FROM SHAREKHAN'S DESK
Will samvat 2063 be really happy and prosperous?
The equity market gave a stupendous return of 60% in samvat 2062 and brought wealth to all those who placed their trust and hard-earned money in it. In that sense, samvat 2062 was indeed a prosperous year. Well, the market place is once again resonating with greetings of a happy and prosperous new year but whether your and my portfolios will continue to make money in samvat 2063 will depend on the economy’s health, India Inc’s earnings growth and foreign fund inflows. These three factors were mainly responsible for taking the market to new heights in samvat 2062 and the same would determine the market’s fate once again.
Sharekhan top picks
In the October 2006 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on November 1, 2006, the return on this basket of stocks has been 4.3% as compared to the Sensex, which has given 5.2% returns and the S&P CNX Nifty, which has given 5.6% returns.
STOCK IDEA
Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs250
Forging ahead
Key points
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The business of Ahmednagar Forgings Ltd (AFL) is growing at a spectacular pace on the back of a buoyant domestic climate and bulging export orders. At present, the company has an order book of Rs850 crore, executable over the next twelve months. Of these, orders worth Rs650 crore are from the domestic market and the balance are export orders.
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To cater to this demand, AFL is more than trebling its forging capacity from 46,000 tonne per annum (tpa) in FY2006 to 165,000tpa by FY2008. The machining capacity is also being expanded from 10,000tpa to 25,000tpa.
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After the acquisition of Amforge's Chakan unit by Mahindra Automotive Steels, some of its original equipment manufacturer (OEM) customers have shifted to AFL. This is expected to generate additional revenues of Rs100 crore.
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AFL's export revenues should get a boost with the acquisition of the two forging lines from Anvil International. At peak levels these lines should generate revenues of Rs300 crore. AFL would also be meeting the outsourcing needs of GWK, UK, the Amtek group’s global business.
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With increased contribution of the machined products and higher revenues from the non-automotive segment, we expect the margins to expand by 120 basis points over the next two years.
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At the current market price of Rs250, the stock discounts its FY2008E earnings by 6.5x. Considering the company's future growth potential and the stupendous increase in its size, we believe that such a discount to its peers is unjustified and recommend a Buy on the stock with a price target of Rs380.
South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs190
At a high tide
Key points
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Boom in offshore service industry: With the surge in crude prices and drop in global spare production capacity for oil, exploration activity has picked up globally. The IEA estimates that USD3.6 trillion would be spent on oil and gas exploration over 2003-30. The day rates for offshore oil and gas drilling, and support assets including MSVs are sky-rocketting as a result of this rise in the E&P spend.
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SEAMEC to benefit from rising E&P spend: With its fleet of three MSVs, SEAMEC is a direct beneficiary of this boom and the higher charter rates for the MSVs. It has recently entered into a long-term charter for its MSVs and that too at high charter rates of USD40,000-47,000 compared with USD20,000 per day for the earlier contracts.
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New vessel to further boost revenues: SEAMEC has recently acquired a vessel named Oceanic Princess, which is being converted into a diving support vessel (DSV). This DSV (expected to commence operation by Q1CY2007) and the three MSVs should help its revenues to grow at a CAGR of 70% over CY2005-07E.
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Profit to grow at a CAGR 126%: With a strong revenue growth, a debt-free status and the tonnage tax scheme, the earnings per share are expected to grow at a CAGR of 126% to Rs17.4 in CY2006 and to Rs29.2 in CY2007.
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Buy with a price target of Rs270: At the current market price of Rs190, the stock is trading at 6.5x CY2007E earnings and 4.1x CY2007E EV/EBIDTA. Compared with its global peers, SEAMEC is trading at a discount of 30%. It has the highest EBIDTA margin and RoE compared with them. We believe the discount is not justified. We recommend Buy on SEAMEC with a price target of Rs270.
STOCK UPDATE
3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs244
Current market price: Rs187
Robust operating performance
Result highlight
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3i Infotech reported a growth of 12.9% quarter on quarter (qoq) and of 49% year on year (yoy) to Rs145 crore during the second quarter. The two acquisitions (Delta Tech and G4 Software) contributed incremental revenues of Rs4.5 crore during the quarter.
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The operating profit margin (OPM) improved by 70 basis points to 23.5% on a sequential basis. The sequential improvement in the OPM was largely contributed by the 250-basis-point improvement in the gross margins of the product business to 55% (due to better revenue mix). On the other hand, the gross margins of the service business declined by 100 basis points sequentially to 38.3%. On an annual comparison basis, the OPM has improved sharply by 300 basis points largely due to increased contribution from the high-margin product business.
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The other income component stood at Rs3.9 crore as compared with Rs4.8 crore in Q1FY2007. The other income declined due to lower gains from the foreign exchange (forex) fluctuations during the quarter (the company had reported Rs1.1 crore of forex gain in Q1).
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The lower other income, and higher interest and depreciation charges limited the sequential growth in the earnings to 5.6% at Rs22.5 crore (exactly in line with our estimates).
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The order backlog has grown by 9.9% qoq to Rs322.3 crore, with the product order book growing by 9.8% qoq to Rs160.9 crore and service backlog rising by 10% qoq to Rs161.4 crore. This is the third consecutive quarter of a double-digit sequential growth in the order backlog.
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Along with the quarterly results, the company announced the acquisition of a 100% stake in a UK-based product company, Rhyme Systems. The acquired company has annual revenues of around $28 million and has OPM of over 20%. The acquisition has been made at consideration of $52 million, which works out to 1.9x its annual revenues.
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The management has revised the annual revenue growth guidance to Rs620-640 crore (48-53% growth). The diluted earnings are guided in the range of Rs16-17 per share (net of dividend on preference share capital) in FY2007, which amounts to a growth of 69-79% over the earnings of Rs9.5 reported in FY2006. The guidance factors in the impact of the acquisitions already made in the current year.
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At the current market price the stock trades at 14.4x FY2007 and 9.6x FY2008 revised earning estimates(On the fully diluted equity base of Rs69 crore). We maintain our Buy call with a price target of Rs244.
Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,031
Current market price: Rs932
Consolidating gains
Result highlight
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The consolidated revenues of Aditya Birla Nuvo (ABN) in Q2FY2007 grew by 95.5% year on year (yoy) to Rs1,962.9 crore, in line with our estimate. The growth was driven by (1) a strong double-digit growth in its value businesses; (2) the addition of the fertiliser and finance businesses due to the merger of Indo Gulf and Birla Global; (3) a higher share in the telecom business at 35.7% during the quarter; and (4) the continued momentum in its growth businesses.
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The share of high-growth businesses (garments, life insurance, business process outsourcing [BPO], software and telecom) improved to 63.2% of sales in Q1FY2007 as compared to 52.6% in the same period last year.
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A sharp margin expansion was witnessed in all the businesses except insurance, BPO, fertilisers and carbon black. The margin expansion yoy was of 1,310 basis points in the rayon business, 410 basis points in the garment business, 240 basis points in the insulator business, 230 basis points in the telecom business, 220 basis points in the software business, and 200 basis points in the textile business.
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Driven by the good performance of the key business segments and the addition of new businesses, the operating profit margin (OPM) saw an expansion of 410 basis points yoy to 14.9%. Consequently, the operating profit grew by a robust 169.4% yoy to Rs291.5 crore.
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Even the net profit grew by 62.6% yoy to Rs70.8 crore in spite of higher depreciation and interest costs. Adjusted for the insurance loss the net profit grew by 73.3% yoy to Rs57.3 crore.
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Given the diverse businesses of ABN, the company is best valued using the sum-of-parts method. Based on the sum-of-parts valuation of the merged entity, we estimate the fair value of ABN to be Rs1,031 per share. The stock is available at 10.6% discount to its fair value and we maintain a Buy recommendation on ABN with a 12-month price target of Rs1,031.
Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs106
Current market price: Rs93
Core performance remains weak
Result highlight
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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In Q2FY2007 Andhra Bank's net profit grew by 10.2% year on year (yoy) to Rs146.4 crore, in line with our expectations.
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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.
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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.
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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.
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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.
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With the provisioning lower than expected, the net profit grew by 10.2% yoy to Rs146.4 crore, in line with our estimates.
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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.
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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.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs53
Current market price: Rs44
Higher truck sales impact margins
Result highlight
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Ashok Leyland's (ALL) Q2FY2007 results are in line with our expectations, though the margins have been slightly lower than our expectations.
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The net sales for the quarter grew by 34% to Rs1,675.7 crore led by a volume growth of 33%.
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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.
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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.
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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.
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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.
Associated Cement Companies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs978
Results ahead of expectations
Result highlight
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In Q2FY2007 the pre-exceptional net profit of Associated Cement Companies (ACC) grew by 228% year on year (yoy) to Rs243 crore, ahead of our expectations.
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The net revenues grew by a healthy 36.7% yoy to Rs1,373.5 crore driven by a 41% growth in the realisations (bolstered by the reduction in the excise duty) and a 5.6% growth in the volumes.
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The operating cost jumped by 18.3% yoy on account of a 12% increase in the power and fuel cost, and a sharp jump of 43% in the other expenditure, which included a one-time maintenance & shutdown expenditure of Rs18-20 crore. But this was overshadowed by the steep revenue growth that caused the company's operating profit to increase sharply by 139.2% yoy to Rs366 crore and the operating profit margin (OPM) to expand by a massive 1,150 basis points to 26.7%.
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The reduction in the interest expense was partially offset by a decline in the other income whereas the depreciation charge increased by 21% on account of the commissioning of the Chaibasa plant and expansion at the Gagal plant.
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A lower tax provision of 22.5% as against 32.4% in the same quarter last year boosted the pre-exceptional net profit by 228% to Rs243.5 crore.
Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,300
Current market price: Rs2,789
Price target downgraded to Rs3,300
Result highlight
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Bajaj Auto's second quarter results were below our and consensus expectations mainly due to a fall in the company's operating profit margin (OPM).
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The company has reported a growth of 30.5% in the net sales to Rs2,435.9 crore with a volume growth of 27.5% and a realisation growth of 2.4%.
