Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs370
Beating expectations
Result highlights
- Wockhardt's Q4CY2006 net sales grew by 43.7% to Rs526.4 crore, led by a 22.1% growth in its domestic business and a 56.6% rise in its international business. The sales growth was above our expectations. The massive increase in the international business was largely due to the Pinewood acquisition.
- Despite sharp escalations in the material cost and the staff cost, the company's operating mazgins remained flat at 23.2%. This was due to the lower research and development (R&D) expenses, which were capitalised instead of being expensed. On excluding the R&D costs, the company's margins actually declined by 190 basis points year on year (yoy). The decline in the margins was on account of the low-margin Pinewood & Dumex acquisitions. Back-of-the-envelope calculations indicate that the Pinewood acquisition alone has impacted the margins by approximately 150 basis points. Wockhardt reported an operating profit (OP) of Rs122.1 crore, a growth of 43.6% yoy.
- The net profit grew by 19.5% to Rs87.1 crore in Q4CY2006. The net profit was impacted by substantially higher interest and depreciation costs, but was nevertheless much higher than our estimate of Rs77.1 crore.
- For CY2006, Wockhardt's net sales grew by 22.4% to Rs1,729.1 crore, as against our expectation of a 17.0% growth. The Dumex and Pinewood acquisitions contributed significantly to the growth. Excluding the acquisitions, the like-to-like growth stood at 14%. The reported net profit grew by 17.3% to Rs301.7 crore. However, the company had incurred extraordinary expenses to the tune of Rs60 crore in the beginning of the year, due to which the adjusted net profit declined by 6.1% to Rs241.3 crore.
- Wockhardt plans to achieve sales of $1 billion by 2009. Of this $1 billion, $700 million will come through organic growth while $300 million will come as contribution from inorganic initiatives. For CY2007, the company is targeting to cross sales of $500 million and maintain the net margins in the range of 16-18%.
- Based on the management's vision and strategy presented at the recently held analyst meet, we are introducing our CY2008 estimates for Wockhardt. We believe that Wockhardt's top-line will grow at a compounded annual growth rate (CAGR) of 21.3% over CY2006-08E, with revenues touching Rs2,544.3 crore in CY2008E. Over the same period, the net profit is estimated to grow at a CAGR of 31.3%, with the profits reaching Rs415.8 crore in CY2008E, translating into earnings of Rs34.8 per share.
- At the current market price of Rs370, the stock is available at 12.2x its estimated CY2007E earnings and at 10.6x its estimated CY2008E earnings, on a fully diluted basis. The valuations seem very attractive at these levels and should be viewed as a strong buying opportunity. We maintain our Buy recommendation on the stock with a price target of Rs552.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs39
Good growth at attractive valuations
Key points
- Ashok Leyland Ltd (ALL) has reported good vehicle sales numbers for the month of February 2007 with an overall growth of 33%. The truck segment recorded a 33% growth and the bus segment grew by 27% during the month.
- The company is all set to surpass its sales target of 80,000 vehicles for the current fiscal. We maintain our positive outlook on the growth prospects of Ashok Leyland on the back of the continuing buoyancy in the commercial vehicle segment.
- The company is expected to spend about Rs4,000 crore in the next three-four years, including about Rs1,200 crore for setting up a plant in Uttaranchal.
- ALL is also a front runner for the acquisition of a stake in Punjab Tractors Ltd (PTL). The acquisition, in case it goes through, would give ALL an entry into the fast growing tractor market in India, and the acquirer would also be able to take advantage of the strong brand equity of PTL and its strong distribution network. However, the acquisition would come at a high price, and the acquirer would have to shell out anything between Rs1,200 crore and Rs1,500 crore, which would necessitate further raising of funds by the company.
- A sharp correction on the bourses following a global meltdown has seen the stock price of Ashok Leyland take a heavy beating. Considering its strong growth outlook, we believe that this is a good buying opportunity, as the stock is available at very attractive valuations, which are at a considerable discount to its peers. At the current market price of Rs39, the stock discounts its FY2008E earnings by 9.5x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs56.
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,780
Price target revised to Rs2,430
Aban Offshore Ltd (AOL) has announced the signing of a contract with affiliates of Addax Petroleum and Sinopec to deploy its deepwater drill ship, Aban Abraham, in the offshore block located at the Gulf of Guinea. The contract to drill five firm wells (with an option to drill another five wells) over a duration of 300 days is worth $123 million (can be increased to $246 million). It works out to a charter rate of $410,000 per day (around 36.6% higher than the charter rate of $300,000 for its contract starting from July 2007). The recently acquired contract is effective from end of May 2008 and would positively affect the earnings of FY2009.
SECTOR UPDATE
Banking
RBI seeks to limit inter-bank lendings
The Reserve Bank of India (RBI) has asked banks to put in place a comprehensive framework for managing its inter-bank liabilities (IBL). Currently there are no defined limits on IBL for banks and with this measure the RBI wants banks to be aware of the potential risks associated with such a liability and contain the liquidity risk arising out of excessive dependence on such liabilities.
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