Stocks you can pick up this week

Larsen & Toubro
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 1,270 (Face Value Rs 2)
12-Month Price Target: Rs 1,350

Larsen & Toubro’s (L&T) Q2FY07 performance on a standalone basis was disappointing, largely due to a delay in commencement of projects and significantly higher staff cost. On a standalone basis, L&T reported revenues of Rs 3,740 crore (up 10% YoY), EBIDTA of Rs 240 crore (up 26% YoY) and adjusted PAT of Rs 180 crore (up 26%). Stellar performance of L&T Infotech overshadowed quarterly aberrations of E&C business.

The H1 FY07 consolidated revenues grew by 20% YoY to Rs 8,940 crore and adjusted profit grew by 60% to Rs 600 crore. Driven by favourable business mix towards hydrocarbon and industrial segments, EBIT margin of E&C business improved by 230 bps to 7.8% despite a flat 9% YoY growth in revenues. Higher realisation, operating efficiency and cost rationalisation led to margin expansion across businesses.

Enam estimates FY07E staff cost to increase by ~150 bps on a standalone basis. L&T InfoTech clocked impressive performance. During H1 FY07, revenues grew by 80% YoY in to Rs 620 crore, profit grew by 234% to Rs 78 crore and EBIDTA margin grew by 17.5%. In view of a strong order backlog of Rs 30,700 crore, revenue traction in H2 FY07 may pick up. Further, the margin expansion witnessed in H1 FY07 is sustainable. At current market price, the stock trades at 13x FY07E and 10x FY08E EV/ EBIDTA.

Nitco Tiles
Research: Karvy Stock Broking
Recommendation: Outperformer
CMP: Rs 184 (Face Value Rs 10)
12-Month Price Target: Rs 222

Nitco Tiles Q2 FY07 revenues were in line with expectations and the net profit was better then the estimates due to improvement in operating margins and lower interest cost for the quarter. The company reported strong YoY growth in sales of 57.6% (QoQ growth of 10.6%) to Rs 109.3 crore against Karvy’s estimates of Rs 106.8 crore. The growth in sales was witnessed across all segments.

The marble division witnessed a robust 155% growth in gross sales, followed by 53% growth in the vitrified division. Operating profits saw a YoY growth of 65% to Rs 17 crore. Net profit increased by 47% YoY to Rs 9 crore, against Rs 6.1 crore for Q2 FY06. Iinterest cost during the quarter was lower than Q2 FY06 on account of lower debt prevailing during the quarter. The effective tax rate during the quarter was on the higher side because of higher provision of deferred tax against write-back of deferred tax in the corresponding quarter in the previous year.

Nicholas Piramal
Research: India Infoline
Recommendation: Buy
CMP: Rs 230 (Face Value Rs 2)
12-Month Price Target: NA

A strong performance in the domestic formulations market and contribution from global CRAMS business were the main drivers of 79.3% growth in topline for Nicholas Piramal India. Operating profit margin remained flat at 17.4% due to lower contribution from Avecia & Morepeth, which made a combined profit of Rs 1.6 crore. Profitability failed to keep pace with sales growth, increasing by a modest 17.5% to Rs 53.7 crore.

This translates into an annualised EPS of Rs 10.3. NPIL received Rs 17.8 crore in settlement of past claims from Boots PLC/Reckitt Benckiser India. Stripping this income and the prior period amount of Rs 10.2 crore, sales increased by 74.4%, while OPM declined by 260 bps to 15.1%. PAT grew 7.4% to
Rs 49.1 crore, translating into an annualised EPS of Rs 9.4.

Despite subdued profitability growth for Q2, global revenue will benefit from Pfizer’s Morpeth facility from Q3 onwards. At these valuations, the stock is trading at 23.5x FY07E EPS and 14.9x FY08E EPS

HCL Technologies
Research: Citigroup
Recommendation: Buy
CMP: Rs 634 (Face Value Rs 2)
12-Month Price Target: Rs 680

HCL Tech’s revenue grew 10.3% QoQ, ahead of the estimate. Software Services grew 9.7%, Infrastructure Services +16.6% and BPO +5.4% QoQ. EBITDA margin declined 78 bps — gross profit margin improved ~20 bps QoQ, but an increase in SG&A (+100 bps QoQ) resulted in EBITDA margin declining ~80 bps QoQ. Software margin declined by ~90 bps due to wage increases in the quarter.

Infrastructure services margins remained flat, while BPO services margins declined by ~50 bps QoQ. The management expects FY07 margins to remain at FY06 levels. HCL Tech added 3,776 employees during the quarter. Software saw a net addition of 1,611 employees, infrastructure business added 446 employees, while the BPO business added 1,769 employees during the quarter. Infrastructure services continues to be a star performer. HCL Tech trades at a 12% discount to Satyam and 35% discount to Infosys on FY08E.

Jyoti Structures
Research: Edelweiss
Recommendation: Buy
CMP: Rs 117 (Face Value Rs 2)
12-Month Price Target: NA

Jyoti Structures posted strong Q2 FY07 results, ahead of expectations in terms of revenue growth and profitability. Net revenues grew by 53% YoY to Rs 240 crore. Margins expanded by 130 bps YoY to 11.1% in Q2 FY07 on account of lower direct costs. Net profit grew by 117% YoY to Rs 11.5 crore. Net margin expanded by 140 bps to 4.7% in Q2 FY07 on account of lower tax rates.

The order book backlog at the end of Q2 was ~Rs 1,400 crore. Exports constituted ~10% of the total sales. Edelweiss believes that robust investment scenario in the transmission and distribution space may translate into high order book growth and better margins for Jyoti Structures. The outlook in the power T&D space remains encouraging. On Edelweiss’ current EPS estimates of Rs 4.3 and Rs 5.6 in FY07E and FY08E, the stock trades at 27.7x and 21.1x times FY07E and FY08E earnings, respectively.

ICICI Bank
Research: Prabhudas Lillladher
Recommendation: Outperformer
CMP: Rs 758 (Face Value Rs 10)
12-Month Price Target: NA

ICICI Bank has reported strong 57% growth in deposits to Rs 1,89,500 crore though it is marginally less than the 61% growth reported in Q1 FY07. Overall healthy growth resulted in NII rising by 47% to Rs 1,577 crore. Fee income growth at 62% is stronger than the 50% growth in Q1. Treasury income has also been higher at Rs 287 crore in Q2 compared to Rs 87.5 crore in Q1. Despite higher amortisation and NPA provisioning, healthy NII growth and strong fee income have resulted in net profit going up by 30% to Rs 755 crore.

ICICI Bank has raised a perpetual debt of $340 million abroad and Rs 783 crore in the domestic market, as well as Rs 1,255 crore as upper tier-II capital, resulting in capital adequacy increasing from 12.46% as on Q1 to 14.34% as on Q2. If Basel-II requirement is factored in, capital adequacy will increase to 14.9%. This will bring down any need for equity dilution in the near to medium term. The stock trades at 2.7x FY08ABV.