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The OPM for the quarter was disappointing as the same fell to 15% from 16.9% in the same quarter last year. This was mainly a result of a steep rise in the raw material cost, which rose to 72.5% as a percentage of sales from 70.1% in the same quarter last year. The higher contribution from the sales of its 100cc bike Platina too affected the profitability as the margins are lower in this segment. Consequently, the operating profit for the quarter marked a growth of only 15.7% to Rs365.2 crore.
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Lower taxes, and stable interest and depreciation costs aided a 14% growth in the company's net profit, which rose to Rs331.4 crore. However, there was an extraordinary item of Rs12.6 crore relating to the voluntary retirement scheme (VRS) expenditure written off during the quarter; this took the profit after tax (PAT) after the extraordinary items to Rs317.6 crore.
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With subdued raw material prices and new product launches planned in the premium segment, the OPM should stabilise at the current levels. Considering the fall in the OPM in Q2FY2007, we downgrade our earnings estimates for FY2007 and FY2008 by 9% to Rs125 and Rs152 respectively.
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At the current market price of Rs2,789, the stock discounts its FY2008E earnings by 18.4x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11x. We maintain our Buy recommendation on the stock with a revised sum-of-parts price target of Rs3,300.
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs167
Exceptional results
Result highlight
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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.
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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.
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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.
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The other income showed a good growth of 16.5%, with the fee-based income showing a strong 30.7% growth.
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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.
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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.
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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.
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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.
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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.
BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs231
Unexciting quarter
Result highlights
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BASF India (BASF) reported unexciting results for Q2FY2007, as the net profit for the quarter grew by 19.8% year on year (yoy) aided by lower depreciation, higher other income and stable tax rate.
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The net sales for the quarter under review grew by 14.2% yoy to Rs218.5 crore on the back of a strong growth (23.9%) in the sales of performance products.
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The operating profit grew by a slower 7.1% as the operating profit margin (OPM) declined by 100 basis points to 15.5%. The steep rise in the other expenses led to contraction in margins. The raw material cost remained stable during the quarter.
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The lower depreciation led to a stronger growth in the profit before interest and tax (PBIT) at 17.2% to Rs31.6 crore.
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With a flat interest outgo and a stable tax rate, the net profit grew by 19.8% to Rs20.4 crore.
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At the current market price of Rs231, the stock is quoting at 8.3x its FY2008E earnings per share (EPS) and 4.7x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We believe that the stock is trading at attractive valuations, given the bright outlook for the company's business over the next two years. We reiterate our Buy recommendation on BASF with a price target of Rs300.
Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,209
A sharp bounce-back
Result highlight
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The Q2FY2007 results of Bharat Bijlee Ltd (BBL) are in line with our expectations.
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The revenue for the quarter grew at a stupendous pace of 104% to Rs110 crore on the back of a strong order book of Rs256 crore at the beginning of the quarter and the support of its recently-commissioned 3,000MVA new transformer facility.
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In line with the revenue growth the operating profit for the quarter doubled to Rs14 crore. The operating profit margin (OPM) as such declined by 30 basis points to 12.7%. The steep jump in the operating profit is a smart bounce-back after BBL's muted performance in Q1FY2007. BBL's Q1FY2007 performance was marred by the low-margin 100 MVA transformer business that was the entry order for BBL in the high-range market.
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The interest charge for the quarter jumped 31% whereas the depreciation charge rose by 29%, as the company had commissioned a 3,000MVA plant during Q1FY2007.
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Apart from the increase in the interest and depreciation charges, the tax outgo for the quarter was also high. The net profit for the quarter, at Rs8.7 crore, grew at 78%, slower than the operating profit growth of 100%. The reported net profit, which includes an extraordinary charge of a voluntary retirement scheme (VRS) expenditure, stood at Rs8.4 crore, up 84%.
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The order backlog for the quarter stood at Rs270 crore, marking an impressive jump of 42% year on year (yoy). The order inflow also jumped significantly by 23% yoy.
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,120
Better performance in H2
Result highlight
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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.
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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.
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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.
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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.
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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.
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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.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,440
Unexciting performance
Result highlight
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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.
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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%.
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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.
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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.
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The net profit for the quarter grew by 38% yoy to Rs360 crore.
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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.
Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs277
Operationally strong results
Result highlight
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Canara Bank's net profit at Rs362.0 crore was in line with expectations driven by a strong growth in the net interest income (NII) and lower-than-expected operating expenditure.
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During the quarter the bank's NII grew by 21.6% year on year (yoy) to Rs981.1 crore compared to our expectations of a 16.6% year-on-year (y-o-y) growth.
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The better growth could be attributed to a 26.8% y-o-y growth in the advances. A sharp improvement in the yields on advances helped the net interest margin (NIM) remain stable despite the cost of deposits moving up.
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The other income at Rs313.3 crore was lower than our expectations as the same decreased by 20.3% yoy. The fall in the other income could be a result of lower recoveries in Q2FY2007 compared to Q2FY2006.
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The operating expenses reported a sedate 9.8% y-o-y growth, slightly below our expectations.
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As a result, the operating profit grew by 5.9% yoy to Rs615.2 crore broadly in line with our expectations as higher NII and lower operating expenses compensated for the higher unanticipated fall in the other income. The operating profit excluding the treasury income grew by 5.6% yoy.
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The decline in the bond yields has helped the bank to write back provisions on the investment book. The bank has used the opportunity to provide higher provisions on its advances book. Despite higher provisions for non-performing assets (NPAs), the total provisions have declined by 24.3%.
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With the operating performance in line with expectations and a decline in the provisions, the net profit at Rs362 crore was in line with our expectations.
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Canara Bank is planning to go for raising hybrid tier I capital funds to the tune of Rs300 crore soon to shore up its Tier I capital adequacy ratio.
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We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs32 and Rs39 to Rs36 and Rs47 respectively to take into account the lower provisioning requirement.
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At the current market price of Rs277, the stock is quoting at 6.0x its FY2008E EPS, 3.2x pre-provision profits (PPP) and 1.2x book value. The stock is available at attractive valuations looking at its strong average return on equity (RoE) of 20.2% over FY2006-08E. We reiterate our Buy call on the stock with a revised price target of Rs320.
Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs300
Current market price: Rs262
Better health than expected
Result highlight
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Cipla reported better-than-expected results for Q2FY2007 with its earnings showing a 47% jump (as against an expected growth of 40%) to Rs180.28 crore.
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The revenues were up by an impressive 33 % year on year (yoy) and by 4% quarter on quarter (qoq) to Rs896.11 crore, largely fuelled by a whopping 120% growth in the exports of active pharmaceutical ingredients (APIs) to Rs159.70 crore and above the industry performance of a 22% increase in the domestic formulations.
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The operating profit margin (OPM) witnessed a contraction of 100 basis points to 25.4% in the quarter, as the raw material costs increased by 250 basis points due to the company’s changed product mix. However, the operating profit increased by 28.4% to Rs227.60 crore.
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With the reduction in the incidence of tax to 18.3% from 21.1%, possibly due to the commissioning of the new export-oriented unit (EOU) at Patalganga, the net profit increased by 47% at Rs180.28 crore.
-
At the current market price of Rs262, the stock trades at 21.5x its FY2008 earnings, but expecting earning surprises in the subsequent quarters (as the company is working on about 150 product projects), we maintain our Buy recommendation on the stock with a price target of Rs300.
Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs402
Price target revised to Rs425
Result highlight
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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.
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs258
Current market price: Rs237
Price target revised to Rs258
Result highlight
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Crompton Greaves' revenues grew by 48.6% year on year (yoy) in Q2FY2007 to Rs824.0 crore, way ahead of our expectations. Although all its three divisions reported a strong performance, the power system division led the pack with a revenue growth of 68.7% yoy to Rs449.7 crore. The revenues of the consumer product division and the industrial system division grew by 33.3% and by 36.8% respectively.
-
The raw material cost/sales ratio spiked to 75.6% in Q2FY2007 from 69.5% in Q2FY2006 largely due to an increase in the prices of the base metals like copper and the inability of the company to pass on the same to its customers. However, lower employee cost and other expenses muted the impact of the same. Consequently, the operating profit margin (OPM) reduced by 60 basis points yoy to 8.9%.
-
The profit before interest and tax (PBIT) margin of the power system division declined by 50 basis points to 8.0% during the period. The high-margin businesses maintained their margins (the consumer product division's margin was up 10 basis points to 9.7% and the industrial system division's margin was up 20 basis points to 13.6%).
-
Crompton Greaves provided for the full tax rate in Q2FY2007 as against the minimum alternate tax (MAT) rate in Q2FY2006.The increased tax provisioning led to a slower growth of 25.0% yoy to Rs40.7 crore in the profit after tax. But the growth was still in line with our expectations.
-
Pauwels' top line grew by 86.4% yoy to Rs520.0 crore in Q2FY2007, way ahead of our estimates and the profit before tax (PBT) stood at Rs21.3 crore.
-
The stand-alone order book grew by 0.6% sequentially and by 20.0% yoy to Rs1,800.0 crore in Q2FY2007. The consolidated order book stood at Rs3,739.0 crore, up 16.5% sequentially largely on account of the 36.5% jump in the order book of Pauwels.
-
The Ganz acquisition, which was announced in July but is yet to be concluded will further accelerate the growth of the consolidated numbers. Though currently loss making, it is expected to contribute 70 million euros in FY2008 and turn profitable by then. We have not currently included these estimates in our numbers.
-
The board has announced a bonus of two shares for every five shares held.
-
Given the robust top line growth, higher raw material costs, the consequent margin contraction and higher provisioning for income tax, we are tweaking our FY2007 and FY2008 estimates. The FY2007 earnings per share (EPS) stand revised lower by 10% to Rs9.2. Although with the margins stabilising in FY2008 and the robust top line growth coupled with the strong performance of Pauwels we are revising our earnings estimates upward by 7.9%.
