Market Commentary

Sensex touches life-time high of 9714

Impressive gains in L&T, ICICI Bank and HDFC among others saw the index close at a new high at 9686.
Appreciating further over its last close, the market today was in a belligerent mood through the trading session and in the process crossed
the 9700 mark for the first time during intra-day trades. After resuming 30 points higher at 9580, the index immediately edged past the 9600 mark and kept surging ahead as the trading progressed. While the market was in the midst of a strong bull run, the index scaled past the 9700 mark in noon trades on firm buying in blue-chip stocks and touched a new intra-day high of 9714. A late bout of profit-taking in select counters saw the Sensex shed some gains and still end at a new closing high of 9686, up 1.42% or 136 points. The Nifty, too, ended on an upbeat note with gains of 32 points at 2940.

Surprisingly, the broader market was negative. Of the 2,589 stocks traded on the BSE, 1,536 stocks declined, 988 stocks advanced and 65 stocks ended unchanged. All the sectoral indices ended on a higher note. Among the major gainers, the BSE CG index moved up by 2.83%, the BSE FMCG index added 2% and the BSE HC index was up nearly 1%.

Driving the rally L&T soared 4.95% at Rs2,038, ICICI Bank advanced 4.52% at Rs597, HDFC moved up 3.99% at Rs1,281 and ONGC rose 2.33% at Rs1,276. Among other gainers HLL shot up by 3.45% at Rs195, Hero Honda added 2.61% at Rs859, Dr Reddy's gained 3.80% at Rs1,083, Tata Motors jumped by 1.82% at Rs676 and Wipro was up 2.20% at Rs504. On the other hand select counters ended weak on profit-taking. SBI dropped 1.78% at Rs885, Grasim was down nearly 1% at Rs1,416 on disappointing Q3 numbers and NTPC ended lower at Rs113.

Capital goods stocks were in the limelight. Alfa Laval zoomed 10.18% at Rs1,175, Jyoti Structures flared up 9.63% at Rs385, Bharat Electronics advanced 7.32% at Rs1,193 and Esab India gained 6.16% at Rs464. KEC International, Batliboi, Asian Electronics, Honeywell Automation and Reliance Industrial Infrastructure were up 5% each.

ABB at Rs2,595, Bannari Amman Sugars at Rs1,400, Bharat Electronics at Rs1,204, BHEL at Rs1,685, Esab India at Rs489, Goodlass Nerolac at Rs885, GHCL at Rs135 and Himadri Chemicals & Industries at Rs181 touched new intra-day highs on the BSE.

Amar Raja Batteries at Rs217.10, Asian Electronics at Rs414.90, Honeywell Automation at Rs1,348.95, Shrenuj & Company at Rs37.80 and Reliance Industrial Infrastructure at Rs474.95 were frozen at the upper limit of the circuit breaker on the BSE.

Over 59.92 lakh LML shares changed hands on the BSE followed by PBA Infrastructure (41.68 lakh shares), Triveni Engineering & Industries (39.39 lakh shares), Reliance Industries (38.34 lakh shares) and Radha Madhav Corporation (30.20 lakh shares).

Reliance Industries registered a turnover of Rs265 crore followed by ICICI Bank (Rs159 crore), SBI (Rs148 crore), Bajaj Hindusthan (Rs92 crore) and PBA Infrastructure (Rs73 crore).

Motilal Oswal Reports

Shasun Chemicals

Himatsinga Seide

Godrej Consumer

Geometric Software

Stock Ideas

25 Jan 2006		Aplab	126	12 Month	380
23 Jan 2006	501343	Motor and general finance	27.75	6 Month	80

INOX Leisure - IPO

Multiplying its presence

Having tested success, it wants to grow fast

Inox Leisure is one of India’s larger multiplex cinema operators. It has eight operational multiplexes, with 32 screens across seven cities: Mumbai, Pune, Vadodara, Goa, Jaipur, Kolkata (two multiplexes) and Bangalore.

