Wednesday, November 01, 2006
The market witnessed strong bullish sentiment in the afternoon, but fell short by 25 points from surpassing the new all-time high of 13076. After exhibiting a sluggish trend yesterday, the Sensex opened 31 points above its previous close at 12993, but slipped below yesterday's close on profit taking to touch the day's low of 12937. However, the market steadily gained momentum on renewed optimism and rallied sharply on sustained buying in oil and gas, capital goods, FMCG and heavyweight stocks to touch an intra-day high of 13051. The Sensex wrapped up the session with gains of 71 points at 13033, while the Nifty advanced 23 points to close at 3767.
Leading the upsurge, Reliance Industries advanced 3.10% at Rs1,264, Reliance Communication soared 2.56% at Rs389, Bharti Airtel jumped 2.08% at Rs541, SBI gained 1.88% at Rs1,116, Gujarat Ambuja added 1.83% at Rs119, BHEL surged 1.83% at Rs2,459, HLL added 1.43% at Rs237, Hero Honda advanced 1.16% at Rs765 and ACC was up 1.12% at Rs979. Grasim, Hindalco, NTPC, L&T, Dr Reddy's, Infosys, ITC and Tata Motors ended the day in the green. However, HDFC slumped 2.88% at Rs1,428, Cipla tumbled 1.95% at Rs257, ONGC shed 1.43% at Rs804, Satyam declined 1.28% at Rs435 and HDFC Bank dropped 1.01% at Rs994. REL, Maruti, Ranbaxy, Bajaj Auto, TCS, Wipro, ICICI Bank and Tata Steel also ended the day in negative territory.
The breadth of the market was mixed. Of the 2,590 stocks traded on the BSE, 1,262 stocks advanced, 1,254 stocks declined and 74 stocks ended unchanged. On the sectoral front, the BSE Oil & Gas index was the biggest gainer and was up 1.53% at 6139 followed by the BSE CG index (up 0.84% at 3187), the BSE FMCG index (up 0.78% at 2065) and the BSE TECk index (up 0.76% at 3296).
Over 1.20 crore Reliance Natural Resources shares changed hands on the BSE followed by Development Credit Bank (92.57 lakh shares), Silverline Technologies (87.34 lakh shares), Nandan Exim (83.53 lakh shares) and IFCI (36.18 lakh shares).
Value-wise Reliance Industries registered a turnover of Rs292.48 crore on the BSE followed by McDowell (Rs133.14 crore), Tech Mahindra (Rs128.24 crore), Hindustan Zinc (Rs107.66 crore) and Alstom Projects (Rs79.57 crore).
Buy Colgate with stop loss of Rs 390 for a target of Rs 490
Buy Tata Tea with stop loss of Rs 730 for a target of Rs 830
Buy Divis Lab below Rs 2725 with a stop loss of Rs 2680; This is a day-trading recommendation
Sell Arvind Mills above Rs 62 with a stop loss of Rs 64; This is a day-trading recommendation
Sell IDFC with a stop loss above Rs 80.75 for a target of Rs 74.60
Buy Hindustan Lever with a stop loss below Rs 229.80 for a target of Rs 238
Buy Denso India at around Rs 98.65 with stop loss of Rs 96. Its a day-trading recommendation
Buy Satyam Computers around Rs 440.55 with a stop loss of Rs 438. Its a day-trading recommendation
Bank of India
CMP: Rs 167 Target: Rs 186 (upgraded from Rs 170) BUY
Hitting the high notes
Bank of India (BOI) has churned out an excellent Q2FY07 performance, posting the best results among PSU banks. As guided by the bank after the FY06 results, net interest income (NII) continues to grow at a very robust pace, well ahead of expectations. An improved yield on funds and a relatively lower increase in cost of funds led a 47% growth in NII. This together with the healthy 18% growth in non-interest income (ex-treasury) to Rs 3bn led to a 61% spurt in net profit. Within loans, lending towards the retail, agriculture and SME segments recorded strong YoY growth of 56%, 22% and 27% respectively. BOI expects these segments to continue to drive asset growth and boost yields.
The management is targeting a growth of 20% in deposits (25% in low-cost deposits) and 25% in loans in FY07. Based on our dividend discount model (DDM) we value the bank at Rs 186, an upward revision from Rs 170 earlier to incorporate the robust financial results. BUY.
