Sharekhan Investor's Eye

Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs360

Impressive numbers

Result highlight

• Esab India's Q3CY2006 results are good and in line with our expectations. In the quarter the company achieved the much-needed top line growth aided by both its businesses, ie equipment and consumables.
• The top line for the quarter grew by a handsome 26% year on year (yoy) to Rs81 crore, driven by a 24.3% growth in the consumable segment and a 30.7% growth in the equipment segment.
• The operating profit for the quarter grew by a decent 24% to Rs20.33 crore, driven by a 29.5% growth in the earnings before interest and tax (EBIT) of the consumable segment.
• The overall operating profit margin (OPM) declined by 40 basis points primarily because of a 420-basis-point decline in the EBIT margin of the equipment division. The division incurred significant overheads in expanding its capacity during the quarter. The new unit has just started operations and gradually as the revenues of the division begin to move up as a result of the additional capacity, the margins would improve again.
• However the EBIT margin of the consumable division improved by 120 basis points and stood at 30.1%, the highest in the last 10-12 quarters.
• The other income for the quarter grew by 200% to Rs1.23 crore primarily because of the commission earned from its parent Esab AB, Sweden, on an ISRO order secured earlier this year.
• With the depreciation charge remaining flat yoy (an increase of 14% sequentially because of the commissioning of the new equipment plant), the net profit for the quarter grew by an impressive 26.7%.
  

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs94
Current market price: Rs73.5

Growth driven by higher realisations

Result highlight

• Selan Exploration Technology (Selan) reported a 30.7% year-on-year (y-o-y) growth in its net revenues to Rs6.3 crore during the second quarter ended September 2006. The revenue growth was driven by the cumulative impact of the incremental volumes from the commercialisation of two new wells in the first half (one in June 2006 and the second well in September 2006) and relatively higher realisations.
• The operating profit margin (OPM) at 65.8% was higher than 65.3% reported in Q2FY2006. This is despite the higher provisioning for the development of hydrocarbon properties (Rs0.94 crore as compared with Rs0.35 crore in Q2FY2006) during the quarter. The operating profit grew 31.6% to Rs4.1 crore.
• The earnings of Rs2.7 crore grew by 47.5% year on year (yoy) but were slightly below our estimates due to the higher provisioning for the development of hydrocarbon reserves in Q2FY2007.
• On a sequential basis, the revenues grew by 3.8% and the earnings were largely flat (a growth of 0.8%). The decline in the OPM on a sequential basis was largely due to the higher provisioning for the development of hydrocarbon reserves.
• In terms of the outlook, the revenue growth is likely to be driven largely by the growth in volumes. The production volume would be boosted by the full impact of the incremental volumes from the two new wells already commercialised in the first half of FY2007. Moreover, the planned commercialisation of two more wells in the second half of the fiscal would further aid the overall growth in revenues. On the other hand, the lower realisation is likely to limit the growth in the third quarter.
• At the current price the stock trades at 13x FY2007E and 6x FY2008E earnings. In terms of the enterprise value (EV) by proven and probable (2P) barrel of oil & oil equivalents (boe) reserves, Selan trades at an attractive valuation of $0.9 per boe (as compared to the global benchmark of around $8 per boe). We maintain our Buy recommendation on the stock with the price target of Rs94.
  

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs394

Margins remain under pressure

Result highlight

• Wockhardt's net sales increased by 21.8% to Rs437.7crore in Q3CY2006. The growth came on the back of a 38.5% growth in the domestic business and a 10.4% growth in the international business.
• The sales in the European market grew by 9.7%. The European sales were buoyed by the strong performance of the UK business. The sales in the US market grew by 19.6%, showing a substantial turnaround from the previous quarter.
• Wockhardt's operating profit margin (OPM) shrank by 220 basis points to 22.2% in Q3CY2006. The contraction in the margin was on account of an increase in the staff cost as the company increased its domestic field force. The decline in the margin was also attributed to the acquisition of the lower-margin Dumex business and the commissioning of the company's biotech facility (which raised the other expenditure by 460 basis points). Consequently, the company's operating profit (OP) increased by 10.8% to Rs97.1 crore in the quarter.
• The company's margins have been clouded by the capitalisation of ANDA development costs, which would have been otherwise added to the operating expenses. Adjusting for the capitalised costs, the company's OPM stands at 18.3% for the quarter (a decline of 610 basis points), whereas the OP shows a decline of 8.6% to Rs80.1 crore.
• Wockhardt's net profit rose by 13.7% to Rs74 crore. The growth in the net profit was aided by a higher other income (which doubled in the quarter). A higher tax outgo of 17.4% as compared to 12.7% in Q3CY2005 restricted the company's net profit growth. The tax outgo was higher on account of an increase in the minimum alternative tax (MAT) rate effected in the previous quarter.
• Wockhardt recently acquired Pinewood Laboratories, an Irish generic firm, for $150 million. The acquisition is expected to be complementary to Wockhardt's existing business in Europe and add marginally to its earnings.
• At the current price of Rs394, Wockhardt is quoting at 14.2x its CY2007 estimated earnings on a fully diluted basis. We reiterate our Buy recommendation on Wockhardt, with a price target of Rs552.
  

