WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs87
Current market price: Rs54
Price target revised to Rs87
Result highlights
- The Q3FY2007 results of WS industries (WSI) are in line with our expectations.
- The revenues for the quarter grew by 8.5% to Rs40.1 crore while the net profit grew by 125% to Rs2.2 crore on the back of the company's high operating leverage and lower interest expense.
- The operating profit for the quarter grew by 30% year on year (yoy) to Rs4.9 crore as the operating profit margin (OPM) expanded by 200 basis points to 12.2%. The OPM expanded because of lower raw material and power & fuel costs. The raw material cost increased by just 2% and the power and fuel cost rose by 5%. The company has benefited from the falling crude oil prices. Going forward we expect the company to maintain its OPM in the range of 12-12.5%.
- The interest cost declined by 12% while the depreciation increased by 17.4% on account of a 20% expansion in its hollow core insulator manufacturing capacity.
- Consequently the net profit grew by 125% to Rs2.2 crore.
- The order book at the end of December 2006 stood at Rs190 crore.
Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs106
Current market price: Rs90
Prior-period income inflates numbers
Result highlights
- In Q3FY2007 Allahabad Bank's net profit grew by 27.6% year on year (yoy), much above our expectation of Rs207.5 crore. The growth was higher than expected mainly due to a one-time interest income of Rs62 crore during the quarter.
- During the quarter the bank's net interest income (NII) grew by 23.8% yoy and 24.3% quarter on quarter (qoq) to Rs484.7 crore mainly due to a one-time interest income of Rs62 crore related to prior period. However, adjusting for the same the NII grew by 8% yoy and 8.4% qoq. The net interest margin (NIM) adjusted for the one-time item increased by five basis points on a sequential basis.
- The non-interest income decreased by 16.3% yoy to Rs125.5 crore despite a 49% year-on-year (y-o-y) growth in the treasury income. That was mainly because a sundry amount of Rs28.1 crore that was included in Q3FY2006 was absent in the Q3FY2007 numbers. Adjusted for the same the non-interest income remained flat on a y-o-y basis. On a sequential basis the non-interest income grew by 2.7%.
- The operating expenses declined 6.7% on a y-o-y basis but showed a 6.3% sequential increase. The operating profit was up 9.7% yoy and 7.7% qoq while the core operating profit (excluding the treasury & others) increased by 28.4% on a y-o-y basis but showed a marginal decline of 0.7% on a sequential basis.
- Provision and contingencies including the amortisation expenses (Allahabad Bank reports its amortisation on held-to-maturity securities under "Other operating expenses", we have adjusted the operating expenses and provisions accordingly) decreased by 70.2% on a y-o-y basis mainly due to higher minimum alternative tax (MAT) credit.
- The Q3FY2007 numbers are much above expectations mainly due to the one-time interest income of Rs62 crore related to the prior years. Hence, we have revised our FY2007 profit after tax (PAT) numbers upwards by 9.7% to Rs770 crore to factor in the one-time income.
- At the current market price of Rs90, the stock is quoting at 4.8x its FY2008E earnings per share (EPS), 2.9x pre-provision profits (PPP) and 1x book value (BV). The bank is available at attractive valuations given its low price-to-book multiple compared with its peers. We maintain our Buy call on the stock with a price target of Rs106.
Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs820
Current market price: Rs780
A mixed bag of policy changes
In the past couple of weeks, the Telecom Regulatory Authority of India (TRAI) has announced a number of policy changes and also released consultation papers that would eventually lead to amendments in the prevailing policies for the domestic telecommunication service industry.
Some of the policy initiatives like the reduction in the cap for roaming charges would adversely affect the industry. But the resulting loss would be more than made up by the reduction in the port charges (beneficial for private sector operators) and the proposal to reduce access deficit charge (ADC) going forward. What's more, the big boost would come from the expected reduction in the revenue sharing licence fee in the forthcoming Union Budget. Thus, the net impact of the changes already announced and of those that are expected to materialise in future is likely to be positive for the private sector operators in general and Bharti Airtel in particular.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs550
Current market price: Rs434
Colours shine bright
Result highlights
- ICI India’s Q3FY2007 net profit (adjusted for extraordinary items) at Rs23.5 crore is ahead of our expectations. The net profit grew by 24.3% year on year (yoy).
- The net revenues have shown degrowth of 13% yoy to Rs224 crore due to the discontinuation of the rubber chemical and surfactant businesses (Uniqema).
- The paint business grew by 11.6% yoy to Rs192 crore. The continuing chemical business grew by 14.6% yoy to Rs32 crore.
- The profit before interest and tax (PBIT) in the paint business grew by 41% yoy with a 310-basis-point expansion in the margin. The PBIT in the residual chemical business grew 16% yoy with a 20-basis-point expansion in the margin.
- The overall operating profit (including all businesses) grew by 6% yoy with a 122 basis-point expansion in the operating profit margin (OPM).
- With a higher other income and stable depreciation, the net profit grew by 24.3% yoy to Rs23.5 crore.
- We have revised our earnings per share (EPS) estimates for the stock for FY2008, from Rs24.2 to Rs29 taking into account the selling off of Quest International as well as the higher non-operating income. Taking the cash per share of Rs232 and 17.5X FY2008 core EPS of Rs18 we have revised our price target upward to Rs550.
- At the current market price of Rs434, the stock trades at 15x its FY2008E EPS of Rs29. We maintain our Buy recommendation on the stock with a price target of Rs550.
Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs246
Comparatively a better quarter
Result highlights
- Bank of Baroda's Q3FY2007 results are much above expectations with the profit after tax (PAT) reporting a growth of 62.8% to Rs329 crore compared to our estimates of Rs258.9 crore. The higher than expected non-interest income growth driven by higher fee income and other income coupled with the lower than expected provisions resulted in the actual PAT exceeding expectations.
- The net interest income (NII) was up 18.1% to Rs960.8 crore compared to our estimates of Rs921.3 crore. The margins have declined on a year-on-year (y-o-y) basis by 17 basis points but have improved by 3 basis points sequentially to 2.98%.
- The non-interest income increased by 21.6% to Rs333.7 crore with the trading income down 22.7% year on year (yoy) and the core fee income up 47.4% yoy.
- The operating profit was up by 29% yoy and by 6.7% quarter on quarter (qoq) to Rs656.9 crore. However the core operating profit was up 34.2% yoy and 14.4% qoq.
- The provisions declined by 37% to Rs141.7 crore primarily due to the nil NPAs provisions made during the quarter as compared to Rs42.6 crore in Q3FY2006.
- The operating profit growth and a decline in the provisions helped in the PAT reporting a sharp rise of 62.8% to Rs329.1 crore despite the tax provisions rising by 126.9% yoy to Rs186.1 crore.
- The asset quality has improved as the gross NPAs have come down on a y-o-y and q-o-q basis with the net NPAs in percentage terms also down to 0.67% from 1.1% yoy and from 0.77% qoq. The capital adequacy stood at 12.24% as on December 2006 compared to 12.93% on a sequential basis with Tier I at 9.13%.
- The operating numbers are comparatively better for Q3FY2007 on a y-o-y and q-o-q basis than what we had witnessed in Q2FY2007 and based on the higher than expected PAT numbers we have revised our FY2007 PAT upwards by 3.6% to Rs1,015.6 crore. At the current market price of Rs246, the stock is quoting at 7x its FY2008E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 0.9x book value. The bank is available at attractive valuations given its low price-to-book multiple compared to its peers and earnings upside possibilities. We maintain our Buy call on the stock with a price target of Rs327.