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Shreyas Shipping & Logistics - PYT.com

Deven Choksey, KR Choksey Securities

Shreyas Shipping & Logistics is at an inflexion point and transforming itself from shipping to logistics company. We feel the valuations from this level are scalable once its capex in the area of setting up logistic parks are commissioned. We thus opine Strong buy on the scrip. Shreyas Shipping, promoted by Late R. Sivaswamy
and family, is the only container feeder service provider in the country with 7 vessels having total capacity of 4575 TEUs (Twenty Feet Equivalent). The company plans to spend about Rs 350 crore in next 18-24 months in vessel acquisition (Rs 250 crore) and in setting up of logistic parks (Rs 100 crore). The company has set up
Warehousing and logistics facilities at Kandla and an enclosed storage & handling facility at Ahmedabad. It is in the process of setting up similar facilities in North, South and Central India.

These logistic parks will enable it to create a synergy of its existing expertise to land transportation. The Company plans to aggressively expand its multimodal logistics operations which includes, among other things, aggregation, consolidation and segregation of cargo and value addition. This will enable the Company to provide end-to-end solutions to all its clients. More over it would also shield the company's revenue and bottom line from
any slump in the freight rates. We believe the company is at an inflexion point and transforming itself from shipping to logistics company. We feel the valuations from this level are scalable once its capex in the area of setting up logistic parks are commissioned. We thus opine Strong buy on the scrip. Financials and Valuation At
CMP of Rs 156, Shreyas is currently quoting at a PER multiple of 7.8x its Sept'05 ttm earnings. On the basis of EV to Sales and EV to Ebidta basis, the company is quoting at 2.8x and 6.7x its Sept'05 ttm results. On the forward basis, the stock is quoting at an attractive valuation of PER of just 7.1x its FY06 EPS of Rs 21.8.

Courtesy : Sarvar

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Software : It is Fast Growing!

Software: It is fast growing!

Well, the quarterly ritual has come and gone, well almost! Software majors have announced their December quarter results amidst much hype and expectations. To put it in perspective, the performance has been impressive. The offshoring momentum continues unabated. But the stockmarket, as usual seems to have mixed views!

The 'Top 4' software companies continue to recruit in thousands, with TCS adding over 6,000 employees this quarter alone. The other 3 companies also saw a healthy addition, with TCS now having nearly 60,000 people on its rolls, Wipro over 50,000 and Infosys just under 50,000. Satyam also had nearly 25,000 employees on its rolls at the end of December 2005. Therefore, these numbers suggest that companies have a strong order pipeline in hand.

In terms of operating metrics, topline growth was fairly robust, both on a sequential as well as on a year-on-year basis. Margins saw an impressive expansion as well, as these players start to effectively leverage on their sales and marketing costs incurred in previous years. However, due to forex losses that adversely affected the other income component, the profit growth at the net level was not quite in sync with that seen at the operating levels, albeit healthy.

Indian IT: 3QFY06 performance…*

(Rs m)	2QFY06	3QFY06	Change
Net sales	88,944	98,270	10.5%
Expenditure	64,383	70,205	9.0%
Operating profit (EBDITA)	24,561	28,065	14.3%
Operating profit margin (%)	27.6%	28.6%
Other income	1,341	259	-80.7%
Depreciation	2,648	2,874	8.5%
Interest	10	45	354.7%
Profit before tax	23,244	25,405	9.3%
Tax	3,171	3,419	7.8%
Profit after tax/(loss)	20,073	21,986	9.5%
Extraordinary items	(10)	-
Minority interest	102	114
Profit/(loss) in earnings of affiliates	66	69
Net profit **	20,027	21,941	9.6%
Net profit margin (%)	22.5%	22.3%

* The above numbers include the results of Infosys, Satyam, TCS and Wipro.
** Excluding an extraordinary item of sale of stake in associate company by Satyam.

What has driven growth in 3QFY06?
Volumes continue to enthuse: This quarter saw a decent volume growth for all the major software companies. Wipro was by far, the best among the lot, posting double-digit volume growth for both onsite as well as offshore volumes. The fact that volume growth has been the main driver of topline growth for the past few quarters is a clear indication of the fact that the offshoring story continues to gather momentum.