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs870
Current market price: Rs762

Price target revised to Rs870

Result highlight

• The Q2FY2007 results of Mahindra and Mahindra (M&M) are way ahead of our expectations. The stand-alone net sales grew by 30.1% to Rs2,490.5 crore. The strong growth was led by the brilliant performance of the farm equipment division (FED) and higher margins of the automotive division due to an improved product mix.
• On a segmental basis, the automotive revenues rose by 21.7% to Rs1,556.5 crore. The FED reported a stellar performance, marking a revenue growth of 45.1%. The profit before interest and tax (PBIT) margin of the automotive segment improved by a whopping 470 basis points to 14.9% while that of the FED rose by 240 basis points to 14.3% in Q2FY2007. Consequently, the overall operating profit margin (OPM) grew by 345 basis points to 14.8% and the operating profit rose by 69.4% year on year (yoy) to Rs369.6 crore.
• A higher interest income aided the pre-extraordinary net profit to grow by 54.6% to Rs245.4 crore. If you consider the special dividend received from Tech Mahindra, the profit on the sale of the stake in Tech Mahindra and an octroi refund received during the quarter, the reported profit after tax (PAT) grew by 146% to Rs386.5 crore.
• M&M's Q2FY2007 consolidated revenues were also strong and grew by 46% to Rs4,617.6 crore. The consolidated PAT after minority interest rose by 133% to Rs510 crore.
• Considering the growth in the various business segments, higher realisations and higher OPM for Q2FY2007, we have upgraded our FY2007 earnings estimates (consolidated) for M&M by 5% to Rs57.8. We have maintained our FY2008 earnings estimates at Rs64.1.
• Using the sum-of-parts model, we have valued M&M's core business at Rs607 (14x FY2008E earnings) and its subsidiaries at Rs263, arriving at a higher price target of Rs870.
  

ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs430
Current market price: Rs342

Price target revised to Rs430

Result highlight

• ICI India's Q2FY2007 net profit (adjusted for extraordinary items) at Rs19.2 crore is in line with our expectations. The net profit has grown by 23.7% year on year (yoy).
• The net revenues have grown by 6.1% yoy to Rs244 crore due to the discontinuation of the rubber chemical and surfactant businesses.
• The paint business has grown by 27% yoy to Rs217.2 crore. The continued chemical business has grown by 28.4% yoy to Rs33.7 crore.
• The profit before interest and tax (PBIT) in the paint business has grown by 54% yoy with a 157-basis-point expansion in the margin. The PBIT margin in the residual chemical business has risen by 52% yoy with a 200-basis-point expansion in the margin.
• The overall operating profit (including all businesses) grew by 12.4% yoy with a 73-basis-point expansion in the operating profit margin (OPM).
• With a higher other income and stable depreciation charge, the net profit grew by 23.7% yoy to Rs19.2 crore.
• We have upgraded our earnings per share (EPS) estimates for the stock for FY2007 and FY2008, from Rs17.4 and Rs23.2 to Rs18.3 (5.5%) and Rs24.2 (4.3%) respectively, to take into account the better-than-expected margins in the paint business. Accordingly we have revised our price target on the stock to Rs430.
• At the current market price of Rs342, the stock is quoting at 15.1x its FY2008E EPS and 5.9x FY2008E enterprise value (EV)/earnings before interest depreciation tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with the revised price target of Rs430.
  

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs402

Price target revised to Rs425

Result highlight

• Corporation Bank's Q2F2007 net profit at Rs127 crore is up 20.3% year on year (yoy) and is below our expectations.
• The net interest income (NII) grew by a modest 3.3% yoy to Rs316.7 crore due to a 69-basis-point fall in the net interest margin (NIM), even as the advances grew by 38.5% yoy.
• The fall in the NIM was due to a lower yield on investments (down 27 basis points) and a higher cost of funds (up 88 basis points; mainly on account of a sharp rise of 77 basis points in the deposit costs).
• The other income declined by 18.1% yoy to Rs113.1 crore due to losses on treasury operation and a sedate 11.4% growth in the fee and other incomes.
• With the net income declining by 3.3% yoy and the operating expenses increasing by 7.4%, the operating profit declined by 10.7% yoy to Rs235.7 crore.
• With a significant fall in the provisioning requirement the net profit grew by 20.3% to Rs127 crore. The provisioning requirement for the non-performing assets (NPAs) declined due to a fall in the gross NPAs on account of higher recoveries and upgradations as well as a write-back of investment depreciation.
• Going forward, we expect the bank's NIM to remain stable or show some marginal improvement over Q2FY2007, as some of its high-priced deposits are likely to mature over the coming fortnight and some of its low-yielding advances are due for re-pricing.
• We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs35.1 and Rs43.1 to Rs36.7 and Rs46.5 respectively to take into account the lower provisioning requirement and stable NIMs going forward.
• At the current market price of Rs402, the stock is quoting at 8.7x its FY2008E EPS, 4.3x pre-provision profit (PPP) and 1.3x book value (BV).
• Although the upside to the current market price is limited, the same could come from a better-than-expected improvement in the NIM. Further, Corporation Bank is best placed to leverage its balance sheet due to its high Tier-I capital adequacy ratio (CAR) of 13.3%. It is also the best bank in the industry to implement the Basel II norms due to its high Tier-I CAR and would not require an equity dilution. We would like to wait and watch the improvement in the NIM before factoring the same into our numbers. We maintain our Buy recommendation on the stock with price target of Rs425.
  