While consolidating its position in the exhibition business, Inox Leisure has entered the film distribution business, acquiring the distribution rights for certain Hindi film titles in select distribution circuits. It had invested Rs 7.5 crore in financing the film, "The Rising’.

Inox Leisure’s present IPO is to raise finance its expansion. The company is setting up around 11 multiplexes in locations like Hyderabad, Vishakapatnam, Jaipur, Kolkata, and Bangalore at an estimated cost of Rs112.82 crore.

Strengths

• Inox Leisure has developed a strong patronage in the last couple of years. Over 2003-05, the number of patrons has shown a robust CAGR of 52% to 38,88,547 and in the half-year ended September 2005, it touched 80% of the numbers in FY 2005, at 31,25,801.

• The revenue has shown a impressive CAGR of 57% to Rs 61.48 crore over 2003-2005 and touched Rs 50.25 crore in the six months ended September 2005, which was 80% of the full year sales of FY 2005. OPM has grown steadily to 33.6% end FY 2005, from 28.7% in FY 2003. In six months ended September 2005, it stood even better at 40.3%. The bottom line grew from mere Rs 9 lakh in FY 2003 to Rs 8.24 crore in FY 2005. In the six months ended September 2005, the profit after tax was Rs 9.73 crore.

• The Indian multiplex industry is on a high growth trajectory, with its increasing share of the overall box office collections. The growth of multiplexes is fuelled by a rise in disposable incomes, a boom in organised retail, entertainment tax benefits given by several state governments and the corporatisation of the Indian film industry.

Weaknesses

• The promoter of the Inox Leisure, Gujarat Fluorochemicals (GFL), is not related to the film industry and is reducing its stake through offer for sale in the present IPO. About 10% of the total funds raised will go to GFL, and not to the company.

• Over 75% of the revenue comes from box-office collections. The poor success rate of Hindi films, inadequate enforcement of anti-piracy laws in India and increasing home viewing options such as DVD and cable TV may constrain the growth in the number of cinema patrons.

• The multiplex business enjoys relatively low breakeven due to higher ticket rates and entertainment tax benefits. However, tax benefits are for a limited period and ticket rates can be regulated by the states.

Valuation

The nearest comparable companies are PVR Cinema, Adlabs and Shringar Cinemas. PVR Cinemas, which is the largest multiplex cinema operator by number of screens, recently completed its IPO and is trading around 169 times its FY 2005 EPS, Adlabs is trading at a PE of around 60 times its FY 2005 EPS. Shringar Cinemas, which has yet to report profit, is trading around Rs 80.

On an expanded equity of Rs 60 crore, FY 2005 EPS of Inox Leisure works out to Rs 1.26. Based on this, PE stands at 79.4 and 95.2 at the price band of Rs 100 and Rs 120. In the first half, the company has already crossed the FY 2005 net profit. However, first half is the main season and one cannot annualise the figures. Nevertheless, one can expect over 100% growth in net profit in FY 2006, bringing down the PE to below 50.

Sharekhan Investor's Eye

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs674
Current market price: Rs561

Q3 results meet expectations

Result highlights

• The net sales of Godrej Consumer Products Ltd (GCPL) grew by 10.2% year on year (yoy) to Rs169.1 crore, powered by a strong 16% year-on-year (y-o-y) growth in the branded portfolio. The sales of the Godrej brand of soaps grew by 11.5% yoy whereas the personal care business grew by 21.2% yoy.
• The profit before interest and tax (PBIT) margin of the soap segment stood at 7.7% (down 20 basis points yoy). The decline was mainly on account of a change in the product mix (which shifted towards lower-margin, high-volume products), and higher ad spend during the quarter (8.9% of sales).
• The PBIT margin of the personal care business improved by 400 basis points yoy to 45.2% in Q3FY2006. The margin improved owing to the price hike effected by the company in its hair colour products in Q1FY2006.
• The net profit grew by 31.1% yoy on the back of the strong performance of the personal care business both on the revenue and margins fronts. The earnings for the quarter stood at Rs6.0 per share as against Rs4.6 per share a year ago.
• GCPL is currently trading at 19.5x its FY2008E stand-alone earnings and 16.7x its FY2008E consolidated earnings. We believe the valuations are attractive considering the strong growth momentum expected in its earnings over the next two years. We maintain our Buy recommendation with a price target of Rs674.
  

