Tuesday, March 13, 2007
FROM SHAREKHAN'S DESK
Walking the tightrope
Sharekhan top picks
In the February 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on March 2, 2007, the return on this basket of stocks has been a negative 13.8% as compared to the Sensex, which declined by 10.5%, and the S&P CNX Nifty, which has dropped by 10.9%, during the period.
SHAREKHAN BUDGET SPECIAL
Budget 2008: Neither reformist, nor populist
Fiscal consolidation remained the priority of the finance minister (FM) in the Union Budget 2007-08 with the fiscal deficit brought down to 3.7% in FY2007 and 3.3% for FY2008 which are in line with the Fiscal Responsibility and Budget Management Act targets. The FM had to tackle a host of things ranging from rising inflation to budgetary impact on the ongoing and upcoming elections. The FM has been able to present a budget that is more or less on expected lines except for the hike in the dividend distribution tax. His key focus areas in this budget have been agriculture, education and irrigation projects. On the taxation front, he has kept things mostly steady and also announced some additional steps to control inflation in the short term.
RAILWAY BUDGET SPECIAL
Railway Budget 2007-08
Railway minister Lalu Prasad Yadav continues to guide the Indian Railways (IR) on a profitable growth path. Announcing his fourth budget for the IR today, he indicated that the capital expenditure (capex) binge of IR would continue. In a move to boost IR's key revenue stream (ie freight), the minister also extended major concessions on the freight rate front. He also reduced the passenger fares in a bid to increase the passenger traffic. The other salient features of the Railway Budget 2007-08 are an impressive reduction in the operating cost of IR, significant policy shifts to turn around the loss-making businesses of the national carrier, continued freight rationalisation and an increase in the capex of IR to make the railways more competitive.
The major beneficiaries of these moves are likely to be Texmaco, Kalindee Rail Nirman Engineers (Kalindee Rail) and Stone India. A few days back, in our special note "Turnaround Express going strong", dated February 22, 2007, we had mentioned how we expected companies like Hind Rectifiers, Simplex Casting, Stone India and Texmaco to show a healthy growth in their earnings on the back of the growing capex of IR.
Besides these companies, oil refiners, cement, steel and iron ore companies would benefit from the railway budget due to the reduction announced in the freight rates, though the impact on earnings is expected to be marginal.
Cluster: Emerging Star
Price target: Rs2,387
Current market price: Rs1,855
Price target revised to Rs2,387
- Aban Offshore Ltd (AOL) has successfully increased its stake in Sinvest ASA to 97% through the completion of the mandatory open offer. With a majority control in Sinvest, AOL would have control over 28 assets (including the six under construction) and has emerged as one of the Top 10 offshore drilling companies globally.
- The acquisition of the additional 57% stake in Sinvest for around $775 million will be earnings accretive. It would boost the earnings by $41.8 million in FY2008 and by $70 million in FY2009. Moreover, AOL would get access to the huge cash flows of around $750-800 million expected to be generated by Sinvest over the next three years.
- We maintain our Buy call on the stock with a one-year revised price target of Rs2,387 (8x FY2009E earnings which is at a slight premium to the valuations of the other comparable global players due to the company's strong cash flows and a relatively higher return on equity [RoE]).
Cluster: Apple Green
Price target: Rs1,250
Current market price: Rs1,100
Stupendous quarterly performance
- ACC put up an excellent performance for the fourth quarter clocking a 250% year-on-year (y-o-y) growth in the profit after tax (PAT) at Rs329 crore, ahead of our estimates.
- The top line grew by a healthy 51% year on year (yoy) to Rs1,619 crore on the back of a 42% y-o-y growth in the realisations and a 7% y-o-y growth in the volumes.
- The operating expenditure grew by 25.8% yoy to Rs1,151 crore driven by a 12.7% y-o-y rise in the power & fuel costs and a 19.7% rise in the freight costs.
- On account of the higher realisation growth, the operating profit witnessed a 197.5% y-o-y growth to Rs468 crore. The operating profit margin expanded by 1,420 basis points yoy and by 230 basis points quarter on quarter (qoq) to 28.9%.
- Consequently, the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne jumped three-fold to Rs975 per tonne on account of the company's high leverage to the cement prices.
