Sundaram Clayton, Genus Power, JM Financial

Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,350
Current market price: Rs835

A subdued quarter

Result highlights

• Sundaram Clayton Ltd's (SCL) Q1FY2008 results were below expectations because of a slower than expected growth in the top line. The net sales grew by just 6.1% year on year (yoy) to Rs201.4 crore, mainly due to a slower growth in its domestic brake business.
• The company was able to maintain its operating profit margin (OPM) despite cost pressures, primarily because of its excellent cost management and continuous efforts to save costs. Consequently, the OPM rose by 60 basis points yoy to 15.2% as the operating profit rose by 10.1% to Rs30.6 crore.
• Higher interest and depreciation charges due to the capital expenditure (capex) incurred by the company during the quarter led to a marginal 1.4% growth in the profit to Rs18.2 crore.
• The company had also recently announced its de-merger and would be spinning off its brake division into a subsidiary. The new entity will be called WABCO-TVS and will be listed on stock exchanges. We believe that the demerger would help both the companies to focus on their core areas and benefit SCL in the long run.
• The performance of SCL is largely dependent on the performance of its key clients in the commercial vehicle (CV) sector. Considering the buoyancy in the economy, the long-term outlook for the CV industry remains positive. We view the current slowdown as just an aberration and expect the demand to pick up in the second half of the fiscal, with the start of the festive season. Consequently, we expect the next quarter to be subdued but growth should pick up from the third quarter of the fiscal.
• However, due to the current slowdown and the lacklustre performance of the first quarter, we are downgrading our sales estimates for FY2008 and FY2009 by 7.8% and 1.8% respectively. Consequently, we are reducing our earnings estimate for FY2008 by 9.8% to Rs53.3 and that for FY2009 by 1.2% to Rs73.6.
• At the current market price, the stock is trading at 11.4x its FY2009 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 8.7x. We maintain our Buy recommendation with a price target of Rs1,350.

Genus Power Infrastructures
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs450
Current market price: Rs370

Price target revised to Rs450

Result highlights

• Genus Power Infrastructures has announced its Q1FY2008 results. The net sales for the quarter grew by 63.7% to Rs83.5 crore with revenues kicking in from the new facility in Uttranchal. The net earnings grew by 86.5% to Rs6.9 crore.
• The operating profit for the quarter grew by 67.1% to Rs13.2 crore, the operating profit margin (OPM) for the quarter improved by 30 basis points to 15.8% as against 15.5% in Q1FY2007.
• The interest expense for the quarter increased by 57.7% to Rs4.1 crore
• The order book of the company stood at around Rs370 crore at the end of the first quarter.
• With effect from March 31, 2007 the company's name has been changed to Genus Power Infrastructures Ltd (GPIL).
• GPIL, a leading manufacturer of tamper proof electronic energy meters (EEMs), has been growing at a robust pace. The healthy growth is expected to continue on the back of the large investments being made in the transmission and distribution sector, and the replacement of old meters with new EEMs by various state electricity boards (SEBs).
• At the current market price of Rs370 the company is discounting its FY2008E earnings by 9.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs450, keeping the target multiple of 12x FY2008E earnings.

JM Financial
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,352
Current market price: Rs1,080

Price target revised to Rs1,352

Key points

• Morgan Stanley (MS), the world's second largest securities broker and investment bank, has decided to set up its own shop in India and hence it has decided to end its current joint venture with the JM Financial (JMF).
• MS and JMF operated in all the spheres of the capital market through two unlisted private companies named JM Morgan Stanley Pvt Ltd (JMMP) and JM Morgan Stanley Securities Pvt Ltd (JMMSP).
• JMF will sell its 49% holding in JMMSP (engaged in institutional broking, largely foreign institutional investor [FII] business) to MS for $445 million (Rs1,970 crore). Simultaneously, MS will also sell its 49% holding in JMMP (engaged in investment banking [IB] business) for $20 million (Rs90 crore) to JMF. This will make MS the 100% owner of the securities business and JMF the 100% owner of the IB business.
• Some regulatory approvals have been pending and the finalisation of the deal is expected by mid-July 2007. The beauty of this deal lies in the fact that Nimesh Kampani has been able to sell the institutional broking business at a cost far higher than what he had paid for the IB business. However the profit contributions from both the businesses were roughly similar in the previous fiscal. The securities business contributed about 48% while the IB and retail brokerage businesses together contributed 51% of JMF's consolidated earnings in FY2007.
• JMF has adopted the strategy of growing both organically and inorganically to expand its current businesses. The same, we feel, is a well thoughtout policy that would compensate for the loss in the revenues (after the split with MS) and make proper utilisation of the huge cash pool that would be available at JMF's disposal post-sale.
• JMF has already acquired a 60% stake in ASK Securities, which is engaged in institutional equity broking business, for Rs58 crore and is looking at buying a stake in a global boutique investment bank, which will offer advisory services for global mergers and acquisitions (M&As).
• We feel JMF would need some time to restructure its operations; hence we have not based our valuation on FY2008E earnings but looked at FY2009E earnings, which we feel would reflect the earnings potential of the company in a much better way as the exit of MS is bound to have its implications on the FY2008E revenues.
• We feel tie-ups with investment banks having global reach would help to bridge the gap created after MS' exit. The retail broking and distribution business should continue to grow with its thrust on expanding the retail branch network. The margin funding and IPO funding business is expected to double with its huge pool of cash and increased reach. Other nascent businesses like the commodities, private equity and mutual funds businesses are expected to contribute to the consolidated PAT going forward. Considering the above developments our 12-month price target—based on the FY2009E earnings using the sum-of-the-parts (SOTP) model—works out to Rs1,352. At its current market price the stock is trading at 25.2x FY2009E earnings per share (EPS) and 1.2x FY2009E consolidated book value (BV) which provide a decent 25% upside from the current price of Rs1,080. At our target price the company would trade at 32x FY2009E EPS and 1.5x FY2009E consolidated BV. The price/earnings (P/E) multiple looks a bit on the higher side mainly due to the negative contribution from some of the nascent businesses. The valuations are attractive from the BV perspective.

Sundaram Clayton, Genus Power, JM Financial