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Market slips on profit taking

After registering gains of 325 points in the last two sessions, the market slipped on profit taking in early trades and the Sensex lingered in negative territory throughout the trading session. Even as the major Asian indices recovered from yesterday's slump, the Sensex faltered after touching a new intra-day high of 13076 in early trades. Further, the RBI in its credit policy hiked the repo rate by 0.25%, which further hurt the market sentiment and increased the selling pressure in the afternoon. The weakness in heavyweight, tech, banking and consumer durables stocks dragged the index to the day's low of 12908, 116 points below its last close. The Sensex finally closed with losses of 62 points at 12962. The Nifty dropped 25 points and closed at 3744.

Dragging down the market, Reliance Communications shed 3.71% at Rs379, Bharti Airtel tumbled 2.18% at Rs530, Wipro slipped 3.11% at Rs538, Tata Motors slumped 2.83% at Rs828, HDFC Bank shed 2% at Rs1,004, Gujarat Ambuja Cements lost 2.05% at Rs117 and Tata Steel declined 1.59% at Rs490. However, select blue chip counters managed to clock decent gains. HLL rose 2.12% at Rs234 on impressive third quarterly numbers. Satyam gained 2.37% at Rs441, HDFC jumped 1.31% at Rs1,470, ITC added 1.25% at Rs190, ONGC advanced 1.37% at Rs816 and Hero Honda was up 1.39% at Rs756.

Except the BSE FMCG index, the rest of the sectoral indices ended in the red. The BSE Teck index dropped 1.29% at 3271 while the other indices were down around 1% each. However, the BSE FMCG index advanced 1.49% at 2049 on the back of good earnings numbers from HLL, Tata Tea and Dabur India. The breadth of the market was weak.

FMCG stocks bucked the downtrend and rallied sharply on sustained buying support. Colgate soared 7.55% at Rs415, McDowell shot up by 5.97% at Rs753, United Breweries gained 5.44% at Rs179, GTC Industries advanced 4.84% at Rs195, Jagatjit Industries added 4.54% at Rs70 and Kothari Products was up 2.76% at Rs510.

Over 1.55 crore Reliance Natural Resources shares changed hands on the BSE followed by Silverline Technologies (72.32 lakh shares), Nandan Exim (66.36 lakh shares), Mysore Cements (54.02 lakh shares) and Morepen Laboratories (48.70 lakh shares).

Value-wise Jaiprakash Associates registered a turnover of Rs242 crore on the BSE followed by Hindustan Zinc (Rs208 crore), Tech Mahindra (Rs164 crore), Tata Motors (Rs98 crore) and Reliance Industries (Rs89 crore).

PYT - Trading Calls

Buy Reliance Energy with a stop loss of Rs 460 for a target of Rs 580

Buy SRF with a stop loss of Rs 240 for a target of Rs 300

Buy Hindustan Petroleum with a stop below 315.25 for a target of Rs 329-337.90

Buy Lupin with a stop loss below Rs 512.75 for a target of Rs 535

Sharekhan Commodities Buzz dated October 30, 2006

Gold managed to break and move above $600 an ounce following the weakness in the dollar on account of below expected Q3 US gross domestic product (GDP) numbers. Further the US trade deficit widened to $639.9 billion, taking off another 0.58% from the GDP. The growing concerns of the weakness in the dollar and the slump in the housing market would only provide support to gold during the peak demand season. Expect the yellow metal to trade firm in the months ahead and any dip could be used as a buying opportunity.

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Sensex Journey - 1000 to 13000 - Rediff

Robust portfolio investments and heavy fund buying lifted the Bombay Stock Exchange's benchmark 30-share Sensex past the magical 13000 -mark on Monday. (See below for the timeline).

The unprecedented Bull Run started on May 6, 2003 when the Sensex was at 3,001.21 level. In took just 67 trading sessions to cross the 4,000-mark and touch 4,026.27 points on August 19, 2003.

The rally continued and the index gained another 1,000 points in 54 trading sessions to post 5,068.66 points on November 3, 2003.

Thereafter, it pierced through the 6,000 mark on January 2, 2004 in another 43 trading sessions. The market then seemed to pause for breath as it took a whopping 370 trading sessions to cross the 7,000 mark, at 7001.55 on June 20, 2005.

From 7,000-mark, the sentiment turned distinctly firm following good liquidity that played a significant role to determine the market direction and Sensex crossed 8,000-mark in just 55 trading sessions at 8,060.26 on September 8, 2005 and 54 trading days to cross 9,000-mark at 9, 005.63 on November 28, 2005.

From 9K to 10K, it took just 48 trading sessions. The index crossed 10,000-mark on February 6, 2006 at 10,002.83.

