Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,215
Results ahead of expectations
Result highlight
- Reliance Industries (RIL) has positively surprised on its Q2FY2007 results by reporting a 9.6% year-on-year (y-o-y) growth in its earnings, much ahead of our estimates.
- The net revenues for the quarter grew by 37.4% driven by a strong 33.1% y-o-y growth in the revenues from the petrochemicals business and a 25% y-o-y growth in the revenues from the refining business.
- In the petrochemicals business the impact of the shut down at the Hazira plant was more than compensated for by the increased capacities as the revenues grew by 33.1% year on year (yoy).
- The profit before tax and interest (PBIT) from the petrochemicals business grew by 38% yoy driven by a 57-basis-point expansion in the profit before interest and tax (PBIT) margins.
- The refining and marketing (R&M) business reported a 24.8% y-o-y growth in revenues driven by a higher throughput and better prices. The PBIT declined by just 3% despite a steep fall in the regional Singapore gross refining margins (GRM). RIL's GRM outperformed Singapore GRM by 90%.
- With extraordinary expenses of Rs34 crore, a higher tax rate and a lower other income the net profit increased by 9.2% yoy. However, the same was ahead of our expectations by 6%.
- We like the way RIL has been diversifying into new areas of growth like upstream oil and gas activity, organised retailing and construction of Special Economic Zones (SEZs). However, these areas of business would entail a lot of investment for RIL going forward, and we expect them to generate tremendous shareholders' value.
- We expect that in near future a substantial upside can come from the higher-than-reported gas find in the KGD6 block owned by RIL (see our report 'It is solid, not gas' dated September 22, 2006). However, we would like to see an official confirmation of the same before taking it into our numbers. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs480
Current market price: Rs428
Growth continues to be robust
Result highlight
- Satyam Computers Services (Satyam) reported a robust revenue growth of 11% quarter on quarter (qoq) and of 38.7% year on year (yoy) to Rs1,601.9 crore during the second quarter ended September 2006. The sequential growth was contributed by a 10.9% quarter-on-quarter (q-o-q) growth in the stand-alone revenues and a sequential growth of 14.5% in the revenues from its various subsidiaries. The sequential growth of 9.5% in the volume on a consolidated basis was higher than that seen in the previous three quarters.
- The operating profit margin (OPM) declined sharply by 200 basis points to 22.6% on a sequential basis, largely due to the aggressive annual salary hikes given with effect from July to its entire workforce (a negative impact of 420 basis points) and lower employee utilisation (offshore utilisation declined by 80 basis points sequentially). On the other hand, the lower visa cost (down 125 basis points), foreign exchange (forex) gains (up 30 basis points), improvement in profitability of subsidiaries (30 basis points) and the savings in the selling, general and administration (SG&A) expenses positively affected the margins.
- The other income component plummeted 62.1% qoq to Rs28.2 crore (sharply down from Rs74.5 crore in Q1FY2007). However, the lower tax rate limited the decline in the net profit to 9.7% qoq at Rs319.8 crore (better than the guidance of over 18% q-o-q decline and consensus estimates of 14-15% q-o-q drop in the earnings).
- For the full year, the management has revised upwards the annual growth guidance for the revenues and earnings by 3.6% and 6% respectively. As per the revised guidance, the revenues are guided to grow by 34.6-35.1% (Rs6,452-6,476 crore) and the earnings per share (EPS; including the non-cash charges related to the restricted stock options) are guided in the range of Rs20.73-20.81 (35.9-36.4% growth over FY2006).
- For Q3, the consolidated revenues and earnings are guided to grow by 4-4.5% sequentially. The management has factored in the appreciation of the rupee, as the revenue growth guidance in US dollar terms is higher at 5.6-6.1%.
- At the current price the stock trades at 20.4x FY2007 and 17x FY2008 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a price target of Rs480.
Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs277
Operationally strong results
Result highlight
- Canara Bank's net profit at Rs362.0 crore was in line with expectations driven by a strong growth in the net interest income (NII) and lower-than-expected operating expenditure.