- The interest cost fell by 80.1% yoy to Rs4.1 crore whereas the depreciation provision stood higher at Rs77.1 crore.
- The pre-exceptional profit stood at Rs329 crore translating into a y-o-y growth of 249.9%. Adjusting for the extraordinary items, the PAT was up 86.1% yoy at Rs358 crore.
- The company has declared a dividend of Rs15 per share for the year ending December 2006 implying a dividend payout of 27%.
- ACC is adding capacity of 0.9 million metric tonne (MMT) at Lakheri along with the setting up of a 25MW captive power plant (CPP). The company is also expanding the capacities at various other locations post which, its total capacity is expected to increase by 3.19MMT to 23.1MMT by December 2007. The company is also adding 1.18MMT capacity coupled with a 30MW CPP at its Bargah Cement unit (expected to be commissioned in the first quarter of CY2008) and is putting up a fresh 3MMT plant at Wadi, which is expected to be commissioned in the next 24-30 months.
- At the current market price of Rs1,100, the stock is discounting its CY2007E earnings by 15.7x and EBITDA by 9.2x. On an enterprise value (EV) per tonne basis, the stock is trading at USD198 per tonne. We believe the stock is very attractive considering its leverage to the cement prices, better cost structure as well as its improving financials. We thus maintain out Buy recommendation on the stock with a price target of Rs1,250.
Aditya Birla Nuvo
Cluster: Apple Green
Price target: Rs1,600
Current market price: Rs1,409
An Idea whose time has come
- The consolidated revenues of Aditya Birla Nuvo (ABN) in Q3FY2007 grew by 69.5% year on year (yoy) to Rs2,288.8 crore, in line with our estimate. The growth was driven by (1) a strong double-digit growth in its value businesses; (2) the addition of the fertiliser and finance businesses due to the merger of Indo Gulf and Birla Global; (3) a higher share in the telecom business at 35.7% during the quarter; and (4) the continued momentum in its growth businesses.
- The share of the high-growth businesses (garments, life insurance, business process outsourcing [BPO], software and telecom) improved to 67.6% of sales in Q3FY2007 as compared to 54.0% in the same period last year.
- A sharp margin expansion was witnessed in the rayon (up 1,010 basis points), insulators (up 420 basis points), telecom (up 390 basis points) and carbon black (up 290 basis points) businesses. The other businesses witnessed margin pressure leading to a decline in the overall margins.
- Driven by the margin pressure in the key business segments, the operating profit margin (OPM) saw a contraction of 130 basis points yoy to 13.1%. Consequently, the operating profit grew by 53.8% yoy to Rs299.4 crore.
- The net profit declined by 0.8% yoy to Rs56.27 crore because of higher depreciation and interest costs.
- We have been maintaining our positive stance on the stock given the company's strategy to use the cash generated from the value businesses to invest in the growth businesses like telecom and insurance. Idea Cellular Ltd, the fourth largest telecom player in the country, in which the company owns 36.26%, has filed its red herring prospectus (RHP) with SEBI for raising Rs2,125 crore with a price band of Rs65-75 per share. Even though the higher end of the band is below our implied price per share, we believe that at Rs75 Idea Cellular would trade at a significant discount to its peer.
- Given the diverse businesses of ABN, the company is best valued using the sum-of-parts method. Based on the sum-of-parts valuation of the merged entity, we estimate the fair value of ABN to be Rs1,600 per share. We maintain a Buy recommendation on ABN with a 12-month revised price target of Rs1,600.
Price target: Rs106
Current market price: Rs90
Prior-period income inflates numbers
- In Q3FY2007 Allahabad Bank's net profit grew by 27.6% year on year (yoy), much above our expectation of Rs207.5 crore. The growth was higher than expected mainly due to a one-time interest income of Rs62 crore during the quarter.
- During the quarter the bank's net interest income (NII) grew by 23.8% yoy and 24.3% quarter on quarter (qoq) to Rs484.7 crore mainly due to a one-time interest income of Rs62 crore related to prior period. However, adjusting for the same the NII grew by 8% yoy and 8.4% qoq. The net interest margin (NIM) adjusted for the one-time item increased by five basis points on a sequential basis.
