Sharekhan ValueLine - Feb 2007

THE STOCK IDEAS REPORT CARD

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FROM SHAREKHAN'S DESK

Is India poised for a Big Leap?

Last month, the Central Statistical Organisation (CSO) revised the country’s economic growth rate for FY2006 to 9% from 8.5% projected earlier, making it the first time in two decades the country’s economy has seen such a high growth. In the past four years, driven by higher income levels, particularly because of an unprecedented boom in the country’s service sector, the gross domestic product (GDP) growth had accelerated to over 8% from around 6% in the 1980s and 1990s. Now with the CSO raising its growth estimate for the last fiscal to 9% and the GDP growing at 9.1% in the first half of this fiscal, it seems the growth bar has been raised yet again. As if reading our mind, the government too has just released its first official growth estimate for FY2007 and the same stands at 9.2%! The thing is, if the sustained double-digit growth in every other key economic indicator is any indication, the economy is poised to move on to an even higher growth plane.

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Sharekhan top picks

In the January 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on February 2, 2007, the return on this basket of stocks has been 1.3% as compared to the Sensex, which has given 3.3% returns and the S&P CNX Nifty, which has given a 4.4% returns.

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STOCK IDEA

Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs780
Current market price: Rs625

Ringing loud and clear

Key points

• Leading explosive growth in wireless telephony: Bharti Airtel Ltd (BAL) has been in the forefront of the wireless telecom revolution and led the growth in this segment. Its total subscriber base has grown at a CAGR of 74.5% over FY2004-06, helping it further consolidate its leadership position in the segment. BAL is expected to continue with the growth momentum and show a 45.7% growth in its mobile subscriber base during FY2006-09E.
• Most cost efficient player: BAL has managed to constantly improve its overall profitability through innovative and pioneering initiatives like the outsourcing of non-core activities (eg network expansion and management, billing and customer call centre), the introduction of high-margin low-denomination coupons and the cost saving electronic re-charging system for the pre-paid customers. Consequently, it has been able to continuously improve its overall profitability despite the competition-led pricing pressures.
• Non-voice value-added services: Given its focus on value-added services and other non-voice revenue generating opportunities, the company has been able to report a healthy average revenue of around Rs1 per minute of usage, much higher than that of most of its peers. The contribution of the non-voice revenues has grown to 10.5% of the total mobile revenues in H1FY2007 and is expected to reach 13.5-14% by FY2009.
• Attractive valuation: The consolidated revenues and earnings of BAL are estimated to grow at a CAGR of 35.1% and 45.7% respectively over FY2006-09. At the current market price the scrip trades at 21.6x FY2008E earnings and 17x FY2009E earnings. We recommend buying BAL with a one-year price target of Rs780 (24x rolling four quarters forward estimated earnings).

Federal-Mogul Goetze (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs559
Current market price: Rs385

The Mogul of the rings

Key points

• Leader in critical auto components: Federal-Mogul Goetze India (FMGI) is a leading supplier of piston and piston rings to OEMs across vehicle segments. It owns a 65% share of the OEM market and enjoys 70-80% penetration in the CV and tractor segments. The CV industry continues to grow at above 30% in FY2007 and the strong double-digit growth rate is expected to sustain in FY2008. FMGI is also set to ride the wave of dieselisation of Indian cars. It will be the 100% supplier for Maruti Udyog’s soon-to-be-launched diesel Swift.
• Revamp over, Federal-Mogul gains control: FMGI turned profitable in Q2CY2006, as it restructured and cleaned up its balance sheet over the first and second quarters of 2006. As its operations stabilised under parent Federal-Mogul's new systems, it reported a 14.2% EBITDA margin in Q3CY2006 against 9.1% in Q2CY2006.
• Huge potential for outsourcing: Federal-Mogul has identified India as a low-cost manufacturing location and is shifting ten manufacturing lines to FMGI's Patiala plant. The resulting outsourcing opportunity is expected to boost FMGI's exports. The export benefits are expected to begin accruing as early as from Q1CY2007, with the company building scale from that point onward.
• Attractive valuations as compared with its peers: FMGI looks attractively valued as compared to the Tier-I auto-component companies. We think the lower valuations are not justified, considering the strong growth prospects on the back of the buoyancy in its domestic business, rising dieselisation of cars and the huge outsourcing opportunity. At the current market price of Rs385, the stock discounts its CY2008E earnings by 12.4x and trades at 7.5x CY2008 EV/EBIDTA. We recommend a Buy on the stock with a price target of Rs559.

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STOCK UPDATE

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs308
Current market price: Rs276

Price target revised to Rs308

Result highlights

• 3i Infotech has reported a robust revenue growth of 18.3% quarter on quarter (qoq) and 53.2% year on year (yoy) to Rs171.6 core, which is slightly ahead of our expectations. The organic revenues grew by 9.5% qoq whereas the acquisition of Rhyme Systems contributed incremental revenues of Rs12.8 crore during the quarter.
• Despite the adverse impact of foreign exchange (forex) fluctuations, the steep sequential improvement of 140 basis points in the operating profit margin (OPM) was quite encouraging. The sequential improvement in the OPM was largely driven by the savings of 150 basis points in the selling, general and administration (SG&A) expenses as a percentage of the sales and the shift in the revenue mix towards the high-margin product business.
• The accounting policy for expensing of the cost related to the development of products was changed which resulted in an additional expenditure of around Rs4 crore during the quarter.
• Given the steep improvement in the operating profit margin (OPM) and a 56.6% sequential jump in the other income component to Rs6.1 crore (includes forex gains of Rs2.6 crore), the consolidated earnings grew by 22.6% qoq and by 69.6% yoy to Rs27.6 crore. Including a one-time extraordinary income of Rs12 crore, the net profit for the quarter stood at Rs39.6 crore.
• In terms of operational highlights, the company showed an impressive growth in its pending order book to Rs426.7 crore (up by 32.4% qoq from Rs322.3 crore reported as on September 2006).
• Along with the results the company has also announced its intentions to raise more capital by issuing additional two crore equity shares for its proposed expansion plans and inorganic initiatives.
• To factor in the incremental revenues from the recent inorganic initiatives, the continued improvement in its margins and the healthy pending order book position, we have revised upwards the earnings estimates by 11.4% and 7.1% for FY2007 and FY2008 respectively.
• At the current market price the stock trades at 13.4x FY2008 and 10.4x FY2009 earnings estimates (on a fully expanded equity base including the dilution from the recently issued foreign currency convertible bonds [FCCBs]). We maintain our Buy call on the stock with a one-year revised price target of Rs308.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,090
Current market price: Rs1,670

Results in line with expectations

Result highlights

• Aban Offshore Ltd (AOL) reported a 4.5% growth in its stand-alone revenues to Rs126.1 crore for the third quarter ended December 2006.
• The operating profit margin (OPM) declined by 310 basis points to 54.8% largely due to higher insurance charges (up 260 basis points) and an increase in the other expenses (up 660 basis points due to the amortisation of the expenses related to the foreign currency convertible bond issue done earlier). On the other hand, the savings in the staff cost and repairs as a percentage of sales limited the decline in the OPM.
• The net profit grew at a relatively higher rate of 13% to Rs20.8 crore in line with expectations. The growth in the bottom line was aided by an 87% jump in the other income to Rs5.6 crore. However, it should be noted that the company does not declare consolidated quarterly results and the stand-alone results do not reflect the robust growth in the earnings on a consolidated basis. We expect the performance to improve significantly in FY2008 and FY2009 due to the huge incremental gains from the additional assets and the scheduled re-pricing of its assets at relatively much higher day rates going forward.
• Along with the results, the company has announced the signing of a joint venture with the state government of Gujarat to offer offshore drilling services. The memorandum of understanding (MoU) has been signed between Gujarat State Petroleum Corporation (nominee of the Gujarat state government) and AOL’s subsidiary, Aban 8 Pte Ltd. The joint venture would function through a special purpose vehicle. The company is expected to spell out the specific details about the scope and scale of the operations of the new venture over the next couple of months.
• At the current market price the stock trades at 14x FY2008 and 6.8x FY2009 consolidated earning estimates. We maintain our Buy call on the stock with a price target of Rs2,090 (based on the derived value of its subsidiaries combined with the calculated value of its stand-alone earning estimates).

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs280

Great show

Result highlights

• Ahmednagar Forgings has reported a stellar performance for Q2FY2007 and the results are better than our expectations.
• The top line for the quarter grew by 48.5% to Rs152.4 crore. We believe that the utilisation level of even the new capacities improved during the quarter. The company had added 40,000 tonne per annum (tpa) of capacity in June last year. Further, it has raised the capacity by another 40,000tpa in January 2007 as the lines acquired from Anvil International last year were shifted to India. Last year, the company had acquired two forging lines from Anvil International, which is a part of Tyco International, for Rs35 crore. Anvil International Inc is one of the largest manufacturers of pipe fittings and pipe hangers in the world.
• The operating profit margin (OPM) of the company improved by 80 basis points to 20.7% as the operating profit rose by 54.2% year on year (yoy) to Rs31.6 crore. The margin improved despite a rise in the raw material cost from 61.9% to 66.6% as a percentage of sales. The margin improvement was possible as a result of significant savings made in its staff cost and other expenses.
• The interest cost was higher as a result of the higher debt taken to fund its expansion plans. Stable depreciation charge and taxes caused the profit to grow by a brilliant 65.8% to Rs17.5 crore for the quarter.
• We expect a very strong growth in the top line from hereon, triggered by the Rs850-crore order book of the company and the commencement of the forging lines of Anvil. The increased capacity would also start contributing from the next quarter onwards. A higher contribution from the machined product business and higher non-automotive revenues should also trigger a growth in the margins going forward.
• At the current market price of Rs280, the stock discounts its FY2008E earnings by 7.3x and trades at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4x. We believe that the valuations are very attractive and maintain our Buy recommendation on the stock with a price target of Rs380.

Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs270
Current market price: Rs203

Price target revised to Rs270

Result highlights

• After the lacklustre performance in the first half of FY2007, Alphageo India (Alphageo) has reported a robust growth of 718% in its revenues to Rs13.2 crore for Q3FY2007. The revenues were largely contributed by the execution of the 3D survey order located in Rajasthan that the company had received from Essar Oil.
• The operating profit margin (OPM) stood at 50.9%, up from 33.8% reported in Q3FY2006. The margin improvement was driven by the better revenue bookings on the back of the large order located in Rajasthan as compared with the concentration of work in the tough terrain of north-east area in Q3FY2006.
• Consequently, the earnings stood at Rs2.2 crore as compared with a marginal loss of Rs0.3 crore in Q3FY2006. The earnings grew in spite of the over five-fold jump in the depreciation cost and the higher effective tax rate.
• On a nine-month basis, the revenues grew by 392% to Rs24.8 crore and the earnings stood at Rs1.6 crore as against a loss of Rs0.1 crore in the same period of the last fiscal.
• The performance is on track in terms of achieving the full-year revenue and earnings estimates. The earnings estimate for FY2007 remains unchanged. But we are revising upward the earnings estimate for FY2008 by 9.4% to factor in the healthy growth in the pending order book to Rs110 crore by the end of December 2006.
• At the current market price the stock trades 15x FY2007 and 8.1x FY2008 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs270 (11x FY2008 estimated earnings).

Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs356

Lower raw material costs aid margin growth

Result highlights

• Apollo Tyres' Q3FY2007 results are ahead of our expectations, both on the top line as well as on the margins front.
• The net sales for the quarter grew by 26.3% to Rs857.5 crore, ahead of our expectations. This was led by a 10% rise in the volumes and a 17% growth in the realisations.
• The operating margins improved by 280 basis points in comparison to last year and by 300 basis points sequentially at 10.8%. The margin improvement was mainly triggered by lower raw material costs, particularly rubber, during the quarter.
• Consequently, the operating profit for the quarter grew by 71.6% to Rs92.4 crore. Stable interest and depreciation costs led to a profit after tax (PAT) growth of 113%, which stood at Rs35.1 crore.
• A further rise in the rubber prices would necessitate another price hike. A decision regarding the same is likely to be taken in the next one month.
• At the current market price (CMP) of Rs356, the stock quotes at FY2008E price/earnings ratio (PER) of 11.3x and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.2x. We maintain our Buy recommendation on the stock with a price target of Rs425.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs49.4

Great show; price target revised

Result highlights

• The Q3FY2007 results of Ashok Leyland Ltd (ALL) are ahead of our expectations because of a substantial improvement in its profitability.
• The top line grew by 47.8% to Rs1,777.6 crore led by a strong volume growth of 54%, while the realizations declined by 4% year on year.
• The operating profit margin (OPM) improved by 70 basis points to 10.4%, leading to a 59% rise in the operating profit. Excluding the foreign exchange (forex) gain/loss, the margin is stable on a year-on-year basis but has risen substantially on a sequential basis. The sequential rise in the margin is mainly owing to the savings in the staff cost and other expenses, which declined as a percentage of sales due to a surge in the volumes.
• The interest cost for the year was lower due to better working capital management of the company; this helped ALL to mark a strong growth of 91.5% in its profit after tax (PAT) year on year (yoy) to Rs108.4 crore.
• The management expects the strong growth to continue in the commercial vehicle (CV) segment and the CV industry to grow at 15-20% for the next two years. Considering strong volume growth registered in the current year, we are also raising our earnings estimates for FY2007 and FY2008 by 6% and 6.4% respectively.
• Considering the buoyancy in the CV segment, the company's capacity expansion plans and better overseas prospects, we maintain our positive outlook on ALL. At the current market price of Rs49.4, the stock quotes at FY2008E price/earnings ratio (PER) of 12.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs56.

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,300
Current market price: Rs2,775

Profit margins disappoint, other income perks up

Result highlights

• Bajaj Auto's Q3FY2007 results have perked up due to the other income component while the operating margins continued to be under pressure during the quarter.
• The net sales rose by 28.4% to Rs2,568.2 crore, which is slightly ahead of our estimates, led by a 22.9% growth in the volumes and a 4.5% growth in the realisations.
• Higher sales of the entry-level bikes, high raw material costs and intensified competition leading to higher selling costs exerted pressure on the margins. The operating margins declined by 370 basis points year on year (yoy) and by about 80 basis points sequentially to 14.2%. Consequently, the operating profit rose by just 1.5% to Rs363.6 crore.
• Higher other income of Rs161 crore and lower interest costs helped the company to post a 22.8% growth in its net profit at Rs357.1 crore. The profit after tax (PAT) after extraordinary items rose by 23.3% to Rs345.2 crore.
• Our view is that Bajaj Auto is the best pick in the two-wheeler space with its strong brand equity and product mix in comparison to its peers. The operating profit margins should improve going forward. We maintain our positive stance on the stock on back of the company's strong position in the two-wheeler industry and continued growth in the insurance segment. A possible demerger of its investment portfolio may act as a further trigger for the stock in the coming times.
• At the current market price of Rs2,775 , the stock discounts its FY2008E earnings by 18.3x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.7x. We maintain our Buy recommendation on the stock with a sum-of-parts price target of Rs3,300.

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.

Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,730
Current market price: Rs1,435

Price target revised to Rs1,730

Result highlights

• Bharat Bijlee Ltd's (BBL) Q3FY2007 results are slightly ahead of our expectations.
• The revenue for the quarter grew by 28.5% to Rs120 crore on the back of a strong order book of Rs270 crore at the beginning of the quarter.
• The operating profit for the quarter grew by 41.5% to Rs22.2 crore, as the operating profit margin (OPM) for the quarter improved by 180 basis points to 20.2% against 18.4% in Q3FY2006. This is a significant improvement and the company has been able to reverse the declining margin trend as depicted in H1FY2007 (H1FY2007 OPM stood at 11.9% as against 12.4%). The H1FY2007 performance was marred by the low margin 100MVA transformer business, which was the entry order for BBL in the high range market.
• The interest for the quarter increased by 53% while the depreciation increased by 25%.
• Consequently the net profit for the quarter grew by an impressive 43% to Rs13.37 crore.
• The order backlog for the quarter jumped by almost 100%. The order inflows also showed a very strong growth of about 140% year on year (yoy).

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,378

Performance ahead of expectations

Result highlights

• Bharat Electronics (BEL) has announced a robust growth of 27.6% in its net sales to Rs863.8 crore, which is ahead of our expectations.
• The operating profit margins have improved by 150 basis points to 22.9% in spite of the 620-basis-point jump in the raw material cost as a percentage of sales. However, the saving of 770 basis points in the staff cost and the other expenses as a percentage of sales more than made up for the adverse impact of the higher raw material cost.
• Consequently, the earnings jumped by 52.7% to Rs148.2 crore, which is ahead of our expectations of around Rs119 crore.
• On the nine-month basis, the revenues have grown by 9.9% to Rs2,181.2 crore. The operating profit has declined by 50 basis points to 20.9%, largely due to the increase in the raw material cost as a percentage of sales. However, the jump of 72.1% in the other income component aided the growth in its earnings, which grew at a relatively higher rate of 18.8% to Rs356.6 crore. The company is expected to comfortably achieve our full year earning estimates of Rs672.6 crore (which implies a growth of 12.5% in Q4FY2007).
• The company has declared an interim dividend of 40% (or Rs4 per share).
• At the current price, the stock trades at 12.2x FY2007 and 9.7x FY2008 estimated earnings (price has been adjusted for cash on the books). We maintain the Buy call on the stock with a target price of Rs1,525 (12x adjusted FY2008 earnings).

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,506

Back on course!

Result highlights

• At Rs667.7 crore, the Q3FY2007 net profit of Bharat Heavy Electricals Limited (BHEL) grew by 57.8%. The same is above our expectations, primarily because of an increase in the margins sequentially and a robust top line growth.
• BHEL’s revenues for the quarter grew by a robust 30.5% year on year (yoy) to Rs4,339.7 crore driven by order booking. The power division registered a 28.6% growth in the revenues whereas the industry division recorded a 33.2% growth in the revenues.
• The operating profit margin (OPM) for the quarter increased by 329 basis points yoy and by 775 basis points sequentially to 21.4%, much above our estimates. Consequently the operating profit for the quarter registered a growth of 54.1%, higher than the revenue growth.
• The other income increased by 56.2% to Rs185.5 crore mainly on account of the rising yields on the huge cash reserves of the company.
• The order inflows during the quarter were slower at 9.5% yoy at Rs5,710 crore. There are some orders that have been awarded post the quarter. We are not overtly concerned about this slow-down because the order backlog continues to be robust at Rs46,700 crore, which is 3.2x its FY2006 sales imparting great visibility to the stock.
• The board has announced a bonus of 1:1 and an interim dividend of Rs12.5 per share.
• At the current levels, the stock is trading at 20.0x its FY2008E earnings and 12.0x its FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). Given the expectations of the continued growth in its order book, a strong compounded annual growth rate (CAGR) of 35.1%, we believe the valuations are attractive. Even on a comparative basis the stock is trading at a significant discount to its peers like Siemens, ABB and Areva. We maintain our Buy recommendation on the stock with a price target of Rs2,650.

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 one-year price target of Rs820 (24x rolling four quarters forward earnings).

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 estimated earnings. We maintain our Buy recommendation on the company with a price target of Rs425.

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs262

Higher investment provisions are a surprise

Result highlights

• Canara Bank's net profit grew by only 1.9% to Rs363 crore, below our expectations of Rs394.7 crore. The operating performance was better than our expectations mainly due to the controlled expenses rather than the growth in the income, but higher provisions have been a surprise, which resulted in the reported profit after tax (PAT) being 8% lower than our estimates.
• During the quarter the bank's net interest income (NII) grew by 8.4% year on year (yoy) to Rs1,038.6 crore compared to our expectations of a 5.6% year-on-year (y-o-y) growth to Rs1,012.3 crore. The increase is primarily due to a sharp rise in the interest on the RBI balances and the other interest component.
• The other income declined by 3.8% yoy due to a 1.4% decline in the fee and other income and a 20% decline in the trading income.
• The reported net interest margin (NIM) has declined by 16 basis points to 3.14% on a y-o-y basis but remained stable on a sequential basis. The NIM has been under pressure on a y-o-y basis because of a steep jump in the interest expended component, which has increased by 50% yoy mainly due to a 29% growth in the deposits and a 58-basis-point y-o-y increase in the cost of funds to 4.86%.
• The operating profit was better than our estimates of Rs648.7 crore and touched Rs701 crore, which remained stable on a y-o-y basis but improved by 13.9% on a sequential basis mainly due to a 6.2% quarter-on-quarter (q-o-q) decline in the operating expenses brought about by the lower staff expenses.
• The provisions at Rs263 crore were up 7.4% yoy. However we expected the provisions to be lower on account of the lower marked-to-market provisions. Hence, despite the operating profits being higher than our expectations the PAT at Rs363 crore was below our expectations of Rs394.7 crore.
• The non-performing asset (NPA) provisions have been lower although the absolute NPA numbers are on the rise on a sequential basis. Hence we feel that going forward higher NPA provisions slightly above the regulatory requirement would be prudent.

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.

Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs300
Current market price: Rs248

Growth triggers remain intact

Result highlights

• Cipla reported lower than expected numbers for Q3FY2007 with a net profit of Rs184.4 crore against the expectation of Rs192.1 crore.
• The earnings were lower due to the disappointing revenues, which grew by only 13% to Rs880.5 crore against the expectation of a 22% growth to Rs952.7 crore.
• The exports of active pharmaceutical ingredients (APIs) declined by 35% due to reduced supplies of Simvastatin and Finasteride APIs to Teva owing to the expiration of the 180-day exclusivities for the said products in December 2006. This affected the company’s revenue growth. Also, the sales of domestic formulations were lower than expected at Rs435.7 crore.
• However, the company reported a strong 35% growth in the formulation exports to Rs319.7 crore on the back of its global partnerships. The stellar performance of the formulation business was however overshadowed by the 35% decline in the API exports.
• The operating profit margin (OPM) witnessed a 450-basis-point expansion to 24.9% in the quarter, as the other expenses saw savings of 490 basis points caused by the foreign exchange (forex) fluctuation gain and lower factory overheads. Consequently, the operating profit increased by 38% to Rs219.3 crore.
• With the reduction in tax incidence to 14.9% from 22.6% (possibly due to the commissioning of the new export-oriented unit at Patalganga), the net profit before the extraordinary items was up 79.7% at Rs184.4 crore.
• At the current market price of Rs248, the stock is trading at 20.6x its estimated FY2008 earnings. Expecting a strong momentum in the company’s formulation exports, we maintain our Buy recommendation on the stock with a price target of Rs300.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs412

Growth momentum continues

Result highlights

• Elder Pharmaceuticals (Elder) continued its strong performance during the quarter. The company's net sales rose by 31.7% to Rs115.7 crore in Q3FY2007, on the back of a steady momentum in its core brands, a ramp-up in the sales of the Fairone brand due to the launch of the product in south India and the growing revenues from the in-licenced portfolio. The sales were in line with our estimate.
• Elder reported a 150-basis-point drop in its operating profit margin (OPM) to 18% during the quarter, on account of a 34.9% rise in the raw material cost and a 32.6% increase in the staff cost. The raw material cost was higher on account of the distribution of free samples as a promotional initiative and the staff cost was higher due to an increase in the sales force in order to expand its market reach and penetration.
• Consequently, the company's operating profit rose by 21.8% to Rs20.8 crore in Q3FY2007.
• Despite a 20% drop in the other income, and an increase in the interest and depreciation costs, Elder's net profit grew by 35.7% to Rs14.6 crore. The net profit was in line with our estimate. It was aided by a sharp 41.2% reduction in the company's tax outgo. The tax incidence halved from 24% in Q3FY2006 to just 12% in Q3FY2007, as the company increased the production from its tax-exempt plants of Himachal Pradesh and Uttaranchal.
• In view of its strong growth potential, we remain positive on Elder's future growth prospects. At the current market price of Rs412, the stock is quoting at 10.2x its estimated FY2008 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.

Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs345
Current market price: Rs256

Price target revised to Rs345

Result highlights

• The Q3FY2007 results of Genus Overseas Electronics (Genus) are in line with our expectations.
• The revenues for the quarter grew by 266% to Rs89.5 crore mainly on the back of the faster execution of the Surat meter supply contract.
• The operating profit for the quarter grew by 182% to Rs12.6 crore and the operating profit margin (OPM) for the quarter stood at 14.1% as against 18.3% in Q3FY2006. However, the Q3FY2007 and Q3FY2006 OPMs are not comparable. That's because the company had abnormal operations in Q3FY2006 due to a fire incident because of which the other expenses were on the lower side in Q3FY2006. Going forward, we expect the company to maintain its OPM in the range of 14.5-15%.
• The interest expense for the quarter rose by 108%, as the company has availed of large working capital loans to execute its project orders.
• Consequently, the net profit for the quarter grew by 273% to Rs6.2 crore.
• The order book of the company stood at Rs470 crore at the end of December 2006.

Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,350
Current market price: Rs2,800

Q3 results ahead of expectations

Result highlights

• The Q3FY2007 net profit of Grasim Industries (Grasim) stood at Rs412 crore. The same was ahead of our expectations on account of the better than expected performance of the viscose staple fibre (VSF) and sponge iron businesses.
• The top line grew by 38.3% year on year (yoy) to Rs2,280 crore on account of the excellent performance of the cement business, higher realisations in the VSF business and strong volumes in the sponge iron business.
• The operating profit jumped by 108% to Rs666 crore whereas the operating profit margin (OPM) expanded by 980 basis points to 29.2%. The margin expansion was driven by a jump of 50% in the cement realisation and a rise of 24% in the VSF realisation. It was also aided by a robust 49% volume growth yoy in the sponge iron business.
• The other income increased substantially by 191% yoy to Rs44 crore, thanks to the deployment of the surplus cash during the quarter.
• The interest cost increased marginally by 2.2% quarter on quarter (qoq) to Rs24 crore whereas the depreciation provision rose by 10% qoq to Rs80.6 crore.
• The excellent performance at the operating level was sweetened by the other income component and this led the net profit to zoom by 154% to Rs412 crore.
• The consolidated results too were of stellar kind on account of a superlative performance of UltraTech Cement Ltd (UTCL). The consolidated net profit (after minority interest) stood at Rs555 crore, up 184% yoy.
• At the current market price of Rs2,800, the stock is discounting its FY2008E earnings by 11.4x and FY2008E enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) by 5.4x. Taking cognisance of the sanguine outlook, we maintain our Buy recommendation on the stock with a price target of Rs3,350.

HCL Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs630

Firing on all cylinders

Result highlights

• HCL Technologies has reported a revenue growth of 6.2% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,465.1 crore for the second quarter ended December 2006, which is slightly below expectations. The sequential growth was largely driven by a 12.5% increase in the revenues of the infrastructure management service (IMS) business. On the other hand, the business process outsourcing (BPO) and software services businesses grew at a relatively lower rate of 5.4% and 5.2% respectively, on a sequential basis.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved by 40 basis points to 22.1% on a sequential basis, despite the annual salary hikes given to 15% (senior and middle management level) of its work force with effect from October, the adverse impact of the steep appreciation in the rupee (3.6% appreciation in the average realised exchange rate against the US dollar) and the relatively higher selling, general and administration (SG&A) cost as a percentage of sales. The margin expansion was primarily driven by the higher employee utilisation (positive impact of 120 basis points) and better realisations (positive impact of 140 basis points).
• In terms of segments, the EBITDA margins of the software service and BPO businesses improved by 60 basis points and 40 basis points respectively. On the other hand, the IMS business reported a marginal decline in the margins to 17.5%, down 10 basis points sequentially.
• The earnings grew at a robust rate of 14.4% qoq and 57.8% yoy to Rs286.2 crore (ahead of our expectations of Rs258.8 crore and the consensus estimates of a flat growth sequentially). The growth in the earnings was also aided by the huge foreign exchange [forex] gains of Rs34.7 crore on the open forward contracts.
• In terms of operational highlights, the management indicated that the ramp-up in the large deals is beginning to make a material impact on the overall performance. The revenues from the six multi-million multi-year deals contributed to around 10% of the total turnover and is reflected in the third consecutive quarter of over 8% quarter-on-quarter (q-o-q) growth in the software services business in the dollar terms. What's more, the EBITDA margin on the revenues from the large deals is indicated to be higher than the average margins of the company.
• At the current market price the stock trades at 18.8x FY2007 and 15.2x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs720.

HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,200
Current market price: Rs1,063

Another consistent quarter

Result highlights

• HDFC Bank's results are in line with expectations with the profit after tax (PAT) reporting a growth of 31.7% to Rs295.6 crore compared to our estimates of Rs292.3 crore.
• The net interest income (NII) grew by 38.5% year on year (yoy) to Rs928.6 crore, above our expectations of Rs912.7 crore. The net advances grew by 33.3% to Rs48,201 crore. The net interest margin (NIM) continues to remain just over 4%.
• The other income growth slowed down to 26.1% largely influenced by a Rs21.1 crore loss reported in the trading income. The core fee income growth slowed down to 20.3% on a year-on-year (y-o-y) basis and declined by 6.1% on a quarter-on-quarter (q-o-q) basis.
• The operating expenses grew by 34.7% yoy in line with a 32.5% growth in the total assets. The operating profit grew by 34.6% yoy to Rs696.9 crore, lower than our expectations on account of a lower other income component.
• The bank added 48 new branches during the quarter. HDFC Bank couldn't open new branches from December 2005 onwards as fresh branch licences were not granted to the bank after it got involved in the initial public offering (IPO) related demat scam.
• The NIM continues to hover above 4% with the proportion of the current and savings account (CASA) deposits in the total deposits improving to 54.9% in Q3FY2007 compared with 53.1%% (Q3FY2006) and 52.2% (Q2FY2007).
• HDFC Bank continues to grow at a steady pace of 30% plus and based on past trends we have factored in a 5% equity dilution in FY2008 and are revising our price target for the stock to Rs1,200. At this level the stock would discount its FY2008E earnings per share (EPS) by 26.3x and FY2008E book value (BV) at 4.4x.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs977

Price target revised to Rs1,240

Result highlights

• ICICI Bank's Q3FY2007 net profit at Rs910 crore was much above our and market expectations. The net profit saw a growth of 42.2% year on year (yoy) against our expectation of a 26.1% year-on-year (y-o-y) growth. The robust performance was driven mainly by a very high growth in the fee income and the other income compared with our expectations. Despite a rise of 125.6% in the provisions, the profit growth was very strong on the back of a 65.4% growth in the operating profit.
• The net interest income (NII) grew by 31.9% yoy to Rs1,708.8 crore. What's impressive is that in Q3FY2006 the NII included a securitisation income excluding which the y-o-y NII growth stands at 53%.
• The other income grew by 68% yoy to Rs1,980.6 crore, of which the core fee income grew by a strong 52.7% yoy to Rs1,345 crore.
• The operating profit was up by a strong 65.4% on the back of a good NII growth and a sharp rise in the fee income. The operating expenses increased in line with the business growth.
• The provisions increased by 125.6% mainly due to higher provisions for the non-performing assets (NPAs). The asset quality deteriorated as non-collateralised retail loan products like credit cards reported defaults. The gross non-performing asset (GNPA) increased by Rs650 crore on a sequential basis and the net non-performing asset (NNPA) also increased in absolute and percentage terms.
• The capital adequacy ratio (CAR) stood at 13.4%, with the Tier-I CAR at 8.63%. Incorporating the Basel II guidelines the Tier-I CAR would be 9.5% and we feel the bank can maintain its current growth rates without any dilution in the medium term.
• We have revised our FY2007 and FY2008 estimates based on the bank's improved performance on the non-interest income front. We have also factored in the higher provisions that may be made in future in view of the signs of deterioration in the retail loan book. We have revised the FY2007 and FY2008 profit after tax (PAT) estimates by 2.9% and 2.4% to Rs3,375.7 crore and Rs4,041.9 crore respectively. We have also introduced our FY2009 numbers as we believe that slowly the market would start factoring in the FY2009 financials.
• At the current market price of Rs977, the stock is quoting at 17.5x its FY2009E earnings per share (EPS), 7.2x its pre-provisioning profits (PPP) and 2.8x book value (BV). The valuation looks attractive if one considers the value of the bank's subsidiaries which works out to Rs400 per share of the bank. We maintain our Buy recommendation on the stock with a one year price target of Rs1,240.

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs242

Net profit up 1,000%

Result highlights

• India Cements achieved a net profit of Rs79.77 crore for Q3FY2007, clocking a year-on-year (y-o-y) growth of 1000% , though it was below our expectations on account of higher-than-expected increase in the costs.
• The top line grew by a robust 36% year on year (yoy) to Rs472 crore on the back of a 4% y-o-y growth in the volumes to 1.75 million metric tonne (MMT) and a 32% growth in the realisations to Rs2,700 per tonne.
• The company's operating expenditure increased by 13% yoy to Rs339 crore on the back of a 20% increase in the raw material costs and an 18% rise in the distribution costs. Sequentially, the freight cost and the power & fuel cost increased by Rs30 per tonne and Rs15 per tonne respectively.
• The company's high leverage to the cement prices resulted in an operating profit growth of 185% yoy to Rs133 crore whereas the operating margin expanded by a mammoth 1,400 basis points to 28%.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne tripled to Rs761 though it was down 12% quarter on quarter (qoq) on account of lower volumes due to the monsoons in the southern region namely Tamil Nadu and Andhra Pradesh.
• The interest expenditure and the depreciation cost remained flat qoq at Rs34.7 crore and Rs19.82 crore respectively. These factors coupled with a negligible tax provision helped the company's net profit to register a 1,000% year-on-year jump to Rs79.77 crore.
• The company's plan to augment its capacity by 2MMT at its existing facilities (namely Sankaridurg and Vishnupuram) is well on schedule. One million tonne of the capacity is expected to come in June 2007 whereas the balance one million will kick in by December 2007.
• We expect the company's volumes to bounce back in the fourth quarter and also expect the prices to firm up further by Rs5-10 per bag.
• At the current price of Rs242, the stock trades at 12.2x its FY2007E and 8.5x its FY2008E earnings. On an enterprise value (EV)/tonne basis, the company is trading at USD115 per tonne, which is a steep discount to its peer Madras Cement, which is trading at USD155 per tonne. We continue to maintain our positive outlook on the company with a price target of Rs315.

