Omax Autos
Cluster: Apple Green
Recommendation: Buy
Price target: Rs134
Current market price: Rs93
Margins improve
Result highlights
- The Q3FY2007 results of Omax Autos are ahead of our estimates due to higher margins during the quarter.
- The net sales for the quarter rose by 9% to Rs179.4 crore, led by a 7.9% growth in the domestic revenues and a 32% growth in the export revenues.
- The operating profit for the quarter rose by 52.8% to Rs18.5 crore mainly due to a 300-basis-point improvement in the operating profit margin (OPM) to 10.3%. This is a result of various cost saving initiatives implemented by the company in order to bring down its power, personnel and other manufacturing costs.
- The other income is higher than estimated at Rs2.72 crore. Aggressive capacity expansion plans of the company have also led to higher interest and depreciation costs. The profit after tax (PAT) for the quarter stood at Rs6.66 crore, rising by 34.3%.
- The company has also announced that it would set up a new manufacturing unit in Lucknow to manufacture chassis for Tata Motors. The unit would be set up with an initial capacity of 48,000 chassis and is expected to deliver revenues of Rs120 crore by FY2009 and of about Rs225 crore by FY2011.
- At the current market price of Rs93, the stock discounts its FY2008E earnings by 6.3x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.7x. We maintain our Buy recommendation on the stock with a price target of Rs134.
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs220
Current market price: Rs196
Another excellent quarter
Result highlights
- For Q3FY2007 Bank of India (BOI) reported numbers well above the market?s and our expectations. The growth in its net interest income (NII) and other income was in line with the expectations of a good set of numbers. What made the good results look even better was the restrain the bank showed in case of operating expenses.
- The NII grew by 26.9% to Rs920 crore against our estimate of Rs936.3 crore. The 26.9% growth in the NII was brought about by a 22.3% growth in the assets and a 16-basis-point improvement in the global net interest margin (NIM) year on year (yoy) to 3.18%.
- The other income reported a 22.8% growth with the trading income showing a very high growth of 144.5% yoy to Rs55.5 crore. The core fee income was up 22.6% yoy while the recoveries declined by 49% to Rs14.9 crore.
- The operating expenses grew by a sedate 15.3% to Rs627.9 crore as the staff expenses grew by only 7.8% and the other expenses grew by 29.6% yoy.
- The operating profit was up by 38.7% yoy to Rs614.4 crore and the core operating profit excluding the treasury income was up 33% yoy to Rs558.9 crore.
- The provisions increased by 16.6% to Rs289.8 crore with the non-performing asset (NPA) provisions up 55.6% to Rs190.9 crore. Lower taxes during the quarter also helped the profit after tax (PAT) to report a 78% year-on-year (y-o-y) growth while the profit before tax (PBT) grew by 67% yoy.
- At the current market price of Rs196, the stock is quoting at 8.1x its FY2008E earnings per share, 3.3x its FY2008E pre-provisioning profits and 1.5x FY2008E book value. We maintain our Buy recommendation on the stock with a revised price target of Rs220.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs345
Extraordinary income boosts net profits
Result highlights
- The net sales of Cadila Healthcare (Cadila) increased by 24.7% year on year (yoy) to Rs460.9 crore in Q3FY2007. The growth was driven by a 105.1% growth in the formulation exports and a 13.4% rise in the exports of active pharmaceutical ingredients (APIs). The sales growth was ahead of our expectations.
- The 105.1% jump in the formulation exports was driven by the improved performance of the French business (a growth of 188.3% year on year [yoy]) and US business (a growth of 105% yoy). New launches in the USA and regulatory reforms in France led to the strong growth of the US and French businesses respectively.
- An 84.5% rise in the company's generic research and development (R&D) expenses, along with an increased advertising spend in the consumer business, caused Cadila's operating profit margin (OPM) to shrink by 200 basis points to 17.4% in Q3FY2007. However, in view of the fact that the increased advertising spend for the consumer business was a one-time charge, we expect the margin to bounce back in the future quarters.
- Consequently, the operating profit (OP) of the company rose by 12.3% to Rs82.3crore in the quarter.
- Cadila's adjusted net profit grew by a robust 66.4% to Rs65.9 crore, on the back of a one-time extraordinary income of Rs19.6 crore from the sale of the French branded business. The profit growth surpassed our expectations. However, on excluding the extraordinary income, the reported net profit stood at Rs46.3 crore, up by 12.9% yoy. The earnings for the quarter stood at Rs3.7 per share.
- The company has signed three new contract manufacturing contracts during the quarter with international companies, taking the cumulative number of contracts to 20, with peak revenue potential of $27.5 million. Cadila has also filed three abbreviated new drug applications (ANDAs) in the quarter, taking the total number of filings to 44 ANDAs.
- At the current market price of Rs345, the company is quoting at 14.7x its FY2008 estimate earnings. We maintain our Buy recommendation on the company with a price target of Rs425.
Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs820
Current market price: Rs689
Price target revised to Rs820
Result highlights
- Bharti Airtel has announced a robust revenue growth of 12.8% quarter on quarter (qoq) and 62.4% year on year (yoy) to Rs4,912.9 crore for Q3FY2007. The sequential revenue growth was evenly driven by a 13.8% rise in the mobile revenues and a 12.4% growth in the non-mobile businesses.
- The company has positively surprised on the margin front, with a 170-basis-point sequential improvement in the operating profit margin (OPM) to 40.8%--one of the highest ever reported in any quarter. Consequently, the operating profit grew by 17.7% qoq and 81% yoy to Rs2,005 crore.
- In addition to the healthy growth in the operating profit, the earnings growth was also boosted by the foreign exchange fluctuation gains of Rs219.2 crore on the forward hedges (as compared with a marginal gain in Q2). Consequently, the consolidated earnings grew at an exponential rate of 30.1% qoq and 122.9% yoy to Rs1,215 crore, way ahead of the market expectations of around Rs1,070 crore.
- The other key highlights include the proposed acquisition of 100% stake in the submarine cable network from India to Singapore for a consideration of $110 million. The cable link is currently equally owned by SingTel and one of the Bharti group companies.
- The company introduced call card for international calls from the USA to India that would enable it to generate an alternate source of revenues from the 2.5 million strong non-resident Indian (NRI) community based in the USA. It also announced some new initiatives during the quarter, including the approval to launch wireless mobile (2G and 3G) services in Sri Lanka, a new venture to introduce direct-to-home (DTH) broadcasting services and a possible launch of (Internet Protocol) IP-based television channel distribution (IPTV) system after a successful testing in the National Capital Region (NCR).
- To factor in the better than expected performance, we have revised upwards our earnings estimates by 17% and 7.1% for FY2007 an FY2008 respectively.
- At the current market price the stock trades at 31x FY2007 and 22.2x FY2008 estimated earnings. We maintain our Buy call on the stock with a revised on-year price target of Rs820 (24x rolling four quarters forward earnings).
State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,380
Current market price: Rs1,174
Sequential growth disappoints
Result highlights
- The Q3FY2007 results of State Bank of India (SBI) are below expectations with the bank's profit after tax (PAT) reporting a decline of 4.5% to Rs1,065 crore as against our estimate of Rs1,195 crore.
- The reported net interest income (NII) at Rs3,951 crore is slightly below our estimate of Rs4,034 crore. However the total other income at Rs1,811 crore is much above our expectation of Rs1,551 crore, mainly due to a higher than expected "Others" component in the "Other income" category. The operating expenses are in line with our expectations; however the provisions have risen more than expected, due to an unexpected investment depreciation. A higher than expected growth in the other income has offset the more than expected rise in the provisions to some extent, as it has actually reduced the gap between the actual PAT and the estimated PAT.
- The reported NII is down by 6.4% year on year (yoy) to Rs3,951.3 crore. However the third quarter saw many one-time items adjusted for which the NII growth stands at 33% yoy. But sequentially the NII has grown by only 1.4%.
- The other income is marginally down by 1.6% to Rs1,811 crore, however adjusted for the India Millennium Deposit (IMD) gains, the growth is strong at 38.3%. The core fee income is up 22.9% yoy and the trading income has risen by 139.3%; the same was expected as the bank planned to make up for the low trading income of Rs7.7 crore reported in Q2FY2007. Though the year-on-year (y-o-y) growth rates are good, the core fee income has seen a sequential growth of only 1.9%.
- The operating expenses are down 16% yoy, however adjusting for the voluntary retirement scheme (VRS), wage arrear and extra gratuity payments made to the tune of Rs641 crore, the growth in the operating expenses remains contained. The operating profit is up 9.8% yoy, however the core operating profit is up 27.3% yoy and 1% quarter on quarter (qoq).
- The provisions and contingencies are up 148.2% yoy and 71.2% qoq to Rs1,166.2 crore. The provision base was lower in Q3FY2006 as there was a Rs102.6-crore write-back in the non-performing asset (NPA) provisions during the quarter. This coupled with the unexpected investment depreciation of around Rs158 crore in Q3FY2007 brought about the sharp rise in the total provisions.
- The adjusted numbers reflect a good core income growth on a y-o-y basis, however there has been no sequential improvement which is a cause for concern. With the deposit costs rising steadily and another interest rate hike looking imminent, the pressure on the margin going forward remains the key issue. Hence, the scrip may remain under pressure in the short term until there is more clarity on how the Reserve Bank of India (RBI) wants to tackle inflation as well as on the measures that the central bank may announce in the latest review of the monetary policy scheduled on January 31, 2007.
Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs190
Current market price: Rs146
A brilliant performance
Result highlights
- Ceat's Q3FY2007 results are ahead of our expectations. The net sales have risen by a brilliant 30.7% to Rs536.7 crore on the back of a 14% tonnage growth and a very strong realisation growth. The sales to original equipment manufacturers (OEMs) have marked a significant improvement of 130% during the quarter whereas the replacement sales have continued to grow at a handsome pace of 25%.