From 10K to 11K, it only took 29 trading sessions.

The Bombay Stock Exchange, the oldest stock exchange in Asia, was established in 1875 as the Native Share and Stock Brokers Association at Dalal Street in Mumbai. A lot has changed since then when 318 persons became members upon paying Re 1.

In 1956, the BSE obtained permanent recognition from the Government of India -- the first stock exchange to do so -- under the Securities Contracts (Regulation) Act, 1956.

The Sensex, first compiled in 1986, is a 'Market Capitalisation-Weighted' Index of 30 component stocks representing a sample of large and financially sound companies. The BSE-Sensex is the benchmark index of the Indian capital markets.

The BSE Sensex comprises these 30 stocks: ACC, Bajaj Auto, Bharti Tele, BHEL, Cipla, Dr Reddy's, Gujarat Ambuja, Grasim, HDFC, HDFC Bank, Hero Honda, Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance, Reliance Energy, Satyam, SBI, Tata Motors, Tata Power, TCS, Tata Motors and Wipro.

Following is the timeline on the rise and rise of the Sensex through Indian stock market history.

1000, July 25, 1990

On July 25, 1990, the Sensex touched the magical four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.

2000, January 15, 1992

On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh.

3000, February 29, 1992

On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by the then Finance Minister, Dr Manmohan Singh.

4000, March 30, 1992

On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

5000, October 8, 1999

On October 8, 1999, the Sensex crossed the 5,000-mark as the BJP-led coalition won the majority in the 13th Lok Sabha election.

6000, February 11, 2000

On February 11, 2000, the infotech boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 20, 2005

On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time.

8000, September 8, 2005

On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk buying by foreign and domestic funds in early trading.

9000, November 28, 2005

The Sensex on November 28, 2005 crossed the magical figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors.

10,000, February 7, 2006

The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10K-mark on February 7, 2006.

11,000, March 27, 2006

The Sensex on March 21, 2006 crossed the magical figure of 11,000 and touched a life-time peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points.

12,000, April 20, 2006

The Sensex on April 20, 2006 crossed the 12,000-mark and closed at a peak of 12,040 points for the first time.

13,000, October 30, 2006

The Sensex on October 30, 2006 crossed the magical figure of 13,000 during intra-day trading.

Google Groups Issue

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Monetary policy preview: Sharekhan Special dated October 27, 2006

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DSPML - Investment Strategy - Weekly Rumblings

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ABN Amro - Daily Morning Notes

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Action may continue

On Oct 27 2006, FIIs were net buyers of stocks to the tune of Rs496.70 crore (purchases worth Rs2,661.50 crore and sales of Rs2,164.70 crore).

The market may show more exuberance and advance further on the back of bullish sentiment amongst investors. Yesterday, the Sensex closed above 13000 mark for the first time amid buying in several heavyweight and sectoral stocks. On the eve of the key credit policy announcement today, the market may appear little cautious during intra-day trades and would hope for the interest rates to remain unchanged. In morning trades, upmove in several Asian indices like Nikkei, Kospi and Jakarta may help the domestic indices commence in positive territory. On the technical side, the Nifty could test upper levels at 3835 and 3880 and should find support in the 3745-3727 range, while the Sensex may face resistance at 13085 and test lower levels at 12800.

On the earnings front, BPCL, Dabur India, HLL, Tata Tea and VSNL etc are some of the major results to be announced today.

US indices on Monday displayed mixed trend. While buying action in technology stocks and fall in crude oil prices helped the Nasdaq gain 13 points at 2364, disappointing news from Wal-Mart and Verizon dragged the Dow Jones to 12086, down four points.

Indian ADRs largely ended on a mixed note on the US bourses. Infosys, Satyam, Wipro, ICICI Bank, HDFC Bank and VSNL gained over 1% each while Tata Motors tumbled over 4% and Patni Computers shed 3.79%. Dr Reddy's, MTNL and Rediff ended with marginal losses.

Crude oil prices in the US market took a major hit, with the Nymex light crude oil for December delivery dropping by $2.39 to close at $58.36 a barrel. However, the London Brent crude was up by 31 cents at $61.08 per barrel. In the commodity space, the Comex gold for December series advanced $6.20 to settle at $607.20 an ounce.

Sharekhan Eagle Eye - Oct 31

The Nifty ended the trading session near its all-time high of 3774 after trading firm through the day...

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Sharekhan Investor's Eye - Oct 30

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,440

Unexciting performance

Result highlight

• At Rs360 crore the Q2FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) is marginally below our expectations, primarily because of higher-than-expected staff and other expenses.
• BHEL’s revenues for the quarter grew by a smart 35% year on year (yoy) to Rs3,341 crore driven by the order backlog of Rs45,700 crore. The power division registered a 29% growth in its revenues whereas the industry division recorded a revenue growth of 35%.
• However the operating profit margin (OPM) for the quarter declined by 100 basis points to 13.7%, as its staff cost increased by 21% and the other expenditure rose by 38.6%. The staff cost increased on two counts. One, the company made an additional outlay of Rs45 crore during the quarter for gratuity provision on an actuarial basis, according to the new AS 15 norms. Two, the company also paid additional performance incentive of Rs15 crore during the quarter.
• The other income increased by 61% to Rs170 crore mainly on account of the rising yields on the huge cash reserves of the company. Also as BHEL’s export revenue was higher during the quarter, the export incentive (which BHEL shows in the other income) boosted the other income.
• The net profit for the quarter grew by 38% yoy to Rs360 crore.
• The order backlog during the quarter maintained its momentum and grew by a very impressive 42% yoy to Rs45,700 crore, resulting in an order inflow of Rs10,035 crore.
  

