Punjab National Bank
Research: DSP Merrill Lynch
Recommendation: Buy
CMP: Rs 470 (Face Value Rs 10)
12-Month Price Target: Rs 600
DSP Merrill Lynch has upgraded PNB from `Neutral' to `Buy' with a price target of Rs 600, as they believe that post hike in its prime lending rates (PLR) by 50 bps and transfer of government securities to held to maturity (HTM) category, PNB, trading at 1.3 times FY07 adjusted book value, could arguably trade up to 1.4-1.5 times one year forward (FY08E) adjusted book value as it is amongst the best positioned banks in a rising rate environment.
PNB is amongst the best positioned banks under our coverage in a rising rate (lending rate) environment, owing to its very high proportion of low cost deposits (>45% of total deposits) and excess G-secs on its balance sheet (>35% of deposits v/s 26-27% for peer banks; minimum requirement is 25%).
PNB is also amongst the few government banks ahead on technology, providing it with greater leverage to enhance fees. Further, transfer of Rs 6,000 crore of G-secs to HTM category would make its reported earnings less vulnerable to rising G-sec yields which should positively impact stock sentiment and it has been the key reason for the stock's underperformance.
While forecast earnings would change owing to the transfer (Rs 300 crore charge required), DSP Merrill Lynch would reassess earnings on May 19th when PNB declares annual results. Currently, they are forecasting a 16% growth for FY07 and that does not capture any rise in lending rates or any transfer of G-secs to the HTM category. Research: DSP Merrill Lynch
Recommendation: Buy
CMP: Rs 470 (Face Value Rs 10)
12-Month Price Target: Rs 600
DSP Merrill Lynch has upgraded PNB from `Neutral' to `Buy' with a price target of Rs 600, as they believe that post hike in its prime lending rates (PLR) by 50 bps and transfer of government securities to held to maturity (HTM) category, PNB, trading at 1.3 times FY07 adjusted book value, could arguably trade up to 1.4-1.5 times one year forward (FY08E) adjusted book value as it is amongst the best positioned banks in a rising rate environment.
PNB is amongst the best positioned banks under our coverage in a rising rate (lending rate) environment, owing to its very high proportion of low cost deposits (>45% of total deposits) and excess G-secs on its balance sheet (>35% of deposits v/s 26-27% for peer banks; minimum requirement is 25%).
PNB is also amongst the few government banks ahead on technology, providing it with greater leverage to enhance fees. Further, transfer of Rs 6,000 crore of G-secs to HTM category would make its reported earnings less vulnerable to rising G-sec yields which should positively impact stock sentiment and it has been the key reason for the stock's underperformance.
Nirma
Research: Angel Broking
Recommendation: Buy
CMP: Rs 528 (Face Value Rs 10)
12-Month Price Target: Rs 592
For the fourth quarter of FY06, Nirma's net sales grew 5.5% to Rs 483 crore. However, profits declined by 12% to Rs 95 crore. For the full year FY06, it posted a net sales and profit of Rs 1,917 crore and Rs 372 crore respectively.
While the topline grew 4%, net profit rose by a sharp 30.7% in FY06. Operating margin declined by 224 basis points during Q4FY06 due to a high rate of growth in the employee and other expenses. For the full year FY06, the OPM remains almost flat at 27.4%.
A higher tax provision during the last quarter of FY06 affected the net profit margin, which declined by 391 basis points to 19.7%. However, for the full year, the NPM expanded by 394 basis points to 19.4% due to a variety of factors which include higher other and interest income and reduced tax provision for the full year.
Nirma is eligible for set off of unabsorbed depreciation and losses of Core Healthcare, which it had acquired recently, and hence has made a lower amount of tax provision in FY06 in comparison to FY05. In key expenditures, power and fuel costs increased by a steep 21.5% YoY in FY06.
