Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs242
FCCB issue to be EPS accretive
Key points
- Orchid Chemicals & Pharmaceuticals (Orchid) has raised $200 million through a zero coupon foreign currency convertible bond (FCCB) offering of $175 million, with a greenshoe option of $25 million. The bonds are convertible into equity shares at an initial conversion price of Rs348.34.
- Further, the company is proposing to issue 5 million warrants to the promoter group, which are convertible into equity shares of face value Rs10 at a conversion price of Rs202.58 within 18 months of their effective date of issue in January 2007.
- With majority of its capital expenditure (capex) over, Orchid intends to use the entire funds to repay a large portion of the Rs1,012-crore debt that it has on its books. With this, we believe that the company will save interest costs of approximately Rs81 crore in FY2008, leading to an incremental earnings per share (EPS) of Rs0.6.
- At the initial conversion price of Rs348.34, the FCCB issue is likely to result in an equity dilution of 37%. Despite the equity dilution, we believe that the FCCB issue will be earnings accretive for the company as it will reduce its debt level and interest burden going forward.
- In order to incorporate the effect of the equity dilution from the FCCB issue and the resultant savings in the interest cost due to the reduced debt burden, we are revising our FY2008 earnings estimate for Orchid; we are however keeping our FY2007 estimate unchanged. We are also maintaining our revenue projections for both the years. We have upgraded our FY2008 earnings estimate by 2.2% to Rs26.1 per share on a fully diluted basis.
- At the current market price of Rs242, Orchid is trading at 9.3x its estimated FY2008 earnings. In view of the bright prospects for the company, we retain our positive stance on Orchid and maintain our Buy call with a price target of Rs390.
Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs380
Current market price: Rs295
Price target revised to Rs380
Result highlights
- Corporation Bank's results are slightly above our expectations; its profit after tax (PAT) grew by 27.2% to Rs146.4 crore compared with our estimates of Rs135.9 crore due to a higher than expected non-interest income led by a higher treasury income.
- During the quarter, one of the wholly-owned subsidiaries of the bank, Corp Bank Homes, was merged with the bank. Due to the merger the current quarter numbers include an additional provision of Rs16.8 crore excluding which the PAT growth would have been higher at 41% to Rs162.4 crore.
- The net interest income (NII) was up by 1.5% to Rs333.3 crore compared with our estimates of Rs343 crore. The net interest margin (NIM) was down five basis points to 3.15% for the nine-month period ended December 2006 compared with 3.2% for H1FY2007.
- The non-interest income increased by 49.6% to Rs159.3 crore, mainly due to a higher treasury income, which increased by 212.5% year on year (yoy) to Rs40 crore compared with a treasury income of Rs12.8 crore in Q3FY2006 and a treasury loss of Rs5.4 crore in Q2FY2007. The fee income was up 20.3% yoy and 3.3% quarter on quarter (qoq).
- With the net income up 13.2% yoy and the operating expenses up only 3.1% yoy, the operating profit was up by 21.4% yoy and 24.4% qoq to Rs293.1 crore.
- Provisions declined by 8.4% to Rs83.2 crore despite a one-time higher provision charge on account of the merger mainly due to nil standard assets provisions. A moderate operating profit growth and a decline in the provisions helped the PAT grow by 27.2% to Rs146.4 crore.
- The asset quality of the bank continues to be healthy with the net non-performing asset (NPA) in percentage terms at 0.47%, down from 0.8% yoy and 0.5% qoq. The capital adequacy ratio (CAR) remains at a comfortable 13.7% with the Tier-I capital at 12.3%. However with the implementation of the Basel II norms the same is expected to come down to 12.5%.
- The bank has witnessed serious pressure on the NIM front, which we feel would sustain considering the rise in the deposit rates and the bank's inability to mobilise more low cost deposits. The non-interest income growth excluding the treasury income remains weak and going forward the incremental recovery amounts would decrease. Hence the overall non-interest component would also not add significantly to the operating level. The above concerns have led us to decrease the FY2008E PAT estimate by 5.4% to Rs628.5 crore from the earlier projection of Rs664.6 crore. We have also revised our one-year price target from Rs425 to Rs380.
- At the current market price of Rs295, the stock is quoting at 6.7x its FY2008E earnings per share (EPS), 3.3x pre-provision profits (PPP) and 1x book value (BV). We maintain our Buy call on the stock with a revised price target of Rs380.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs870
Bidding for Punjab Tractors
Key points
- Mahindra & Mahindra (M&M) has made a non-binding bid to acquire the private equity fund Actis' 29% stake and the Burman Family's 14.5% stake in Punjab Tractors Ltd (PTL).
- PTL, with an installed capacity to manufacture 60,000 tractors, enjoys an overall market share of 10% in the domestic tractor market. We believe that acquiring PTL makes good strategic sense for M&M as it would help consolidate its presence in the 31-40 horse power (HP) category, and help it to acquire a dominant status in the >51HP category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
- Further, M&M can take advantage of the strong brand equity of PTL and its strong distribution network.
- The deal could cost M&M somewhere between Rs1,200 and Rs1,500 crore (includig the open offer). Though PTL's valuations appear to be a bit stretched due to the recent run-up in its stock price, we do feel that the acquisition would yield substantial long-term benefits to M&M considering that the deal would give M&M a dominant status in the tractor industry (particularly in the higher HP category), and a strong distribution network.
- Many other players including TAFE, Escorts, Tata Motors, the Sonalika group and Ashok Leyland are also in the race to acquire a stake in PTL, which may heat up the valuations further.
- At the current levels, M&M trades at 13.1x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
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