Nicholas Piramal India

Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs240

Price target revised to Rs325

Result highlights

• Nicholas Piramal's consolidated net sales for Q3FY2006 were up 17.3% year on year (yoy) to Rs402.6 crore due to additional revenues from the acquisition of Avecia and Rhodia.
• The earnings before interest, depreciation, tax and research (EBIDTR) stood at Rs62.2 crore. The EBIDTR fell by 12.5% yoy due to higher selling (promotional) costs, foreign exchange (forex) losses and lower revenues from the high-margin products like Phensedyl.
• The research and development (R&D) expense increased by 10.3%, causing the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to decline from 17.1% in Q2FY2006 to 11.8%. The profit before tax saw a decline of 30.9% yoy to Rs28.7 crore from Rs41.6 crore in Q3FY2005 aided by increased depreciation costs.
• The adjusted profit after tax (PAT) stood at Rs23.4 crore, down 7.6% yoy. The company spent Rs13.7 crore on due diligence for its acquisitions in this quarter.
• At the current market price of Rs240, the stock is trading at 18.9x FY2007 earnings estimate. We maintain our Buy recommendation on Nicholas Piramal with the revised price target of Rs325.
  

Indian Hotel Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,244

Price target revised to Rs1,474

Result highlights

• The revenues of Indian Hotel Company Ltd (IHCL) increased by 27.4% year on year (yoy) to Rs317.5 crore in Q3FY2006. The growth was powered by a sharp rise in the average room rates (ARRs). The revenue growth was in line with expectations.
• The occupancy rates (ORs) in Q3FY2006 remained flat yoy at 75%, whereas the ARRs grew by a whopping 34.7% to Rs8,150. The ORs were flat mainly on account of a delay in the market's realignment with a 30% hike in the room rates in the prime properties.
• On the back of the strong revenue growth and the benefits of operating leverage (typical to the hotel industry), the operating profit margin (OPM) improved by 600 basis points yoy to 32.9% in the quarter.
• IHCL's profit after tax (PAT) increased by 76.2% yoy to Rs61.5 crore in Q3FY2006. The growth was in line with expectations. The earnings for the quarter stood at Rs11.1 per share.
• We have revised our estimates for FY2006 and FY2007. The stand-alone net profit estimate has been revised upwards by 15.6% to Rs166.7 crore for FY2006 and by 37.6% Rs256.4 crore for FY2007. The consolidated net profit estimate has been revised upwards by 7.3% to Rs190.8 crore for FY2006 and by 36.0% to Rs318.6 crore for FY2007.
• Considering the bright prospects for the company's business and the fact that its stock trades at an 11% discount to its replacement cost of Rs1,400, we maintain our Buy recommendation on the stock. We revise our price target to Rs1,474.0 (ie a target multiple of 27x, as the stock typically trades at 25-27x its one-year forward earnings), expecting an upside of 18.5% from the current levels.
  

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs170
Current market price: Rs152

Grand numbers

Result highlights

• ITC's net revenues grew by a robust 42.4% year on year (yoy) in Q3FY2006 to Rs2,556 crore, powered by a strong growth in all the business segments.
• All the businesses reported a high double-digit growth for Q3FY2006 with the main business of cigarettes growing at 19%, the highest growth ever in the last fifteen quarters.
• The adjusted operating profit grew at a slower pace of 30% yoy to Rs878.3 crore for Q3FY2006 as the operating profit margin (OPM) fell by 330 basis points yoy to 34.3%. The margin dropped on account of a margin contraction in the agri business.
• ITC's adjusted profit after tax (PAT) increased by 26.3% to Rs567.1 crore.
• To take into account the splendid performance of Q3FY2006, we have upgraded our numbers for FY2006 and consequently for FY2007. At the current market price of Rs152, the stock is attractively quoting at 21.7x its FY2007E earnings. We maintain our Buy recommendation on ITC with a price target of Rs170.
  