- The non-interest income decreased by 16.3% yoy to Rs125.5 crore despite a 49% year-on-year (y-o-y) growth in the treasury income. That was mainly because a sundry amount of Rs28.1 crore that was included in Q3FY2006 was absent in the Q3FY2007 numbers. Adjusted for the same the non-interest income remained flat on a y-o-y basis. On a sequential basis the non-interest income grew by 2.7%.
- The operating expenses declined 6.7% on a y-o-y basis but showed a 6.3% sequential increase. The operating profit was up 9.7% yoy and 7.7% qoq while the core operating profit (excluding the treasury & others) increased by 28.4% on a y-o-y basis but showed a marginal decline of 0.7% on a sequential basis.
- Provisions and contingencies including the amortisation expenses (Allahabad Bank reports its amortisation on held-to-maturity securities under "Other operating expenses", we have adjusted the operating expenses and provisions accordingly) decreased by 70.2% on a y-o-y basis mainly due to higher minimum alternative tax (MAT) credit.
- The Q3FY2007 numbers are much above expectations mainly due to the one-time interest income of Rs62 crore related to the prior years. Hence, we have revised our FY2007 profit after tax (PAT) numbers upwards by 9.7% to Rs770 crore to factor in the one-time income.
- At the current market price of Rs90, the stock is quoting at 4.8x its FY2008E earnings per share (EPS), 2.9x pre-provision profits (PPP) and 1x book value (BV). The bank is available at attractive valuations given its low price-to-book multiple compared with its peers. We maintain our Buy call on the stock with a price target of Rs106.
Price target: Rs109
Current market price: Rs81
Operating performance improves
- For Q3FY2007 Andhra Bank (ANDB) reported a 5.8% year-on-year (y-o-y) growth in its net profit to Rs136.3 crore. The same is in line with our profit after tax (PAT) expectations of Rs138.5 crore.
- During the quarter the bank's net interest income (NII) grew by 22.8% year on year (yoy) and by 9.9% quarter on quarter (qoq) to Rs363.5 crore. ANDB has been one of the few banks which have shown an improvement in their net interest margin (NIM) yoy and maintained the NIM stable on a sequential basis.
- The non-interest income of the bank increased by 11.8% yoy to Rs132.9 crore despite a 21.6% y-o-y decline in the treasury income. The non-interest income excluding the treasury income was up 18.7% yoy and 5.1% qoq.
- The operating profit was up 28.5% yoy and 16.9% qoq while the core-operating profit (excluding the treasury income) increased by 33.8% yoy and 19% qoq.
- Provisions and contingencies showed a significant jump to Rs64.5 crore mainly on account of higher investment depreciation and provisions related to non-performing assets (NPAs).
- The net NPAs increased from 0.1% to 0.44% on a sequential basis while the gross NPAs declined by four basis points to 1.72% qoq. However, in absolute terms, both the net NPAs and the gross NPAs showed an increase. Despite the rise in the NPAs the asset quality of the bank continues to be one of the best in the industry.
- The bank has reported numbers in line with our expectations and also improved on its operating performance. The capital adequacy levels are comfortable at 12.8% with the Tier-I capital at 11.4%. Also, despite some increase during the quarter the asset quality of the bank continues to be among the best in the industry.
- At the current market price of Rs81, the stock is quoting at 6.1x its FY2008E earnings per share (EPS), 3.7x pre-provision profits (PPP) and 1.1x book value (BV). The bank is available at attractive valuations, given its low price to book multiple with an average return on equity (RoE) of 18.5% compared with its peers. We maintain our Buy call on the stock with a price target of Rs109.
Cluster: Ugly Duckling
Price target: Rs56
Current market price: Rs49.8
Spillover boosts January numbers
- Ashok Leyland has reported a magnificent growth in its January numbers. The higher than expected growth was a result of the spillover of sales from the previous month due to the implementation of the value-added tax in Tamil Nadu w.e.f January 1, 2007.
- The company reported an overall growth of 67% year on year (yoy) as its vehicle sales jumped to 9,650 units in the month. Its domestic sales grew by 62% while its exports rose by a whopping 228%.