-
At the current market price of Rs237, Crompton Greaves is trading at 25.7x its FY2008E stand-alone earnings and 17.4x its FY2008E consolidated earnings. We maintain a Buy on the stock with a revised price target of Rs258 discounting its FY2008E consolidated earnings by 19x.
Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs126
Current market price: Rs90
Chemicals drive revenue growth
Result highlight
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The revenues of Deepak Fertilisers and Petrochemical Ltd (DFPCL) grew by 91.5% year on year (yoy) to Rs212.6 crore in Q2FY2007 driven by the strong revenues from the chemical business. The September volumes of the isopropyl alcohol (IPA) plant drove the growth in the revenues in the chemical business.
-
The operating profit grew by 48.7% yoy despite losses from the fertiliser business. The profitability in the chemical business was strong, as the margins at the profit before interest and tax (PBIT) level expanded by 40 basis points despite higher depreciation.
-
The net profit for Q2FY2007 grew by 27.6% yoy, due to a higher depreciation charge (on the IPA plant; though the production was only for one month), higher interest cost and lower other income.
-
We believe that there could be further delays in the revenues from Ishanya, DFPCL’s specialty mall coming up in Pune.
-
We have lowered our earnings per share (EPS) estimates for the company by 7% for FY2007 to take into account the delayed commencement of production at the IPA plant and the delay in the Ishanya project. We have left our FY2008 EPS estimates unchanged.
-
We believe that DFPCL’s valuations at 6.0x FY2008E EPS are attractive, given the fact that the company has undertaken capital expenditure (capex) of Rs700 crore without diluting its equity and return on equity (RoE). We maintain our Buy recommendation on the stock with price target of Rs126.
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs410
Current market price: Rs351
Results in line with expectations
Result highlight
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The net sales of Elder Pharmaceuticals (Elder) grew by 34.7% year on year (yoy) to Rs113.7 crore in Q2FY2007. The sales growth was in line with our estimates. The growth came on the back of continued momentum in Elder’s core brands like Shelcal and Chymoral, steady revenues from its in-licenced portfolio, and growing contributions from the new products and line extensions launched in the previous two quarters.
-
The company’s operating profit margin (OPM) expanded by 120 basis points to 18.1% in the quarter. The margin expansion was driven by a sharp decline in the material cost. The material cost as a percentage of sales stood at 45.7% in Q2FY2007 as compared with 51.9% in the corresponding quarter of the previous year. The improvement in the material cost was on account of an improved product mix, shift of focus from low-margin products and a greater captive use of active pharmaceutical ingredients (APIs).
-
Consequently, the company’s operating profit grew by 44.6% to Rs20.6 crore in Q2FY2007.
-
A higher other income coupled with a lower tax outgo caused Elder’s profit after tax (PAT) to increase by 94.5% to Rs14.2 crore. The earnings for the quarter stood at Rs7.9 per share and were in line with our estimates.
-
At the current market price of Rs351, the stock is trading at 13.0x its FY2007E earnings and 9.6x its FY2008E earnings. We maintain our Buy recommendation on Elder with a price target of Rs410.
Esab India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs360
Impressive numbers
Result highlight
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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%.
Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs230
Profit meter ticking on
Result highlight
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Genus Overseas reported a year-on-year (y-o-y) growth of 87% in its net profit to Rs5.6 crore for Q2FY2007. The same is above our expectations, primarily because of higher-than-expected revenue booking and operating profit margin (OPM) for the quarter.
-
As a result of the healthy revenue booking for the project business and impressive offtake in the metering business, the company's net sales for the quarter grew by a smart 105% year on year (yoy) to Rs78 crore. Notably, the growth in the net sales was higher than that in the gross sales (y-o-y growth of 97%). This was primarily because the project business earned higher revenues, which were free of excise duty. The growth was also aided by the sales from the new excise-free plant at Uttaranchal.
-
The operating profit for the quarter grew by 140 percentage points to Rs12 crore, as the OPM improved by 220 basis points to 15.4%. The margin improved on the back of higher order booking that brought operating leverage into play. This was clearly visible as the other expenditure as a percentage of sales came down to 11.6% in Q2FY2007 from 20.1% in Q2FY2006.
-
However the interest expenses for the quarter trebled to Rs4.82 crore as the company had to avail of large working capital loans to execute project orders. The depreciation charge also rose by 135% to Rs1.2 crore as the company commissioned the first phase of its Uttaranchal plant.
-
Consequently the net profit for the quarter grew by 87% yoy to Rs5.6 crore.
-
The order book for the quarter jumped by 123% to Rs491 crore as the company started taking metering orders on project basis as against on the basis of pure metering sales.
Godrej Consumer Products
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs171
Book profits
Result highlight
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Godrej Consumer Products Limited's (GCPL) stand-alone revenues grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007--below our expectations. The soaps 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, which is below our expectations. The operating profit margins (OPM) contracted by 220 basis points to 18.5%. This mediocre growth in the OP was attributable to a sharp increase in the material cost by 27.8% to Rs92.2 crore. The material cost as a percentage of sales spiked to 50.5%, up 460 basis points yoy and 120 basis points sequentially, due to the hardening of the vegetable oil prices. Vegetable oil is a key ingredient for fast moving consumer goods (FMCG) companies.
-
The profit before interest and tax (PBIT) margins of the soaps division reduced by 400 basis points yoy to 10.8%, while the PBIT margins of the personal care division increased by 60 basis points yoy to 42.7%.
-
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, leading to a 122.9% year-on-year (y-o-y) increase. 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, which is below our expectations.
-
GCPL's consolidated revenues for Q2FY2007 were Rs231.8 crore, the operating profit was Rs39.7 crore and the net profit was Rs31.0 crore. GCPL's consolidated numbers reflect the stand-alone numbers, Keyline, UK's numbers and the numbers of Rapidol, South Africa (the subsidiary company, which was acquired this quarter).
-
Though we like the space in which GCPL is operating, we are concerned over GCPL's continued subdued growth for the last three quarters in the high-margin hair colour business. In the soaps business, while we see GCPL sustaining its robust growth traction, the profitability in the business will remain limited as the mass segment brand (Godrej No. 1) continues to outpace the other brands besides the margins pressures due to the increase in the vegetable oil prices. In light of its muted H1FY2007 performance, we are downgrading our consolidated earnings estimates for FY2007 and FY2008 by 12.7% and 10.6% and recommend booking profits on the stock.
Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,150
Current market price: Rs2,586
Performance ahead of expectation
Result highlight
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Grasim's Q2FY2007 net profit stood at Rs337.9 crore, ahead of our expectations primarily because of the better-than-expected performance of the VSF division. Also the consolidated net profit at Rs418 crore is ahead of our expectations.
-
The net revenues on a stand-alone basis grew by 22.7% year on year (yoy) to Rs2,011 crore driven by the strong performance of the cement (up 53% yoy) and VSF businesses (up 15.4% yoy).
-
The cement revenues grew by a robust 53% yoy to Rs1,141 crore boosted by a 46.6% rise in the cement realisations and a 4.2% growth in the cement volumes. The VSF business grew on the back of a 15% growth in the realisations.
-
The operating profit margin (OPM) for the quarter grew by 680 basis points to 26.5% driven by a substantial improvement in the earnings before interest, depreciation, tax and amortisation (EBIDTA) margins of the VSF business (up 570 basis points) and the cement business (up 810 basis points). However the sponge iron and chemicals businesses continued to show a dismal performance. Consequently the operating profit for the quarter grew by 65.4% to Rs532 crore.
-
A flat interest and depreciation cost led to a sharp 80% jump in the net profit to Rs337.9 crore.
-
The consolidated results were even better than the stand-alone results primarily because of a sharp improvement in the performance of the company's 51% subsidiary UltarTech Cement. On a consolidated basis, Grasim's revenue for the quarter grew by 37% to Rs3,184 crore driven largely by the cement business.
-
The operating profit (on a consolidated basis) grew at a faster pace of 102% as the OPMs expanded by 850 basis points to 26.5%. The net profit grew by 109% to Rs418.3 crore.
HCL Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs609
Results ahead of expectations
Result highlight
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HCL Technologies has reported a robust revenue growth of 10% quarter on quarter (qoq) and 42.1% year on year (yoy) to Rs1,379.5 crore for the first quarter ended September 2006. The sequential growth was driven by a 9.7% increase in the revenues of the software service business and a growth of 16.6% in the infrastructure management service (IMS) business. On the other hand, the business process outsourcing (BPO) business continues to lag behind with a relatively lower growth rate of 5.4% on a sequential basis.
-
The earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 70 basis points to 21.7% on a sequential basis, largely due to the salary hikes given to almost 85% (employees below "project manager" level) of its work force with effect from July. The worst affected was the profitability of the software service business that reported a 90-basis-point decline in the EBITDA margin to 22.3%. On the other hand, the IMS business reported another quarter of margin expansion (up 20 basis points to 17.6%). The operating profit grew 6.2% qoq and 43.9% yoy to Rs298.9 crore.
-
The earnings grew at a relatively lower rate of 7.4% qoq and 49.6% yoy to Rs250.2 crore (ahead of our expectations of Rs239.5 crore and consensus estimates of a sequential drop in the earnings). The growth in the earnings was also aided by the 25.2% sequential growth in the other income (due to the lower base resulting from a negative foreign exchange [forex] impact of Rs16.6 crore in Q4).
-
In terms of operational highlights, the company added 3,826 employees during the quarter, one of the highest in the past 10 quarters. The revenues from the top 10 clients grew at a robust rate of 13% on a sequential basis.
-
At the current market price the stock trades at 19x FY2007 and 15.2x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs720 (18x FY2008 revised earning estimates).
HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,080
Current market price: Rs1,010
Strong operational growth
Result highlight
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HDFC Bank's Q2FY2007 results were better than our expectations driven by a higher fee income and controlled expenses.
-
The net interest income (NII) grew by 38.1% year on year (yoy) to Rs845.6 crore in line with our expectations. The advances grew by 34.4%. The net interest margin (NIM) declined by eight basis points to 3.92%, albeit the same remained the highest in the industry.