- During the quarter the bank's NII grew by 21.6% year on year (yoy) to Rs981.1 crore compared to our expectations of a 16.6% year-on-year (y-o-y) growth.
- The better growth could be attributed to a 26.8% y-o-y growth in the advances. A sharp improvement in the yields on advances helped the net interest margin (NIM) remain stable despite the cost of deposits moving up.
- The other income at Rs313.3 crore was lower than our expectations as the same decreased by 20.3% yoy. The fall in the other income could be a result of lower recoveries in Q2FY2007 compared to Q2FY2006.
- The operating expenses reported a sedate 9.8% y-o-y growth, slightly below our expectations.
- As a result, the operating profit grew by 5.9% yoy to Rs615.2 crore broadly in line with our expectations as higher NII and lower operating expenses compensated for the higher unanticipated fall in the other income. The operating profit excluding the treasury income grew by 5.6% yoy.
- The decline in the bond yields has helped the bank to write back provisions on the investment book. The bank has used the opportunity to provide higher provisions on its advances book. Despite higher provisions for non-performing assets (NPAs), the total provisions have declined by 24.3%.
- With the operating performance in line with expectations and a decline in the provisions, the net profit at Rs362 crore was in line with our expectations.
- Canara Bank is planning to go for raising hybrid tier I capital funds to the tune of Rs300 crore soon to shore up its Tier I capital adequacy ratio.
- We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs32 and Rs39 to Rs36 and Rs47 respectively to take into account the lower provisioning requirement.
- At the current market price of Rs277, the stock is quoting at 6.0x its FY2008E EPS, 3.2x pre-provision profits (PPP) and 1.2x book value. The stock is available at attractive valuations looking at its strong average return on equity (RoE) of 20.2% over FY2006-08E. We reiterate our Buy call on the stock with a revised price target of Rs320.
Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs243
Q2 results in line with expectations
Result highlight
- Nicholas Piramal India Ltd (NIPL) reported an 18.6% quarter-on-quarter (q-o-q) and 29.8% year-on-year (y-o-y) growth in its earnings to Rs63.89 crore for the second quarter ended September 2006.
- The revenues were up by 21.9% quarter on quarter (qoq) and 74.4% year on year (yoy) to Rs636.86 crore. The 393% jump in the international sales (largely due to the incremental revenue of Rs260 crore flowing from the new acquisitions of Pfizer's Morpeth facility, UK and Avecia) supported by a 22% rise in the domestic formulation business contributed to the revenue growth.
- The operating profit margin (OPM) declined by 250 basis points yoy to 15.1% largely due to a substantial 650-basis-point jump in the staff cost driven by the integration of the acquired businesses like Pfizer's Morpeth facility, UK and Avecia.
- During the quarter, NPIL acquired the balance 51% equity stake in its 49:51 joint venture company, Boots Piramal Healthcare Pvt. Ltd (BHPL). In the process it got a one-time income of Rs17.8 crore as compensation for losing three brands, Strepsils, Clearasil and Sweetex.
- Due to the acquisitions, the depreciation and interest costs were higher by 31% and 58% at Rs7.64 crore and Rs24.36 crore respectively.
- In terms of valuation, at Rs243 the stock trades at 15.9x FY2008 estimated earnings. We maintain our Buy call on the stock. Considering the recent acquisitions of Pfizer's Morpeth facility, the acquisition of the 51% stake in BHPL etc, we are evaluating the financials and are likely to revise our estimates soon.
Associated Cement Companies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs978
Results ahead of expectations
Result highlight
- In Q2FY2007 the pre-exceptional net profit of Associated Cement Companies (ACC) grew by 228% year on year (yoy) to Rs243 crore, ahead of our expectations.
- The net revenues grew by a healthy 36.7% yoy to Rs1,373.5 crore driven by a 41% growth in the realisations (bolstered by the reduction in the excise duty) and a 5.6% growth in the volumes.