- The medium-duty vehicle (MDV) goods segment (which accounts for the bulk of the company's sales) turned a brilliant performance, reporting a growth of 69.6% yoy with sales of 7,870 vehicles. The MDV passenger segment, where the company has been losing market share, is beginning to show signs of improvement grew by 56% in January.
- In January the sales of its light commercial vehicles stood at 28 units, marking a growth of 16.7% yoy.
- Looking at the year-till-date numbers, the company has reported an overall growth of 41.7% with the MDV goods segment growing by 61% yoy and the MDV passenger segment marking a decline of 4.7%.
w At the current market price of Rs49.8, the stock quotes at FY2008E PER of 12.4x and at an EV/ EBIDTA of 6.9x. We maintain our Buy recommendation on the stock with a price target of Rs56.
Bank of Baroda
Cluster: Apple Green
Price target: Rs327
Current market price: Rs246
Comparatively a better quarter
- Bank of Baroda's Q3FY2007 results are much above expectations with the profit after tax (PAT) reporting a growth of 62.8% to Rs329 crore compared to our estimates of Rs258.9 crore. The higher than expected non-interest income growth driven by higher fee income and other income coupled with the lower than expected provisions resulted in the actual PAT exceeding expectations.
- The net interest income (NII) was up 18.1% to Rs960.8 crore compared to our estimates of Rs921.3 crore. The margins have declined on a year-on-year (y-o-y) basis by 17 basis points but have improved by 3 basis points sequentially to 2.98%.
- The non-interest income increased by 21.6% to Rs333.7 crore with the trading income down 22.7% year on year (yoy) and the core fee income up 47.4% yoy.
- The operating profit was up by 29% yoy and by 6.7% quarter on quarter (qoq) to Rs656.9 crore. However the core operating profit was up 34.2% yoy and 14.4% qoq.
- The provisions declined by 37% to Rs141.7 crore primarily due to the nil NPAs provisions made during the quarter as compared to Rs42.6 crore in Q3FY2006.
- The operating profit growth and a decline in the provisions helped in the PAT reporting a sharp rise of 62.8% to Rs329.1 crore despite the tax provisions rising by 126.9% yoy to Rs186.1 crore.
- The asset quality has improved as the gross NPAs have come down on a y-o-y and q-o-q basis with the net NPAs in percentage terms also down to 0.67% from 1.1% yoy and from 0.77% qoq. The capital adequacy stood at 12.24% as on December 2006 compared to 12.93% on a sequential basis with Tier I at 9.13%.
- The operating numbers are comparatively better for Q3FY2007 on a y-o-y and q-o-q basis than what we had witnessed in Q2FY2007 and based on the higher than expected PAT numbers we have revised our FY2007 PAT upwards by 3.6% to Rs1,015.6 crore. At the current market price of Rs246, the stock is quoting at 7x its FY2008E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 0.9x book value. The bank is available at attractive valuations given its low price-to-book multiple compared to its peers and earnings upside possibilities. We maintain our Buy call on the stock with a price target of Rs327.
Cluster: Apple Green
Price target: Rs1,715
Current market price: Rs1,600
Price target revised to Rs1,715
Bharat Electronics Ltd (BEL) is making the most out of the Aero India 2007 (aerospace show and defence exhibition) held at Bangalore. It is effectively utilising the platform to forge alliances, tie-ups and agreements with the leading manufacturers and contractors of defence equipment and systems globally. In the past couple of days, it has signed two important memoranda of understanding (MOUs). The first one is with Northrop Grumman, one of the largest global defence, electronic system and solutions and technology companies. The second one is with Elbit Systems Electro Optics (Elbit Systems) of Israel that specialises in state-of-the-art surveillance and security equipment and systems.
Cluster: Apple Green
Price target: Rs820
Current market price: Rs729
Vodafone deal to boost valuations
- The entry of the global telecom giant Vodafone into the Indian markets through the acquisition of a controlling stake in Hutchison Essar Ltd (HEL) would result in a tougher competitive scenario in the already crowded domestic telecom service space.