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,120

Better performance in H2

Result highlight

• Bharat Electronics Ltd (BEL) has reported a lacklustre performance for the second quarter. On a stand-alone basis, its net revenues grew marginally by 0.7% to Rs834.3 crore.
• The operating profit margin (OPM) declined by 240 basis points to 22.4% from 24.8% in Q2FY2006. The OPM was dented by an increase in the employee cost as a percentage of sales (up from 12.1% in Q2FY2006 to 13.9% in Q2FY2007) and a jump of 38.8% in the other expenses. On the other hand, the raw material cost as a percentage of sales declined by 50 basis points and supported the margins.
• The other income more than doubled to Rs50.8 crore, which enabled the company to report a marginal growth (1.1% year on year [yoy]) in the net profit to Rs148.3 crore.
• On a half-yearly basis, the net revenues grew marginally by 0.7% to Rs1,317.4 crore. The OPM declined by 180 basis points to 19.6% during the period. The earnings grew by 2.6% to Rs208.6 crore aided by a 65.8% jump in the other income to Rs89.2 crore.
• Notwithstanding the lower-than-expected performance, the company is likely to achieve the stated gross revenue target of Rs4,200 crore during the current fiscal. The fresh order intake of over Rs800 crore during H1FY2007 was much better than that of Rs285 crore in H1FY2006. Moreover, the company generally accrues the bulk of its revenues (especially from the government segment) in the second half of the fiscal.
• In terms of valuations, the company trades at attractive valuations of 13.3x FY2007 and 11.8x FY2008 estimated earnings (without adjusting for the free cash of Rs229 per share on its books at the end of FY2006). We maintain our Buy call with a price target of Rs1,525.
  

Omax Autos
Cluster: Apple Green
Recommendation: Buy
Price target: Rs134
Current market price: Rs100

Price target revised to Rs134

Result highlight

• Omax Auto's Q2FY2007 results are in line with our expectations with the sales reporting a growth of 12.1% to Rs168.6 crore. However, due to the delay in the export orders from Arvin Meritor and Tenneco, the company witnessed a slower-than-expected ramp-up in its exports.
• The operating profit margin (OPM) improved by 220 basis points to 9.9% on the back of lower power costs and other expenses. Consequently, the operating profit grew by 44.7% to Rs16.7 crore.
• However, higher interest and depreciation charges as a result of the capital expenditure incurred by the company led the profit before prior period expenses to grow by 22.2% to Rs5.8 crore. The net profit after the prior period expenses grew by 18.7% to Rs5.7 crore.
• Due to the delay in the export revenues and a muted performance in the domestic business (Hero Honda contributes 60% of the company's sales), higher interest and depreciation charges, we are downgrading our FY2007 and FY2008E earnings by 23% and 32% respectively.
• At the current market price of Rs100, the stock quotes at 6.8x its FY2008E earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 3.9x. Considering the cheap valuations we maintain our BUY recommendation on the stock with a revised price target of Rs134.
  

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs220
Current market price: Rs188

All-round performance

Result highlight

• ITC's Q2FY2007 net profit grew by 18.7% year on year (yoy) to Rs680.0 crore, in line with our expectations.
• The net revenues for the quarter grew by 32.3% yoy as most of its businesses grew strongly: cigarettes (14%), fast moving consumer goods (FMCG; 66%), hotels (30.5%), paperboards (11.3%) and agri-business (86.6%).
• The profit before interest and tax (PBIT) grew by 19.4% yoy as the PBIT margin contracted by 100 basis points, as per our expectations.
• The contraction in the margin was on account of a higher contribution from the low-margin agri-business. Except the agri-business all the other businesses witnessed a healthy expansion in their PBIT margin.
• The non-cigarette FMCG business is the only business in ITC's portfolio that is making losses. However, with a strong growth in the revenues, the magnitude of losses, ie the loss margin, have come down considerably.
• We have always liked the way ITC has channelised the strong cash flows generated from the cigarette business into the other businesses without affecting its return on capital employed (RoCE). At the current market price of Rs188, the stock is attractively quoting at 21.3x its FY2008E earnings per share (EPS) and 13.6x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on ITC with a price target of Rs220.
  