However, the backward integration strategy has aided the company in keeping a check on its raw material costs. At the current market price, the stock trades at 10.2 times FY07E (standalone) earnings. Taking into consideration the company's long standing, strong domestic demand for FMCG products and its recent foray into the pharmaceutical segment, Angel Broking expects the company to clock healthy growth rates going forward.
i-flex Solutions
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 1,288 (Face Value Rs 5)
12-Month Price Target: Rs 1,466
i-flex finished FY06 with a strong fourth quarter topline growth of 15.4% QoQ with FY06 topline at Rs 1,480 crore (30% YoY). EBITDA growth at 38.2% QoQ to Rs.130 crore was led by strong 25.4% QoQ growth in product revenues (Product OPM – 43.9% v/s 38.8% QoQ) with services recording a muted topline growth (4.3% QoQ).
Q4FY06 PAT at Rs 110 crore (FY06 PAT Rs 220 crore) was higher than our expectations, aided by lower taxes (61% QoQ). EPS growth of 6% YoY was impacted by the Rs 33-35 crore loss of KPO. Increased licence fee bookings have reduced the tank size from $7.25 crore to $6.5 crore, yet it is the second highest till date.
Stronger business traction for both FLEXCUBE and Reveleus coupled with higher visibility via Oracle parentage are expected to lead revenue growth. Higher deal flow is expected as the incentive structure is in place for Oracle's sales team, along with their ongoing training on i-flex's offerings.
Muted topline growth (4.3% QoQ ) was due to de-growth in offshore revenues (8% QoQ, 11.1% YoY) and 6% QoQ dip in utilisation. Both products are witnessing increased traction with demand for core banking replacement as well as risk and increasing compliance, e.g. FLEXCUBE's average. deal size from ~$0.09 crore to $0.16-0.17 crore YoY, coupled with leveraging Oracle's sales platform and parentage is expected to drive sales performance.
Nonetheless, higher services business growth (41% of consolidated FY06 OPBDIT) would be imperative for higher PAT growth. While current multiples appear rich at 29 times FY07E and 24 times FY08E earnings, the large addressable market for i-flex's products and robust business traction would continue to drive valuations.
Hindalco
Research: Edelweiss
Recommendation: Buy
CMP: Rs 242.50 (Face Value Rs 1)
12-Month Price Target: NA
Hindalco reported its Q4FY06 results, which were ahead of expectations. Notwithstanding the contribution of one-time gains (export incentives and tax adjustments), the key highlight of the quarter was the bouncing back of the copper business into the black.
On expected lines, copper business volumes improved post stabilisation of the refurbished smelters and higher TC/RCs aided profit growth despite high backwardation charges (YoY). The aluminium business maintained a stellar performance on the back of enhanced volumes, higher realisations, effective cost control and enriched product mix.
Topline received a thrust from higher realisations in both aluminium and copper due to a firm trend in LME prices. EBITDA growth (and higher EBITDA margins) was aided by effective cost control in operations despite higher cost of some key inputs like bauxite and energy.
With the copper business bouncing back in the black, expectations of robust performance from the aluminium business, and progress on its growth projects, FY07 should be a year of strong earnings growth for Hindalco. While the aluminium business continued to shine - with higher realisations, effective cost control and an enriched product mix - the copper business bounced back into the black.
Volume growth in copper was aided by refurbished Copper I (180 ktpa) and Copper II (70 ktpa) smelters and planned ramp-up of the Copper III (250 ktpa) smelter. For FY06, revenue rose 20% to Rs 11,390 crore. EBITDA in Q4FY06 rose 48% YoY to Rs 930 crore and EBITDA margins increased 40bps YoY (510bps QoQ) to 25.4%.
Net profit rose 40% YoY to Rs 630 crore (ahead of expectations). This includes a one-time gain of Rs 104 crore (export incentives based on the Target Plus scheme, which now stands withdrawn). Adjusted for this, net profit for the quarter grew 16% YoY.
For FY06, the company reported a profit of Rs 1,650 crore, a growth of 48%. Adjusted for the one-time gain, FY06 profit grew by 17%. In keeping with improved market fundamentals for the entire base-metals space, we have revised our metal price assumptions upwards.
Consequently, we have revised Hindalco's EPS forecast for FY07 28% upwards to Rs 23. At the current market price of Rs 229, the stock trades at a P/E of 10 times and EV/EBITDA of 5.1 times FY07 revised estimates and continues to look attractive.