International Combustion (India)
Cluster: Cannonball
Recommendation: Buy
Price target: Rs519
Current market price: Rs320
Results meet expectations
Result highlights
- The revenues of International Combustion India Ltd (ICIL) grew by 15.6% year on year (yoy) to Rs24.1 crore in Q4FY2007, in line with our estimates.
- The revenues of the heavy engineering division (HED) grew by 24.8% yoy to Rs18.4 crore while that of the geared motor and geared box division (GMGBD) declined by 5.1% yoy to Rs5.9 crore. However, on a sequential basis the GMGBD's top line grew by 61.2%.
- The operating profit margin (OPM) of the company improved by 280 basis points yoy to 20.3% in Q4FY2007, in line with our estimates. The margin expansion was driven by a lower raw material cost as the raw material cost as a percentage of sales ratio declined to 51% from 56.3% yoy. Consequently, the operating profit grew by 34.6% to Rs4.9 crore.
- The margin of the HED improved by a whopping 1,340 basis points yoy to 32.6% while that of the GMGBD declined by 1,800 basis points to 14.7%. The GMGBD's margin declined largely because the company started manufacturing the B2000 series of geared motors and gear boxes in this year. It has made huge investments in the B2000 series project the results of which will get reflected in its FY2008 numbers.
- The interest cost declined by 7.7% yoy to Rs0.1 crore as the company repaid its entire debt and became a debt-free company in this year. Consequently, the net profit grew by a strong 47.4% yoy to Rs2.8 crore.
- The outstanding order book stood at Rs56 crore out of which the HED's order book stood at Rs48 crore with the GMGBD accounting for the balance Rs8 crore.
- ICIL is currently trading at a price/earnings ratio (PER) of 6.8x its FY2008E earnings and 4.2x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). Considering the strong order backlog and the expansion plans of its key user industries such as steel, sugar and cement, we maintain our Buy recommendation on the stock with a price target of Rs519.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs3,500
Current market price: Rs2,746
Price target revised to Rs3,500
Result highlights
- Cement volumes of Madras Cement Ltd (MCL) grew at a slower rate of 10.1% in Q4FY2007 compared the previous quarters to 1.48MMT as the plant at Alathiyur witnessed a maintenance shutdown for 15 days. The realisation growth was strong at 27% year on year (yoy) to Rs2,923 per tonne which resulted in a robust top line growth of 45.1% yoy to Rs435 crore.
- The operating expenditure increased by 29.4% yoy to Rs301.8 crore as the power and fuel cost increased by 25% yoy to Rs85 crore on the back of higher international coal prices and freight cost, which increased by 35% yoy to Rs72.8 crore. The employee cost too jumped substantially to Rs18 crore as against Rs12 crore in the previous quarter on account of the bonuses given to employees.
- The operating profit doubled yoy to Rs133 crore whereas the operating profit margin (OPM) improved by 800 basis points yoy to 30%; though on a sequential basis, the OPM dropped by 270 basis points.
- The interest cost reduced by Rs3 crore yoy to Rs6 crore, thanks to the repayment of debt in the quarter. The depreciation provision remained more or less flat sequentially at Rs18.2 crore.
- With the tax provision growing at a marginal rate, the net profit jumped by 117% yoy to Rs71 crore.
- Thanks to the additional capacity of 4MMT that kicked in during the fourth quarter, we expect the company to clock a healthy volume growth of 12% in FY2008 and 26% in FY2009 yoy. The accompanying captive power plants (CPPs) will help the company to keep its power cost under control.
- We are reducing our FY2008 earnings per share (EPS) estimate by 6.6% to Rs313 from Rs334 earlier as we expect the cement prices to remain firm for the next one year. We are also introducing our FY2009 estimate of Rs359.
- We expect the company to clock a 40% compounded annual growth in its earnings over FY2007-09. At the current market price of Rs2,746, the stock trades at 7.7x its FY2009 estimates and an enterprise value (EV) per tonne of USD77. Considering the positive outlook, we maintain our Buy recommendation on the stock with a reduced price target of Rs3,500 per share.
SECTOR UPDATE
Automobiles
Weakness across
The weakness in automobile sales continued across segments in May, with utility vehicles (uv) being the only exception. The two-wheeler segment witnessed a decline in sales across players, confirming fears of a slow-down in the segment. The passenger car segment managed to show a small growth due to new product launches. The commercial vehicle (CV) segment, particularly the medium and heavy commercial vehicle (M&HCV) segment, continues to decline due to rising interest rates. The light commercial vehicle (LCV) segment has also managed to report a nominal growth that too due to the growth of ACE. Mahindra and Mahindra (M&M) was the exception in the month with strong sales being reported by Scorpio as well as non-Scorpio UVs, good response to Logan with the exception of high base effect restricting the growth in the tractor segment.