-
The other income grew by a strong 52.9% driven by a 44.2% year-on-year (y-o-y) growth in the fee income, which was higher than our expectations.
-
The operating profit grew by 41.1% yoy to Rs664.2 crore as the operating expenses remained under check. The operating expenses grew by 44.2% yoy, lower than expected, probably because there was no expansion in its branch network during the quarter.
-
That the bank did not add any branch in Q2FY2007 (for want of new licences from the Reserve Bank of India) is a cause for concern. Because of this the proportion of the CASA deposits in the total deposits fell to 52.2% in Q2FY2007 compared with 59.7% (Q2FY2006) and 52.6% (Q1FY2007).
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The growth in the advances was also lower than an average growth of 50%+ recorded over the previous four quarters.
-
At the current market price of Rs1,010, the stock is quoting at 21.1x its FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provision profits (P/PPP) and 4.3x its FY2008E book value (BV).
-
We believe that the current market price fairly discounts the growth expected over FY2006-08E, leaving very marginal upside to the stock price. We are revising our price target for the stock to Rs1,080. At this level the stock would discount its FY2008E EPS by 22.6x and FY2008E BV at 4.6x.
Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs234
Price target revised to Rs280
Result highlight
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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.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs430
Current market price: Rs342
Price target revised to Rs430
Result highlight
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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.
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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.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs770
Current market price: Rs753
Strong operational results
Result highlight
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ICICI Bank's Q2FY2007 net profit at Rs755 crore was ahead of our expectations. The net profit saw a growth of 30.2% year on year (yoy) against our expectations of a 24% growth.
-
The net interest income (NII) grew by 47.4% yoy to Rs1,577 crore on the back of a 45.1% year-on-year (y-o-y) growth in the advances and a 30-basis-point gain in the net interest margin (NIM). On a sequential basis, the NIM was stable.
-
The fee income grew by a strong 61.8% yoy to Rs1,138 crore and the total other income grew by 41.3%.
-
With a 44.3% y-o-y growth in the net income and a 35% y-o-y growth in the expenses, the operating profit grew by 54.4% yoy to Rs1,612 crore.
-
The net profit growth was little lower at 30.2% due to a higher provisioning requirement which more than doubled yoy to Rs709.3 crore.
-
The gross non-performing assets (NPAs) have increased by Rs500 crore sequentially whereas the net NPAs have gone up by Rs380 crore sequentially and by Rs500 crore yoy.
-
At the current market price of Rs753, the stock is quoting at 16.7x its FY2008E earnings per share (EPS), 8.5x its pre-provisioning profits (PPP) and 2.4x book value (BV). We maintain our Buy recommendation on the stock with price target of Rs770.
India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs222
Results better than expected
Result highlight
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India Cements (ICL) achieved a net profit of Rs117 crore for Q2FY2007, ahead of our expectations.
-
The net revenues grew by a healthy 31.91% to Rs517 crore helped by a 16% growth in the volumes and a 21% growth in the realisations.
-
Due to strict cost control measures, the operating cost growth remained subdued at 6.3% year on year (yoy). This, coupled with the company’s leverage to the cement prices, resulted in the operating profit jumping by a whopping 154% to Rs173 crore as against Rs67 crore in the same quarter last year.
-
The operating margins expanded by a staggering 1,605 basis points to 33.41% whereas the earnings before interest, tax, depreciation and amortisation (EBITDA)/tonne more than doubled to Rs791 as against Rs361 in the same quarter last year.
-
The interest cost decreased by 8.7% to Rs36 crore on account of the repayment of debt, whereas the depreciation remained stagnant at Rs19 crore.
-
The tax provision was negligible at Rs40 lakh on account of the write-off of the accumulated losses. Thus the net profit grew by a staggering 1,900% year on year to Rs117 crore.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,388
Merger to be earnings accretive
The board of directors of Indian Hotels Company Ltd (IHCL) has approved the proposal for amalgamation of 4 of its subsidiary/associate companies with itself. Specifically, the proposal seeks to amalgamate Indian Resort Hotels Ltd, Gateway Hotels and Gateway Resorts Ltd, Asia Pacific Hotels Ltd and Taj Lands End Ltd into the company in terms of a scheme of amalgamation under section 391-394 of the Companies Act 1956.
Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,981
Far ahead of street expectations
Result highlights
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Infosys Technologies has reported an impressive revenue growth of 14.5% quarter on quarter (qoq) and of 50.4% year on year (yoy) to Rs3,451 crore for the second quarter ended September 2006. The sequential growth in the revenues was driven largely by an 11.2% growth in the volume in the information technology (IT) service business. The uptick in the blended billing rate (up 1.2%) and depreciation of the rupee (1.3%) also aided the sequential growth in the revenues.
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But the highlight of the performance was the smart improvement of 260 basis points in the operating profit margin (OPM) on a sequential basis. The margin improvement was possible due to the cumulative impact of a lower visa cost (1.1%), the positive impact of foreign exchange (forex) fluctuation (0.9%) and savings in the selling, general and administration (SG&A) expenses (0.6%) as a percentage of sales.
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Consequently, the earnings grew 17.1% qoq and 58.5% yoy to Rs929 crore, despite the substantial reduction in the other income to Rs66 crore (as compared with Rs128 crore in Q1). The rupee depreciation resulted in a net positive impact of Rs11 crore (reflected in the other income component) as compared with Rs52 crore in Q1.
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In addition to announcing a robust performance in Q2, the management revised upward its growth guidance once again. The consolidated revenues are now guided to grow in the range of 45.5-46% to Rs13,400-13,899 crore (up from Rs13,350-13,400 crore revised guidance given with the Q1 results). The earnings are guided to grow by 46.6% to Rs66 per share (up from Rs62.25-62.85 given with the Q1 results).
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In terms of the guidance for Q3, the revenues and earnings (in rupee terms) are guided to grow sequentially by 4.4-5% and 0.5% respectively. The management expects appreciation of the rupee and relatively lesser number of working days to not only limit the growth in the revenues but also adversely affect the margins in Q3.
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At the current market price the scrip trades at 29x FY2007 and 22x its FY2008 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs2,430 (27x FY2008E earnings).
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.
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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.
Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs562
Current market price: Rs480
Subdued performance
Result highlight
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The stand-alone net profit of Jaiprakash Associates Ltd (JAL) stood at Rs90 crore in Q2FY2007. It was marginally below our expectations primarily because of a lower other income and higher tax rate. However at the operating profit level, the results are ahead of our estimates.
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JAL's net revenues grew by 14.6% to Rs770 crore on the back of a robust year-on-year (y-o-y) growth of 67% in cement revenues to Rs427 crore. However the construction revenues fell by 15% year on year (yoy) to Rs380 crore as new projects in the quarter were in the ramp-up phase.
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The growth in the cement revenues was achieved on the back of a healthy 23% y-o-y growth in the cement volumes to 1.53 million tonne and a 36% y-o-y growth in the cement realisations to Rs2,800/tonne.
-
The operating profit for the quarter grew by 42% to Rs198 crore. The overall operating profit margin (OPM) of the company stood at 25.7% bolstered by a 1,500-basis-point improvement in the earnings before interest and tax (EBIT) margin of the cement division to 26.7%. The EBIT margin for the construction division improved by 80 basis points to 27.6%.
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The other income during the quarter fell by 42% yoy to Rs38 crore as Q2FY2006 reflected the dividend income from Jaiprakash Hydro Power Ltd (JHPL); the same was not reflected in the current quarter. Moreover, the income from machinery rentals (receivable from sub-contractors for using JAL's equipment) has fallen led by the drop in the construction revenues.
-
On account of a higher tax provision (33.3% in Q2FY2007 vs 19.6% in Q2FY2006), and an increase in the interest and depreciation charges the net profit stood at Rs90 crore, up only 5% yoy.
JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs295
Current market price: Rs190
Whopper results
Result highlight
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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.
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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.
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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%.
JM Financial
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs900
Current market price: Rs727 On strong financial wicket
Result highlight
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JM Financial Ltd (JMFL) reported a strong 74.7% year-on-year (y-o-y) growth in the revenues for H1FY2007 to Rs183.5 crore. The strong growth in the revenues was backed by the institutional broking and investment banking divisions. The revenues of these divisions together grew by 62.2% year on year (yoy).
-
The operating profit of JMFL grew by 70% yoy to Rs92.1 crore as the operating profit margin (OPM) was stable at 50.2%.
-
The company's net profit for H1FY2007 stood at Rs41.2 crore, up by 68.6%.
-
On a quarter-on-quarter (q-o-q) basis, its income for Q2FY2007 was lower by 11.1% to Rs86.4 crore as there were no big initial public offerings (IPOs) during Q2FY2007 and the income for Q1FY2007 was also abnormally higher due to the Reliance Petroleum IPO.
-
On a q-o-q basis, the net profit for Q2FY2007 was lower by 37%.
-
At the current market price of Rs727 the stock is quoting at 17x its FY2008E earnings per share and 2.7x its FY2008E book value per share.
-
We have revised our price target on the stock to Rs900, as we have valued JMFL at 20x its FY2008E earnings.
KEI Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs361 Power packed performance
Result highlight
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In Q2FY2007 KEI Industries (KEI) recorded a robust growth of 96% year on year (yoy) in its net profit to Rs10.1 crore. The growth was in line with our expectations.
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KEI's net sales for the quarter rose to Rs136.8 crore, up 108.6% yoy and by 37.7% quarter on quarter (qoq). The revenues from the cable segment grew by 105.3% yoy and by 35.6% qoq on the back of expanded capacities.
-
The operating profit grew by 142.5% yoy and by 45.2% qoq as the operating profit margin (OPM) expanded by 225 basis points yoy and by 83 basis points qoq.
-
However, the pressure on the raw material cost continued as the raw material consumed (RMC)/sales ratio increased by 100 basis points to 70.1% during the quarter.
-
The profit before tax (PBT) increased by 137% yoy and by 39.5% qoq. However, the net profit grew by a lower 95.8% yoy and by 33.2% qoq because of a higher effective tax rate.