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs175
Current market price: Rs159

Another good quarter

Result highlights

• For the third quarter of FY2007, Indian Hotels Company Ltd (IHCL) reported a top line growth of 29% at Rs409 crore against Rs317 crore in the third quarter of the previous year. The bottom line of the company grew by a healthy 43% to Rs87.9 crore from Rs61.5 crore in Q3FY2006, resulting in earnings of Rs1.5 per share.
• The operating profit margin (OPM) improved by 450 basis points from 32.9% in Q3FY2006 to 37.4%. The operating profit has shown a growth of 35% year on year (yoy) to Rs155 crore.
• The healthy trend in the top line is due to the rise in the number of foreign tourist arrivals into India, which has pushed up the average room rate (ARR) and the occupancy rate (OR). During the third quarter, the ARR grew by 32% to Rs10,772 from Rs8,150 in Q3FY2006; the OR zoomed to 76% from 74% in the corresponding quarter of the last fiscal. The hotel industry has witnessed continued buoyancy in the arrival of foreign tourists. During the period January-December 2006, the number of foreign tourist arrivals increased to 4.4 million from 3.9 million in Q3FY2006, representing a 13% growth yoy.
• At the current market price of Rs159 the stock is quoting at a price/earnings ratio (PER) of 25x FY2007E consolidated earnings per share (EPS) of Rs6.2. We maintain our Buy recommendation on the stock with a revised price target of Rs175.

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs335
Current market price: Rs288

Price target revised to Rs335

Result highlights

• The Q3FY2007 results of Indo Tech Transformers Ltd (ITTL) are above our expectations.
• The company has reported strong quarterly results. The revenues for the quarter grew by 130% to Rs45.04 crore as against our expectations of Rs40 crore while the net profit grew by 166% to Rs7.3 crore against our expectations of Rs5.3 crore. The volume growth was 89% as the company sold 672 mega Volt Ampere (MVA) during the quarter as against 355MVA in Q3FY2006.
• The above performance was due to the fact that the company executed some high-margin orders during the quarter under review and hence the operating profit for the quarter grew by 153% to Rs11.86 crore. The operating profit margin (OPM) for the quarter improved by 240 basis points to 26.3% as against 23.9% in Q3FY2006. Going forward the company expects to maintain its OPM in the range of 19-20%.
• The interest expense for the quarter stood at Rs0.23 crore while the depreciation cost for the quarter was Rs0.28 crore.
• The order backlog at the end of Q3FY2007 stood at Rs153 crore as against Rs79 crore at the end of the previous quarter, showing a growth of 94%.

Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs2,183

Rupee appreciation spoils the party

Result highlights

• Infosys Technologies (Infosys) reported a revenue growth of 5.9% quarter on quarter (qoq) and 44.4% year on year (yoy) to Rs3,655 crore. The consolidated revenue in dollar terms has grown by 10.1% qoq but the appreciation of 3.8% in the rupee against the dollar limited the growth of the revenues in rupee terms.
• The sequential improvement of 60 basis points in the operating profit margin (OPM) to 32.7% is commendable, given the adverse impact of the rupee appreciation (of around 200 basis points) during the quarter. The improvement in the OPM was driven by a 1.4% improvement in the blended billing rates, a 40-basis-point saving in the selling, general and administration (SG&A) cost, a favourable shift towards higher proportion of offshore revenue (offshore contribution increased by 90 basis points) and a steep growth of 27.5% qoq in the high-margin banking product business.
• The company has also done an appreciable job of limiting the foreign exchange (forex) fluctuation losses on the open forward contracts to just Rs20 crore, which gets reflected in the other income component. Consequently, the other income of Rs59 crore declined only 10.6% qoq and was higher than market expectations.
• The earnings growth of 5.8% qoq and 51.5% yoy to Rs983 crore is in line with our estimates and consensus market expectations. However, the company has failed to comprehensively surpass the street expectations this time.
• What's more, the guidance for Q4 is quite muted. The revenue and earnings are guided to grow by 3.7-3.9% and 1.4% qoq respectively, which has resulted in a mere 1% upward revision in the annual guidance. This essentially means that the consensus earnings estimates already imply a reasonably stiff sequential growth of over 13.5-14% in Q4 and are likely to result in the pruning down of the earnings estimates by some analysts (in comparison with an across-the-board upward revision of earnings estimates by analysts in the previous two quarters). We are also revising down our FY2007 revenue estimates by 0.4% and earning estimates by 0.65% to factor in the impact of the rupee appreciation.
• At the current market price the stock trades at 32.2x FY2007 and 24.2x FY2008 estimated earnings. Though the stock could underperform the broader market in the short term, we continue to remain bullish on it with a one-year perspective and maintain our Buy call with a price target of Rs2,430.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs850
Current market price: Rs726

Cement division boosts overall performance

Result highlights

• In Q3FY2007 the stand-alone net profit of Jaiprakash Associates Ltd (JAL) grew by 79% to Rs102 crore led by a strong performance by the cement division. The cement revenues grew by 64% yoy (40% growth in realisation yoy) which led to a sharp jump in the EBIT margin. The cement division's EBIT margin rose by 1,870 basis points to 28.3%. The construction revenues fell by 16% yoy as most of the projects in this segment were in the ramp-up phase during the quarter.
• Overall, the net revenues grew by 11.8% to Rs891 crore from Rs797 crore in Q3FY2006.
• The operating profit margin improved sharply by 490 basis points to 25.9% during the quarter mainly due to a sharp jump in the cement EBIT margin on strong realisations and volumes. On the other hand, the construction division's EBIT margin fell by 490 basis points yoy to 21.2% during the quarter led by lower revenues.
• The interest expenses increased by 4% yoy to Rs70 crore while the depreciation increased by 13% yoy to Rs43 crore mainly due to the commissioning of the 38MW captive thermal power plant in Q2FY2007. Consequently, the net profit witnessed a strong growth of 79% yoy to Rs102 crore during the quarter.
• We maintain our Buy on the stock with a revised price target of Rs850 based on the sum-of-parts valuation method.

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs295
Current market price: Rs193

Q3FY2007 results beat expectations

Result highlights

• JK Cement has reported a net profit of Rs50 crore, much ahead of our expectations, clocking a mammoth year-on-year (y-o-y) growth of 544%.
• The net sales grew by a healthy 44% year on year (yoy) to Rs319 crore on the back of a buoyant 36% growth in the average cement realisations to Rs3,186 per tonne. The grey cement realisations improved by 45% yoy and by 6% quarter on quarter (qoq) to Rs2,917 per tonne whereas the white cement realisations improved by 14.6% yoy and by 5% qoq to Rs7,609 per tonne.
• The company’s operating expenditure grew by 22% yoy to Rs230.7 crore, lower than expected. The power & fuel costs reduced marginally to Rs77.2 crore on a y-o-y basis on account of an increase in the share of blended cement to 56% vis-à-vis 40% last year. The freight expenses increased by 24% yoy to Rs59.2 crore whereas the costs per tonne declined marginally by Rs15 on a sequential basis.
• On account of the company’s high leverage to the cement prices as well as a benign increase in the costs, the company’s operating expenditure increased by 168% yoy to Rs88.3 crore. The operating margins expanded by a huge 1,430 basis points yoy and by 5% qoq to 28%. The cumulative impact of the rising prices and lower costs resulted in the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne multiplying 2.75x yoy to Rs882.
• The company’s net interest cost has reduced by 47% yoy to Rs8.1 crore on account of a) an interest income component of Rs4 crore from the unutilised proceeds of the foreign currency convertible bonds (FCCBs); and b) the quarterly repayment of the long-term debt. The depreciation provision stood flat at Rs8.2 crore. Consequently, the net profit zoomed by 544% yoy to Rs50 crore.
• The company has acquired the manufacturing facilities of Nihon Nirmaan Limited from IDBI Limited for Rs42 crore and thus will be able to add close to 3.5 lakh tonne of grey cement to its existing capacity.
• Considering the better-than-expected performance in the 9-month period as well as factoring in the acquisition of the new facility, we are upgrading our FY2007 and FY2008 earnings estimates by 13% to Rs167 crore and by 3% to Rs222.3 crore respectively. The revised earnings per share (EPS) would stand at Rs24.9 for FY2007 and Rs31.8 for FY2008.
• At the current price of Rs193, the stock is discounting its FY2007E earnings by 7.9x and FY2008E earnings by 6.1x. On an enterprise value/tonne basis, the stock is trading at a valuation of USD73.5 per tonne whereas its closest peer Shree Cement commands a valuation of USD179 per tonne. Even after discounting for the efficient cost structure and the consistent performance of Shree Cement, we believe such a steep discount is unjustified and thus the company should command higher valuations. We maintain our Buy recommendation on the stock with a price target of Rs295.

KEI Industries
Cluster: Ugly Ducking
Recommendation: Buy
Price target: Rs140
Current market price: Rs118

Price target revised to Rs140

Result highlights

• KEI Industries (KEI) has reported a growth of 107% in its net sales for Q3FY2007. The same is in line with our expectations. The net profit growth of 46.9% is however slightly below our expectations on account of a higher interest cost and a lower other income during the quarter.
• The power cable segment grew by 102% to Rs157 crore while the stainless steel wire segment showed a growth of 122% during the quarter.
• The operating profit margin (OPM) for the quarter improved by 140 basis points to 15.6%, led by the better performance of the stainless steel wire segment. The earnings before interest and tax (EBIT) margin of the stainless steel wire segment increased to 8.6% from just 1% in Q3FY2006 while the EBIT margin of the power cable segment declined by 110 basis points to 14.9% from 16% in Q3FY2006.
• The operating profit for the quarter grew by 126% to Rs24.5 crore.
• The interest expense for the quarter increased by 238% to Rs7 crore as the company availed of higher working capital loans. The working capital loans during this quarter were to the tune of Rs100 crore as against Rs50 crore in the same quarter last year. The depreciation cost for the quarter increased by 148% to Rs1.6 crore.
• Consequently the net profit for the quarter grew by 46.9% to Rs11 crore.
• The order book at the end of December 2006 stood at Rs200 crore (including the high-tension [HT] order book of around Rs30 crore) as against Rs180 crore at the end of September 2006.

Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs574

Results in line with expectations

Result highlights

• Lupin's net sales increased by 15.5% year on year (yoy) to Rs492.9 crore in Q3FY2007. The growth in the top line is in line with our expectations. The sales growth was driven by a healthy growth of 29% in the domestic formulation business to Rs189.2 crore and a 33.7% increase in the formulation exports to Rs122.8 crore.
• The company's active pharmaceutical ingredient (API) business declined by 2.5% yoy and remained flat sequentially at Rs195.1 crore. The poor show on the API front was largely on account of a 22.8% decline in the domestic API sales due to a greater captive use of the APIs and deferrals by the multinational pharma companies in buying APIs with the nearing of the year-end .
• Lupin's sales in the USA stood at Rs84 crore, up 31.3% yoy, mainly due to healthy sales of Lisinopril tablets and a 105% increase in the sales of its branded product, Suprax. Despite the presence of 14 players in the Lisinopril market, Lupin has been able to garner a 27% share of this market.
• Lupin's operating profit margin (OPM) expanded by 70 basis points yoy to 16.1% in Q3FY2007, driven mainly by an improvement in the gross margins despite higher employee costs and other expenses. The gross margins in the quarter expanded by 370 basis points to 56.2%, as Lupin continued to improve its product and geographical mix. Consequently, the company's operating profit grew by 20.5% yoy to Rs79.3 crore in Q3FY2007.
• Lupin's net profit rose by 26.8% yoy to Rs56 crore in Q3FY2007. The profit growth was aided by an over nine times jump in the other income, which was higher on account of the interest on the unused foreign currency convertible bond (FCCB) funds and the recovery of milestone payments from Cornerstone on the termination of the agreement. The net profit was in line with our estimates.
• At the current market price of Rs574, Lupin is quoting at 15.5x its FY2008 earnings estimate, on a fully diluted basis. Keeping in mind the strong business fundamentals and growth potential of the company, we reiterate our Buy recommendation on Lupin with a price target of Rs670.

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs569

Margins disappoint, but stay on course!!

Result highlights

• In Q3FY2007 the net revenues of Marico grew by 34.7% year on year (yoy) to Rs409.2 crore, ahead of our estimate. The top line growth was higher in this quarter on account of the full contribution from the acquired brands of Nihar, Manjal, Camelia and Aromatic, partial contribution from the Fiancée acquisition, and the strong growth of 20% in the focused brand portfolio (organic growth).
• The operating profit margin (OPM) declined by 210 basis points to 13.5% on account of an increase in the selling and administration expenses, and the other expenses as a percentage of sales. Consequently, the operating profit grew by 16.2% year on year (yoy) to Rs55.1 crore. The same was below our estimate.
• The interest cost for Q3FY2007 grew to Rs5.4 crore from Rs1.3 crore in Q3FY2006, on account of the debt taken to achieve inorganic growth. The depreciation and amortisation cost was lower by 20.2% due to a one-time write-off in Q3FY2007 on account of the change in the depreciation policy.
• The net profit before extraordinary items grew by 26.4% yoy to Rs27.7 crore and it was below our expectation. The net profit after the extraordinary items grew by 29.6% yoy to Rs28.4 crore. But due to the placement with the qualified institutional buyers and the resultant equity dilution, the earnings per share (EPS) grew by a slower 20.4% to Rs4.5.
• Marico has acquired two brands (Fiancée and HairCode) in Egypt which will generate revenues of Rs90-95 crore in FY2008. Significantly, these brands provide 15-18% profit after tax (PAT) margin against that of 7-7.5% for Marico. This indeed comes as a positive surprise as it will help Marico expand its OPM next year.
• The Kaya business grew by an impressive 64% yoy to Rs19.7 crore. It managed to achieve a profit before tax (PBT) in the current quarter. Marico expects the Kaya business to also break even on a full-year basis. This is a big positive because going forward the business will be contribute to the bottom line and its higher margin profile will contribute to the margin of Marico. Marico plans to open roughly 12 new Kaya clinics in FY2008 and Marico wants to concentrate on increasing the utilisation levels and product penetration going forward.
• We are revising our FY2007 and FY2008 earnings estimates higher by 0.6% and 0.7% to Rs18.5 and Rs24.2 respectively. The stock is trading at attractive valuations of a price/earnings ratio (PER) of 23.1x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.2x FY2008E. We continue to remain bullish on Marico 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: Rs944

Diesel Swift hits the road

Key points

• Maruti Udyog Ltd (MUL) has made its first serious attempt to capture share in the diesel segment with the launch of the new diesel Swift. Powered with a superior CRDi engine, we believe that the car would present itself as a very strong option in the small car diesel segment.
• The two variants—LDi and Vdi—are priced at Rs4.68 lakh and Rs4.96 lakh respectively, ex-showroom Delhi.
• We expect MUL to gain market share in the compact car segment despite some amount of cannibalisation after the launch of the new Zen Estilo and now the diesel version of Swift.
• At the current market price of Rs944, the stock discounts its FY2008E earnings by 14.3x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 9.9x. 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: Rs67
Current market price: Rs55.5

Price target revised to Rs67

Result highlights

• Navneet Publications reported a tepid growth of 2.9% in its revenues to Rs45.7 crore during the third quarter. The publication business showed a decent growth of 11.7% to Rs28.6 crore. However, the stationary business continues to remain sluggish and declined by 11.4% to Rs16.4 crore.
• The operating profit margin (OPM) of 13.7% is 20 basis points lower than 13.9% reported in Q3FY2006. Consequently, the operating profit grew by just 1.1% to Rs6.3 crore.
• However, the healthy other income component of Rs0.9 crore (includes foreign exchange [forex] gains of Rs0.6 crore) against the negative other income of Rs0.2 crore in Q3FY2006, enabled the company to report a healthy earnings growth of 43.2% to Rs3.4 crore.
• On a nine-month basis, the revenues and earnings have grown by 12.1% to Rs279.9 crore and by 18.6% to Rs42.2 crore respectively. The OPM has improved by 190 basis points to 24.2%, largely due to the better profitability in the publication business.
• Grafalco, the wholly-owned subsidiary in Spain, reported revenues of 1.05 million euros and a net loss of 0.02 million euros in its first full year of operations ended December 2006. It reported profit on the operational level and is expected to show a profit on the net level in the calendar year 2007. The results of Grafalco are not yet consolidated in the quarterly performance.
• Along with the results the company announced that it would invest Rs25 crore to set up a windmill-based power generation plant in Gujarat. The same has been approved in the recently held board meeting.
• To factor in the lower-than-expected performance of the stationary business, we have revised downwards the earnings estimates by 1.7% and 4.1% for FY2007 and FY2008 respectively. At the current price the stock trades at 12x FY2007 and 10x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a one-year target price of Rs67 (12x FY2008 earnings).

New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs348
Current market price: Rs309

Price target revised to Rs348

Result highlights

• NDTV witnessed a muted revenue growth of 15.8% year on year (yoy) to Rs79.1 crore owing to higher competition.
• The operating profit margin (OPM) was down by 360 basis points yoy to 24.2% as the company is spending for new businesses. The operating profit was flat yoy at Rs19.1 crore as per expectations; however, it improved substantially compared to an operating loss in Q2FY2007.
• The marketing and distribution cost, the primary reason for the increased cost, was up 59.8% yoy at Rs10.7 crore, but as a percentage of sales it declined to 13.5% as compared to 14.1% and 18% in Q1FY2007 and Q2FY2007 respectively.
• The incubation costs of the planned new ventures seem to have inflated the cost structure and segregation of these costs this quarter onwards will lead to the improved profitability picture for the news business.
• The profit after tax (adjusted for extraordinary items) was down at Rs10.0 crore as against Rs14.1 crore in Q3FY2006 as expected.

We have lowered our earnings estimates for FY2007 and FY2008 as NDTV continues to be in an investment mode whereby we expect the short-term profitability to remain muted. At the same time we remain bullish on its exciting broadcasting properties, diversification in other genres of broadcasting such as general entertainment and lifestyle, its foray in the media consulting segment and media process outsourcing thus leveraging on its expertise in the business. The above makes it a good integrated media play.

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs393
Current market price: Rs266

Results in line with expectations

Result highlights

• Nicholas Piramal (Nicholas) reported a 61.3% year-on-year (y-o-y) increase in its net sales to Rs649.5 crore in Q3FY2007. The growth was achieved on the back of a 13% increase in the domestic sales and a whopping 208.9% surge in the global revenues. The sales growth was ahead of expectations.
• The 13% rise in the domestic sales was driven mainly by a 12.6% growth in the branded formulation business and a staggering 53.1% rise in the pathology laboratory (pathlabs) business.
• The international sales benefitted largely from the incremental revenues flowing in from Pfizer's Morpeth facility in the UK and Avecia (now NPIL UK). Morpeth and NPIL UK together contributed Rs216 crore of revenues during the quarter, up 17% on a sequential basis.
• Nicholas' operating profit margin (OPM) expanded by 650 basis points to 14.9% in the quarter, driven by a sharp 970-basis-point reduction in the raw material cost and a 360-basis-point drop in the other expenses. The material cost improved because the company derived a higher amount of the high-margin CRAMS revenues during the quarter. Further, the enhanced capacity utilisation of the Morpeth facility also increased the operating leverage.
• Consequently, the company's operating profit rose by 185.3% to Rs97 crore during the quarter.
• Even though the acquisitions led to a substantial increase in the interest and depreciation expenses during the quarter, the growth in the net profit was impressive at 400% to Rs48.4 crore. Adjusting for the income for the prior-period adjustments, the adjusted net profit stood at Rs55.6 crore, up 474% year on year (yoy). The net profit growth was aided by a relatively lower tax incidence during the quarter. The tax outgo was lower on account of the progressive shift of the manufacturing activities to the tax-exempt Baddi facility. The net profit was in line with our estimates.
• At the current market price of Rs266, the stock is quoting at 15.9x its estimated FY2008 earnings. In view of the strong revenue flows and the enhanced profitability picture for the coming years, we maintain our Buy recommendation on the stock with a price target of Rs393.

NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs474
Current market price: Rs341

Price target revised to Rs474

Result highlights

• NIIT Technologies Ltd (NTL) reported a growth of 5.3% quarter on quarter (qoq) and 47.1% year on year (yoy) in its consolidated revenues to Rs231.5 crore during the third quarter. The organic revenues grew at a rate of 5% sequentially whereas the revenues of Room Solutions (acquired in May 2006) grew at a relatively higher rate of 7% qoq to Rs29.7 crore.
• The highlight of the performance was the steep improvement of 230 basis points in its operating profit margin (OPM) to 21.2% on a sequential basis. The margin improved in spite of the adverse impact of the appreciation of the rupee against the other major global currencies. The improvement was driven by multiple factors like the absence of the cost related to the integration and transition of Room Solutions (the same was around Rs1 crore in Q2), savings in the overhead cost, higher margins in the business process outsourcing (BPO) business and better profitability of Room Solutions.
• The increase in the other income (Rs3.3 crore as compared with Rs2.4 crore in Q2) and lower depreciation charges also aided the earnings growth during the quarter. Consequently, the consolidated earnings grew at an explosive rate of 28.6% qoq and 91.9% yoy to Rs34.6 crore. This is the second consecutive quarter of over 20% growth in earnings, which is a commendable performance in a tough quarter by a mid-sized information technology (IT) service company.
• In terms of the outlook, the company is expected to maintain the growth momentum on the back of the record order intake of $56 million during the quarter. The pending order backlog of $95 million (executable over the next one year) is one of the highest ever reported by the company. The management expects the margin to also improve with the improving profitability of the BPO business, the efforts taken to increase the proportion of the high-margin offshore revenues and other cost levers like a lower overhead cost. There is enough scope for further improvement with the overhead cost currently at 20% of its sales. Consequently, the earnings estimates have been revised upwards by 20.7% and 18.4% for FY2007 and FY2008 respectively.
• At the current market price the stock trades at 11x FY2007 and 9.4x FY2008 estimated earnings. We re-iterate our Buy call on the stock with an upgraded price target of Rs474 (13x FY2008 earnings).