This quarter however, also saw the rupee being fairly volatile against the dollar. Depreciation of the rupee early in the quarter led to topline benefits. Billing rates were flat, with companies like Wipro actually witnessing a decline. Going forward, these companies have said that they do not see too much action on this front. New clients have been coming in at 3% to 4% higher rates, and a few contracts are also coming up for re-negotiation. Better billing rates could also come from an increase in higher-end businesses like package implementation and consulting in the total business mix.

An interesting trend seen has been the slow but sure winning of larger-sized deals by Indian companies. We had the ABN Amro deal and then the DSG deal of US$ 330 m won by HCL Technologies, the largest-ever IT services deal won by any Indian software company. In such deals, which are by definition competitive, rates could be below the average rates, which would impact the margins to some extent. But winning these deals is an absolute necessity in order to sustain growth rates between 25% and 30%. Therefore, it is a sort of toss-up between growth and profitability.

Strong margin expansion: This quarter saw the 'Top 4' software companies witness a near-100 basis points margin expansion collectively. This was possible mainly due to impressive cost control as well as leverage on selling, general and administrative (SG&A) expenses by these companies. As regards a company-specific scenario, Infosys saw an impressive 200 basis points expansion, while Satyam also witnessed a near-100 basis points improvement. Wipro witnessed a strong 145 basis points expansion, despite a hike in salaries of its offshore staff. This was due to productivity improvements and cost rationalisation carried out. TCS, however, saw a marginal 11 basis points contraction in margins.

Good bottomline performance: The performance of these companies at the net level has also been enthusing, with net profits showing a decent 9.5% sequential growth. It must be said here that the bottomline did not grow at quite the same pace as the operating profits. This was mainly due to the considerably lower other income component reported.

What to expect?
At current valuations, these companies appear to be fairly valued from a medium-term perspective. But we firmly believe that, as a long-term investor, there is a lot of steam left in these companies. There is strong visibility for the top-tier companies over the next 2 to 3 years. At a recent analysts' conference organised by Wipro, the company said that NASSCOM's target for software and BPO exports is US$ 60 bn by 2010. From the FY05 levels of US$ 17.2 bn, this represents a compounded annual growth rate (CAGR) of over 28%.

While the macro-fundamentals are good, of course, one must always take into account the risks that these companies face. These include rupee appreciation, MNC competition, the emergence of other cost-competitive nations for offshoring, wage inflation and employee attrition. In the last five years, many software companies have faltered and even the likes of Infosys have had employee-related problems. So, choose your pick!

Sharekhan Report - Investor's Eye

Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs420
Current market price: Rs362

Price target revised to Rs420

Result highlights

• Transport Corporation of India Ltd's (TCIL) Q3FY2006 pre-exceptional net profit of Rs3.6 crore is in line with our expectation. The performance was primarily driven by the performance of TCIL's transport division, which contributed around 60% to the total revenues.
• The net sales for the quarter stood at Rs224 crore, registering a growth of 15.6%.
• The operating profit margins (OPMs) for the quarter improved by 10 basis points, and consequently the operating profit for the quarter was up 16%.
• The earnings before interest and tax (EBIT) margins of the transport division improved by an impressive 90 basis points. However, the EBIT margins for the express cargo division declined by 130 basis points.
• During the quarter TCIL made a gain of Rs2.11 crore on the sale of its long-term investments. We have treated this as extraordinary other income and accounted for it below the line.
• The pre-exceptional net profit stands at Rs3.6 crore, up 15%, and the reported net profit stands at Rs5.2 crore, up 68%.
  

Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,031
Current market price: Rs716