Hyderabad Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs700
Current market price: Rs500

Production problem affects results

Result highlights

• Hyderabad Industries Ltd (HIL) reported a 5.2% increase in its net sales in Q3FY2006 to Rs95.4 crore. However, on a like-to-like basis, the building product division's revenue grew by 18.8%.
• Despite a 5.2% increase in the top line, HIL reported a flat growth in the operating profit. The operating profit margin (OPM) declined by 59 basis points to 11.6%. The decline in the OPM was primarily due to an increase in the raw material cost. The raw material cost as a percentage of sales increased from 43% in Q3FY2005 to 48.2% in Q3FY2006.
• HIL is utilising its strong cash flows from operations to pay a large portion of its debt. The reduction in the debt lowered its interest cost by 61.2% to Rs0.9 crore in Q3FY2006.
• The company has reported a net profit growth of 22.5% for Q3FY2006 to Rs5.7 crore. However, the numbers are below our expectation and we are downgrading our FY2006 and FY2007 estimates. We expect the company to report a net profit of Rs42.9 crore in FY2006 and of Rs46.5 crore in FY2007. (Our earlier net profit estimates for FY2006 and FY2007 were Rs46.6 crore and Rs50.2 crore respectively).
  

UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs620
Current market price: Rs507

Price target revised to Rs620

Result highlights

• The Q3FY2006 results of UltraTech Cement Ltd (UTCL) are above our expectations at the operating profit level but below our expectations at the net profit level primarily because of a higher tax outgo during the quarter.
• UTCL's net sales for the quarter grew by 5% year on year (yoy) to Rs783 crore (after adjusting the freight and trading sales impact). The growth was driven by a 12.8% increase in cement realisation.
• Cement volumes were down 6.9% owing to floods in the southern region, which restricted production in the southern plants. As a result, the utilisation of UTCL's cement capacity fell to 87% during Q3FY2006 compared with 97% in Q3FY2005.
• The operating profits stood at Rs110.4 crore, up 108% yoy. The operating profit margin (OPM) during the quarter improved by 610 basis points to 14.1%, primarily because of a flat other expenditure. The improvement in the OPM could have been higher, but for an 18.7% jump in the per-tonne cost of power and fuel, and a 58% rise in the freight cost per tonne during the quarter.
• The tax outgo of Rs19.2 crore (at a tax rate of 44.6%) restricted the net profit to Rs24 crore.
  

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs244
Current market price: Rs187

Product play

Result highlights

• The consolidated revenues of 3i Infotech have grown by 15% quarter on quarter (qoq) and by 47.2% year on year (yoy) to Rs112 crore. The sequential revenue growth was aided by the incremental revenues of Rs6.7 crore accrued from the three acquisitions made during the last quarter. The organic growth stood at 8.2% on a sequential basis.
• The operating profit margin (OPM) improved by 40 basis points qoq and by 170 basis points yoy to 20.9% in the third quarter. The increased contribution from the high-margin product business and the positive impact of the rupee depreciation are the key reasons for the improvement in the company's overall profitability.
• At Rs16.3 the earnings grew at 22% sequentially and at 56.5% when compared with the growth rate in the third quarter of the previous year. The earnings growth was boosted by a healthy jump in the other income component from Rs1 crore in Q2 to Rs2.4 crore. The company reported a positive impact of Rs1.6 crore from the foreign exchange fluctuations witnessed in the last quarter.
• Given the robust performance reported during the first nine months, the management has revised the revenue growth guidance from 25-30% to 40-45% for the current year. Earnings have been guided in the range of Rs9.2-9.6 per share as compared with the earlier indications of Rs8.5-9.5 per share.
• We maintain our Buy call on the stock with the one-year price target of Rs244.