- The Vodafone deal values HEL at an enterprise value (EV) of $18.8 billion and is at a steep premium to the current valuations of Bharti Airtel Ltd (BAL) and Reliance Communications (Rcom) in terms EV/earnings before interest, tax, depreciation and amortisation (EBITDA). Consequently, it should have a positive impact on the sector's valuations over the long term and reflects the increasing confidence of global players in the Indian telecom service market.
- The Bharti group has been granted an option to acquire the 5.6% direct stake held by Vodafone in BAL while Vodafone would retain the 4.4% indirect stake (held in lieu of its interest in a holding company) as a financial investor. The direct stake of 5.6% has been offered to BAL at a consideration of $1.6 billion, which is at a 10-12% discount to the existing equity value of BAL. The Bharti group is likely to utilise the acquired stake to either enhance the free float (through placement to institutional investors) or bring in a strategic partner (some global telecom giant) that could support BAL to roll out 3G services. Thus, the deal is a positive development for BAL from a long-term perspective.
- On the other hand, the deal is likely to have a negative impact on Rcom. Especially since the acquisition of HEL could have given Rcom the required head start in the GSM-based wireless service space and also enabled it to emerge as the largest telecom service operator in the country.
- BAL continues to be our preferred pick in the sector. We maintain our Buy call on the stock with a price target of Rs820.
Cluster: Apple Green
Price target: Rs380
Current market price: Rs295
Price target revised to Rs380
- Corporation Bank's results are slightly above our expectations; its profit after tax (PAT) grew by 27.2% to Rs146.4 crore compared with our estimates of Rs135.9 crore due to a higher than expected non-interest income led by a higher treasury income.
- During the quarter, one of the wholly-owned subsidiaries of the bank, Corp Bank Homes, was merged with the bank. Due to the merger the current quarter numbers include an additional provision of Rs16.8 crore excluding which the PAT growth would have been higher at 41% to Rs162.4 crore.
- The net interest income (NII) was up by 1.5% to Rs333.3 crore compared with our estimates of Rs343 crore. The net interest margin (NIM) was down five basis points to 3.15% for the nine-month period ended December 2006 compared with 3.2% for H1FY2007.
- The non-interest income increased by 49.6% to Rs159.3 crore, mainly due to a higher treasury income, which increased by 212.5% year on year (yoy) to Rs40 crore compared with a treasury income of Rs12.8 crore in Q3FY2006 and a treasury loss of Rs5.4 crore in Q2FY2007. The fee income was up 20.3% yoy and 3.3% quarter on quarter (qoq).
- With the net income up 13.2% yoy and the operating expenses up only 3.1% yoy, the operating profit was up by 21.4% yoy and 24.4% qoq to Rs293.1 crore.
- Provisions declined by 8.4% to Rs83.2 crore despite a one-time higher provision charge on account of the merger mainly due to nil standard assets provisions. A moderate operating profit growth and a decline in the provisions helped the PAT grow by 27.2% to Rs146.4 crore.
- The asset quality of the bank continues to be healthy with the net non-performing asset (NPA) in percentage terms at 0.47%, down from 0.8% yoy and 0.5% qoq. The capital adequacy ratio (CAR) remains at a comfortable 13.7% with the Tier-I capital at 12.3%. However with the implementation of the Basel II norms the same is expected to come down to 12.5%.
- The bank has witnessed serious pressure on the NIM front, which we feel would sustain considering the rise in the deposit rates and the bank's inability to mobilise more low cost deposits. The non-interest income growth excluding the treasury income remains weak and going forward the incremental recovery amounts would decrease. Hence the overall non-interest component would also not add significantly to the operating level. The above concerns have led us to decrease the FY2008E PAT estimate by 5.4% to Rs628.5 crore from the earlier projection of Rs664.6 crore. We have also revised our one-year price target from Rs425 to Rs380.
- At the current market price of Rs295, the stock is quoting at 6.7x its FY2008E earnings per share (EPS), 3.3x pre-provision profits (PPP) and 1x book value (BV). We maintain our Buy call on the stock with a revised price target of Rs380.
Cluster: Apple Green
Price target: Rs230
Current market price: Rs209
Price target revised to Rs230
- Crompton Greaves' revenues grew by 25.5% year on year (yoy) in Q3FY2007 to Rs813.0 crore, slightly below our expectations. The top line of the power system division grew by 27.9% to Rs426.2 crore and of the consumer product division rose by 21.0% to Rs226.3 crore. The industrial system division saw a growth of 32.9% in its top line to Rs231.1 crore.