- The operating profit margin (OPM) has expanded by 250 basis points to 7.3% as a result of a lower raw material cost during the quarter as well as avings in the manpower cost and the other overheads. With several price hikes effected in the last one year, the OEM business has also become a lot more profitable, leading to further margin improvement. As a result, the operating profit has grown by 98.3% to Rs39 crore.
- Stable interest and depreciation costs have helped the company to report a 665% growth in the net profit, which stands at Rs11.8 crore.
- Though the rising rubber prices are a concern, we are pretty confident of the pricing power of the tyre industry and expect another price hike from the tyre majors in the next two to three months.
- At the current market price of Rs146, the stock is trading at 9.4x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.7x. We maintain our Buy recommendation on the sock with a price target of Rs190.
ORG Informatics
Cluster: Emerging Star
Recomendation: Buy
Price target: Rs190
Current market price: Rs172
Maintains growth momentum
Result highlights
- ORG Infomatics (ORG) reported a 273.5% growth in its net revenues to Rs108.5 crore during the third quarter ended December 2006. The revenue growth was driven by the execution of some its large orders, especially the Mahanagar Telephone Nigam Ltd (MTNL) order.
- The operating profit margin (OPM) declined by 190 basis points to 8.4% as the initial part of the MTNL order involves low-margin hardware supplies.
- However, the jump in the other income (that included a one-time gain of Rs0.8 crore from the sale of assets) aided the overall growth in the earnings. Consequently, the consolidated earnings grew by 70.6% to Rs5.2 crore during the quarter, which is ahead of our expectation of Rs4.6 crore.
- The fresh order intake continues to be robust and the company has been able to maintain the pending order position of around Rs600 crore (marginally lower than Rs625 crore reported in September 2006). The management also indicated that it is pursuing some more large-sized orders and expects to close one to two large orders in the coming months.
- Along with the results the company has also announced the acquisition of 100% sake in the Bangalore-based TechUnified Pvt Ltd (UT) for a total consideration of Rs49 crore (partly paid through issue of 8.93 lakh shares at a price of Rs181 per share). UT is a profitable company at the net level and is expected to report net profit of around Rs7 crore in the current fiscal. It offers wireless, speech and e-Business solutions to financial companies and telecom operators. This is the second acquisition in the month as the company had recently announced the acquisition of a 100% stake in DGIT Solutions.
- At the current market price the stock trades at 17x FY2007 and 11.7x FY2008 estimated earnings. The estimates do not include the impact of the acquisitions as details of the same are awaited. However, the equity dilution has already been factored in the calculation of the earnings per share (EPS). We maintain our Buy recommendation on the stock with a price target of Rs190 (10x rolling four quarters forward earnings).
Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs115
Capacity expansion to drive revenue growth
Result highlights
- The net sales of Universal Cables Ltd (UCL) grew by 25% and the growth is in line with our expectations. However the net profit growth of 10.6% is slightly below our expectations on account of a higher than expected increase in the other expenses.
- The net sales for the quarter grew by 25% to Rs87.64 crore. The power cable business grew by 22% to Rs81.66 crore, the capacitors business grew by 9% to Rs3.41 crore and the telephone cable sales stood at Rs2.60 crore against nil in the corresponding quarter of the previous year.
- The operating profit margin (OPM) for the quarter declined by 211 basis points to 9.32% as the other expenses to sales ratio increased to 17.09% from 14.60% last year. Hence the operating profit for the quarter grew by just 1.62% to Rs8.17 crore.
- Going forward, we expect the OPM to improve, as the company focuses on the high-end products that have better margins and as its 100% subsidiary, Optic Fibre Goa Ltd (OFGL), turns profitable. The segmental losses from the telephone cable division stood at Rs0.33 crore in this quarter as against Rs0.79 crore in the previous quarter.
- The interest expense for the quarter increased by 48% to Rs1.54 crore, while the depreciation cost for the quarter increased by 81% to Rs1.92 crore.
- Consequently the net profit growth was lower at 10.6% to Rs5 crore.
- At the current market price of Rs115, the stock is quoting at 8.7x its FY2008E earnings per share (EPS) and 5.2x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs179.
VIEWPOINT
Zee Entertainment Enterprises
Blow-out performance
Zee Entertainment Enterprises Ltd (ZEEL) declared its first set of quarterly numbers after its incorporation on demerger of the erstwhile Zee Telefilms Ltd (ZTL). As of now ZEEL comprises ZTL?s global broadcasting business and direct-to-home (DTH) business. Post-formation of Dish TV India Ltd (Dish TV; likely to be listed in February 2007) the DTH business will be allocated to the new company, leaving ZEEL with the broadcasting operations. Thus the results for Q3FY2007 include the performance of these two revenue streams.
SECTOR UPDATE
Cement
Import duty on cement slashed to zero
With the headline inflation crossing 6%, the government has slashed the customs duty on cement, various raw materials and capital goods to check inflationary pressures. The changes in the duty structure would come into effect immediately. The duty cut comes as no surprise for the cement sector as cement prices have risen unabated in the last one year