Stock Ideas

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

Sharekhan Investor's Eye

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs150
Current market price: Rs125

Strong operating performance

Result highlights

• The net interest income (NII) of Union Bank of India (UBI) grew by a strong 20.7% year on year (yoy) on the back of a 35% growth in its advances. However the net interest margin (NIM) was down by 11 basis points.
• The bank's core operating profit grew by a strong 21.2% as the operating expenses were kept under control during the quarter.
• The bank's Q3FY2006 results are not strictly comparable with that of Q3FY2005 due to a provisioning done in that quarter on account of the transfer of securities from the available for sale (AFS) and held for trading (HFT) portfolios to the held till maturity (HTM) portfolio.
• At the current market price of Rs125, UBI is quoting at 5.0x its FY2007E earnings per share (EPS) and 0.9x its FY2007E book value. The bank is expected to generate an average return on equity (RoE) of 21.2% over FY2005-07E despite a 10% dilution. We reiterate our Buy recommendation on the stock with a price target of Rs150.
  

MRO-TEK

Cluster: Apple Green
Recommendation: Buy
Price target: Rs113
Current market price: Rs88

Meeting expectations

Result highlights

• The net revenues of MRO-TEK grew by 1.3% quarter on quarter (qoq) and by 39.6% year on year (yoy) to Rs36.8 crore in Q3FY2006. The healthy quarterly revenue run rate of over Rs35 crore is much higher than the average of below Rs30 crore reported in the last fiscal.
• The operating profit margin (OPM) was flat at 17.8% on an annual comparison basis but declined by 90 basis points as compared with that in the previous quarter. The sequential decline was largely due to a 15.2% jump in the selling, general & admin (SG&A) expenses.
• On an annual comparison, the 19.3% growth in the profit before tax (PBT) was relatively lower than the revenue growth due to an increase in the interest outgo and depreciation charges during the quarter.
• The net profit, before the extraordinary items and prior year adjustments, stood at Rs4.55 crore, in line with our estimates. However, prior adjustments of Rs0.29 crore boosted the earnings to Rs4.8 crore. On an annual basis, the figures are not comparable due to the one-time write-off of Rs6.5 crore taken in the third quarter of the previous year. The company had reported a net loss of Rs0.8 crore in Q3FY2005.
• The company announced its maiden interim dividend of 25% (or Rs1.25 per share) during the quarter. Given the fact that all of its term loans have been repaid and there isn't any requirement for substantial capital expenditure (capex) in the near future, the dividend policy is likely to be more liberal going forward.
• We maintain our Buy call on the stock with the one-year price target of Rs113.
  

Alphageo India

Cluster: Emerging Star
Recommendation: Buy
Price target: Rs135
Current market price: Rs100

Results below expectations

Result highlights

• Alphageo India Ltd (AIL) has reported a net loss of Rs31 lakh for Q3FY2006 against our expectations. The net loss was a result of a higher-than-expected interest outgo of Rs69 lakh during the quarter. The interest charge in turn was higher on account of the Rs30 crore debt that the company has taken to set up its two 3-D seismic survey crews.
• The revenues for the quarter stood at Rs160 lakh, down 77% over last year. The results are not comparable on a year-on-year (y-o-y) basis, as the two 2-D crews did not operate in the third quarter. Consequently the company did only data analysis job during the quarter.
• Till November 2005, severe weather conditions prevailed in Arunachal Pradesh and Mizoram, where AIL is executing two contracts for Oil India Ltd (OIL) and Oil and Natural Gas Corporation (ONGC) respectively. Since then, the company has resumed operations on the ONGC contract. However work on the OIL contract has not resumed yet, as OIL has postponed the operations in Arunachal Pradesh.
• AIL has bagged an order worth Rs4 crore from HOEC for a 2-D contract. The crew that was to work on the OIL contract will now commence survey for the HOEC contract. The company intends to finish the survey by the end of this fiscal. We had not factored in the revenue from this new contract in our FY2006 estimates.
• The fourth quarter will see all the company crews (ie two 2-D crews and the two new 3-D crews) in full operation. Hence its revenues would increase from Q4FY2006 onwards. We believe that the revenues and earnings would begin to grow exponentially on a y-o-y basis from Q1FY2007.
  

Orchid Chemicals & Pharmaceuticals

Cluster: Emerging Star
Recommendation: Buy
Price target: Rs355
Current market price: Rs260

Early launch of cefoxitin

Key points

• Orchid Chemicals and Pharmaceuticals has received the US Food and Drug Administration's (USFDA) approval for 1 gm/vial and 2 gm/vial of Cefoxitin, a second-generation cephalosporin having a market size of US$45.million. Orchid is launching this product in the USA exclusively through Apotex from January28, 2006.
• Limited competition due to technology barrier and a good marketing network through Apotex are expected to prevent price erosion and result in large Orchid's share in the Cefoxitin market.
• The launch of Cefoxitin earlier than expected is a positive surprise. At the current market price of Rs260, Orchid is trading at 7.7x its FY2007E cash earnings per share (EPS). We reiterate our Buy recommendation on Orchid with the price target of Rs355.