- The operating profit margin (OPM) reduced by only by 90 basis points yoy to 11.9%. Sequentially though the material pricing eased and this resulted in an expansion of 120 basis points in the margin.
- Crompton Greaves provided for full tax rate in Q3FY2007 as against the MAT rate in Q3FY2006. The increased tax provisioning led to a negative growth of 17.0% yoy in the PAT to Rs45.4 crore in spite of an 18.3% rise in the PBT. However the PAT after extraordinary items grew by 5.1%.
- Pauwels' top line grew by 86.4% yoy to Rs520.0 crore in Q3FY2007, way ahead of our estimates; its PBT stood at Rs21.3 crore.
- The stand-alone order book grew at 41% yoy and 17.5% sequentially to Rs2,115 crore. Pauwels' order book grew by an impressive 50.3% yoy and 12.5% sequentially to Rs1,939 crore.
- The Ganz acquisition, which has been concluded, will further accelerate the growth of the consolidated numbers. Though currently loss-making it is expected to contribute 70 million euros in FY2008 and turn profitable by then.
- We are revising our FY2007 and FY2008 estimates. The FY2007 earnings per share (EPS) estimate adjusted for bonus has been downgraded by 7.6% to Rs6. However considering the stabilisation of the margins in FY2008, the robust top line growth, the strong performance of Pauwels and the contribution from Ganz, we are revising upwards our FY2008 earnings estimate by 9.9% to Rs10.7.
- At the current market price of Rs209, Crompton Greaves is trading at 19.6x its FY2008E consolidated earnings and 11.8x its FY2008 EV/EBIDTA. We believe that these valuations are fair, given the robust operating performance of the stand-alone company; the higher geographical width and product depth of the subsidiaries; and the management's expertise in turning around operations. We are revising our price target to Rs230.
Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Price target: Rs126
Current market price: Rs95
Strong profits in the pipeline
- The revenues of Deepak Fertilisers and Petrochemical Ltd (DFPCL) grew by 69.7% year on year (yoy) to Rs243.3 crore in Q3FY2007 driven by the strong performance of both its chemicals and fertilisers divisions. The robust growth in manufactured chemicals due to the isopropyl alcohol (IPA) plant becoming operational drove the growth in the revenues in the chemicals business, while the fertiliser segment witnessed a surge in its revenues from traded goods. The sales last year were lower due to lack of availability of gas and the floods, which further gives a positive bias to the year-on-year (y-o-y) growth figures.
- The operating profit grew by 47.3% yoy to Rs40.6 crore due to the firm naphtha prices & higher revenues from traded goods. The profit before interest and tax (PBIT) margin of the chemicals division declined by 300 basis points while the fertilisers business continued to make losses having a PBIT margin of -16%.
- The net profit for Q3FY2007 grew by 55.4% yoy, due to lower tax provisioning compared to the last year. The net profit was up 55.4% in spite of a higher depreciation charge, higher interest cost and lower other income.
- Ishanya, DFPCL's specialty mall coming up in Pune will stabilise its operations from April 2007. Around 76% of the leasable area has already been leased out for Ishanya and after making the changes required by the new clients the mall is likely to be launched in a phased manner by April 2007.
- The progress on the ammonium nitrate (AN) plant in Orissa is on schedule and the plant is set to begin production in Q1FY2009.
- We believe that DFPCL's valuations at 6.3x FY2008E earnings per share (EPS) are attractive, given the fact that the company has undertaken capital expenditure (capex) of Rs700 crore without diluting its equity and return on equity (RoE). We maintain our Buy recommendation on the stock with a price target of Rs126.
Fem Care Pharma
Cluster: Ugly Duckling
Price target: Rs500
Current market price: Rs373
Growth driven by consumer products
- Fem Care Pharma (FCP) reported a growth of 27.4% in its stand-alone revenues to Rs17.6 crore during the third quarter of FY2007. The growth was driven largely by the 24.5% growth in the consumer product business to Rs12.4 crore; the consumer product business contributed over 70% of the total turnover during the quarter.