-
KEI is planning a foreign currency convertible bond (FCCB) issue of $35 million (Rs150 crore) to fund its expansion at Uttaranchal. The funds would be raised over the next three to four weeks. The promoters are ready to dilute their stake up to 10% which means the issue may be priced at Rs440-450 per share.
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At the current market price of Rs361, the stock quotes at 7.4x its FY2008E earnings per share (EPS) and 4.5x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on KEI with a price target of Rs500.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs565
Current market price: Rs510
A mixed bag
Result highlight
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Lupin's net sales increased by 21.1% year on year (yoy) to Rs491.1 crore in Q2FY2007. The growth in the top line is in line with our expectations. The sales growth was driven by a healthy growth of 25% in the domestic business to Rs288.6 crore and a 17% increase in the exports to Rs218 crore.
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The formulation sales advanced by 48.6% to Rs298.9 crore, with a strong growth in both the domestic business and exports. However, the sales of active pharmaceutical ingredients (APIs) rose by a meagre 6.9% to Rs195 crore in the quarter. The subdued growth in the API sales was on account of lower sales of Ceftriaxone bulk drug to Baxter (due to one-time production constraints) and a strategic change of focus from the Lisinopril API to Lisinopril formulations.
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Lupin's operating profit margins (OPMs) took a hit of 60 basis points to 17.0% in Q2FY2007 mainly on account of a 38% rise in the research and development (R&D) expenditure and a 34.5% increase in the other expenses. Consequently, the operating profit grew by only 17.2% to Rs83.4 crore in the quarter.
-
A substantially higher tax outgo impacted Lupin's net profit, which nevertheless grew by 29% to Rs58.3 crore in the quarter. At the profit before tax (PBT) level, Lupin reported a 32% rise in its profits to Rs79.2 crore.
-
Lupin's R&D expenses for the quarter stood at Rs31.8 crore or 6.5% of sales. This is in line with the company's plans to accelerate the spend on R&D, which it believes will yield results in the future.
-
At the current market price of Rs510, Lupin is quoting at 13.5x its FY2008E earnings estimate. In view of the strong growth potential lined up for the company—a pick-up in the sales of Suprax, a healthy growth in the domestic market and new product launches arising out of the aggressive R&D efforts—we reiterate our Buy recommendation on Lupin, with a price target of Rs565.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs870
Current market price: Rs762
Price target revised to Rs870
Result highlight
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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.
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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.
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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.
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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.
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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.
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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.
Marico Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs521
A well-oiled machine
Result highlight
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Marico Industries' Q2FY2007 net revenues grew by 36.4% year on year (yoy) to Rs378.0 crore, ahead of our estimates. The top line growth was led by an organic growth of 26%. The recently acquired brands of Camelia, Aromatic, Manjal and Nihar contributed to the 11% inorganic growth.
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The operating profit margin (OPM) expanded by 410 basis points to 15.3% mainly on account of lower material costs and employee expenses as a percentage of sales. Consequently, the operating profit grew by 87.6% yoy to R58.0 crore, ahead of our estimates.
-
The interest cost for Q2FY2007 grew to Rs5.7 crore from Rs0.6 crore in Q2FY2006, on account of the debt taken to acquire Nihar in Q4FY2006. The write-off of intangible assets and the change in the accounting policy in Q3FY2006 led to higher depreciation to the tune of 167.2%.
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Higher interest and depreciation charges slowed down the growth in the profit before tax (PBT), which grew at 50.6% to Rs39.7 crore. The PBT growth was however still ahead of our expectations.
-
Marico Industries exhausted its minimum alternate tax (MAT) credit in FY2006, which resulted in higher tax provisioning. Consequently, the tax outgo went up by 234% yoy with the effective tax rate shooting from 13.2% in Q2FY2006 to 29.2% during the quarter.
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The net profit before extraordinary items (one-time tax write-off, provisions written back, and change in leave encashment and gratuity calculation assumptions) grew by 21.4% yoy to Rs28.1 crore, ahead of our expectations. The net profit after the extraordinary items grew by 29.1% yoy to Rs26.1 crore.
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The company acquired the hair-care brand Fiancée in September 2006, its fifth acquisition in 18 months. Fiancée is a market leader and commands a share of about 30% of the Egyptian hair-care market that is worth Egyptian Pound 215 million. The integration team was put in place in September. The acquisition is expected to add Rs20-25 crore to the top line in H2FY2007.
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The board of directors of Marico Industries approved the proposal to raise equity capital through the Qualified Institutional Placement (QIP) route, subject to the approval of the shareholders. This is part of the overall approval granted earlier to raise funds of Rs500 crore (through a mix of debt and equity).
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The stock is trading at attractive valuations of a price/earnings ratio (PER) of 20.9x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.5x FY2008E. The valuations are attractive given the growing risk appetite and ongoing transformation (reducing dependence on Parachute/Saffola) of the company. We continue to remain bullish on Marico Industries and reiterate a Buy on the stock with a price target of Rs634.
Maruti Udyog
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs953
Q2 results ahead of expectations
Result highlight
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The Q2FY2007 results of Maruti Udyog Ltd (MUL) are ahead of our expectations.
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The company's net sales for the quarter are in line with our expectations at Rs3,400.6 crore against Rs3,025.8 crore reported in Q2FY2006, marking a year-on-year growth of 12.4%. The sales growth was led primarily by a volume growth of 12.2% during the quarter.
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The operating profit margin (OPM) is marginally below expectations even though the same has risen by 240 basis points year on year (yoy) to 13.9%. Consequently, the operating profit has grown by 36% to Rs475.6 crore. Despite rising raw material costs, the company's raw material cost as a percentage of sales has reduced by 170 basis points to 75.5% due to various cost reduction and value engineering measures undertaken. However, the margin growth was restricted due to rise in other expenditure, particularly power & fuel expenses, royalty charges and selling expenses.
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A higher other income of Rs121.7 crore, and lower interest and depreciation charges aided the company to post a 39.9% growth in the net profit, which rose to Rs367.4 crore from Rs262.6 crore in the same period last year.
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The company has increased its capital expenditure (capex) to Rs9,000 crore to be spent over a period of five years. The funds would be utilised to set up a plant in Manesar, to upgrade and expand the Gurgaon unit, and to set up a new diesel engine platform.
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We are upgrading our volume estimates for MUL to 18% growth for FY2007 and 21% growth in FY2008. Consequently, we are marginally upgrading our earnings estimates from Rs50.1 to Rs52.4 for FY2007 and from Rs62 to Rs65.2 for FY2008. At the current market price of Rs953, the stock quotes at 14.6x its FY2008E earnings and 5.3x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,050.
Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs72.4
Current market price: Rs59
Earnings growth below expectations
Result highlight
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Navneet Publications India (Navneet) reported a 33.7% year-on-year (y-o-y) growth in its net sales to Rs60.5 crore during Q2FY2007. The revenue growth was driven largely by a 41.6% growth in the publication revenue to Rs41.8 crore. The performance of the stationary business improved considerably in Q2. The business reported a growth of 18.4% to Rs18.3 crore (as compared with a decline of 9.4% in Q1).
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The operating profit grew by 68% to Rs8.7 crore. The operating profit margin (OPM) improved by around 300 basis points to 14.4% during Q2FY2007 on the back of higher profitability in both the publication and the stationary segment.
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Despite the high tax rate (the tax rate was lower last fiscal due to the accumulated losses of Navneet Entertainment on account of the latter's merger), the earnings grew by 136.3% to Rs4.7 crore. The earnings growth was aided by the lower interest outgo and reduction in the depreciation charge. On the foreign exchange (forex) front, the company reported a translation loss of Rs8 lakh (as compared with over Rs40 lakh in Q1FY2007 and Rs3 lakh in Q2FY2006).
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In terms of outlook, the management expects the publication business to drive the growth in the coming quarters also. The benefit of changes in syllabus would be spread over all the four quarters. On the other hand, the growth in the stationary business is likely to remain subdued due to the continued pricing pressure in the export market. However, the introduction of the non-paper stationary items like pencil, pencil boxes, sharpener and erasers would aid the overall growth in the stationary business.
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At the current price Navneet is available at 10.1x FY2008E earnings and 5.9x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy on Navneet with price target of Rs72.4.
Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs243
Q2 results in line with expectations
Result highlight
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Nicholas Piramal India Ltd (NIPL) reported an 18.6% quarter-on-quarter (q-o-q) and 29.8% year-on-year (y-o-y) growth in its earnings to Rs63.89 crore for the second quarter ended September 2006.
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The revenues were up by 21.9% quarter on quarter (qoq) and 74.4% year on year (yoy) to Rs636.86 crore. The 393% jump in the international sales (largely due to the incremental revenue of Rs260 crore flowing from the new acquisitions of Pfizer's Morpeth facility, UK and Avecia) supported by a 22% rise in the domestic formulation business contributed to the revenue growth.
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The operating profit margin (OPM) declined by 250 basis points yoy to 15.1% largely due to a substantial 650-basis-point jump in the staff cost driven by the integration of the acquired businesses like Pfizer's Morpeth facility, UK and Avecia.
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During the quarter, NPIL acquired the balance 51% equity stake in its 49:51 joint venture company, Boots Piramal Healthcare Pvt. Ltd (BHPL). In the process it got a one-time income of Rs17.8 crore as compensation for losing three brands, Strepsils, Clearasil and Sweetex.
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Due to the acquisitions, the depreciation and interest costs were higher by 31% and 58% at Rs7.64 crore and Rs24.36 crore respectively.
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In terms of valuation, at Rs243 the stock trades at 15.9x FY2008 estimated earnings. We maintain our Buy call on the stock. Considering the recent acquisitions of Pfizer's Morpeth facility, the acquisition of the 51% stake in BHPL etc, we are evaluating the financials and are likely to revise our estimates soon.
NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs308
Current market price: Rs234
Price target revised to Rs308
Result highlight
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NIIT Technologies Ltd (NTL) reported a growth of 15.1% quarter on quarter (qoq) and of 49.1% year on year (yoy) in its consolidated revenues to Rs219.9 crore during the second quarter. After excluding the incremental contribution from Room Solutions (acquired in May 2006), the organic revenues grew at a healthy rate of 10.7% sequentially. The strong sequential growth of 14.9% (as compared to 4.3% in Q1) in the business process outsourcing (BPO) business also aided the growth in the consolidated revenues.
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The operating profit margin (OPM) declined marginally by 10 basis points qoq but improved by 120 basis points yoy as compared to 17.7% reported in Q2FY2006. The sequential decline was largely on account of a one-time transition cost related to the integration of Room Solutions (around Rs1 crore). The adverse impact of the same was mitigated by the turn-around in the BPO business, lower visa cost and the saving in the selling, general and administration (SG&A) expenses as a percentage of sales.
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The other income declined to Rs2.4 crore from Rs3.5 crore in Q1FY2007, largely due to lower gains from the foreign exchange (forex) fluctuations during the quarter (forex gains of Rs0.4 crore as compared with that of Rs1.7 crore in Q1). However, the lower depreciation and minority interest charges enabled the company to post an impressive earnings growth of 23.9% qoq and of 79.1% yoy to Rs27 crore (much ahead of our expectations due to a lower-than-expected decline in the margins).
-
In terms of the outlook, the growth in the organic business is likely to accelerate on the back of healthy fresh order intake of $42 million in Q2, one of the highest in any quarters. The pending order backlog of $87 million is executable over the next one year.
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At the current market price the stock trades at 9x FY2007 and 7.6x FY2008 estimated earnings. We re-iterate our Buy call on the stock with an upgraded price target of Rs308 (10x FY2008 earnings).
Omax Autos
Cluster: Apple Green
Recommendation: Buy
Price target: Rs134
Current market price: Rs100
Price target revised to Rs134
Result highlight
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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.
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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.
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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.
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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.
Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs590
Performance below expectations
Result highlight
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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.
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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.
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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.
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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%.
Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs600
Current market price: Rs520
Core operating numbers look promising
Result highlight
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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.
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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.
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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%.
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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.
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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.
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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.
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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.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs412
Q3CY2006 results below expectations
Result highlight
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Ranbaxy Laboratories (Ranbaxy) reported a 15.0% quarter-on-quarter (q-o-q) in its earnings to Rs139.3 crore for the third quarter ended September 2006; the earnings saw a six-fold jump on a year-on-year (y-o-y) basis. Though the net profit seems higher, the same is much below the expected earnings of Rs193.2 crore.
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The revenues are up 26.8% to Rs1,627.10 crore, largely driven by a 25% jump in the US sales, a 39% rise in sales in the European and CIS markets, and a 49% increase in the sales in the Asia-Pacific and Middle-East markets.
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The operating profit margin (OPM) witnessed a 140-basis-point fall sequentially to 16.8%. The fall was largely due to the company incurring a Rs18.4 crore other operating loss as against an income of Rs75.5 crore in the previous quarter.
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Further, the company has charged a one-time cost of Rs22.6 crore relating to a settlement of its contract manufacturing arrangement.
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Finally, with higher depreciation, the loss at the other operating income level and the one-time provision, the net profit grew by 6.5x against the estimated 9.5x. Though Ranbaxy has disappointed the market with below expected earnings, we believe the company would perform well going forward by following a comprehensive business model that involves aggressive new launches, in-licencing, strategic partnering, widening geographical presence etc. Also, its margins will remain firm, thanks to its cost-cutting initiatives. At the current price of Rs412, the stock trades at 19.8x its CY2007 earnings per share (EPS). We maintain our confidence in the stock and reiterate the Buy recommendation with price target of Rs558.
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,215
Results ahead of expectations
Result highlight
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Reliance Industries (RIL) has positively surprised on its Q2FY2007 results by reporting a 9.6% year-on-year (y-o-y) growth in its earnings, much ahead of our estimates.
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The net revenues for the quarter grew by 37.4% driven by a strong 33.1% y-o-y growth in the revenues from the petrochemicals business and a 25% y-o-y growth in the revenues from the refining business.
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In the petrochemicals business the impact of the shut down at the Hazira plant was more than compensated for by the increased capacities as the revenues grew by 33.1% year on year (yoy).
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The profit before tax and interest (PBIT) from the petrochemicals business grew by 38% yoy driven by a 57-basis-point expansion in the profit before interest and tax (PBIT) margins.
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The refining and marketing (R&M) business reported a 24.8% y-o-y growth in revenues driven by a higher throughput and better prices. The PBIT declined by just 3% despite a steep fall in the regional Singapore gross refining margins (GRM). RIL's GRM outperformed Singapore GRM by 90%.
-
With extraordinary expenses of Rs34 crore, a higher tax rate and a lower other income the net profit increased by 9.2% yoy. However, the same was ahead of our expectations by 6%.
-
We like the way RIL has been diversifying into new areas of growth like upstream oil and gas activity, organised retailing and construction of Special Economic Zones (SEZs). However, these areas of business would entail a lot of investment for RIL going forward, and we expect them to generate tremendous shareholders' value.
-
We expect that in near future a substantial upside can come from the higher-than-reported gas find in the KGD6 block owned by RIL (see our report 'It is solid, not gas' dated September 22, 2006). However, we would like to see an official confirmation of the same before taking it into our numbers. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,150
Current market price: Rs762
Strong operational performance
Result highlight
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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.
Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs480
Current market price: Rs428
Growth continues to be robust
Result highlight
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Satyam Computers Services (Satyam) reported a robust revenue growth of 11% quarter on quarter (qoq) and of 38.7% year on year (yoy) to Rs1,601.9 crore during the second quarter ended September 2006. The sequential growth was contributed by a 10.9% quarter-on-quarter (q-o-q) growth in the stand-alone revenues and a sequential growth of 14.5% in the revenues from its various subsidiaries. The sequential growth of 9.5% in the volume on a consolidated basis was higher than that seen in the previous three quarters.
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The operating profit margin (OPM) declined sharply by 200 basis points to 22.6% on a sequential basis, largely due to the aggressive annual salary hikes given with effect from July to its entire workforce (a negative impact of 420 basis points) and lower employee utilisation (offshore utilisation declined by 80 basis points sequentially). On the other hand, the lower visa cost (down 125 basis points), foreign exchange (forex) gains (up 30 basis points), improvement in profitability of subsidiaries (30 basis points) and the savings in the selling, general and administration (SG&A) expenses positively affected the margins.
-
The other income component plummeted 62.1% qoq to Rs28.2 crore (sharply down from Rs74.5 crore in Q1FY2007). However, the lower tax rate limited the decline in the net profit to 9.7% qoq at Rs319.8 crore (better than the guidance of over 18% q-o-q decline and consensus estimates of 14-15% q-o-q drop in the earnings).
-
For the full year, the management has revised upwards the annual growth guidance for the revenues and earnings by 3.6% and 6% respectively. As per the revised guidance, the revenues are guided to grow by 34.6-35.1% (Rs6,452-6,476 crore) and the earnings per share (EPS; including the non-cash charges related to the restricted stock options) are guided in the range of Rs20.73-20.81 (35.9-36.4% growth over FY2006).
-
For Q3, the consolidated revenues and earnings are guided to grow by 4-4.5% sequentially. The management has factored in the appreciation of the rupee, as the revenue growth guidance in US dollar terms is higher at 5.6-6.1%.
-
At the current price the stock trades at 20.4x FY2007 and 17x FY2008 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a price target of Rs480.
Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs94
Current market price: Rs73.5
Growth driven by higher realisations
Result highlight
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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.
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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.
Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,400
Current market price: Rs1,100
Superlative performance at operating level
Result highlights
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On the operating front Shree Cement has reported a superlative performance. The operating profit jumped 173% to Rs142.66 crore as the operating profit margins (OPMs) expanded by 11.1% to 45.2%.
-
Shree Cement's Q2FY2007 net profit increased by 108% at Rs78 crore, marginally below our expectation of Rs83 crore.
-
The revenues for the quarter jumped by a whopping 103% to Rs315.95 crore. This was on the back of a 45.5% growth in the cement volumes and a 39.7% growth in the cement realisations. The volumes jumped as the company commissioned its new 1.5 million tonne plant during March 2006.
-
Shree Cement has reported a very handsome Rs1,276 of earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne ie a growth of 88% year on year (yoy).
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On the cost front, the total cost increased by 15.4% largely because of a 20.7% increase in the power and fuel cost and a 22% increase in the raw material cost. Surprisingly the company's freight cost stayed absolutely flat as the company moved a higher proportion of its dispatches through the cost efficient railway transport.
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The depreciation charge increased by 176% to Rs33.8 crore on account of the new plant and the tax outgo for the quarter was Rs32.6 as against no tax in Q2FY2006 (last year the company had changed its depreciation policy on account of which it had some deferred tax benefits).
SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs406
Current market price: Rs315
First-cut analysis
Result highlight
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SKF India's Q3CY2006 net profit at Rs22.5 crore is below our expectations primarily because of a lower revenue growth and a higher-than-expected increase in the raw material cost and stores consumed. The pre-exceptional net profit at Rs22.5 crore for the quarter has declined by 18% on a year-on-year (y-o-y) basis.
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The net sales for the quarter stood at Rs339 crore marking a growth of 84% year on year (yoy). The revenues are not strictly comparable as the Q3CY2006 revenues include the revenues from the indenting business, which hitherto was conducted on a commission basis and was included in the other income. Hence the quarter shows a steep rise in the revenues and a steep fall in the other income (down 86% yoy).
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The company had increased the capacity at its Bangolore and Pune units during Q3CY2006. The combined capacity was enhanced to 100 million units per year from the then existing 74 million units. However it seems that the new capacity has not contributed significantly as the revenue growth for the quarter at 84% yoy is the same as witnessed in H1CY2006. We believe there could be some plant stabilisation problems for the new capacity.
