of 7.8x. At the current market price, the cement business of the company is valued at US$59 per tonne, which is the cheapest in the cement sector. We maintain our sum-of-part valuation target of Rs335.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs333
All fired up
Result highlights
- The Q3FY2006 results of Ratnamani Metals and Tubes Ltd (RMTL) are above our expectations. Its revenues grew by 121.9% to Rs118.5 crore over last year. The massive growth in the top line was achieved on the back of a strong order book.
- The operating profit grew by 168.5% to Rs20 crore in Q3FY2006 year on year (yoy). The operating profit margin (OPM) improved by 293 basis points to 16.9% during the quarter. We had earlier stated that we expected the OPM to improve owing to the easing of the raw material prices going forward.
- RMTL's profit before tax (PBT) increased by 157% to Rs1,498 crore yoy. The net profit increased by 146% to Rs9.86 crore yoy. However the provision for tax for the quarter included the Rs1.73 crore paid for the previous year. Excluding this, the profit after tax (PAT) increased by 190% to Rs11.6 crore.
- RMTL has reported a net profit of Rs20.9 crore for M9FY2006 as compared with our FY2006 estimate of Rs24.5 crore. Given the company's robust order book position, we are upgrading our FY2006 and FY2007 estimates. We expect the company to earn a net profit of Rs26.3 crore and Rs36.1 crore in FY2006 and FY2007 respectively. The stock trades at 11.3x the FY2006 and 8.3x the FY2007 earnings estimates. We maintain our Buy recommendation on the stock with the price target of Rs375.
Surya Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs205
Current market price: Rs147
Growing strongly
Result highlights
- Surya Pharma's net sales were up 31% year on year (yoy) in Q3FY2006 to Rs60.2 crore as against Rs45.9 crore in Q3FY2005 on the back of good contract manufacturing orders.
- The lower raw material costs as a percentage of the net sales resulted in the operating margins increasing by 203 basis points to 19.5%.
- The operating profit stood at Rs11.7 crore, an increase of 46% yoy.
- The net profit saw an increase of 67.2% yoy to Rs6.77 crore in Q3FY2006 as the net profit margin soared by 231 basis points on a year-on-year (y-o-y) basis. The quarterly earnings per share (EPS) stood at Rs6.11 in Q3FY2006 as against Rs3.87 in Q3FY2005.
- At the current market price of Rs147 the stock is trading at 5.8x its FY2007 earnings estimate. We maintain our Buy recommendation on Surya Pharma with a price target of Rs205.
Grasim Industries
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,462
Cement comes to rescue
Result highlights
- Grasim Industries' Q3FY2006 stand-alone net profit of Rs162 crore is down by 25% year on year (yoy) and below our expectations. The dent in the net profit was caused by the poor performance of the sponge iron and viscose staple fibre (VSF) divisions. The company's net sales for the quarter grew by only 6%, driven by the good performance of the cement division.
- A 580-basis-point drop in the operating profit margin (OPM) to 19.4% resulted in a 19% decline in the operating profit to Rs319 crore. The earnings before interest, depreciation, tax and amortisation (EBIDTA) of the sponge iron business fell sharply by 97% yoy mainly due to a sharp fall in the volumes (down 50% yoy). The volumes were hurt by an inadequate supply of natural gas and higher input prices. On the other hand, despite an 18% year-on-year (y-o-y) growth in the VSF volumes, the EBIDTA of the VSF business fell by 23% basis points yoy due to a 10% y-o-y fall in the realisations.
- The cement division's performance improved significantly during the quarter. Higher volumes and realisations resulted in a 61% jump in its EBIDTA.
- Grasim's consolidated results are much better than its stand-alone results, primarily because of the excellent performance of the consolidated cement division. The consolidated revenues are up 7% whereas the consolidated net profit is down 5%.
- Grasim's Q3FY2006 results are below our expectations primarily because of the dismal performance of the sponge iron business. Consequently, we are downgrading our stand-alone FY2006 earnings estimates by 7.4% and the consolidated earnings estimates by 6.4%. Further we are downgrading our FY2007 earnings estimates by 4% to Rs120 per share. Our earnings downgrade reflects the deteriorating outlook for the company's sponge iron business and the rescheduling of the commissioning of captive power plant for UltraTech Cement from June 2007 to January 2008.
International Combustion (India)
Recommendation: Buy
Price target: Rs450
Current market price: Rs355
Good results
Result highlights
- The revenues of International Combustion India Ltd (ICIL) grew by a robust 29.3% year on year (yoy) to Rs16.3 crore in Q3FY2006 on the back of the strong performance of the heavy engineering division (HED).
- The operating profit margin (OPM) of the company improved by 620 basis points yoy to 16.9% in Q3FY2006 mainly on account of the lower material cost and the leverage effect coming into play.
- The robust performance on the operating profit front was reflected in the bottom line as the net profit grew 110.4% yoy to Rs1.4 crore. The earnings for the quarter stood at Rs6.5 per share, in line with our estimates.
- The HED continued with its growth momentum in the quarter registering a strong revenue growth of 41.2% yoy to Rs12.9 crore. But the PBIT margins saw a marginal fall of 170 basis points yoy to 26.1% primarily on account of the change in the product mix.
- ICIL has a healthy order book of Rs50 crore which is 1.1x its FY2005 revenues, thus imparting a strong visibility to its earnings. The order book grew by 56.0% on a quarter-on-quarter (q-o-q) basis.
- We expect the company to report earnings of Rs22.9 per share in FY2006E and of Rs42.5 per share in FY2007E. ICIL is currently trading at a PER of 8.3X its FY2007E earnings and 4.9X its FY2007E enterprise value/earnings before interest, depreciation, tax and amortisation (EV/EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs450.