WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs99
Current market price: Rs54
Results below expectations
Result highlight
- The Q2FY2007 results of WS Industries (WSI) are below expectations primarily because of a lower-than-expected top line growth and higher-than-expected power and fuel costs.
- The operating profit for the quarter grew by 30% year on year (yoy) to Rs4.91 crore as the operating profit margin (OPM) expanded by 180 basis points to 12%. The OPM expanded because of a 10% decline in the other expenditure and strict control on the employee cost. However WSI's power and fuel costs increased by 31%. As a percentage of sales the same increased by 340 basis points to 20.9% on account of rising crude oil prices. The crude prices have, however, cooled off substantially from their highs and the same should provide some respite going forward.
- The interest cost increased by 16% and the depreciation rose by 18% on account of a 20% expansion in the manufacturing capacity of hollow core insulators. The net profit at Rs1.89 crore grew by 51% yoy.
- In a significant development, WSI has diluted its stake in its relity subsidiary, WS Electric, from 98% to 59% by placing 42,200 shares @Rs4,325 each and 50 lakh convertible preference shares with Schroder, thereby mobilising Rs23.25 crore. This puts the value of WS Electric at Rs60 crore.
- The total value of the realty subsidiary is more or less in line with our estimates, but the equity dilution in WS Electric is against our expectations.
- Out of the 15 lakh square feet of area to be developed into an IT park , WS Electric will get a total of 300,000 square feet of developed area and the rest shall go to its partner TCG (the Chatarjee group). Assuming that the company sells it at the current rate of Rs3,500 per square feet, it would realise Rs105 crore.
Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs217
An operationally strong quarter
Result highlight
- The net profit before exceptional items of Saregama India Ltd (SIL) is in line with our expectations.
- During Q2FY2007 SIL's revenues grew by 26.2% year on year (yoy) backed by a three-fold jump in the licence fee income.
- The pre-exceptional operating profit for Q2FY2007 grew by 105.5% yoy with a 700-basis-point expansion in the margins as the licence fee income rose steeply.
- However, during the quarter under review SIL did one-time provisions of Rs1.4 crore and incurred an asset impairment charge of Rs0.87 crore. Hence, the reported operating profit grew by only 8.4%.
- The pre-exceptional profit grew by 66.4% yoy to Rs4.6 crore. With the above-mentioned provisioning, the reported net profit grew by 16% to Rs3.2 crore.
- We believe there are several positive triggers lined up for SIL over the next two years, viz the revision of the rates with radio stations, growth of value-added services in the telecom sector and the turn-around of its subsidiaries.
- At the current market price of Rs217, the stock is quoting at 13.1x its FY2008E earnings per share (EPS) and 9.7x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). In view of the stock's attractive valuations, and cash and cash equivalent of Rs28 per share, we reiterate our Buy recommendation on the stock with a price target of Rs375.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs210
Strong growth potential ahead
Result highlight
- Orchid Chemicals reported a 2.7% increase in its net sales year on year (yoy) to Rs245.7 crore in Q2FY2007. The growth in the sales was low on account of a high base in the corresponding quarter of the previous year. On a sequential basis, the sales grew by 21.8%. The growth in the sales was in line with our expectations, and was driven mainly by the US generics business and a recovery in the sales of active pharmaceutical ingredients (API) to the regulated markets.
- Orchid's operating profit margins (OPMs) improved by 90 basis points to 31.7% in the quarter under review. The improvement in the margins was driven by a 20.4% decline in the company's material costs. The sharp drop in the material costs was on account of an improved product and geographical mix, as the company continued to derive an increasing share of its revenues from the high-margin formulation exports to the regulated markets. However, the steep drop in the raw material costs was largely offset by an increase in the staff costs and regulatory expenses. Consequently, the company's operating profit (OP) grew by 5.5% to Rs77.8 crore in Q2FY2007.
- Orchid's interest expenses have risen from Rs22 crore in Q1FY2007 to Rs25 crore in Q2FY2007. The increase in the interest cost is due to a general hardening of the interest rates. Further, the company has raised its debt level in H1FY2007 by Rs100 crore. The highly leveraged financial structure of the company continues to remain a cause of concern.
- Orchid's net profit for the quarter rose by 8.2% to Rs29.5 crore. The growth in the net profit was aided by lower depreciation charges and a lower tax provisioning in the quarter. The earnings for the quarter stood at Rs4.5 per share.
