SHAREKHAN SPECIAL
Monetary Policy Review
In its mid-term review of the Annual Monetary Policy for 2006-07, the Reserve Bank of India (RBI) has raised the repo rate by 25 basis points from 7% to 7.25%, leaving the reverse repo and bank rates unchanged.
STOCK UPDATE
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,386
Price target revised to Rs4,000
Result highlight
- At Rs90 crore the Q2FY2007 net profit of Madras Cement Ltd (MCL) is in line with our expectations. Cement prices for the year till date have remained extremely strong and on account of the same we are upgrading MCL's FY2007 and FY2008 earnings estimates by 28.1% and 21.4% respectively. Our earnings per share (EPS) estimates now stand at Rs257.7 for FY2007 and Rs303.7 for FY2008.
- The revenues for the quarter grew by a whopping 66% year on year (yoy) to Rs407.2 crore driven by a 19% growth in the cement volumes and a staggering 39.4% growth in the cement realisation.
- As the cement realisation improved sharply, MCL's operating leverage came into play and consequently the operating profit for the quarter grew by a huge 208% yoy to Rs158.2 crore. The operating profit margin (OPM) for the quarter improved by 1,800 basis points to 38.9%.
- On the cost front, MCL implemented strict cost-control measures as the total cost per tonne saw a rise of just 7.7% compared with a 39.4% growth in the cement realisation. Hence most of the Rs800-increase in the realisation per tonne flowed into the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne. As a result the EBIDTA per tonne jumped to Rs1,127, one of the highest in the entire industry.
- With a 40% decline in the interest cost and a 66% increase in the other income, the net profit for the quarter grew by a staggering 378% to Rs90 crore.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs350
Above expectations on net profit front
Result highlight
- The net sales of Cadila Healthcare increased by 25.2% year on year (yoy) to Rs467.3 crore in Q2FY2007, driven by a 97% growth in the formulation exports and a 56% rise in the exports of active pharmaceutical ingredients (APIs). The improved performance of the French (growth of 87% year on year [yoy]) and US (growth of 352% yoy) businesses also aided the robust sales growth. The sales growth was in line with our expectations.
- The operating profit margin (OPM) expanded by 200 basis points to 23.0% in the quarter. The margin improvement was driven by a sharp decline of 380 basis points in the company's raw material cost, on account of an improved product mix (a higher share of formulations and exports in the overall sales mix). Consequently, the operating profit (OP) of the company rose by 34.1% to Rs109 crore in the quarter under review.
- The reported profit after tax (PAT) of the company grew by a whopping 46.9% to Rs70.5 crore in Q2FY2007. The profit growth surpassed our expectations. The earnings for the quarter stood at Rs5.6 per share as against Rs4 per share in Q2FY2006.
- The company has signed three new contracts during the quarter under review for contract manufacturing with international companies, taking the cumulative number of contracts to 17, with peak revenue potential of $25.5 million.
- Cadila has filed 2 abbreviated new drug applications (ANDAs) and 5 drug master files (DMFs) in Q2FY2007, taking the total number of filings to 45 ANDAs and 45 DMFs.
- At the current market price of Rs350, the company is quoting at 15.0x its FY2008E estimated earnings. We maintain our Buy recommendation on the company with a price target of Rs425.
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs550
Results below expectations
Result highlight
- KSB Pumps' Q3CY2007 results are below our expectations primarily because of lower-than-expected top line growth and lesser operating profit margin (OPM).
- The top line is lower because of a delay in the dispatch of some orders, as is reflected by the inventory, which stood at Rs6.3 crore. The revenues for the quarter grew by a meagre 2.9% to Rs90.2 crore.
- The operating profit for the quarter stood flat year on year (yoy) at Rs16.4 crore, as the OPM declined by 40 basis points to 18.2%. The OPM declined on account of higher raw material cost (adjusted for stocks) and other expenditure.
- The interest and depreciation charges declined by 65% and 5.6% respectively.
