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Sharekhan Investor's Eye

Balmer Lawrie & Company
Cluster: Cannonball
Recommendation: Buy
Price target: Rs600
Current market price: Rs555

PAT performance below expectation

Result highlights

• Balmer Lawrie & Company (Balmer Lawrie) reported a robust revenue growth of 20.6% year on year (yoy) to Rs299 crore in Q3FY2006—as per our expectation. The growth was led by the strong performance of the industrial packaging strategic business unit (SBU), which was up 17.8% yoy, logistics SBU (up 8.2% yoy) and greases and lubricants SBU (up 20.5% yoy).
• Driven by the strong performance of the SBUs, the operating profit margins (OPMs) for the company improved by 60 basis points yoy to 8.1%. Consequently, the operating profit (OP) grew by 31.2% yoy to Rs24.2 crore—as per our expectation.
• The disappointing factor in Q3FY2006 results was that the growth in the OP and the profit before tax (PBT) did not percolate down to the profit after tax (PAT) level due to higher tax outflow in the quarter. The company's tax rate jumped to 44.9% in Q3FY2006 as against 32.8% in the corresponding period of the previous year.
• Rate hikes and capacity augmentation at the Mumbai container freight station (CFS) will fuel the logistics SBU’s performance, which in turn will drive Balmer Lawrie’s earnings. We expect Balmer Lawrie’s stand-alone earnings to grow at a compounded annual growth rate of 39.0% over FY2005-08 to Rs30.9 in FY2006E, to Rs42.4 in FY2007E and to Rs49.3 in FY2008E.
• Balmer Lawrie is currently trading at 9.6x its FY2008E consolidated earnings. We believe that the valuations are attractive considering the strong growth momentum expected in the earnings over the next two years. We maintain our Buy recommendation on the stock, with a price target of Rs600.
  

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,100
Current market price: Rs1,795

Results ahead of expectation

Result highlights

• At Rs423 crore the Q3FY2006 net profit of Bharat Heavy Electricals Ltd (BHEL) is sharply higher than our expectations.
• The revenues for the quarter grew by 45% year on year (yoy) to Rs3,326 crore driven by a strong growth of 55% in the revenues of the power division.
• The operating profit margin (OPM) improved by 270 basis points yoy to 18.1% during the quarter due to the operating leverage and savings in the employee costs. The other income increased by 19% yoy to Rs119 crore during the quarter due to the huge cash (Rs3,200 crore) on the company's books as on March 31, 2005.
• Depreciation for the quarter grew by 14% yoy to Rs62 crore primarily due to the capacity expansion at its various plants. As a result, the net profit grew by 78% yoy to Rs423 crore during the quarter.
• The order backlog during the quarter grew by 7% yoy to Rs33,800 crore.
  

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs700
Current market price: Rs560

Price target revised to Rs700

Result highlights

• Mahindra & Mahindra's (M&M's) results are higher than our estimates, mainly due to the better-than-expected profit margin. We have upgraded our estimates and target on the company.
• M&M's stand-alone net sales for Q3FY2006 grew by 24.5% year on year (yoy) to Rs2,207.2 crore on the back of a strong volume growth. The volume growth was primarily driven by a strong 26% year-on-year (y-o-y) growth in the farm equipment division and a marginal 4% y-o-y growth in the utility vehicles segment.
• The operating margins improved by 150 basis points yoy and 70 basis points quarter on quarter (qoq) to 12.05% (adjusting for the octroi refund of Rs20 crore), primarily due to the lower raw material costs. While the earnings before interest, depreciation, tax and amortisation (EBIDTA) margin in the farm equipment segment improved by 70 basis points yoy, it increased by 130 basis points yoy in the automotive segment. The operating profit growth was higher at 34.2% yoy to Rs284.1 crore.
• The net profits before extraordinary items increased by 39% yoy to Rs186.5 crore, in line with our estimates. There is an extraordinary item, which includes Rs48.4 crore received from the transfer of the light commercial vehicle (LCV) business to a joint venture between M&M and International Truck and Engine Corporation. Consequently, the adjusted profits stand at Rs233.5 crore.
• M&M's consolidated gross sales and other income stood at Rs3,639.8 crore for Q3FY2006, up 32%; while the consolidated PAT before minority interest grew by 78% yoy to Rs303.6 crore.
• We are upgrading the stand-alone earnings per share (EPS) by 16% to Rs25.6 for FY2006 (factoring in the full equity dilution--the bonus issue and the foreign currency convertible bond (FCCB) conversion) and for FY2007 by 8% to Rs32.3. Similarly, the consolidated EPS for FY2006 is being upgraded by 8% to Rs39.2 and for FY2007 by 10% to Rs43.9. The stock is currently trading on a consolidated basis at 14.3x on FY2006 and 12.7x on FY2007. We maintain our BUY recommendation and are revising the price target to Rs700.
  

Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs405
Current market price: Rs272

Forex loss arrests bottom line growth

Result highlights

• The Q3FY2006 results of Navneet Publications India Ltd (NPIL) are in line with our estimates. However, a foreign exchange (forex) loss of Rs0.95 crore has taken a toll on the company's bottom line.
• A 48% growth in the stationery segment helped the overall sales to grow by 19.30% to Rs44.44 crore in Q3FY2006 from Rs37.25 crore in Q3FY2005.
• The sales of the stationery segment grew by 48% from Rs12.50 crore in Q3FY2005 to Rs18.52 crore in Q3FY2006. In the same period, the sales of the publication segment grew by 5% from Rs24.45 crore in Q3FY2005 to Rs25.62 crore.
• The operating profit grew by 18.81% from Rs5.21 crore in Q3FY2005 to Rs6.19 crore in Q3FY2006. The operating profit margin (OPM) stayed nearly flat at 13.93% vs 13.99% in Q3FY2005.
• NPIL incurred a forex loss of Rs0.95 crore in Q3FY2006 as against a forex gain of Rs2.41 crore in Q3FY2005. As a result the other income reported a negative figure of Rs0.21 crore in Q3FY2006 as against an other income of Rs3.15 crore in Q3FY2005.
• The profit before tax (PBT) declined by 38.82% from Rs5.59 crore in Q3FY2005 to Rs3.42 crore in Q3FY2006 due to a lower other income. The reported profit after tax (PAT) stood at Rs2.36 crore as against Rs3.56 crore in Q3FY2005.
  

Marico Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs478
Current market price: Rs419

Price target revised to Rs478

Result highlights

• The revenues of Marico Industries grew sharply by 17% year on year (yoy) to Rs303.8 crore in Q3FY2006. The growth was driven by the good performances of its domestic and international businesses.
• The volumes of Marico's key brands, ie Parachute and Saffola, grew by 15% and 6.5% respectively. The aggregate international business grew by 58% (in value terms) in the quarter to Rs37 crore.
• The high-margin portfolio of the company witnessed a healthy volume growth of 24% yoy, contributing 77% to the total turnover as against a 73% contribution in Q2FY2006.
• The operating profit margin (OPM) improved by a whopping 690 basis points in the quarter to 15.6%. The improvement was led by a steep decline in the raw material cost and fiscal gains derived from the Uttaranchal unit.
• Powered by the improvement in the margins, the profit after tax (PAT) grew by 24.1% to Rs21.9 crore in the quarter, despite a one-time depreciation adjustment of Rs15.2 crore. Barring the adjustment the PAT growth would have been higher at almost 120% yoy.
• The company announced a third interim dividend of 16% or Rs1.6 per share.
• The stock trades at a price/earnings ratio (PER) of 17.6x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.9x FY2008E. Looking at the healthy growth prospects for the company, we maintain our Buy call on the stock and revise the price target to Rs478.
  

Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,040
Current market price: Rs892

Domestic operations going strong

Result highlights

• Tata Tea's consolidated sales grew by 0.7% year on year (yoy) for Q3FY2006 to Rs811.7 crore. The domestic operations grew by 16.2% yoy, Tata Tetley's sales grew by 6% yoy in pound terms.
• The domestic operations managed to post a 180-basis-point expansion in the operating profit margin (OPM) to 19.0% due to higher packaged tea sales and lower tea prices. However, the international operations reported a sharp decline of 430 basis points in the OPM due to translation losses and high promotion expenses. As a result, the consolidated operating profit declined by 11.5% yoy to Rs141.6 crore.
• The consolidate profit after tax (PAT) declined by 32.4%. However, adjusted for the extraordinary items, the PAT declined by a lower 10.3%.
• Going forward, we expect the increased promotional spending of the international operations to get reflected in the revenues. The domestic operations are going strong on the revenue front. The margins are expected to remain stable in these businesses. At the current market price of Rs892, the stock is quoting at 15.3x its FY2007E earnings per share and 9.2x its FY2007E enterprise value/earnings before interest, depreciation, tax and amortisation. We maintain our Buy recommendation on the stock with the price target of Rs1,040.