Tulip IT Services
CMP: Rs 362 Target: Rs 457 (upgraded from Rs 383) BUY
Power packed performance
Tulip IT Services reported a very strong Q2FY07 financial performance, much ahead of our expectations. Revenues in the quarter grew sequentially by 29.7% to Rs 1.9bn on the back of 59.4% growth in the corporate data services (CDS) segment. Operating margins expanded by 280 bps to 15.5% as the share of CDS revenues increased to 34% of total revenues. Net profit grew by 46.5% to Rs 202.5mn, a slower pace than the 58.6% QoQ increase in operating profit due to higher depreciation and tax costs during the quarter. In view of the exceptional performance, we are raising our estimates for FY07 and FY08 and accordingly upgrading our target price to Rs 457 (from Rs 383). BUY.
K S Oils
CMP: Rs 176 Target: Rs 218 BUY
Fuelled for success
KS Oils (KSO) has clocked an outstanding performance during Q2FY07 with 79% YoY growth in revenues to Rs 2.3bn and a 213% spike in net profit to Rs 111mn. Better volumes due to enhanced capacity utilisation and increased realisations from a heightened focus on the retail segment drove sales during the quarter. Operating profit has grown 140% YoY to Rs 161mn, accompanied by an improved margin at 7.1% from 5.3% a year ago. The margin growth was fuelled by increased realisations, lowered operating costs (particularly power) and better working capital cycles. Net profit margins also rose 75% from 2.8% to 4.9% this quarter. We retain our projections for FY07 and FY08, and thus recommend a BUY with our initial target price of Rs 218.
CMP: Rs 293 Target: Rs 410 BUY
Healthy growth, in line with estimates
Indoco Remedies' Q1FY07 results are largely in line with our estimates. Though the sales growth in the quarter exceeded our expectations, net profit was marginally below our estimates due to higher finance charges and depreciation. Net sales in Q1FY07 grew by 37% to Rs 726.5mn as against Rs 529mn in Q1FY06, driven by 26% growth in domestic sales and a 103% rise in exports to regulated markets. Domestic sales contributed about 81.3% to the topline whereas exports to regulated markets contributed about 12% in Q1FY07. These exports have grown more than anticipated (103% as against 60%) on account of a swelling customer base as well as an increase in the products supplied. Operating margins for the quarter have fallen by 90 bps YoY due to an increase in raw material cost as a percentage of sales. We believe the margins in the coming quarters will stabilise at about 20% as the exports gain further momentum.
At the current market price of Rs 293, the stock is trading at P/E multiples of 7.4x on FY07E and 5.9x on FY08E which we believe is very attractive. With an expected ROE of 23% in FY08 and earnings growth of about 30% we believe the stock should trade at a higher multiple. We therefore recommend a BUY with a target of Rs 410.
CMP: Rs 191 Target: Rs 315 BUY
Pillar of strength
JK Cements' (JKCL) Q2FY07 results are in line with our expectations. Sales have grown by 30% YoY from Rs 2.1bn to Rs 2.7bn. The company sold 8.13 lakh tonnes of grey cement and 60,900 tonnes of white cement in Q2FY07. Net profit has risen substantially from Rs 49mn to Rs 340mn in Q2FY07 mainly due to better realisations as compared to the last year. Operating margins have also jumped from 13.7% in Q2FY06 to 23.7% in Q2FY07. The EPS for the current quarter stands at Rs 4.9 versus Rs 1 in Q2FY06.
The company's expansion plans and power projects are on schedule and it has concluded the acquisition of JayKayCem, a wholly owned subsidiary. Further, the outlook on cement demand and prices remains upbeat, with a Rs 3-5 price hike per bag expected in the near term. We thus maintain a strong BUY on JKCL with our target of Rs 315.
Price target: Rs295
Current market price: Rs190
- JK Cement reported a pre-exceptional net profit of Rs30 crore for Q2FY2007, much higher than expected. The same was better than expected because of higher-than-expected cement volume and realisation. Also its white cement business delivered a good performance during the quarter.
- Impressed by JK Cement's Q2FY2007 results we are upgrading our earnings estimates for FY2007 and FY2008 by 59% and 49% respectively. Our earnings per share (EPS) estimates now stand at Rs21.3 for FY2007 and Rs31 for FY2008.
- The revenues for Q2FY2007 grew by a healthy 30% year on year (yoy) to Rs268 crore driven by a growth of 36.6% in the cement realisation. Overall cement volume declined by 4.6% because of excessive rains and floods in Rajasthan and Gujarat.
- The grey cement volume declined by 6.4% whereas its realisation grew by a massive 37%. On the other hand, the white cement volume and realisation grew by 29.6% and 9% respectively yoy.
- The company's leverage to cement prices led to a massive 125% jump in its operating profit to Rs63.5 crore whereas the operating profit margin (OPM) expanded by 10% points to 23.7%. The earnings before interest, tax, depreciation and amortisation (EBITDA)/tonne more than doubled to Rs726 from Rs308 in the same quarter last year.