- However the tax rate jumped up significantly from 34.2% in Q3CY2005 to 39.3% in Q3CY2006. Consequently, the net profit for the quarter declined by 4.2% yoy to Rs9.4 crore.
- On account of the lower-than-expected top line growth and OPM we are downgrading our CY2006 earnings estimates by 9% to Rs33.7 per share. We maintain our CY2007 EPS estimates at Rs40.4.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs570
Current market price: Rs457
Price target revised to Rs570
Result highlight
- For Q2FY2007 Ratnamani Metals and Tubes Ltd (RMTL) reported a whopping growth of 135% in its net profit year on year (yoy) to Rs16.4 crore, far ahead of our expectations.
- The net revenues grew by 90% yoy to Rs143.1 crore driven by a four-fold jump in the exports. The domestic sales grew by 10% yoy.
- The operating profit grew by 116% yoy to Rs32.4 crore with a 273-basis-point expansion in the operating profit margin (OPM), again much ahead of our expectations.
- The OPM expanded because of controlled other expenses, which grew by 21.6% and as a percentage of sales declined by 620 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 340 basis points as a percentage of sales.
- The net profit increased by 135% yoy to Rs16.4 crore driven by operational efficiency.
- We have upgraded our earnings per shares (EPS) estimates for FY2007 and FY2008 by 8.0% and 5.4% to Rs47.7 and Rs57.0 respectively to take into account the better-than-expected earnings growth and margin expansion.
- At the current market price of Rs457, the stock is trading at 7.5x its FY2008E EPS and 4.6x its FY2008E enterprise value (EV)/earnings before interest, depreciation, taxes and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs570.
Television Eighteen India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs850
Current market price: Rs776
Price target revised to Rs850
Result highlight
- The Q2FY2007 net profit of Television Eighteen India (TV18) at Rs16.2 crore is in line with our expectations.
- The net revenues grew by a strong 72% year on year (yoy) and 27.8% quarter on quarter (qoq) to Rs53 crore. During the quarter under review, TV18 consolidated the revenues from the Awaaz channel.
- Even after excluding the revenues from the Awaaz channel, the revenues grew by a strong 44.1% yoy and 8.0% qoq to Rs45 crore, in line with our estimates.
- The operating profit grew by a slower 43.3% yoy and 16.8% qoq to Rs23.5 crore as the operating profit margin (OPM) declined by 820 basis points yoy and 400 basis points qoq. The decline in the OPM was on account of the inclusion of the numbers of Awaaz, which is still at a nascent stage.
- With stable deprecation and interest expenses, the net profit grew by 42.6% yoy and 17% qoq to Rs16.2 crore, in line with our estimates.
- During the quarter under review, Web18 Caymans (a TV18 group company) raised $10 million from Tracer Capital Management LP (TCML), valuing Web18 at more than Rs460 crore.
- At the current market price of Rs776, the stock is quoting at 21.3x its FY2008E earnings per share (EPS) and 13.3x FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA).
- We like the way TV18 has been monetising its various media properties. The TCML deal, for instance, which gives a rough idea of the valuations that its other Internet ventures may enjoy. TV18 is also bringing out the initial public offering (IPO) of Global Broadcast News (GBN). We reiterate our Buy recommendation on the stock with a revised price target of Rs850 which captures the unlocking of the value of its media ventures that are still at a nascent stage.
India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs219
Upgrading earnings
Result highlight
- India Cements Ltd (ICL) achieved a net profit of Rs117 crore for Q2FY2007, much ahead of our expectations.
- The net revenues grew by a healthy 31.9% to Rs517 crore and the net profit grew by a staggering 1,900% year on year (yoy) to Rs117 crore. (For detailed quarterly analysis refer to our report dated October 23, 2006).
