BRICS PCG Research

Bank of India

CMP: Rs 167 Target: Rs 186 (upgraded from Rs 170) BUY

Hitting the high notes

Bank of India (BOI) has churned out an excellent Q2FY07 performance, posting the best results among PSU banks. As guided by the bank after the FY06 results, net interest income (NII) continues to grow at a very robust pace, well ahead of expectations. An improved yield on funds and a relatively lower increase in cost of funds led a 47% growth in NII. This together with the healthy 18% growth in non-interest income (ex-treasury) to Rs 3bn led to a 61% spurt in net profit. Within loans, lending towards the retail, agriculture and SME segments recorded strong YoY growth of 56%, 22% and 27% respectively. BOI expects these segments to continue to drive asset growth and boost yields.

The management is targeting a growth of 20% in deposits (25% in low-cost deposits) and 25% in loans in FY07. Based on our dividend discount model (DDM) we value the bank at Rs 186, an upward revision from Rs 170 earlier to incorporate the robust financial results. BUY.

Tulip IT Services

CMP: Rs 362 Target: Rs 457 (upgraded from Rs 383) BUY

Power packed performance

Tulip IT Services reported a very strong Q2FY07 financial performance, much ahead of our expectations. Revenues in the quarter grew sequentially by 29.7% to Rs 1.9bn on the back of 59.4% growth in the corporate data services (CDS) segment. Operating margins expanded by 280 bps to 15.5% as the share of CDS revenues increased to 34% of total revenues. Net profit grew by 46.5% to Rs 202.5mn, a slower pace than the 58.6% QoQ increase in operating profit due to higher depreciation and tax costs during the quarter. In view of the exceptional performance, we are raising our estimates for FY07 and FY08 and accordingly upgrading our target price to Rs 457 (from Rs 383). BUY.

K S Oils

CMP: Rs 176 Target: Rs 218 BUY

Fuelled for success

KS Oils (KSO) has clocked an outstanding performance during Q2FY07 with 79% YoY growth in revenues to Rs 2.3bn and a 213% spike in net profit to Rs 111mn. Better volumes due to enhanced capacity utilisation and increased realisations from a heightened focus on the retail segment drove sales during the quarter. Operating profit has grown 140% YoY to Rs 161mn, accompanied by an improved margin at 7.1% from 5.3% a year ago. The margin growth was fuelled by increased realisations, lowered operating costs (particularly power) and better working capital cycles. Net profit margins also rose 75% from 2.8% to 4.9% this quarter. We retain our projections for FY07 and FY08, and thus recommend a BUY with our initial target price of Rs 218.

Indoco Remedies

CMP: Rs 293 Target: Rs 410 BUY

Healthy growth, in line with estimates

Indoco Remedies' Q1FY07 results are largely in line with our estimates. Though the sales growth in the quarter exceeded our expectations, net profit was marginally below our estimates due to higher finance charges and depreciation. Net sales in Q1FY07 grew by 37% to Rs 726.5mn as against Rs 529mn in Q1FY06, driven by 26% growth in domestic sales and a 103% rise in exports to regulated markets. Domestic sales contributed about 81.3% to the topline whereas exports to regulated markets contributed about 12% in Q1FY07. These exports have grown more than anticipated (103% as against 60%) on account of a swelling customer base as well as an increase in the products supplied. Operating margins for the quarter have fallen by 90 bps YoY due to an increase in raw material cost as a percentage of sales. We believe the margins in the coming quarters will stabilise at about 20% as the exports gain further momentum.

At the current market price of Rs 293, the stock is trading at P/E multiples of 7.4x on FY07E and 5.9x on FY08E which we believe is very attractive. With an expected ROE of 23% in FY08 and earnings growth of about 30% we believe the stock should trade at a higher multiple. We therefore recommend a BUY with a target of Rs 410.

JK Cements

CMP: Rs 191 Target: Rs 315 BUY

Pillar of strength

JK Cements' (JKCL) Q2FY07 results are in line with our expectations. Sales have grown by 30% YoY from Rs 2.1bn to Rs 2.7bn. The company sold 8.13 lakh tonnes of grey cement and 60,900 tonnes of white cement in Q2FY07. Net profit has risen substantially from Rs 49mn to Rs 340mn in Q2FY07 mainly due to better realisations as compared to the last year. Operating margins have also jumped from 13.7% in Q2FY06 to 23.7% in Q2FY07. The EPS for the current quarter stands at Rs 4.9 versus Rs 1 in Q2FY06.

The company's expansion plans and power projects are on schedule and it has concluded the acquisition of JayKayCem, a wholly owned subsidiary. Further, the outlook on cement demand and prices remains upbeat, with a Rs 3-5 price hike per bag expected in the near term. We thus maintain a strong BUY on JKCL with our target of Rs 315.

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