- The net interest cost stood at Rs9.2 crore whereas the depreciation charge stood at Rs8.1 crore, in line with our expectations.
- The pre-exceptional net profit for the quarter stood at Rs30 crore, up a whopping 512% yoy. The quarter included a one-time extraordinary other income of Rs4 crore in the form of a refund given by the Rajasthan State Electricity Board (RSEB) towards a waiver on electricity duty pertaining to an earlier period. We have treated this as an extraordinary item and accounted for it below the line. The reported net profit grew by 594%.
Cluster: Ugly Duckling
Price target: Rs1,150
Current market price: Rs762
Strong operational performance
- The Q2FY2007 net profit of Sanghvi Movers Ltd (SML) grew by 90.1% year on year (yoy) to Rs13.1 crore, ahead of our expectations of Rs11.4 crore.
- The net revenues grew by 37.1% yoy to Rs47.3 crore driven by the addition of cranes worth Rs80 crore during H1FY2007 and a utilisation rate of 43%, which was higher than that of 40% achieved in Q1FY2007.
- The operating profit grew by 52.3% yoy driven by an 820-basis-point expansion in the operating profit margin (OPM). The OPM expanded by 170 basis points sequentially.
- Despite the addition of the new cranes, the depreciation charge was down 9.7% yoy to Rs8.5 crore, reflecting the effect of the change in the company's accounting policy for depreciation of new assets (bought after April 1, 2005), effected in Q3FY2006. The company has shifted from the written-down value (WDV) method to the straight-line method (SLM). Also it has changed the depreciation method for all assets (bought between April 1, 2002 and March 31, 2005) in the current quarter.
- Driven by the strong operational performance and aided by the lower depreciation the net profit grew by a robust 90.1% yoy to Rs13.1 crore.
- We have upgraded our estimates of earnings per share (EPS) for FY2007 and FY2008 by 4.1% and 5.2% to Rs63.7 and Rs82.9 respectively to take into account the better-than-expected OPM and the revenue growth that is in line with our estimates.
- At the current market price of Rs762, the stock is trading at 9.2x its FY2008E EPS, 6.2x FY2008E cash EPS (CEPS) and 5.0x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs1,150.
Cluster: Apple Green
Price target: Rs280
Current market price: Rs234
Price target revised to Rs280
- The Q3CY2006 net profit of Hindustan Lever Ltd (HLL) grew by 17.5% year on year (yoy) to Rs383.0 crore, in line with our expectations.
- The net revenues grew by 12.2% yoy on the back of a 14% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses. Adjusted for Nihar (a brand sold by HLL to Marico Industries) the growth in the revenues stood at 12.8%.
- The profit before interest and tax (PBIT) grew by 15.3% yoy as the PBIT margin expanded by 44 basis points yoy to 16.2%.
- The expansion in the PBIT margin was partly a result of an improvement in the margins of the ice cream business and exports. Another reason was the turnaround in the process foods business, which had made losses in Q3CY2005.
- The PBIT margin in the soap and detergent, and personal product businesses contracted by 76 basis points and 136 basis points respectively despite price increases, as the sales and promotion expenses of these businesses went up substantially.
- We have lowered our earnings per share (EPS) estimates for CY2006 and CY2007 by 5% and 6.6% to Rs7.1 and Rs8.5 respectively to take into account the slower-than-expected expansion in the margin of the HPC segment.
- At the current market price of Rs234, the stock is quoting at 26.8x its CY2007E EPS and 24.6x CY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs280.
Cluster: Ugly Duckling
Price target: Rs370
Current market price: Rs250
- Subros' Q2FY2007 net profit at Rs7.8 crore is sharply ahead of our expectation, primarily because of a higher-than-expected revenue growth and a better operating profit margin (OPM).
- We are upgrading our earnings estimates for Subros by 17% for FY2007 and 13% for FY2008. Our earnings per share (EPS) estimates now stand at Rs28.1 for FY2007 and Rs40.5 for FY2008.
- The revenues for the quarter at Rs166 crore grew by 27% year on year (yoy), driven by an impressive growth in the volumes of its key clients, Maruti Udyog Ltd (MUL) and Tata Motors (TAMO), which are currently reaping the benefits of an 8% reduction in the excise duty on small cars. The total automotive air-conditioning system (AAS) volumes grew by a handsome 41% to 125,756 units and, as expected, the realisation came down by 10%.
- The volume growth (41%) reported by Subros is higher than that reported by its key clients MUL (13%) and TAMO (21%). This means it has been able to increase its combined supply share for these two auto majors from 47% a year ago to 58% in Q2FY2007.