- Cement consumption in the southern region has grown at 18% in the first six months of the current fiscal as against the industry growth rate of 10%. As a result, the cement capacity utilisation levels stand at 92-95% which is reflected in the cement prices that are hovering at Rs200-210 per 50kg bag as against Rs135-140 per 50kg bag last year.
- The company has also lined up a capital expenditure (capex) plan of Rs350 crore to augment its production capacity by 2 million metric tonne by December 2007.
- The company has also revamped its balance sheet by infusing capital in bouts. Consequently, the debt:equity ratio reduced to a much respectable 1.8:1 at the end of FY2006. Now with a strong free cash flow, we expect the debt:equity ratio to reduce further to 0.8:1 by FY2007 and to 0:3:1 by FY2008.
- Also the date for the conversion of 13.5% optionally convertible debentures (OCDs) worth Rs109 crore into equity shares (convertible at a price of Rs125) elapsed in September 2006. Consequently, the company has redeemed these high-cost OCDs. This in effect is a positive, as it not only reduces the company's interest cost but also adds value to its shareholders on account of the lower-than-expected equity dilution. For example, we had expected the conversion of these OCDs to result in higher equity capital of Rs229 crore. However on non-conversion of the OCDs, the equity capital stands at Rs220 crore.
- Encouraged by the stellar performance of ICL we are upgrading our net profit estimates for FY2007 and FY2008 by 14% and 10% respectively. Our earnings per share (EPS) estimates now stand at Rs20 for FY2007 and Rs28.6 for FY2008. Our EPS estimates have been upgraded by 19% for FY2007 and by 14% for FY2008 on account of the non-conversion of the OCDs.
- At the current market price of Rs219, ICL is trading at 7.7x its FY2008E earnings and 5.4x its EV/EBITDA. On an EV/tonne basis, it is trading at USD105/tonne, which is a huge discount of 30% to its peers. We maintain a Buy on the stock with a price target of Rs315.
Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs281
Asset growth drives numbers
Result highlight
- Bank of Baroda’s net profit grew by 11.3% year on year (yoy) in line with our estimates of a growth of 12.1% as the lower-than-expected net interest income (NII) growth was compensated by higher other income growth and flat operating expenses.
- During the quarter the bank’s NII grew by 13.9% yoy to Rs890.8 crore, driven by a robust growth of 45% yoy in the advances.
- The net interest margins (NIMs) declined by 26 basis points yoy to 3.1% for H1FY2006 mainly due to lower investment yields due to a change in the accounting practice.
- The other income increased by 3.9% yoy to Rs321.7 crore due to a lower treasury income. However, the core fee income has shown a robust growth of 24.3% yoy.
- With the net income growing by 11.1% and the operating expenses remaining flat yoy, the operating profit was up by 24.3% yoy to Rs615.7 crore. The core operating profit reported a 43.1% year-on-year (y-o-y) growth.
- We have downgraded our earnings per share (EPS) estimates for FY2008 from Rs38.1 to Rs35.1 mainly on account of the pressure on the margins and higher expected non-performing asset (NPA) provisioning required going forward.
- At the current market price of Rs281, the stock is quoting at 8x its FY2008E EPS, 3.6x pre-provision profits (PPP) and 1.1x book value. The bank is available at attractive valuations given its low price to book multiple compared to its peers and earnings upside possibilities if we see the margins improving going ahead. We maintain our Buy call on the stock with a price target of Rs327.
Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs269
A stellar performance
Result highlight
- Ahmednagar Forgings has reported a stellar performance for Q1 and the results are better than our expectations.
- The top line for the quarter grew by 72.5% to Rs122 crore. The company’s additional capacity of 40,000 tonne per annum (tpa) commenced operations from June 2006 and hence was operational for the whole quarter.
- The operating profit margin (OPM) has improved by 140 basis points to 19.3% as the operating profit rose by 86.5% year on year (yoy) to Rs23.6 crore. The margin improved despite a rise in the raw material cost from 60.7% to 66.7% as a percentage of sales. However, the company made savings in its staff cost and other expenditures.