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The operating profit margins (OPMs) for the quarter are down 5.5% to 11.4% during the quarter, as the indenting business, which has a lower margin of close to 5%, has brought down the overall OPMs. Further the OPMs are down because of the increase in the raw material consumed which as a percentage of sales stood at 66.1% as compared to 65.1% in Q2CY2006 (we have not compared the raw material cost on a y-o-y basis as the quarter included the cost of indented goods also). Also the stores consumed have jumped by 60% on a y-o-y basis to Rs17.05 crore. The operating profit for the quarter increased by 24% and the same stood at Rs38.7 crore.
-
We were expecting an improvement in the OPMs on a sequential basis, as with the commencement of the new capacities, the proportion of the high-margin manufacturing goods would have been higher which in turn would have improved the OPMs. However contrary to our expectations, the OPMS on a sequential basis have come down from 13% in Q2CY2006 to 11.4% in Q3CY2006.
-
The interest charges stood at Rs1 crore as against an interest income for the earlier quarter. Also the depreciation charge has jumped by 18.46% as the company expanded its capacities at its Banglore and Pune units.
-
Consequently the pre-exceptional net profit at Rs22.5 crore for the quarter has declined by 18%. Q3CY2005 included Rs7.1 crore of extraordinary write off. Hence the reported net profit has shown a jump of 11%.
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
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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.
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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%.
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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.
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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.
Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs370
Current market price: Rs250
Cool gains
Result highlight
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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).
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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.
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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%.
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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.
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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.
Sun Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs914
Impressive performance continues
Result highlight
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Sun Pharmaceuticals’ consolidated net sales grew by 29.1% year on year (yoy) to Rs536.2 crore in Q2FY2007. The strong growth was driven by an increase of 46.9% in its exports and a 14.6% growth in the domestic business.
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A sharp spike in the research and development (R&D) expenses, along with higher staff costs led to a decline in the company’s operating profit margin (OPM), which contracted by 50 basis points to 31.9% in Q2FY2007, causing the operating profit (OP) to increase by 27.1% to Rs170.8 crore. Barring the higher R&D costs, the company’s margins actually showed an expansion of 160 basis points.
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Sun Pharma’s net profit for Q2FY2007 stood at Rs186.4 crore, up 26.1% yoy. The growth in the profit was aided by a 1.5-fold increase in the company’s other income to Rs40.2 crore and a deferred tax write-back of Rs5.4 crore.
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Between Sun Pharma and Caraco, the group has 56 abbreviated new drug applications (ANDAs) pending approvals and 28 products already in the market. This is one of the strongest product pipelines in the industry.
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At the current market price of Rs914, Sun Pharmaceutical is valued at 26.7x FY2007 and 22.6x FY2008 fully diluted earnings. The company’s future growth prospects, positive contributions from past acquisitions and value-unlocking post R&D demerger reinforce our positive stance on the company. We maintain our Buy recommendation on the stock with a price target of Rs1,000.
Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,325
Current market price: Rs1,130
Margins firm up
Result highlight
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For Q2FY2007 Tata Consultancy Services (TCS) has reported a growth of 8.2% quarter on quarter (qoq) and of 42% year on year (yoy) in its consolidated revenues to Rs4,482.2 crore. The sequential revenue growth was largely driven by a 10.8% quarter-on-quarter (q-o-q) growth in the international business with the domestic revenues declining by 14.3% on a sequential basis. The international business witnessed a strong volume growth of 11.33% sequentially.
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The earnings before interest and tax (EBIT) margins improved sharply by 294 basis points to 25.3% on a sequential basis. Apart from the impact of lower visa cost, the margins were boosted by an offshore shift (67 basis points), gains from foreign exchange (forex) movement (50 basis points) and an overall improvement in the employee productivity (driven by better realisations and operational efficiencies). The EBIT margins were also positively impacted by the write back of Rs46.8 crore worth of provisions (made for the provident fund earlier) and lower provisioning for bad debts during the last quarter. The operating profit grew by 21.4% qoq to Rs1,229.4 crore.
-
Consequently, despite the sharp decline in the other income to Rs7.7 crore (down from Rs66.8 crore reported in Q1), the consolidated earnings grew by 15% qoq and by 43.7% yoy to Rs991.5 crore (higher than the consensus estimate of around Rs835 crore).
w In terms of outlook, the company does not provide any specific growth guidance. However, the management reiterated that the demand environment is quite favourable. It is also confident of maintaining the EBIT margins at around the 25.8% level (on the full year basis) in line with FY2006. This implies a significant improvement in the EBIT margins in the second half as the margins stood at 23.9% during the first half ended September 2006.
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The company has announced an interim dividend of Rs3 per share.
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At the current market price the stock trades at 27.8x FY2007 and 22.1x FY2008 revised earning estimates. We maintain our Buy call on the stock with a price target of Rs1,325.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,004
Current market price: Rs828
Margins dip, just a blip
Result highlight
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Tata Motors’ Q2 results are below our expectations due to a marginal drop in the operating margins and higher interest and product development costs.
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The net sales for the quarter are in line with our expectations, marking a growth of 37.4% to Rs6,571.8 crore.
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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.
Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs420
Current market price: Rs369
Sharp improvement in performance
Result highlight
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The Q2FY2007 results of Transport Corporation of India Ltd (TCIL) are ahead of our expectation, primarily because of a strong improvement in the performance of the transport division. On a like-to-like basis, the division's earnings before interest and tax (EBIT) jumped by 96% year on year (yoy) to Rs4 crore.
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The results for the quarter also include those of TCI Seaways Ltd (TCISL), which was merged with TCIL during the quarter. Hence we are presenting here the post-amalgamation results.
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TCIL's net sales for the quarter stood at Rs273 crore, registering a growth of 25.8%. The growth was driven by the performance of the transport division (a 33% growth on a like-to-like basis*) and the XPS cargo division (a 22.6% growth yoy).
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In line with the revenue growth, the operating profit for the quarter grew by 26.2% to Rs15.8 crore. The operating profit margin (OPM) for the quarter remained flat at 5.8%. However the notable thing is that the EBIT margin of the transport division improved smartly by 77 basis points to 2.39% on a like-to-like basis (earlier the supply chain solution [SCS] business was part of the transport division).
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The EBIT margin of the XPS cargo division declined 120 basis points to 6.9% as the division is in an expansion mode and the revenues from its new branches have not yet achieved the break-even point. However prima facie, it seems that the profitability of the old branches has improved significantly.
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The interest charge for the quarter grew by 49.7% whereas the depreciation charge stood flat. Hence the net profit for the quarter grew by a handsome 32.1% yoy to Rs6.5 crore.
UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs886
Results below expectations
Result highlight
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UltraTech Cement Ltd (UCL) has announced a net profit of Rs127.4 crore for Q2FY2007 and the same is below our expectations, primarily because of higher-than-expected power & fuel cost and other expenditure.
-
The company's revenue for the quarter grew by a healthy 58.3% to Rs1,004 crore driven by a 17% rise in its cement volume and a 35.2% increase in its cement realisation.
-
The operating profit for the quarter grew by 291.8% to Rs254.5 crore as the operating profit margin (OPM) expanded by 15.1 percentage points to 25.3%. The same was however below our expectations primarily because of higher-than-expected power & fuel cost and other expenditure.
-
During the quarter UCL’s jetty situated at its Gujarat plant was non-operational for about 15 days. Hence the company not only lost some export volumes but also had to incur an additional expense of Rs15-20 crore on its repairs. Also the packing cost has gone up by Rs10 crore. This in turn increased the other expenditure per tonne by 30% yoy. Had these costs not been there, the company would have easily met our estimates.
-
During the quarter UCL's cost per tonne of cement increased by 12.5% against a 35% rise in realisation per tonne. Hence its earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne in the quarter stood at Rs691 against Rs206 per tonne in Q2FY2006.
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On the back of flat interest cost and depreciation charge, the net profit for the quarter registered a quantum jump to Rs127.4 crore during the quarter.
Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs252
Good set of numbers
Result highlight
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Unichem Laboratories reported a 17% increase in its top line to Rs143.3 crore in Q2FY2007. The growth was driven by a 13.7% increase in the domestic business to Rs117.4 crore and a 25% surge in the export revenues of the company.
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A decline in the raw material costs caused the company's operating profit margins (OPMs) to expand by 300 basis points to 22% in the quarter. The raw material costs declined as the company increased its share of the high-margin export business and continued to vertically integrate itself in many of its products.
-
Consequently, the company's operating profit grew by 35% to Rs31.5 crore in the quarter.
-
Strong operating performance and a substantially higher other income of Rs2.4 crore caused the company's net profit to grow by 47.2% to Rs25.7 crore in Q2FY2007. The earnings for the quarter stood at Rs5.8 per share.
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At the current market price of Rs252, Unichem is trading at 10.1x its estimated FY2007 earnings and at 8.9x its estimated FY2008 earnings. In view of the positive outlook for the company, we maintain our Buy recommendation on Unichem Laboratories, with a price target of Rs360.
Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs150
Current market price: Rs127
Operationally weak results
Result highlight
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Albeit at Rs194.2 crore the Q2FY2007 net profit of Union Bank of India (UBI) is in line with our expectations, the bank's second quarter results are weaker at the operational level.
-
During the quarter the bank's net interest income (NII) grew by 4.2% year on year (yoy) to Rs627.2 crore compared with our expectations of a 10% year-on-year (y-o-y) growth. The lower growth could be attributed to a squeeze on the net interest margin (NIM).
-
The other income (excluding the treasury income) grew by 42.6% driven by a strong growth in the fee income and higher recoveries.
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The operating expenses grew by a sedate 1.4% as during the same quarter last year UBI had spent heavily on technology and expansion of its automated teller machine (ATM) network.
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As a result, the operating profit grew by a strong 19.9% year on year (yoy) to Rs428.3 crore. The operating profit excluding the treasury income grew by 20.2% yoy.
-
Due to the lower provisioning requirement the bank could report a 217.8% y-o-y jump in its profits. In Q2FY2006 the bank had a one-time extraordinary provision of Rs235 crore that had pulled down its profits in that quarter.