- During the quarter, the company filed 4 drug master files (DMFs), 2 abbreviated new drug applications (ANDAs) and 4 dossiers for marketing authorisations (MA) in Europe. The company plans to continue this accelerated pace of filings in the upcoming quarters.
- Going forward, the addition of non-antibiotic products to the US generics portfolio, the ramp-up in the European business and contract research and manufacturing (CRAMS) deals are likely to drive the company's growth. With these growth drivers in place, Orchid aims to become a $1 billion company by FY2012.
- At the current price of Rs210, Orchid is quoting at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 8.1x for FY2007 and 5.8x for FY2008. This is way below its peers like Lupin, Wockhardt and Aurobindo Pharma, which are trading at an EV/EBIDTA range of 9.0-10.2x. Given the strong growth drivers of the company and the untapped potential, we maintain our Buy recommendation on Orchid with a price target of Rs390.
South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs183
Read between the lines
Result highlight
- For Q3CY2006 South East Asia Marine Engineering & Construction Limited (Seamec) reported a net profit of Rs0.5 crore, which is below our expectations. However if we read between the lines, there are three extraordinary costs, to the extent of Rs13 crore that are not related to the fleet that was operational during the quarter under review. Adjusted for these extraordinary costs, the pre-exceptional net profit at Rs13.5 crore is ahead of our estimates.
- The extraordinary costs include a Rs8 crore mobilisation and repairs cost incurred on Seamec Princess, a newly acquired vessel all set to begin its operations. Further Rs4 crore were paid as salary to the crew of this vessel, which anyway was not operational during the quarter. There was also an additional depreciation cost of Rs1 crore, charged on account of Seamec Princess.
- The revenue for the quarter increased by 90% year on year (yoy) to Rs33.6 crore, as all the company's vessels operated for a higher number of days and that too at higher charter rates.
- The operating profit for the quarter, adjusted for the extraordinary costs mentioned above, grew by 232% to Rs16.5 crore. The reported operating profit declined by 9%.
- The other income declined by 52% as the company utilised its excess cash to buy Seamec Princess. The depreciation charges jumped by 52%, as there was an additional depreciation of Rs1 crore charged on account of Seamec Princess.
- Adjusted for the three extraordinary costs, the net profit for the quarter grew by 413% to Rs13.5 crore. The reported net profit at Rs0.5 crore declined by 81%.
VIEWPOINT
Glenmark Pharmaceuticals
Rides high on milestone anticipations
Highlights of analyst meet
- Glenmark believes that the creation and ownership of intellectual property (IP) are critical for differentiation and value creation; therefore it plans to focus on building IP assets and out-licencing these to drive its growth.
- The company expects to receive $30 million from Forest Laboratory in FY2008. As per the company, the said milestone payment is already due, but has been delayed. Currently, the company is scouting for a partner in Europe to out-licence the GRC 3886 molecule for the European market, which would also trigger a milestone payment.
- In October 2006, the company signed an out-licencing agreement with Germany's Merck KgaA for its prospective diabetes molecule GRC 8200 for a total of €190 million (approximately Rs1,110 crore), including an up-front payment of €25 million (approximately Rs146 crore).
- For the USA, the company believes that to maintain the growth momentum it must continuously expand its product basket either by its own product filings or by product development alliances or by licencing marketing rights or by acquiring registrations in the USA.
- For Europe, Glenmark plans to focus on select branded generic markets like Spain, Italy and Eastern European countries. It is looking to acquire a company in Europe (having sales of 8-12 million euros and a strong product pipeline) to establish a front end. It plans to conclude the acquisition by the end of FY2007.
- Glenmark has a target for a 100% growth in Latin America in FY2007.
- Glenmark currently has 6 new chemical entity (NCE) molecules in its pipeline; 2 in Phase II trials, 3 entering the Phase I trials shortly and one in the pre-clinical stages. Its target is to take one molecule into the clinical trials every year. The company plans to conclude one more out-licencing deal in the current financial year.
- The company is upbeat on its growth prospects for the next two years. It has raised its growth guidance and its profit guidance for FY2007 and FY2008. As per the company's projections, it is planning to grow at a compounded annual growth rate (CAGR) of 52% over FY2006-08E, with profits growing at a CAGR of over 137% over the same period. It has raised its earnings per share (EPS) guidance from Rs36 earlier to Rs42. But the projected EPS has been powered largely by the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. Considering the uncertainty of the milestone receipts, if we remove them from the projected earnings of Glenmark, the revised EPS would reduce by 50%.
- At the current market price (CMP) of Rs437, the stock is trading at 18.9x its consensus FY2008 earnings.