- Stable depreciation charge and taxes caused the profit to grow by a stellar 92.2% to Rs13.5 crore for the quarter.
- The company has an order book of Rs850 crore which is to be executed in the next twelve months, triggering a strong top line growth going forward. A higher contribution from the machined products and higher non-automotive revenues should also trigger a growth in the margins going forward.
- At the current market price of Rs269, the stock discounts its FY2008E earnings by 7.1x and trades at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.9x. We believe that the valuations are very attractive and maintain our Buy on the stock with a price target of Rs380.
Godrej Consumer Products
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs171
Book profits
Result highlight
- Godrej Consumer Products Limited's (GCPL) stand-alone revenues grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007--below our expectations. The soaps business grew by 16.5% yoy to Rs127.2 crore whereas the personal care business grew by 15.4% yoy to Rs55.3 crore.
- GCPL's operating profit (OP) grew by a meagre 3.8% yoy to Rs33.8 crore in Q2FY2007, which is below our expectations. The operating profit margins (OPM) contracted by 220 basis points to 18.5%. This mediocre growth in the OP was attributable to a sharp increase in the material cost by 27.8% to Rs92.2 crore. The material cost as a percentage of sales spiked to 50.5%, up 460 basis points yoy and 120 basis points sequentially, due to the hardening of the vegetable oil prices. Vegetable oil is a key ingredient for fast moving consumer goods (FMCG) companies.
- The profit before interest and tax (PBIT) margins of the soaps division reduced by 400 basis points yoy to 10.8%, while the PBIT margins of the personal care division increased by 60 basis points yoy to 42.7%.
- The interest cost zoomed by 87.1% to Rs1.6 crore. The effective tax rate also increased from 5.8% in Q2FY2006 to 12.7% Q2FY2007, leading to a 122.9% year-on-year (y-o-y) increase. The higher-than-expected interest cost and tax expenses coupled with the lower-than-expected operating performance led to a 6% decline in the profit after tax to Rs26.1 crore, which is below our expectations.
- GCPL's consolidated revenues for Q2FY2007 were Rs231.8 crore, the operating profit was Rs39.7 crore and the net profit was Rs31.0 crore. GCPL's consolidated numbers reflect the stand-alone numbers, Keyline, UK's numbers and the numbers of Rapidol, South Africa (the subsidiary company, which was acquired this quarter).
- Though we like the space in which GCPL is operating, we are concerned over GCPL's continued subdued growth for the last three quarters in the high-margin hair colour business. In the soaps business, while we see GCPL sustaining its robust growth traction, the profitability in the business will remain limited as the mass segment brand (Godrej No. 1) continues to outpace the other brands besides the margins pressures due to the increase in the vegetable oil prices. In light of its muted H1FY2007 performance, we are downgrading our consolidated earnings estimates for FY2007 and FY2008 by 12.7% and 10.6% and recommend booking profits on the stock.
SECTOR UPDATE
Automobiles
Subdued growth despite festive season
- Bajaj Auto reported decent numbers for October, with an overall growth of 15.7% year on year (yoy).
- Hero Honda Motors’ sales bounced back in the festive season as the company reported a strong sales growth of 20.4% yoy to 363,480 units.
- TVS Motors' sold 142,325 vehicles in the month, posting a disappointing growth of just 3.2% yoy even though October is usually a good month for the automobile industry.
- Maruti Udyog sold overall 60,163 vehicles in October as compared with 51,543 units in last October, marking a growth of 16.7% yoy.
- The utility vehicle (UV) segment of Mahindra and Mahindra (M&M) marked a decline of 3.8% for the month due to lower Scorpio sales as the total UV sales stood at 11,789 units. The Scorpio sales declined by 13.3% to 2,947 units for the month.
- Tata Motors overall sales stood at 43,540 vehicles (including exports) for the month of October 2006, growing by 5.6% compared to 41,219 vehicles sold last year.
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