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At the current market price of Rs127, the stock is quoting at 5.7x its FY2008E earnings per share (EPS), 3.0x pre-provision profits (PPP) and 1.1x book value. The bank is available at attractive valuations looking at its strong average return on equity (RoE), which is estimated to be 18.2% over FY2006-08E. We reiterate our Buy call on the stock with a price target of Rs150.
Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs118
Performance in line with expectations
Result highlight
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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.
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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).
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We reiterate our Buy recommendation on the stock with price target of Rs179.
UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs490
Current market price: Rs410
Price target revised to Rs490
Result highlight
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UTI Bank's Q2FY2007 net profit at Rs142.0 crore was in line with our expectations.
-
The net interest income (NII) grew by 43% year on year (yoy) backed by a strong growth in the advances.
-
Remarkably UTI Bank's net interest margins (NIMs) expanded by 12 basis points yoy and by 24 basis points quarter on quarter (qoq) as the yield on the assets expanded and there was a growth in the demand deposits at almost one and half times the growth in the overall deposits.
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The fee income too grew by a strong 66% yoy backed by a strong growth in the fee income from the cash management and retail businesses.
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The operating profit for the quarter grew by a slower 16% yoy to Rs274.5 crore. The slower growth was attributable to a steep rise in the employee and other cost. However, we believe that the rise in the cost is justifiable looking at the rapid growth expected in the bank's branch network.
-
The net profit grew by a faster 30.2% due to a lower provisioning for investment depreciation and a higher loan provisioning.
-
The net non-performing assets (NPAs) as a percentage of the bank's customer assets were flat at 0.74% compared with 0.73% in Q1FY2007. However, the same have come down substantially over Q2FY2006.
-
UTI Bank's Tier-I capital adequacy ratio (CAR) stood at 6.71% at the end of Q2FY2007 whereas its overall CAR stood at 11.5%. The bank will have to go in for further Tier-I capital raising to sustain the growth.
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We expect UTI Bank to go in for plain equity issuance of $250 million by the end of FY2007 or early FY2008 which will raise its book value to Rs167 by the end of FY2008, up by 16% from our current estimates.
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At the current market price of Rs410, the stock is quoting at 14.1x its FY2008E EPS and 2.7x its FY2008E book value (BV). We reiterate our Buy recommendation on the bank with a revised price target of Rs490 based on our revised earnings as well as estimated increase in its book value.
Welspun Gujarat Stahl Rohren
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs84
Current market price: Rs74
Results ahead of expectations
Result highlight
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Welpsun Gujarat Stahl Rohren (WGSR) reported a 70.2% growth in its net sales to Rs674.4 crore in Q2FY2007 (higher than our estimates of around Rs620 crore).
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The operating profit margin (OPM) improved sharply by 320 basis points to 11.8%, driven largely by a sharp reduction in the freight cost and the execution of high-margin export orders during the quarter. The operating profit grew by 133.8% to Rs79.5 crore.
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Consequently, in spite of a sharp decline in the other income (Rs0.5 crore as compared with Rs8.3 crore in Q2FY2006), higher interest cost (Rs17.6 crore as compared with Rs7.4 crore in Q2FY2006) and increased depreciation charge, the net profit grew by 85.1% to Rs33.5 crore. The depreciation and interest costs increased due to the commissioning of new capacities at Anjar.
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On a half-yearly basis, the net sales grew by 67% to Rs1,210.4 crore. The OPM improved by 290 basis points to 12.1%. The net profit grew by 76.4% to Rs59.8 crore.
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The highlight of the quarter was the formation of a joint venture with the TMK group, one of the largest pipe manufacturers in Russia. WGSR would invest $150 million for a 40% stake in the venture, and get access to additional capacities of one million tonne and established presence in the oil & gas segment of the Russian market.
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The pending order book of Rs2,000 crore executable over the next three quarters provides a strong revenue growth visibility for the coming quarters.
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At the current market price the stock trades at 12x FY2007 and 9x FY2008 estimated earnings on a fully diluted equity base. We maintain our Buy call on the stock with price target of Rs84.
Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs625
Current market price: Rs557
Lags behind its peers
Result highlight
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Wipo (under the US GAAP) has reported a 12.2% quarter on quarter (qoq) and a 40.7% year on year (yoy) growth in its revenues to Rs3,513.8 crore during the second quarter ended September 2006.
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On a consolidated basis, the gross profit margin (GPM) declined by 20 basis points to 32.2% on the back of the salary hikes given to part of its workforce in the information technology (IT) services business. However, the savings of 70 basis points in the selling, general and administration (SG&A) expenses as a percentage of sales resulted in a 50-basis-point improvement in its operating profit margin (OPM) to 21.3%. Consequently, the operating profit grew at a healthy rate of 14.7% qoq to Rs746.8 crore.
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In spite of the 7.1% quarter-on-quarter (q-o-q) decline in the other income to Rs47.1 crore, the consolidated earnings grew by 13.4% qoq and by 48% yoy to Rs696.3 crore.
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In case of the global IT services business, the revenue grew by 10.9% qoq and by 44% yoy to Rs2,717.9 crore. The healthy sequential growth in the revenues was contributed by an 11% q-o-q growth in its IT services business and a 9.7% growth in its revenues of the business process outsourcing (BPO) business. In spite of the salary hikes to part of the work force, the OPM improved by 40 basis points to 24.5% largely due to the saving in the SG&A expenses as a percentage of sales.
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In terms of guidance, the revenues of the global IT services business are estimated to grow by 7.5% qoq to $633 million in the third quarter. The guidance does not include any contribution from the possible inorganic initiatives during the quarter.
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At the current market price the scrip trades at 29.2x FY2007 and 23.2x FY2008 estimated earnings. We maintain our Buy call on the stock with a revised target price of Rs625.
Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs394
Margins remain under pressure
Result highlight
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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.
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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.
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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.
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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.
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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.
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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.
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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.
SHAREKHAN SPECIAL
Monetary Policy Review
In its mid-term review of the Annual Monetary Policy for 2006-07, the Reserve Bank of India (RBI) has raised the repo rate by 25 basis points from 7% to 7.25%, leaving the reverse repo and bank rates unchanged.
Q2FY2007 Earnings Review
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The Q2FY2007 earnings of the Sensex companies grew by 22.7% year on year (yoy) and 8.4% quarter on quarter (qoq) compared with the consensus expectations of 20.0% growth yoy and 6.0% growth qoq. Capital goods, cement, and information and technology (IT) companies led the growth in the earnings.
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The quarter was a celebration of sort as of the total thirty companies in the Sensex twenty five companies reported results above or in line with expectations.
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While the sales of the non-banking companies in the Sensex grew by 29.3% yoy, the operating profit of these companies grew by a slower 24.4% as their operating profit margin (OPM) contracted by 120 basis points yoy to 23.5%.
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The earnings of the BSE200 companies grew by 35.0% yoy. The sales of the non-banking companies reported a revenue growth of 34.1% whereas their operating profit grew faster at 40.6% driven by an 80-basis-point expansion in the margins.
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The consensus estimates for the earnings growth of the Sensex companies has been upgraded to 22.6% for FY2007E and FY2008E. The earnings growth estimate for FY2007 has been upgraded to 22.6% from the earlier 21% whereas the FY2008 consensus estimate has seen a sharper upgrade from 11% to 14.6%. At the current level of 13,091, the Sensex is trading at 16.2x its one-year forward earnings which is towards the higher end of its valuation range.
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Many of the companies in our universe have seen upgrades in their earnings, led by cement and banking sectors. The IT sector is not far behind with almost all the IT companies also witnessing upgrades in their FY2007 and FY2008 estimates. The ratio of upgrades to downgrades in full year's earnings after Q2FY2007 stands at a stupendous 28:5.
MUTUAL GAINS
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available in the market today based on the following parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity).
The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken.
FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE
Cement
Smart bounce back
In line with our expectation, for the month of September the cement majors (Gujarat Ambuja, ACC and the AV Birla group) have reported a very healthy growth in their dispatch numbers. Cumulatively these majors have reported a strong growth of 16% in their cement dispatch numbers. This is a bounce back after a subdued dispatch growth in the month of August 2006, which was affected by heavy rains in most parts of the country.
Telecom
India records the highest addition ever
On the back of falling tariff rates and lucrative offers, the Indian telecom service providers continue to shine. The industry added 6.1 million subscribers in September, taking the total subscriber base to 126.7 million. Both the GSM and CDMA industries witnessed a robust growth in subscriber add-ins during the month.
VIEWPOINT
Bharat Forge
No surprises
Result highlights
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Bharat Forge's stand-alone net sales for Q2FY2007 have grown by 19.7% to Rs486.7 crore, with the domestic revenues rising by 18% and the exports going up by 22.6%.
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An improved product mix, progressive ramp-up in the forging capacity and higher machining contribution led to a 30-basis-point improvement in the operating profit margin (OPM) to 26.1% as the operating profit for the quarter grew by 21.1% to Rs117.7 crore.
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The net profit for the quarter rose by 20.1% to Rs62.2 crore due to higher interest costs and depreciation on account of the capacity expansions done by the company.
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On a consolidated basis, the company's net sales grew by 41.4% to Rs970.9 crore. The OPM declined by 240 basis points year on year (yoy) to 16.6% but improved sequentially as the operating profit for the quarter rose by 23.7% to Rs160.7 crore. The consolidated profit after tax (PAT) for the quarter grew by 21.4% to Rs74.2 crore.
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The company is also in the process of finalising four major long-term contracts, with the value of each contract being in excess of USD50 million per year. The contracts are expected to be signed by March 2007.
Dr Reddy’s Laboratories
Results above expectations
Result highlight
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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).
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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.
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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.
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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.
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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.
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The net profit increased by over two times (up by 214%) at Rs279.8 crore.
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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.
Glenmark Pharmaceuticals
GRC 8200 out-licenced to Merck
In its second major out-licencing deal in two years, Glenmark Pharmaceuticals Ltd (GPL) has entered into an out-licencing agreement with Germany's Merck KgaA for its prospective diabetes molecule GRC 8200. The first molecule out-licenced by Glenmark was a prospective drug for asthma, GRC 3886.
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.