Stocks you can pick up this week

SBI
Research: Enam Broking
Recommendation: Outperformer
CMP: Rs 1,126 (Face Value Rs 10)
12-Month Price Target: NA

State Bank of India’s (SBI’s) net profit declined 2.5% y-o-y in Q2 FY07 largely due to the tax effect. Strong growth in fee income, lower operating expenses and a stable asset quality are the key highlights. Other income grew 11% y-o-y to Rs 1,430 crore against Rs 1,290 crore for the corresponding quarter last year.

However, excluding treasury income, which fell to Rs 7.7 crore in Q2 FY07 (Rs 240 crore for Q2 FY06), the growth in other income was very strong at 36%, driven by 35% growth in commission and exchange, and 53% growth in miscellaneous income, including recoveries.

Deposits grew 3.3% y-o-y, largely due to the base effect of IMDs redemption in FY06. Excluding IMDs, core deposits grew 10.8%. Credit growth, at ~23%, though lower than the system growth, has been maintained from Q1 levels.

While margins for Q1 FY07 stood at 3.37%, implying a fall in Q2 FY07, the fall is largely on account of higher interest expense on borrowings (up 155% y-o-y) and other sundry interests (up 142% y-o-y).

The reported PAT of both standalone SBI and SBI group are expected to show a decline in FY07 on account of ~Rs 2,200 crore one-time income in FY06. However, core operating profit of SBI is estimated to grow ~15% this fiscal. The stock quotes at 1.4 times FY07E BV.

Ashok Leyland
Research: Angel Broking
Recommendation: Buy
CMP: Rs 43 (Face Value Rs 1)
12-Month Price Target: Rs 55

In October ’06, the company’s wholly-owned foreign subsidiary, AVIA Ashok Leyland Motors sro, completed the acquisition of the truck business of AVIA in Czech Republic in pursuance of the framework agreement signed earlier.

The subsidiary has begun its business operations, post-acquisition. AVIA specialises in the manufacture of D-Line trucks in the 6T to 9T GVW range. AVIA’s facility, at the heart of the Czech capital, with an annual production capacity of 20,000 vehicles, is supported by state-of-the-art R&D facilities.

The company also has marketing footprints in Europe. The current sales volume of AVIA is around 2,000 units. Ashok Leyland (ALL) expects to increase this to 5,000 units in the current year and 10,000-15,000 in the next 2-3 years. For Q2 FY07, ALL reported net sales of Rs 1,675.7crore (Rs 1,249.2 crore) on the back of a 33% growth in sales volume, up from 14,895 units to 19,863 units. Going forward, volume is likely to grow by around 20% in FY07.

ALL also stands to benefit from the price hikes effected in the next quarter. Angel Broking estimates ALL to clock an EPS of Rs 3.1 in FY07 and Rs 4.1 in FY08. At the current market price, the stock is trading at 14.2x FY07E and 10.7x FY08E EPS.

ITC
Research: SSKI
Recommendation: Outperformer
CMP: Rs 187 (Face Value Rs 1)
12-Month Price Target: NA

ITC reported stunning sales growth of 32% to Rs 2,890 crore in Q2 FY07, with all business segments witnessing sustained growth momentum. The non-cigarettes consumer business grew at 66%, hotels at 31% and the agri business at 87%.

While margin profile in individual businesses has improved (except for agri), the changing business mix away from cigarettes has led to EBITDA margin shrinkage of 390 bps. SSKI is impressed by ITC’s dominance in the core cigarettes portfolio, no dearth of growth-drivers and risk-taking appetite.

While all non-cigarettes businesses like foods, agri and hotels are growing at a brisk pace, SSKI believes that the foods and agri businesses offer the largest scale-up potential. While ITC’s deep pockets and distribution network make it the potent force in the foods and FMCG businesses, it is also investing heavily in the agri and hotel space.

It intends to become an aggregator (e-choupal) and branded consumer play (Choupal Sagar); it currently has over 6,400 e-choupal kiosks and 11 Choupal Sagars.

The build-up of a superior and impregnable business model, like the cigarettes business, continues to throw huge cash (over Rs 2,000 crore annually) and ITC has the appetite to redirect funds in long gestation businesses (expected annual capex of Rs 800 crore). Hence, ITC remains SSKI’s top pick in the sector.

Usha Martin
Research: Edelweiss
Recommendation: Buy
CMP: Rs 176 (Face Value Rs 5)
12-Month Price Target: NA

Usha Martin’s Q2 FY07 results were in line with expectations. The consolidated topline of the company grew 12% q-o-q to Rs 520 crore. EBITDA, at Rs 85.5 crore, is up 21% sequentially. Consolidated net profit grew 13% q-o-q to Rs 30.9 crore.

The company is expanding its steel capacity at Jamshedpur to capture a larger portion of the burgeoning automotive steel market. It plans to increase its capacity from the current 360,000 tpa to 600,000 tpa by Q2 FY09 and further to 1 million tpa by FY10. Major equipment orders have been placed for phase I of the expansion plan to increase capacity to 600,000 tpa.

The company plans to obtain its entire iron ore requirement from captive sources by the end of the current fiscal. The coal mine acquisition is progressing as per schedule. It is also in the final stage of commissioning a wire rope plant in the US.

The JV project with Joh Pengg of Austria, for specialty OT wires, is progressing on schedule and is expected to be completed by Q3 FY08. The capital expenditure plan for steel capacity expansion to 1 million tpa, as well as value-added product capacity enhancements, are progressing as per schedule. At the current market price, the stock trades at an EV/EBITDA of 4.2x and P/E of 6.0x FY07E and looks attractive.

Cadila Healthcare
Research: India Infoline
Recommendation: Buy
CMP: Rs 351 (Face Value Rs 5)
12-Month Price Target: Rs 392

Cadila Healthcare’s (CHL’s) Q2 FY07 results were better than expectations. Sales increased by 22.6% to Rs 475 crore, driven by 78% growth in exports to Rs 140 crore. Sales would have been higher, but for another quarter of lower-than-expected domestic formulations growth (Q2 FY07-8.8%, Q1 FY07-3.6%), mainly due to restructuring of field force and withdrawal of some products from the market.

OPM grew by 200 bps to 23.1%, driven by increasing contribution from regulated markets. Profitability increased by 55% to Rs 72.6 crore, translating into an annualised EPS of Rs 23.1 CHL’s strategy for the US market is paying off well and the company is on track to achieve sales of $30 million for FY07.

Zydus France is also recording consistent growth and is set to contribute to the profitability in H2 FY08. The CRAMS business is fast gaining pace, with CHL signing three more contracts for the quarter, taking the total number of contracts to 17, and having a peak revenue potential of $25 million.

The potential acquisition of Mayne Pharma by Hospira is unlikely to have any negative impact on CHL. The JV for eight oncology products, starting FY09, may turn out to be a win-win situation for both companies. Hospira will gain access to a low-cost manufacturing base in India, while CHL’s products will be marketed globally.