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs898
Current market price: Rs811

Price target revised to Rs898

Result highlights

• Nucleus Software Exports has announced lower-than-expected sequential growth in its revenues at 2% quarter on quarter (qoq) and 50.3% year on year (yoy) to Rs56.2 crore (against the expectations of Rs58.6 crore). The product revenues have grown at a robust rate of 12.8% sequential. However the revenues from the project and services business declined 9.3% sequentially and resulted in a lower-than-expected overall growth in the revenues during the third quarter.
• The operating profit margin (OPM) declined by 110 basis points sequentially to 27.9% during the quarter, largely due to the steep increase in the selling, general and administration expenses (SG&A) as a percentage of sales (up from 12.6% of the sales in Q2 to 15.7% in Q3). The huge jump in the SG&A expenses was driven by the additional cost incurred (on travel and other related expenses) in pursuing some of the large deals in the pipeline (including the recently bagged order from ACOM).
• Consequently, the earnings were largely flat at Rs13.9 crore on a sequential basis. However, the earnings grew at a robust rate of 58.1% on an annual basis.
• Notwithstanding the muted performance (sequentially) during the quarter, the company has shown an exponential growth in its order backlog that is likely to boost the overall revenue growth in the coming quarters. The pending order book jumped to Rs335 crore, up from Rs135 crore at the end of the previous quarter. The order backlog includes the multi-million multi-year order from ACOM, a leading consumer finance company in Japan.
• To factor in the impact of the huge fresh order intake, we are revising upwards the revenues and earnings estimates by 7% and 9% respectively, for FY2008. At the current market price the stock trades at 22.8x FY2007 and 16.5x FY2008 earning estimates. We maintain our Buy call on the stock with a one-year revised target price of Rs898 (15x its rolling four-quarter earnings).

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.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs217

Strong growth potential despite poor performance

Result highlights

• The net sales of Orchid Chemicals & Pharmaceuticals (Orchid) rose by 0.5% year on year (yoy) to Rs238.7 crore in the third quarter of FY007. The sales growth was slightly below our expectations, partly due to an absence of any significant new product launches in the USA and partly due to the high base of Q3FY2006.
• The company maintained its performance in its major market, the USA. Its key products—Ceftriaoxne and Cefproxil—continued to maintain a healthy market share in excess of 20-25%.
• The company's operating profit margin (OPM) expanded by 350 basis points to 32.6% as against our expectation of 31.5%. The improvement in the margin was primarily on account of a 27% drop in the raw material cost, as the company continued to derive an increasing proportion of its revenues from the sale of formulations in the high-margin regulated markets. Formulations constituted roughly 45% of its sales, almost 90% of which came from the USA.
• Consequently, the operating profit grew by 12.4% to Rs77.8 crore in the quarter.
• Despite a substantial improvement in the margins, the high interest cost (up by 19.4% yoy) and the higher tax provisioning as compared to Q3FY2006 dragged down the net profit, which declined by 2.2% to Rs28.3 crore in the quarter. The profit growth was in line with our estimate.
• Orchid has just received approval from the UK MHRA for its betalactum API facility at Aurangabad. This development indicates that Orchid is on track to make its big entry into Europe in FY2008, which will add to its growth from FY2008 onwards.
• At the current market price of Rs217, the stock is quoting at 8.5x our estimated FY2008 earnings. The valuation is very attractive given the strong growth potential for FY2008 and FY2009 in view of some forthcoming big launches in the USA and a big entry into Europe. Hence, we maintain our Buy call on the company with a price target of Rs390.

ORG Informatics
Cluster: Emerging Star
Recommendation: 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).

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs414

Operating margin lower than expected

Result highlights

• Ranbaxy Laboratories (Ranbaxy) reported an impressive 167% growth in its net profit to Rs183.3 crore in Q4CY2006, which is higher than our expectation of Rs174.1 crore. The improvement in the profitability was triggered by a forex gain of $8 million. The focused cost-control efforts and rationalisation of research and development (R&D) spending also contributed to the profit growth.
• The net sales were higher by 22% to Rs1,697.50 crore in Q4CY2006 which was 4% above our expectation. The revenue growth was supported by a stronger revenue inflow from the Simvastatin-80mg tablet (which was under exclusivity in the USA), integration of Terapia SA (which reported over 50% growth) and the jump of 45% in the business from Brazil, Russia, India, China and South Africa (BRICS) during the quarter.
• However, the revenue growth was moderated by the pricing concerns in Europe, particularly the UK, Germany and France, leading to a 6% fall in the sales to $52 million and a 16% sequential decline in the domestic revenues to $66 million.
• With the higher realisation from the products under exclusivity and cost-cutting efforts, the operating profit margin (OPM) expanded by 920 basis points to 15%; but the expansion was 240 basis points less than our expectation. Again the margins were inflated by a foreign exchange (forex) gain of $8 million (against a $2 million forex gain in Q4CY2005). So if we discount the impact of the forex gain and the other operating income, the OPM appears 620 basis points less than our expectation. There is another cause for concern as well: The OPM has declined by 180 basis points sequentially. The decline was caused partly by the tapering of the realisation from Simvastatin after the expiration of exclusivity in the fag end of Q4CY2006.
• For CY2006, the company reported an 18% growth in the top line to Rs6,021.6 crore and an 890-basis-point expansion in the OPM to 15.4%. This caused the net profit to double (ie a 97% rise) to Rs515.1 crore.
• The company has guided for a 15% top line growth (which is in line with our estimations) with an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 16% for CY2007. At the current market price, the stock trades at 19.9x CY2007E earnings of Rs20.8 per share. We maintain our Buy recommendation with a longer-term price target of Rs558.

Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,530
Current market price: Rs1,380

Price target revised to Rs1,530

Result highlights

• Reliance Industries (RIL) has positively surprised in its Q3FY2007 results by reporting a whopping 57.6% year-on-year (y-o-y) growth in its earnings, way ahead of our and consensus estimates.
• The net revenues for the quarter grew by 45.7% driven by a strong 48.2% y-o-y growth in the revenues from the petrochemicals business and a 37.5% y-o-y growth in the revenues from the refining business.
• The profit before interest and tax (PBIT) in the petrochemicals business grew by only 32.2% on account of a 156-basis-point contraction in the margins. The PBIT of the refining business grew by 124.9% on the back of a 358-basis-point expansion in the margins. As a result the PBIT grew by 38% yoy to Rs1,764 crore.
• The refining business again gave a positive surprise and the gross refining margins (GRMs) grew by 28.6% yoy and also 28.6% sequentially despite a 36.1% yoy and a 17.9% sequential decline in the Singapore benchmark GRMs. In fact this is the highest ever out-performance over the benchmark Singapore complex by RIL.
• With the better-than-expected performance of the refining division and the robust top line growth of the petrochemical business, the net profit grew by a massive 57.6% to Rs2,799 crore.
• We like the way RIL has been diversifying into new areas of growth like the upstream oil and gas activity, organised retailing and construction of special economic zones (SEZs). However, these areas of businesses would entail a lot of investment for RIL going forward and we expect them to generate tremendous value for the shareholders.
• We are revising our FY2007E earnings by 7.1% and the FY2008E earnings by 7.9%. Given the out-performance of our and street's expectations for the second consecutive quarter, more clarity on the exploration end of the business and definitive visions for the new ventures like retail, we are revising our price target to Rs1,530.

Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs550
Current market price: Rs488

Price target revised to Rs550

Result highlights

• Satyam Computer Services (Satyam) reported a revenue growth of 3.7% quarter on quarter (qoq) and of 31.3% year on year (yoy) to Rs1,661 crore during the third quarter. The revenue growth was not only below market expectations but also a tad below the company's guidance. The consolidated volume growth was decent at 8.2% qoq but the same was not reflected in the revenue growth due to the appreciation in the rupee and the shift in the revenue mix towards the offshore business.
• The operating profit margin (OPM) improved by 205 basis points to 24.7% on a sequential basis, in spite of the adverse impact of the rupee appreciation, an increase in the selling, general and administrative (SG&A) expenses as a percentage of sales and a decline in the profitability of its subsidiaries. On the other hand, the shift towards high-margin offshore business, decline in provisions (related to leave encashment and gratuity) and other cost efficiencies (including pricing and productivity gains in foxed priced projects) had a positive impact (of over 400 basis points) on the margins. Consequently, the operating profit grew at a healthy rate of 13.1% sequentially to Rs410 crore.
• However, the earnings growth was limited by the steep decline of 64.2% in the other income component to Rs10.1 crore (due to the foreign exchange fluctuation loss of Rs35.5 crore) and the increase in the effective tax rate to 10.7% (up from 8.8% in the previous quarter). Consequently, the consolidated earnings grew by 5.4% qoq and 25% yoy to Rs337.2 crore, which is below the consensus estimate of around Rs340 crore.
• For Q4, the consolidated revenues and earnings are guided to grow by 4-4.5% and 5.4% respectively on a sequential basis. This implies a 0.3-0.5% downgrade in the annual revenue guidance to Rs6,434-6,442 crore (down from Rs6,452-6,476 crore guided earlier). But the annual guidance for the earnings including the stock compensation charges has increased marginally to Rs20.9 per share (up from Rs20.73-20.81 per share guided earlier). Moreover, the marginal upgrade in the revenue guidance in dollar terms to $1,443-1,445 million (up from $1,434-1,440 million guided earlier) suggests that the downgrade in the revenue guidance in rupee terms is largely due to the steep appreciation in the rupee.
• At the current price the stock trades at 23.3x FY2007 and 19.4x FY2008 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a revised price target of Rs550 (18x rolling four quarters one-year forward earnings).

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs94
Current market price: Rs77

Ramp-up in volumes delayed

Result highlights

• Selan Exploration Technologies (SETL) reported a revenue growth of 22.6% to Rs5.4 crore. The softening of the crude oil prices globally dented the overall growth in the company's revenues during the quarter.
• The operating profit margins stood at 50.4% (as compared to 62% in Q3FY2006) and were largely impacted due to the higher provisioning for the development of hydrocarbon reserves (provisioning of Rs1 crore as compared to Rs0.3 crore in Q3FY2006).
• However, the jump in the other income to Rs0.7 crore (up from Rs0.2 crore) aided the growth in the company's earnings. Consequently, the earnings grew by 20% to Rs1.9 crore.
• On a nine-month basis, the revenues and earnings have grown by 23.5% to Rs17.7 crore and by 33.2% to Rs7.2 crore respectively. However, after adjusting for the one-time income in the form of arrears of Rs1.44 crore received in Q1FY2006, the revenues and earnings have grown by 37.3% and 56.5% respectively.
• The efforts taken to further develop the oil fields are also yielding results. The commercialisation of two new wells and the work over drilling in some of the old wells have resulted in a volume growth of 16.5% to around 64,000 barrels of oil & oil equivalents (boe) during the first nine months of FY2007.
• The management has reiterated its guidance of 30-40% growth in the volumes during the current fiscal. However, given the lower-than-expected growth in the volumes in the first nine-month period, the company is unlikely to achieve its stated guidance. To factor in the lower-than-expected growth in the volumes, but higher than assumed average realisations, the earnings estimates for FY2007 are revised upwards by over 10% to Rs9.1 crore. On the other hand, we are downgrading the earnings estimates for FY2008 to factor in the lower-than-expected ramp-up in the volumes.
• At the current market price the stock trades at 12.2x FY2007 and 6.8x FY2008 estimated earnings. We maintain our Buy call on the stock with a target price of Rs94.

Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,700
Current market price: Rs1,482

Another quarter of superlative performance

Result highlights

• The company achieved a net profit of Rs104 crore for Q3FY2007, in line with our expectations, translating into a year-on-year (y-o-y) growth of 165%.
• The net sales increased by 153% year on year (yoy) to Rs364.5 crore driven by a huge 80% jump in the volumes and a robust 40% y-o-y rise in the realisations; however, the sales were down sequentially by 2%.
• The operating expenditure increased by 128% yoy to Rs204.4 crore. The rise in the expenditure was in line with our expectations except for the freight cost, which was slightly more than expectations at Rs390 per tonne.
• The sequential dip in the realisations as well as the rise in the freight costs can be attributed to the exercise undertaken by the company to test new markets like Uttar Pradesh. This exercise was undertaken as the company will be commissioning a plant of 1.5 million metric tonne (MMT) capacity in March 2007.
• The operating profit rose by a whopping 194% yoy to Rs160 crore whereas the operating margins expanded by 620 basis points to 43.9%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne rose 1.5x yoy to stand at Rs1,222 per tonne, whereas the EBITDA witnessed a marginal dip of 4% sequentially.
• The interest cost stood much lower at Rs0.65 crore whereas the depreciation provision was also lower at Rs26 crore. Consequently, the net profit grew by 165.5 % yoy to Rs104 crore in line with our expectations.
• Looking at the stupendous performance by the company in the first nine months of the current fiscal year, we are upgrading our FY2007 estimates by 20% to Rs400 crore as against Rs332 crore as per current estimates.
• At the current market price of Rs1,500, the stock is trading at 13.1x its FY2007 earnings and 11.7x its FY2008 earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,700.

Solectron Centum Electronics
Cluster: Emerging Star
Recommendation: Book Profit
Current market price: Rs300

Book profits

Result highlights

• Solectron Centum Electronics (Solectron) reported a robust growth of 132.7% in its revenues to Rs48 crore during the third quarter of FY2007. The growth was driven largely by the 186% jump in the electronic manufacturing service (EMS) business to Rs36.8 crore. The component business is also showing signs of improvement with a growth of 44.8% to Rs11.3 crore as compared with a rather stagnant performance in the past seven quarters.
• The operating profit margin (OPM) declined by 330 basis points to 13%, largely due to the continued increase in the proportion of the low-margin EMS revenues in the total turnover. Moreover, the margins in the component and EMS businesses have been declining gradually. Consequently, the operating profit grew at a relatively lower rate of 86.1% to Rs6.3 crore.
• The increase in the interest charges and depreciation outgo further dented the overall growth in the earnings, which grew by 21.2% to Rs3.7 crore. However, after adjusting for the one-time item (a write-back of Rs0.7 lakh provisions made for the on-going restructuring in Q2), the earnings growth stood at Rs3 crore, a decline of 1.8% as compared with Q3FY2006.
• On a nine-month basis, the revenue grew at a robust rate of 160.6% to Rs125.7 crore. The OPM declined by 600 basis points to 13.2% due to the cumulative impact of the shift towards the low-margin EMS business and a steep decline in the profitability of both component and EMS businesses. Consequently, the earnings grew at a rate of 37.4% to Rs10.5 crore.
• At the current price the stock trades at 32.2x FY2007 and 27.6x FY2008 estimated earnings. The de-merger of the EMS business would unlock value for the shareholders and the sum-of-the-parts (STOP) based fair value works out to Rs315. Since the current market price is quite close to the fair value, we recommend investors to book profit on the stock.

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.

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs370
Current market price: Rs248

Results in line with expectations

Result highlights

• The Q3FY2007 results of Subros, adjusted for extraordinary expenses, are in line with our expectations.
• The top line grew by 17.8% year on year (yoy) to Rs182.7 crore led by a volume growth of 12.6% and a realisation growth of 4.5%.
• The operating margins grew by 50 basis points to 11.1% as the operating profits grew by 24.1% to Rs20.3 crore. This is after adjusting for an extraordinary item of Rs1.5 crore relating to the voluntary retirement scheme (VRS) expenditure during the quarter. The raw material cost as a percentage of sales has come down by 40 basis points to 69.4% while the staff cost has risen slightly.
• Both the interest cost and depreciation rose considerably due to the high capital expenditure of the company. Its Gurgaon facility has begun its operations and the benefits of the same should start rolling in from the next quarter.
• The profit after tax (PAT) for the quarter marked a growth of 23.1% to Rs8.1 crore. The PAT after extraordinary items was flat yoy at Rs6.6 crore.
• At the current market price of Rs248 the stock is trading at compelling valuations of 6.1x FY2007E earnings per share (EPS) and 3.1x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). The valuations are at a huge discount to the valuations commanded by its peers. We maintain our Buy recommendation on the stock with a price target of Rs370.

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,028

Results beat expectations; upgrading earnings

Result highlights

• The consolidated net sales of Sun Pharmaceuticals (Sun Pharma) grew by 27.1% year on year (yoy) to Rs540.0 crore in Q3FY2007. The strong growth was driven by an increase of 36.3% in its exports and a 19.0% growth in its domestic business. The sales growth was ahead of our expectations.
• Its US subsidiary, Caraco Pharma, continued its growth momentum. Caraco Pharma's sales grew by 51% yoy to $31.3 million and its profits expanded by over 15 times to $10.1 million during the quarter.
• A sharp spike of 54.1% in the research and development (R&D) expenses of Sun Pharma led to a decline in its operating profit margin (OPM), which contracted by 40 basis points to 32.1% in Q3FY2007. The margin contraction caused the operating profit (OP) to increase by 25.6% to Rs173.3 crore. Barring the higher R&D cost, the company's margin actually showed an expansion of 190 basis points.
• Sun Pharma's net profit for Q3FY2007 stood at Rs198.9 crore, up 35.8% yoy. The growth in the profit was aided by a 1.5-fold increase in the company's other income to Rs63.6 crore and a deferred tax write-back of Rs4.0 crore.
• In view of the better than expected performance in M9FY2007, led by Caraco Pharma's improved profitability, the higher than industry growth in the domestic formulation business, a higher than expected other income and reduced tax rates, we are revising our earnings estimates for FY2007 and FY2008. We are however keeping our revenue estimates intact. We have revised upwards our net profit estimates by 5% for FY2007 to Rs748.6 crore and by 1% for FY2008 to Rs936.5 crore. Our revised earnings estimates stand at Rs38.3 per share for FY2007 and Rs47.9 per share for FY2008.
• At the current market price of Rs1,028, Sun Pharma is valued at 26.9x FY2007E and 21.4x FY2008E fully diluted earnings. The company's future growth prospects, the positive contributions from its past acquisitions and the unlocking of value to take place after the demerger of the R&D division reinforce our positive stance on the company. We maintain our Buy recommendation on the stock with a price target of Rs1,341.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,508
Current market price: Rs1,342

Results ahead of expectations

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 8.4% quarter on quarter (qoq) and of 40.8% year on year (yoy) in its consolidated revenues to Rs4,860.5 crore. The sequential revenue growth was driven largely by a 7.87% growth in the volumes, a 2% improvement in the billing rates and productivity gains of 2.6% on the fixed price projects. On the other hand, the revenue growth was dented by the appreciation of the rupee (to an extent of 2.46%) and an increase in the offshore contribution (to an extent of 1.56%).
• The earnings before interest and tax (EBIT) margin improved by 79 basis points to 26.1% on a sequential basis. The steep appreciation of the rupee dented the margin by 1.37% but the dip in the margin was more than made up by the positive impact of the higher billing rates (1.74%), the shift towards the high-margin offshore business (0.28%) and the cost efficiencies (0.14%). The company maintained its broad guidance of sustaining the full year margin at close to 25.8%, as reported in FY2006. However, we have factored in a decline of 60 basis points in the margin on a full year basis.
• The other income stood at Rs30 crore (includes foreign exchange fluctuation gain of around Rs3.6 crore), up from Rs7.7 crore in Q2FY2007. Consequently, the earnings grew at a relatively higher rate of 11.4% qoq and 47.2% yoy to Rs1,104.7 crore, which is much higher than the consensus estimate of around Rs1,086 crore.
• In terms of operational highlights, the company added 5,562 employees and 55 new clients during the quarter. It also bagged five large deals, including two deals of over $100 million and three deals of over $50 million. The management also indicated that it is currently pursuing around ten large deals of over $50 million each.
• Given the better than expected performance, we are revising upward the earnings estimates by 3.8% for FY2007 and by 5.6% for FY2008. We maintain the Buy call on the stock with a price target of Rs1,508.

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs356
Current market price: Rs309

Price target revised to Rs356

Result highlights

• Tata Elxsi Ltd (TEL) announced a revenue growth of 7.3% quarter on quarter (qoq) and 39.1% year on year (yoy) to Rs80.5 crore. The revenue growth was largely contributed by a growth of 8.3% qoq and of 51% yoy in the software service business to Rs69 crore. On the other hand, the system integration business remained largely stagnant at Rs11.6 crore, down 5.9% yoy and up 2% on a sequential basis.
• The operating profit margin (OPM) improved by 190 basis points sequentially and by 420 basis points yoy to 22.7%, which is one of the highest reported in the past 12 quarters. The company continues to show an improving trend in its margin due to the shift in the revenue mix towards the high-margin software service business. The software service business contributed 86.4% of the revenues in the first nine month of FY2007 as compared with 80% in FY2006 and 78% in FY2005. Moreover, the margin in the software service business itself has improved over the past few quarters due to the efforts taken to focus on the high-end business.
• Consequently, the earnings grew at a robust rate of 17.4% qoq and 83.1% yoy to Rs14 crore during the quarter, way ahead of expectations. This is the second consecutive quarter of over 15% sequential growth in the earnings.
• In terms of operational highlights, the management continues to be confident about the growth visibility of the software service business. It is reflected in the efforts taken to expand the existing development facilities, and set up new offshore centres in Kerala and a near-shore development facility in Japan.
• To factor in the robust performance of the third quarter, we have revised upwards the earnings estimates by 6.1% for FY2007 and by 4.2% for FY2008. At the current market price the stock trades at 19x FY2007 and 14.8x FY2008 estimated earnings. We maintain our Buy call on the stock with a revised target price of Rs356.

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs916

Forex gains lift profits

Result highlights

• The net sales (excluding the foreign exchange [forex] gain/loss) of Tata Motors for Q3FY2007 have marked a strong growth of 34.5% to Rs6,825.2 crore, ahead of our expectations. This was led by a 27.7% volume growth and a 7.7% growth in the realisations. The total income for the quarter stood at Rs6,956.8 crore and includes the forex gains of Rs131.6 crore.
• The operating profit margins (excluding the effect of the forex gains) have declined by 80 basis points year on year (yoy) but have improved slightly sequentially to 12.3%. Consequently, the operating profits excluding the forex gain/loss have improved by 26.5% to Rs842.6 crore. The sequential improvement in the margins is due to the stable raw material costs and cost savings in the other overheads.
• Both the interest costs as well as the depreciation costs have risen due to the higher capital expenditure (capex) of the company. As a result, the adjusted net profits for the quarter stood at 535.6 crore as against Rs80.4 crore a year ago.
• On a consolidated basis, the company has marked a 37% growth in its net sales and a 14% growth in the net profits.
• Due to a very strong volume growth registered in the first nine months, we are revising our estimates upwards for both FY2007 and FY2008. Our net profit estimates are revised upwards by 7.4% and 3.8% respectively.
• At the current market price (CMP) of Rs916, the stock trades at 13.1x its consolidated earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs1,075.