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs205
Current market price: Rs182

First-cut analysis

Result highlight

• The stand-alone revenues of Godrej Consumer Products Ltd (GCPL) grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007. The revenue growth was below our expectations. The soap business grew by 16.5% yoy to Rs127.2 crore whereas the personal care business grew by 15.4% yoy to Rs55.3 crore.
• GCPL's operating profit (OP) grew by a meagre 3.8% yoy to Rs33.8 crore in Q2FY2007, also below our expectations. The operating profit margin contracted by 220 basis points to 18.5%. The mediocre growth in the OP was a result of a sharp increase in the material cost, which jumped by 27.8% to Rs92.2 crore during the quarter. This increase was a result of the hardening prices of vegetable oil, which is a key raw material for the fast moving consumer goods companies.
• The profit before interest and tax (PBIT) margin of the soap division reduced by 400 basis points yoy to 10.8% whereas that of the personal care division increased by 60 basis points yoy to 42.7% during the quarter.
• The interest cost zoomed by 87.1% to Rs1.6 crore. The effective tax rate also increased from 5.8% in Q2FY2006 to 12.7% Q2FY2007. The higher-than-expected interest cost and tax expenses coupled with the lower-than-expected operating performance led to a 6% decline in the profit after tax to Rs26.1 crore. The same was below our expectations.
• GCPL's consolidated revenues for Q2FY2007 stood at Rs231.8 crore. Its consolidated OP and net profit stood at Rs39.7 crore and Rs31.0 crore respectively. The company's consolidated numbers reflect the stand-alone numbers of Keyline, UK and Rapidol, South Africa (the latter is the subsidiary company GCPL acquired this quarter).
• The stock trades at a price/earnings ratio of 22.4x FY2008E consolidated earnings. In view of the lower-than-expected results in the second quarter we are revising our earnings estimates for the company. We shall update our estimates after attending the company's earnings conference call for the Q2FY2007 results.
  

Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs118

Performance in line with expectations

Result highlight

• Universal Cables' Q2FY2007 net profit at Rs5.64 crore is in line with our expectations.
• The net revenues have grown by 20.4% year on year (yoy) to Rs91 crore driven by a 19.6% growth in the cable sales. The sales of capacitators grew by 45.3% yoy.
• The operating profit margin (OPM) contracted by 49 basis points yoy, resulting in a slower operating profit growth of 15.5% yoy.
• The margin at the profit before interest and tax (PBIT) level in the cable business contracted by 48 basis points yoy. This resulted in a slower growth of 14.8% yoy in the PBIT to Rs9.85 crore. The PBIT margin in the capacitator business contracted by 77 basis points, leading to a slower PBIT growth of 40.3% yoy to Rs0.87 crore.
• The net profit growth too was lower at 14.4% due to higher depreciation during the quarter.
• At the current market price of Rs118, the stock is quoting at 5.5x its FY2008E earnings per share (EPS) and 3.2x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA).
• We reiterate our Buy recommendation on the stock with price target of Rs179.
  

Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs106
Current market price: Rs93

Core performance remains weak

Result highlight

• Allahabad Bank's net profit grew by 24.8% year on year (yoy) to Rs210.2 crore in Q2FY2007. The net profit grew at a rate higher than our expectations of 13.2% mainly due to a write-back in provisions, as at the operating level the profit growth was below our expectations at just 0.8% yoy.
• During the quarter, the bank's net interest income (NII) grew by 6.1% yoy to Rs389.9 crore, much below our expectations of a 16.9% year-on-year (y-o-y) growth.
• The NII growth was lower since the net interest margin (NIM) slipped by 47 basis points yoy and by 41 basis points quarter on quarter (qoq) to 2.6%. The yield on advances improved by 25 basis points yoy and by 11 basis points quarter on quarter (qoq) to 8.88%. However, the same and a 47.4% growth in the advances couldn't restrict the fall in the NIM. That is because the deposit cost increased by 56 basis points yoy and by 31 basis points qoq, and the deposits grew by 23.6% yoy during the quarter.
• The other income decreased by 24.6% yoy to Rs122.2 crore mainly due to a fall in the trading and other non-fee incomes. The other income excluding the treasury income also reported a fall of 15.5%. The core fee income, however, grew by 8% yoy.
• The operating expenses reported a fall of 6.8% yoy on account of a 12% fall in the staff expenses. As a result, the operating profit grew marginally by 0.8% yoy to Rs243.3 crore. The operating profit excluding the treasury income grew by 12.4% yoy, much below our expectations of a 21.5% growth.
• However, despite a marginal rise at the operating level, the bank reported a 41.8% rise in its profit before tax (PBT). This was mainly on account of a Rs19.7-crore write-back in the total provisions arising due to a Rs38.4-crore write-back in depreciation on investments.
• Even though the operating performance was below expectations and the write-back in the provisions higher than expected, the net profit at Rs210.2 crore was much above our expectations.
• We have revised our earnings per share (EPS) estimates for FY2007 from Rs14.6 to Rs15.7 mainly on account of the lower provisioning requirements and operating expenses of the bank. Our FY2008 EPS estimates however remain unchanged at Rs21.8.
• At the current market price of Rs93, the stock is quoting at 4.3x its FY2008E EPS, 3x pre-provision profit (PPP) and 0.8x book value. The bank is available at attractive valuations, considering its strong average return on equity (RoE) of 20.2% over FY2006-08E. We maintain our Buy call on the stock with a price target of Rs106.
  

Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs109
Current market price: Rs92

In line with expectations

Result highlight

• In Q2FY2007 Andhra Bank's net profit grew by 10.2% year on year (yoy) to Rs146.4 crore, in line with our expectations.
• During the quarter the bank's net interest income (NII) grew by 14.7% yoy to Rs330.9 crore, below our expectations of a 23.8% year-on-year (y-o-y) growth.
• The growth in the NII was lower because of an 8.7-basis-point fall in the net interest margin (NIM) due to a lower yield on investments and a higher cost of deposits.
• The other income increased by 9.1% yoy to Rs128.7 crore. The growth was in single digits mainly due to a fall of 39.7% in the trading income. However, the other income excluding the treasury income reported a strong growth of 25% with the core fee income growing by 22.3% yoy to Rs47.7 crore.
• The operating expenses reported a rise of 14.8% yoy and the operating profit grew by 11.3% yoy to Rs223.1 crore. The operating profit excluding the treasury income grew by 19.9% yoy, below our expectations.
• With the provisioning lower than expected, the net profit grew by 10.2% yoy to Rs146.4 crore, in line with our estimates.
• We have revised our earnings per share (EPS) estimates for FY2007 from Rs10.7 to Rs11.3 mainly on account of the improving core banking performance and the stable other income growth. Our FY2008 EPS estimates however remain at Rs13.3.
• At the current market price of Rs92, the stock is quoting at 6.9x its FY2008E EPS, 4.1x pre-provision profits (PPP) and 1.2x book value. The bank is available at attractive valuations given its improving operating performance, the adequate capital available in its books to meet the Basel II requirements and asset quality that is one of the best in the industry. We maintain our Buy call on the stock with a price target of Rs109.
  

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs167

Exceptional results

Result highlight

• Bank of India's net profit grew by 60.5% year on year (yoy) to Rs212.1 crore, which is above our expectations of a 52.5% growth. The excellent numbers were driven by an improvement in all the key parameters of the bank's business.
• During the quarter the bank's adjusted net interest income (NII) grew by a robust 39.6% yoy to Rs908.5 crore compared to our expectations of a 27% year-on-year (y-o-y) growth. The improvement in the NII was due to the expansion in the net interest margins (NIMs) coupled with the growth in the advances.
• The domestic NIMs improved by 45 basis points yoy while the global NIMs improved by 43 basis points yoy. The expansion was also robust on a quarter-on-quarter (q-o-q) basis as the domestic NIMs improved by 21 basis points while the global NIMs improved by 15 basis points.
• The other income showed a good growth of 16.5%, with the fee-based income showing a strong 30.7% growth.
• The operating expenses were up 31.2% mainly due to the expenses incurred on the implementation of the core banking solution (CBS) that the bank charges to the profit and loss account unlike the other banks that prefer to capitalise and claim depreciation on the same. Some promotional expenses for the centenary year celebration also kept the operating expenses on the higher side.
• As a result, the operating profit grew by 33.9% yoy to Rs538.2 crore. The operating profit excluding the treasury income grew by 37.6% yoy.
• We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs15.5 and Rs18 to Rs18.8 and Rs22.2 respectively to take into account the improved expected operating performance of the bank going forward. The improved performance of the bank is based on the improving margins, which should stabilise going forward coupled with the stable other income and the operating expenses growth.
• The capital adequacy ratio (CAR) of the bank stood at 11.85% with the Tier-I ratio at 6.19%. This leaves very little room for the bank to grow its assets without diluting its equity in the medium term. However, the bank has shown no intent of raising its equity capital, unless absolutely necessary. Hence, we feel that the bank would initially use all the options available like innovative Tier-I capital. A plain equity issue may follow in H1FY2008, which would enhance the bank's book value and be value accretive going forward for the investors.
• At the current market price of Rs167, the stock is quoting at 7.5x its FY2008E EPS, 3.3x pre-provision profits (PPP) and 1.2x its book value. The bank is available at attractive valuations looking at the strong visibility in its earnings and is less prone to interest rate risk shocks unlike some leading PSU banks. We reiterate our Buy call on the stock with a revised price target of Rs185.
  

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,116
Current market price: Rs1,095