- The operating cost jumped by 18.3% yoy on account of a 12% increase in the power and fuel cost, and a sharp jump of 43% in the other expenditure, which included a one-time maintenance & shutdown expenditure of Rs18-20 crore. But this was overshadowed by the steep revenue growth that caused the company's operating profit to increase sharply by 139.2% yoy to Rs366 crore and the operating profit margin (OPM) to expand by a massive 1,150 basis points to 26.7%.
- The reduction in the interest expense was partially offset by a decline in the other income whereas the depreciation charge increased by 21% on account of the commissioning of the Chaibasa plant and expansion at the Gagal plant.
- A lower tax provision of 22.5% as against 32.4% in the same quarter last year boosted the pre-exceptional net profit by 228% to Rs243.5 crore.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs565
Current market price: Rs510
A mixed bag
Result highlight
- Lupin's net sales increased by 21.1% year on year (yoy) to Rs491.1 crore in Q2FY2007. The growth in the top line is in line with our expectations. The sales growth was driven by a healthy growth of 25% in the domestic business to Rs288.6 crore and a 17% increase in the exports to Rs218 crore.
- The formulation sales advanced by 48.6% to Rs298.9 crore, with a strong growth in both the domestic business and exports. However, the sales of active pharmaceutical ingredients (APIs) rose by a meagre 6.9% to Rs195 crore in the quarter. The subdued growth in the API sales was on account of lower sales of Ceftriaxone bulk drug to Baxter (due to one-time production constraints) and a strategic change of focus from the Lisinopril API to Lisinopril formulations.
- Lupin's operating profit margins (OPMs) took a hit of 60 basis points to 17.0% in Q2FY2007 mainly on account of a 38% rise in the research and development (R&D) expenditure and a 34.5% increase in the other expenses. Consequently, the operating profit grew by only 17.2% to Rs83.4 crore in the quarter.
- A substantially higher tax outgo impacted Lupin's net profit, which nevertheless grew by 29% to Rs58.3 crore in the quarter. At the profit before tax (PBT) level, Lupin reported a 32% rise in its profits to Rs79.2 crore.
- Lupin's R&D expenses for the quarter stood at Rs31.8 crore or 6.5% of sales. This is in line with the company's plans to accelerate the spend on R&D, which it believes will yield results in the future.
- At the current market price of Rs510, Lupin is quoting at 13.5x its FY2008E earnings estimate. In view of the strong growth potential lined up for the company�a pick-up in the sales of Suprax, a healthy growth in the domestic market and new product launches arising out of the aggressive R&D efforts�we reiterate our Buy recommendation on Lupin, with a price target of Rs565.
3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs244
Current market price: Rs187
Robust operating performance
Result highlight
- 3i Infotech reported a growth of 12.9% quarter on quarter (qoq) and of 49% year on year (yoy) to Rs145 crore during the second quarter. The two acquisitions (Delta Tech and G4 Software) contributed incremental revenues of Rs4.5 crore during the quarter.
- The operating profit margin (OPM) improved by 70 basis points to 23.5% on a sequential basis. The sequential improvement in the OPM was largely contributed by the 250-basis-point improvement in the gross margins of the product business to 55% (due to better revenue mix). On the other hand, the gross margins of the service business declined by 100 basis points sequentially to 38.3%. On an annual comparison basis, the OPM has improved sharply by 300 basis points largely due to increased contribution from the high-margin product business.
- The other income component stood at Rs3.9 crore as compared with Rs4.8 crore in Q1FY2007. The other income declined due to lower gains from the foreign exchange (forex) fluctuations during the quarter (the company had reported Rs1.1 crore of forex gain in Q1).
- The lower other income, and higher interest and depreciation charges limited the sequential growth in the earnings to 5.6% at Rs22.5 crore (exactly in line with our estimates).
- The order backlog has grown by 9.9% qoq to Rs322.3 crore, with the product order book growing by 9.8% qoq to Rs160.9 crore and service backlog rising by 10% qoq to Rs161.4 crore. This is the third consecutive quarter of a double-digit sequential growth in the order backlog.
- Along with the quarterly results, the company announced the acquisition of a 100% stake in a UK-based product company, Rhyme Systems. The acquired company has annual revenues of around $28 million and has OPM of over 20%. The acquisition has been made at consideration of $52 million, which works out to 1.9x its annual revenues.
