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Saturday, May 12, 2007

Sharekhan Investor's Eye dated May 09, 2007


Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs259

Results in line with expectations

Result highlights

  • Orchid Chemicals (Orchid) reported a year-on-year (y-o-y) increase of 3.4% in its net sales to Rs248.0 crore in Q4FY2007. The sales growth was above our expectations. The sales growth was marginal due to the absence of any significant new launches in the US market during the quarter.
  • The company maintained its performance in its major market, the USA. Its key products—Ceftriaoxne and Cefproxil—continued to enjoy a healthy market share in excess of 20-25%. Further, being the sole generic supplier of Cefoxitin and Cefazolin in the USA, Orchid maintains its high market share for these products.
  • Orchid's operating profit margin (OPM) improved by 190 basis points to 30.7% in the quarter. The improvement in the margin was driven by a 14.5% decline in the company's material cost on account of an improved product and geographical mix. The resultant improvement in the margin has caused the company's operating profit to grow by 10.2% to Rs76.1 crore in Q3FY2007.
  • For FY2007, Orchid's stand-alone revenues grew by 5.1% to Rs934.2 crore. The revenue growth was below our estimates. Despite higher interest cost and tax outgo, the net profits grew by an appreciable 16.6% to Rs96.6 crore. The net profit reported by the company was higher than our estimate of Rs92.3 crore. On a consolidated basis, Orchid's revenues rose by 3.5% to Rs985.1 crore in FY2007. The company's consolidated profits grew by an impressive 37.2% to Rs78.6 crore. The consolidated profits were higher than our estimate of Rs75.3 crore.
  • Orchid has already repaid $138 million of its total $290-million debt. Our back-of-the-envelope calculations indicate the repayment of debt will result in savings of approximately Rs56 crore in FY2008 for Orchid. The resultant cleaning up of the balance sheet will also help to improve the sentiment towards the stock.
  • Based on the FY2007 performance of the company and the outlook provided by the management during the recently held earnings call, we are reviewing our estimates for Orchid and will come out with an update shortly. At the current market price of Rs259, Orchid is quoting at 10.1x its 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 an entry into Canada and Europe. Hence, we maintain our Buy call on the company with a price target of Rs390.

Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs67
Current market price: Rs55

Results in line with expectation

Result highlights

  • Navneet Publications reported a growth of 5% in its revenues to Rs46.8 crore during the fourth quarter. The fourth quarter, which is usually a lull period for the publication business, showed a growth of 3% to Rs16.9 crore. However, the stationary business continues to grow at 7% (Rs28.3 crore in the fourth quarter). This growth was mainly due to the higher domestic sales.
  • The operating profit margin (OPM) of 10% is 200 basis points higher than the 8% OPM reported in Q4FY2006. Consequently, the operating profit grew by just 27% to Rs4.71 crore.
  • The profit after tax (PAT) was lower by 13% to Rs1.33 crore primarily due to a lower other income and higher taxes. In FY2006, the company had a tax shield due to its merger with Navneet Edutainment.
  • On a full-year basis, the revenues and earnings have grown by 11% to Rs326.7 crore and by 23% to Rs43.5 crore respectively. The OPM has improved by 200 basis points to 22%, largely due to the better profitability in the publication business. The company has declared a dividend of Rs2 for FY2007 which as resulted in a dividend yield of 3.6%.
  • The company had announced that it would invest Rs25 crore to set up a windmill-based power generation plant in Gujarat. This power project is expected to get functional by the end of July 2007. This will help the company to save income taxes as well as generate additional source of revenue.
  • At the current market price the stock trades at 12x FY2007 and 10x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a one-year price target of Rs67 (12x FY2008E earnings).

UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs935
Current market price: Rs816

Price target revised to Rs935

Result highlights

  • A strong realisation growth of 28% year on year (yoy) and a volume growht of 12% yoy helped the top line of UltraTech Cement to grow by 43% yoy to Rs1,465 crore. The domestic volume grew at a slower rate of 6% to 4.18 million metric tonne (MMT) whereas exports witnessed a 28% growth yoy to 0.86MMT.
  • The expenditure grew by 27% yoy to Rs1,057 crore whereas the expenditure per tonne increased by 13.6% yoy and 7% sequentially to Rs2,097.
  • The company's high leverage to cement prices led the operating profit to zoom by 113% yoy to Rs409 crore whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne almost doubled to Rs811.
  • Helped by a flat interest cost, depreciation provision and a stable tax rate, the net profit increased by 184% yoy to Rs231 crore.
  • The 4MMT project is on schedule and the facility is expected to come up by the end of FY2008. It would scale up the capacity of the company to 21.5MMT.
  • The company is also putting up a 92-megawatt (MW) lignite-based captive power plant (CPP) at Gujarat and a 46MW coal-based CPP at Hirmi, Chattisgarh. On account of these CPP projects the company's per unit cost of power will come down to Rs2 in FY2009 from Rs5.28 now, resulting in a saving of Rs120-130 crore.
  • We expect the company's earnings to grow at a compounded annual growth rate (CAGR) of 11% over FY2007-09 to Rs77.2 per share. At the current market price of Rs816 the stock is trading at 11.3x its FY2008 and 10.6x its FY2009 estimated earnings. The enterprise value (EV) per tonne stands at USD 112. Looking at the positive triggers for the stock, we maintain our Buy recommendation on it with a reduced price target of Rs935.

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Sharekhan Investor's Eye dated May 09, 2007