Strong growth in core operating profits

Result highlight

• State Bank of India's (SBI) Q2FY2007 stand-alone net profit at Rs1,184.5 crore was down 2.5% year on year (yoy), but above our expectations of a fall of 11.4% largely due to the lower-than-expected operating expenses reported by the bank and on account of lower provisions.
• The net interest income (NII) grew by 8.1% yoy to Rs3,898.7 crore, above our expectations of a 6.9% growth. The improved yield on the advances (up by 67 basis points) to 8.48% over a 21.2% advances growth coupled with the lower cost of deposits (down 15 basis points) to 4.64% mainly resulted in a better NII growth. The reported core net interest margin (NIM; adjusted for a one-time interest income) for H1FY2007 has improved by 40 basis points to 3.32%.
• Most other PSU banks have reported an increase in the cost of deposits, while SBI has reported a fall mainly due to the improvement in its CASA ratio to 42.6% from 39.5% and the lowering of the bulk deposit rates to discourage high-cost deposits in its books.
• The other income increased by 10.7% yoy to Rs1,433.8 crore, restricted mainly due to a drop of 96.9% in the trading income during Q2FY2007 to Rs7.7 crore from Rs246.7 crore in Q2FY2006. The other income excluding the treasury income reported a very strong growth of 36.1%.
• With the net income up by 8.8% yoy and a decrease of 2% in the operating expenses, the operating profit increased by a healthy 24.7% yoy. The operating profit excluding the treasury income was up 42% yoy.
• The provisions were down 16.7% yoy mainly on account of the absence of investment depreciation during the quarter. However the tax outflow at Rs606 crore with an effective tax rate of 33.9% was much above our expectations.
• At the current market price of Rs1,095, the stock is quoting at 9.6x its FY2008E earnings per share (EPS), 4.5x its pre-provision profits (PPP), 1.6x its stand-alone book value and 1.3x its consolidated book value. The bank is definitely a proxy investment for the Indian economy and the improved operating performance post the redemption of India Millennium Deposits (IMDs) could still provide some upside from the current levels. We maintain our Buy call on the stock with a price target of Rs1,116.
  

Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs590

Performance below expectations

Result highlight

• Orient Paper & Industries Ltd's (OPIL) Q2FY2007 net profit at Rs20.4 crore is below our expectations primarily because of a 33-day maintenance shutdown at the company's Amlai paper unit for a major overhaul. This plant shutdown resulted in a 21% decline in the paper division's revenues, leading to a loss of Rs8.5 crore. However the performance of the cement business (earnings before interest, depreciation, tax and amortisation [EBIDTA] per tonne of Rs929 as against Rs111 per tonne) is above our expectations.
• The revenues for the quarter grew by 34.6% to Rs229 crore entirely driven by its cement division, which almost doubled its revenues to Rs141 crore. The paper division registered a decline of 21% in its revenue due to a shutdown and the fans division showed a decent performance registering a 22.6% growth in its revenues.
• The operating profit for the quarter grew by a whopping 288% to Rs43.8 crore as the cement division's earnings before interest and tax (EBIT) reported a significant jump to Rs49 crore signifying the effect of the cement prices on the company's profitability. The paper division reported an overall loss of Rs8.5 crore out of which Rs5.6 crore is the loss because of a 33-day plant shutdown and the balance is on the already non-operational Brijrajnagar unit. The other two units together reported a loss of Rs1 crore. Hence the overall profitability was significantly affected.
• The operating profit margins (OPMs) for the quarter jumped three-fold to 19.1%, driven by the stellar performance of the cement division.
• The performance at the operating level was strengthened by a 26% decline in the interest cost and a 25% increase in the other income to Rs2.44 core and consequently the pre-exceptional net profit for the quarter stood at Rs20.4 crore as against a loss of Rs3.36 crore a year ago. Q2FY2006 included a profit of Rs6.6 crore on the sale of investments which we have treated as an extraordinary income. Hence OPIL's reported net profit jumped by 526%.

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VIEWPOINT

Moser Baer

Strong reversal in fortune
Incorporated in 1983, Moser Baer has emerged as one of the top three optical storage media manufacturers in the world. It has a wide range of products ranging from floppy disks, compact discs (CDs) to digital versatile discs (DVDs). It has relationship with all the top 12 global technology brands and has steadily gained market share over the past few years.

Recently, the company has diversified into manufacturing of photovoltaic cells to tap the growing demand for solar power generation globally. The company is likely to commission the first phase of its photovoltaic cell manufacturing facility in the fourth quarter of this fiscal.

Dr Reddy’s Laboratories

Results above expectations

Result highlight

• Dr Reddy’s Laboratories (DRL) reported revenues of Rs2,003.9 crore in Q2FY2007, as against Rs580.4 crore in Q2FY2006, representing an increase of 245% year on year (yoy).
• The revenues from the international markets increased by 391% yoy at Rs1,760 crore largely because of the contributions from the authorised generics and acquisitions.
• The revenues from its core businesses (excluding the contributions from the authorised generics and acquisitions) increased by an impressive 42% to Rs820 crore during the quarter.
• The overall gross margin declined to 41.3% from 51.6% in the corresponding quarter of the previous year, largely because of the pricing pressures in the USA and Europe and due to the integration of the Betapharma acquisition.
• However, with the impressive reduction in the selling, general and administrative (SG&A) cost to 18.3% of sales from 30% in Q2FY2006, the operating profit margin (OPM) expanded to 19.0% from 11.9% in Q2FY2006.
• The net profit increased by over two times (up by 214%) at Rs279.8 crore.
• At the current market price of Rs752, the stock trades at 18.2x and 22.0x of FY2007 and FY2008 consensus earnings. Currently, the management plans to focus strategically on enhancing the earnings by leveraging its Day-1 launches (as 55 ANDAs are in the pipeline) and authorised generic deals. On the cost front, DRL plans to curtail its litigation costs by out of court settlements and has already started tightening its SG&A expenses. On the R&D front, the company has already de-risked its model by partnering with financial partners. With all these developments we are positive about the stock.
  

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