TVS Motor Company
Cluster: Emerging Star
Recommendation: Book Out
Current market price: Rs75

Book Out

Result highlights

• TVS Motors’ Q3FY2007 results are below our expectations primarily due to the intensifying competition in the two-wheeler segment and rising raw material prices leading to lower profitability.
• The company has recorded a 7.3% growth in its net sales for the quarter, which stood at Rs935.4 crore due to a marginal volume growth of 1.4% and a realisation growth of 5.8% year on year (yoy).
• The operating profit for the quarter declined by 51% to Rs29.6 crore as the operating margins declined by 380 basis points to disappointing levels of 3.2%. Even on a sequential basis, the margins were down 200 basis points. The lower margins are largely attributed to the lower sales volumes and a rise in the raw material costs.
• The profit before tax (PBT) during the quarter stood at Rs14.1 crore as compared to Rs45 crore a year ago. The profit after tax (PAT) declined by 63% to Rs11.5 crore.
• Considering the competitive pressures in the two-wheeler industry, we expect the pressure on the profit margins to continue in spite of the new product launches. We are downgrading our estimates for FY2007 by 30% and for FY2008 by 80%.
• At the current market price of Rs75, the stock discounts its FY2008E earnings by 17.2x and FY2008E EBIDTA by 9.1x. We advise to book profit in the stock.

UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,365
Current market price: Rs1,130

Stellar performance

Result highlights

• UltraTech Cement Limited (UTCL) has reported a whopping 790% year-on-year (y-o-y) jump in its net profit at Rs212.46 crore for Q3FY2007, marginally ahead of our expectations.
• The net sales increased by 61% year on year (yoy) from Rs782 crore to Rs1,260 crore boosted by a 14% increase in the volumes and a 41% jump in the realisations.
• The company's leverage to volumes resulted in the operating profit registering a growth of 244.5% yoy to Rs380 crore whereas the operating margins expanded by 1,600 basis points to 30% yoy.
• On the backdrop of a robust realisation growth and a muted increase in the operating expenditure, the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne stood at Rs879 clocking a y-o-y growth of 200% and a quarter-on-quarter (q-o-q) growth of 27%.
• Depreciation stood at Rs57 crore whereas the interest expenditure stood at Rs20 crore, marginally lower than expectations.
• Sweetened by a higher-than-expected other income of Rs16 crore, the net profit stood at Rs212.5 crore clocking a y-o-y growth of 790%.
• The company's capital expenditure (capex) plan of Rs2,700 crore is progressing well. This will provide the much needed volume growth going forward and result in higher profitability on account of the savings in power costs.
• Taking notice of the stellar third quarter performance and considering the buoyant scenario in the sector in the next one year, we are upgrading our FY2007 earnings estimates by 6% to Rs722 crore and FY2008 earnings by 28% to Rs1,132 crore.
• At the current market price of Rs1,130, the stock is discounting its FY2007 revised earnings by 18.4x and its FY2008 revised estimates by 12.4x whereas on an enterprise value (EV) per tonne basis, the stock is trading at USD171 per tonne. Maintaining our positive view on the stock, we are upgrading our price target to Rs1,365.

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs580
Current market price: Rs535

Performance above expectations

Result highlights

• UTI Bank's Q3FY2007 profit after tax (PAT) reported a 40% year on year (yoy) growth to Rs184.6 crore which is 6.4% higher than our estimate of Rs173.5 crore, mainly due to a higher trading income reported during the quarter.
• The net interest income (NII) was up by 44.7% to Rs415.8 crore compared with our estimate of Rs407 crore. The reported net interest margin (NIM) expanded by six basis points yoy and by eight basis points quarter on quarter (qoq).
• The other income zoomed by 61.3% to Rs279.7 crore due mainly to a higher trading income while the core fee income growth remained robust at 58.9% yoy.
• The operating expenses continue to remain high due to a significant increase in the employee expenses and network expansion.
• The bank currently has a network of 481 branches with 2,126 automated teller machines (ATMs). This has helped the bank to grow its savings and current account deposits by 58.8% and 61.3% respectively compared with the overall deposit growth rate of 49.7% and improve its current and savings account (CASA) ratio to 37.1% from 34.7% yoy. However on a sequential basis, the CASA ratio has declined to 37.1% from 40% in Q2FY2007 mainly due to a 14.2% quarter on quarter (q-o-q) decline in the current account balance.
• The capital adequacy ratio (CAR) for the bank as on December 2006 stood at 11.8% with the tier-I capital at 6.96%. The bank has already raised Rs420 crore of hybrid tier-I capital and exhausted the headroom to raise more funds using the same route. Hence, considering the growth potential of the bank, we feel the bank needs to come out with a plain equity issue in FY2008. We have factored in an equity dilution of 3.6 crore shares (12.8% of pre-issue equity capital) at an issue price of Rs500 per share. This would help the bank to raise Rs1,800 crore and improve the tier-I ratio to above 8%. The book value (BV) per share would increase by almost Rs40 per share post-dilution from our previous pre-issue estimates.
• Based on the improved performance of the bank we have also increased our FY2007 and FY2008 PAT estimates by 7.3% to Rs645 crore and Rs829 crore respectively. Thus the revised FY2007 earnings per share (EPS) estimate stands at Rs23.2, up from Rs21.6. The equity dilution assumed by us has reduced the FY2008 EPS estimate from Rs27.8 to Rs26.4. At the current market price of Rs535 the stock is quoting at 20.3x its FY2008E EPS, 10.3x its FY2008E pre-provisional profit (PPP) and 2.9x its FY2008E BV. We feel the dilution would be BV accretive and hence maintain our Buy recommendation on the stock with a revised price target of Rs580.

Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs700
Current market price: Rs636

Price target revised to Rs700

Result highlights

• Wipro's global information technology (IT) service business reported a growth of 6.2% quarter on quarter (qoq) and of 34.1% year on year (yoy) to Rs2,887 crore. The growth is largely in line with our expectations. In dollar terms, the revenues grew at a reasonably healthy rate of 8.8% sequentially to $640.5 million; the growth was contributed by an 8.9% growth in the IT service business and a 7.1% growth in the business process outsourcing (BPO) business. The sequential growth in the IT service business was driven by a 9.3% volume growth but the average realisation declined by 0.4%, resulting in a net growth of 8.9% sequentially. On the other hand, the sequential growth in the BPO business was purely driven by a 7% improvement in the average realisation with a flat growth in the volume.
• In terms of the operating profit margin (OPM), the adverse impact of the wage hikes (to part of the offshore work force in September 2006 and to the remaining in November 2006; a net impact of 180 basis points) and the rupee appreciation (a negative impact of 80 basis points) was partially mitigated by the higher employee utilisation, lower losses in the acquired entities and other cost efficiencies. This resulted in a net decline of 80 basis points in the OPM of the global IT service business.
• The revenue growth guidance of $685 million for Q4FY2007 implies a healthy sequential growth of close to 7% in the revenues of the global IT service business. The guidance does not include any contribution from the possible inorganic initiatives during the quarter. The management indicated that the overall outlook for the coming fiscal is also encouraging.
• On a consolidated basis, the revenues have grown by 12.8% qoq and 42.9% yoy to Rs3,964 crore under the US GAAP. The OPM has declined by 180 basis points to 19.4% on the back of a sequential decline of 80 basis points in the profitability of the global IT service business and a dip of 40 basis point in the OPM of the Indian IT service business. However, the sequential jump of 49.6% in the other income component (boosted partly by the sale of investments) and a lower tax rate (12.7% as compared with 13.3% in Q2) enabled the company to report a growth of 7% qoq and of 39.9% yoy in its earnings to Rs745 crore under the US GAAP.
• We have revised upwards Wipro's earnings estimates by 5.1% and 4.3% for FY2007 and FY2008 respectively. At the current market price the scrip trades at 31.7x FY2007 and 25.4x FY2008 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs700.

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SHAREKHAN SPECIAL

Q3FY2007 earnings review

The Q3FY2007 performance of the Sensex companies was way ahead of expectations. The year-on-year (y-o-y) and quarter-on-quarter (q-o-q) growth in the Sensex earnings stood at 40% and 12.6% respectively compared to the market expectations of a 26% y-o-y and a 1.2% q-o-q growth. However, in our Q2FY2007 earnings review we had not considered Reliance Communication's earnings and excluding the same the earnings growth stood at 37% year on year (yoy) and 12% quarter on quarter (qoq). The operating profit margin (OPM) for all non-banking Sensex companies has shown an improvement of 140 basis points yoy.

Monetary policy review

The Reserve Bank of India (RBI) has raised the repo rate by 25 basis points to 7.5% in the third quarter review of its Monetary Policy for 2006-07 in line with the market expectations. The RBI has maintained its inflation target stating that the current high inflation levels may be transitional. Overall the RBI continues to remain vigilant. While the rate hike was on expected lines the prudential measures on standard assets provisioning announced by the RBI reaffirms its focus on the quality of assets in the system.

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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 3 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. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

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.

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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.

Information Technology

A quarter of strong performance

Key points

• The Indian information technology (IT) services companies reported a robust performance in a difficult quarter. The volume growth continues to be healthy and most of the companies were able to show an improvement in the margins on a sequential basis, despite the adverse impact of the steep appreciation of the rupee.
• The outlook is optimistic in terms of the demand environment as well as the pricing scenario. Despite the expected slow-down in the growth of the IT budgets, the growing awareness and willingness to increase offshore outsourcing is likely to drive the growth in the calendar year 2007. However, the exchange rate fluctuations continue to be the wild card that could potentially spoil the party.
• In the note, we have revised the price targets of the companies under our coverage in line with the expected growth in the coming years. We prefer Infosys Technologies and HCL Tech among the front-line stocks. In the mid-cap space, our top picks are NIIT Tech and 3i Infotech.

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VIEWPOINT

Allsec Technologies

All set to grow
Allsec, a Chennai-based business process outsourcing (BPO) company, started operations in mid-2000 with a 100-seat facility. Currently, the company has staff strength of 2,700 employees spread over three delivery centres (two in Chennai and one in Bangalore) with a combined capacity of 2,300 seats. It includes a 600-seat capacity acquired by the take-over of B2K Corporation in December 2005.

The company is largely focused on financial services and insurance industry vertical. Currently, it generates around 80% of its revenues from voice-based processes. However, it has continuously improved the revenue contribution from non-voice based services and hopes to maintain the trend.

KEC International

Powerful numbers
KEC International (KEC) reported a strong set of results for Q3FY2007. The company has strong presence in the international power transmission and distribution (T&D) space, with operations in more than 20 countries. More than 75% of its order backlog was from the overseas markets as on December 2006.

The net sales of the company grew by 25.1% year on year (yoy) to Rs572 crore in the third quarter from Rs457 crore in Q3FY2006. In the same quarter, the net profits grew by 116% to Rs38.2 crore from Rs17.7 crore in Q3FY2006 whereas the operating profit margin (OPM) improved by 440 basis points to 14.1%. The margin improved owing to the execution of a high-margin order in the quarter. The company expects to maintain its OPM in the range of 11-12% going forward.

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