Good results

Result highlights

• The consolidated revenues of Aditya Birla Nuvo (ABN) grew sharply by 41.5% year on year (yoy) to Rs1,150.2 crore. The growth was driven by the increase in the revenues of the businesses of garments (up 31.5% yoy), carbon black (up 25.5% yoy), textiles (up 18.0% yoy), insurance (up 37.3% yoy) and telecom (up 24.2% yoy).
• The contribution of the high-growth businesses—garments, insurance, business process outsourcing (BPO), software and telecom—to the total revenues improved to 60.5% in Q3FY2006 from 52.2% in Q3FY2005.
• The margins in all the businesses except that of rayon improved sharply yoy: garments (up 500 basis points), BPO (up 1,410 basis points), insulators (up 990 basis points), textiles (up 430 basis points yoy) and telecom (up 290 basis points).
• Telecom business was the pick of the performers—with the revenues growing by 24.2% yoy, the PBIT rising by 43.3% yoy and the PBIT margins expanding by 290 basis points yoy to 21.9%.
• Driven by the strong performance of all the business segments (except rayon), the company's operating profit margin (OPM) expanded by 410 basis points to 12.1% and its net profit grew by 481.9% yoy to Rs32.9 crore.
• Based on the sum-of-parts valuation of the merged entity, we estimate the fair value of ABN at Rs1,031 per share. The stock is available at a 44% discount to its fair value and we maintain a Buy recommendation on ABN with a 12-month price target of Rs1,031.
  

Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs143

Profit margins below expectations

Result highlights

• Omax Auto's Q3FY2006 net sales grew by 16% year on year (yoy) to Rs164.7 crore. For the 9MFY2006 the sales have registered a growth of 18% to Rs459.0 crore. Export sales for the nine-month period touched Rs19.0 crore as compared to Rs10.0 crore in the corresponding period of FY2005.
• The operating profits for the quarter declined by 4.7% yoy to Rs12.1 crore. This was on the back of a 160-basis-point decline in the operating margins to 7.4%, which were affected by higher other expenses and staff costs that negated the savings on the raw material costs.
• The net profits declined by 7.1% yoy to Rs5.0 crore, as there was a higher interest charge of Rs2.3 crore, but was somewhat aided by a lower effective tax rate of 35.1%.
• We are downgrading the earnings for FY2006E by 13% at Rs9.6 and for FY2007E by 2% at Rs13.9.
• At the current market price of Rs143, the stock trades at 11.1x its FY2007E earnings. We maintain our Buy on the stock with a price target of Rs178.
  

Alok Textile Industries
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs120
Current market price: Rs72

Consolidating its position

Result highlights

• The net sales of Alok Industries (Alok) for the quarter were up by 10.7% year on year (yoy) to Rs366.4 crore from Rs330.9 crore in Q3FY2005 on the back of a 61.4% year-on-year (y-o-y) jump in its home textile sales. The home textile sales grew from Rs46.5 crore in Q3FY2005 to Rs75 crore during the quarter.
• The operating profit for the quarter was up 31.8% yoy to Rs81.0 crore as against Rs61.5 crore in Q3FY2005 on the back of a 352-basis-point jump in its operating profit margin (OPM). The OPM increased from 18.6% in Q3FY2005 to 22.1% in Q3FY2006.
• Depreciation for the quarter was up by 38.6% yoy to Rs19.8 crore in Q3FY2006 from Rs14.3 crore in Q3FY2005. The interest cost for the quarter stood at Rs18.1 crore as against Rs15.8 crore in Q3FY2005, a jump of 14.2%.
• The profits before tax (PBT) during the quarter were up by 16.8% yoy to Rs40.4 crore as against Rs34.6 crore in Q3FY2005. The net profits jumped by 18.6% yoy to Rs29.5 crore in Q3FY2006 from Rs24.9 crore in Q3FY2005.
  

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs810
Current market price: Rs725

Price target revised to Rs810

Result highlights

• Sun Pharma's net sales on a consolidated basis were up 37.1% year on year (yoy) from Rs309.9 crore in Q3FY2005 to Rs424.7 crore in Q3FY2006 due to a good performance in the domestic and international formulations business.
• The operating margins saw a decline in the quarter due to a change in classification of the revenues. The operating profit saw an increase of 24% yoy to Rs138 crore.
• The net profit in the quarter stood at Rs146.4 crore as against Rs106.9 crore in Q3FY2005, a rise of 36.9% yoy. The net profit was boosted by the interest income obtained from the foreign currency convertible bond (FCCB) proceeds. The net profit margins were maintained at 34.5%.
• At the current market price of Rs725, the stock is trading at 18x its FY2008 earnings estimate. We are revising our estimates for FY2006 and FY2007 upwards and maintain our Buy recommendation on Sun Pharma with a revised price target of Rs810.

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