- Driven by a slight improvement in the raw material cost and a strict control on the other operating costs, the OPM for the quarter improved by 240 basis points yoy to 11.1%. Hence the operating profit for the quarter grew by 61.5% yoy to Rs18.3 crore.
- With the commissioning of some of the capacities set up as part of the first phase of the capacity expansion programme, depreciation for the quarter inched up by 10.3% and the interest charge doubled to Rs1.71 crore.
- The net profit for the quarter grew by a handsome 93% to Rs7.8 crore.
Cluster: Ugly Duckling
Price target: Rs53
Current market price: Rs44
Higher truck sales impact margins
- Ashok Leyland's (ALL) Q2FY2007 results are in line with our expectations, though the margins have been slightly lower than our expectations.
- The net sales for the quarter grew by 34% to Rs1,675.7 crore led by a volume growth of 33%.
- The operating margins have declined by 80 basis points to 8.2% as a result of higher raw material costs, particularly rubber and non-ferrous metals. Consequently, the operating profits (after adjusting for the foreign exchange [forex] gain/loss) for the quarter rose by 22% to Rs138 crore.
- With a price hike of 2.5% with effect from November and a higher contribution from the defence and bus segments in the second half, the margins should improve.
- Higher other income, lower interest costs and stable depreciation aided the company in posting a 27.1% growth in the reported net profits to Rs95.4 crore.
- At the current market price (CMP) of Rs44, the stock quotes at 11.6x its FY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs53.
Punjab National Bank
Cluster: Ugly Duckling
Price target: Rs600
Current market price: Rs520
Core operating numbers look promising
- Punjab National Bank's results are slightly below our expectations with the profit after tax (PAT) reporting a growth of 19.7% to Rs505 crore compared to our estimates of a PAT of Rs532 crore.
- The net interest income (NII) was up by 14.4% compared to our estimates of 20.5%. The reported net interest margins (NIMs) for H1FY2007 at 4.16% have improved by 16 basis points year on year (yoy). The bank's CASA ratio at 49% is among the best in the industry.
- The other income decreased by 9.1% to Rs284 crore mainly due to the lower trading income as the fee income growth remained robust at 17.6%.
- The core operating profit was up 33.5% while the operating profit was up 30% with the provisions up from Rs9.4 crore to Rs101 crore mainly due to the higher non-performing assets (NPAs) and standard assets provisioning. We expect that the bank must have utilised the write-back in the excess depreciation due to a fall in the bond yields, booked during Q1FY2007 to make higher NPA related provisions during Q2FY2007.
- The advances growth has been at 28.9% yoy as on September 2006 compared to 37.4% yoy as on June 2006. The moderation in the advances growth is welcome with the high yielding advances like retail growing by 47.7% yoy as on September 2006.
- We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs51.8 and Rs 65.2 to Rs56.1 and Rs 70.7 respectively mainly on account of the improving core banking performance on the back of improving margins and selective credit growth along with a high 49% CASA which protects the cost of deposits during a rising interest scenario. However, the scrip remains exposed to some amount of interest rate risk if the bond yields move up significantly beyond 8% from the current levels.
- At the current market price of Rs520, the stock is quoting at 7.4x its FY2008E EPS, 4.2x pre-provision profits (PPP) and 1.3x book value. The bank is available at attractive valuations given its improving operating performance 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 Rs600.
Cluster: Apple Green
Price target: Rs1,004
Current market price: Rs828
Margins dip, just a blip
- Tata Motors� Q2 results are below our expectations due to a marginal drop in the operating margins and higher interest and product development costs.
- The net sales for the quarter are in line with our expectations, marking a growth of 37.4% to Rs6,571.8 crore.
- The operating margins (excluding forex gain/loss and some non-incurring employee expenses) for the quarter have declined by 60 basis points to 11.8%. The margins have been affected due to the higher consumption of steel and rubber in commerical vehicles. Consequently, the operating profits for the quarter have grown by 30.8% to Rs777.9 crore.
- Higher interest and product development costs led to a net profit growth of 30.4% to Rs441.9 crore.
- The company is in talks with Fiat to expand the terms of its joint venture agreement across product categories and markets.
- In view of the favourable domestic market, increasing international dimension (soaring exports, acquisitions & tie-ups) and an aggressive growth strategy, we believe Tata Motors is set to assert itself as a globally competitive auto major.
- Considering the decline in the operating profit margins we are marginally downgrading our estimates by 7% from Rs58.0 to Rs53.9 for FY2007 and by 5% for FY2008 from Rs70.6 to Rs67.4. At the current market price of Rs828, the stock quotes at 12.4x its consolidated FY2008E earnings and 7.9x its FY2008E earnings before interest, depreciation, tax and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs1,004