- The management has revised the annual revenue growth guidance to Rs620-640 crore (48-53% growth). The diluted earnings are guided in the range of Rs16-17 per share (net of dividend on preference share capital) in FY2007, which amounts to a growth of 69-79% over the earnings of Rs9.5 reported in FY2006. The guidance factors in the impact of the acquisitions already made in the current year.
- At the current market price the stock trades at 14.4x FY2007 and 9.6x FY2008 revised earning estimates(On the fully diluted equity base of Rs69 crore). We maintain our Buy call with a price target of Rs244.
NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs296
Current market price: Rs207
First-cut analysis of Q2FY2007 results
Result highlight
- NIIT Technologies (NIIT) reported a growth of 15.1% quarter on quarter (qoq) and of 39.9% year on year (yoy) in its consolidated revenues to Rs219.9 crore during the second quarter of FY2007. Excluding the incremental contribution from Room Solutions (acquired in May 2006), the organic revenues grew at a healthy rate of 10.6% sequentially. The strong sequential growth of 14.9% (as compared with that of 4.3% in Q1) in the BPO business also aided the overall growth in the consolidated revenues.
- The operating profit margin declined marginally by ten basis points qoq but improved by 120 basis points yoy as compared with 17.7% reported in Q2FY2006. The sequential decline was largely contributed by the one-time transition cost related to the integration of Room Solutions (around Rs1 crore). The adverse impact of the same was mitigated by the savings in the selling, general and administration expenses as a percentage of sales.
- The other income declined to Rs2.4 crore as compared with Rs3.5 crore in Q1FY2007, largely due to the lower gains from the foreign exchange (forex) fluctuations during the quarter (forex gains of Rs0.4 crore as compared with Rs1.7 crore in Q1). However, the lower depreciation charges and minority interest enabled the company to post an impressive earnings growth of 23.9% qoq and of 79.1% yoy to Rs27 crore (much ahead of expectations).
- In terms of the outlook, the growth in the organic business is likely to remain robust on the back of healthy fresh order intake of $42 million in Q2, one of the highest in any quarter. The pending order backlog of $87 million is executable over the next one year.
- At the current market price the stock trades at 9.5x FY2007 and 7.8x FY2008 estimated earnings. However, we would be revising our earning estimates to factor in the higher-than-expected Q2 performance and robust net addition of employees in the first half of FY2007. We maintain our Buy call on the stock with the price target of Rs296.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs412
Q3CY2006 results below expectations
Result highlight
- Ranbaxy Laboratories (Ranbaxy) reported a 15.0% quarter-on-quarter (q-o-q) in its earnings to Rs139.3 crore for the third quarter ended September 2006; the earnings saw a six-fold jump on a year-on-year (y-o-y) basis. Though the net profit seems higher, the same is much below the expected earnings of Rs193.2 crore.
- The revenues are up 26.8% to Rs1,627.10 crore, largely driven by a 25% jump in the US sales, a 39% rise in sales in the European and CIS markets, and a 49% increase in the sales in the Asia-Pacific and Middle-East markets.
- The operating profit margin (OPM) witnessed a 140-basis-point fall sequentially to 16.8%. The fall was largely due to the company incurring a Rs18.4 crore other operating loss as against an income of Rs75.5 crore in the previous quarter.
- Further, the company has charged a one-time cost of Rs22.6 crore relating to a settlement of its contract manufacturing arrangement.
- Finally, with higher depreciation, the loss at the other operating income level and the one-time provision, the net profit grew by 6.5x against the estimated 9.5x. Though Ranbaxy has disappointed the market with below expected earnings, we believe the company would perform well going forward by following a comprehensive business model that involves aggressive new launches, in-licencing, strategic partnering, widening geographical presence etc. Also, its margins will remain firm, thanks to its cost-cutting initiatives. At the current price of Rs412, the stock trades at 19.8x its CY2007 earnings per share (EPS). We maintain our confidence in the stock and reiterate the Buy recommendation with price target of Rs558 .
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