- The operating profit margin (OPM) plummeted by 500 basis points to 19.7% during the quarter. The decline in the margin was contributed largely by the increased spending on advertisement and publicity (at Rs1.3 crore as compared with Rs0.56 crore in Q3FY2006) to support the introduction of its premium product, Oxyz Bleach, through retail channels as against through beauty saloons initially. Moreover, the margin was also affected by the partial shift of the festive season sales to Q2 this year due to an early Diwali.
- However, the substantial decline in the tax rate (to 11.9% from 32.3% in Q3FY2006 due to the transfer of production to its new facility at Himachal Pradesh that enjoys tax benefits) enabled the company to post earnings growth of 12.9% to Rs2.9 crore, in line with our expectations.
- On the nine-month basis, the performance was quite encouraging. The stand-alone revenues grew by 22.8% to Rs51.4 crore. The OPM improved by 50 basis points to 22.5% despite the fact that the advertisement and publicity expenses grew to 7.2% of the sales (up from 4.8% in the corresponding period last fiscal). Moreover, the anticipated decline in the effective tax rate (to 13.6% from 34.6%) resulted in a robust growth of 66% in the earnings to Rs10.2 crore.
- We are upgrading the consolidated earnings estimates by 3.5% for FY2007 and by 2% for FY2008, largely to factor in the lower than expected decline in the effective tax rate. At the current market price the stock trades at 10x FY2007 and 8.1x FY2008 consolidated earnings estimates. We maintain our Buy call on the stock with a price target of Rs500.
Price target: Rs250
Current market price: Rs173
Results below expectations
- Gateway Distriparks Ltd (GDL) reported a net profit of Rs18.8 crore for Q3FY2007, which is below our expectations.
- The revenues increased by 20% year on year (yoy) to Rs41.7 crore led by a strong volume growth of 112%, 51.5% and 392.9% at Garhi, Chennai and Vizag container freight stations respectively and a realisation growth of 9% year on year.
- The operating profit declined by 2.4% yoy to Rs20.3 crore and the margins were under tremendous pressure on account of the strong competition and lower realisations at Chennai and Vizag. This consequently led to the margins declining by 1,130 basis points quarter on quarter (qoq) to 48.7%.
- The other income grew by 109% yoy to Rs5.4 crore due to the interest income on the higher surplus cash of Rs200 crore during the quarter.
- Depreciation grew by 36% yoy due to the amortisation of Snowman's goodwill during the quarter.
- The tax rate for the quarter was at 14.5% as the company had 80IA benefits for its investments in inland container depot (ICDs). As a result the pre-exceptional net profit grew by 5.0% yoy to Rs18.8 crore in Q3FY2007.
- During the quarter GDL acquired Snowman Frozen Foods, a cold chain logistic services business, at a cost Rs48.1 crore. The company incurred an expenditure of Rs2.1 crore for the acquisition, which has been treated as extraordinary expenditure. Thus the post-exceptional profit stood at Rs16.7 crore.
- Snowman moves close to 9,000 tonne of frozen and chilled products across India and provides the entire spectrum of supply chain solutions with HLL being one of its major clients. We believe this acquisition will enable the company to cash in on the growth in the nascent food retailing market in India.
- The company has recently won the bid for a 15-year operations and management (O&M) contract of the Punjab Conware container freight station (CFS) at the JNPT port. GDL will be able to expand the volumes at the Punjab Conware CFS considering the dominant position of the company at the port and its expertise in operating CFS' and ICDs.
- We maintain our positive outlook on the company, as GDL will be one of the prime beneficiaries of the growth in container traffic, which currently just accounts for 10% of the total cargo. The company's strategy to become an integrated player by entering into rail-based container movement will help the company to offer better services to its clients. With the large players like Reliance and the AV Birla group betting huge on food retailing, the company's strategy to enter the cold chain business comes at a right time and will add significant value to the company's business going ahead. At the current market price of Rs173, the stock discounts its FY2007 earnings per share (EPS) by 20x and FY2008 EPS by 14x. We believe that the valuations are attractive and thus maintain our Buy recommendation on the stock with a price target of Rs250.
Cluster: Apple Green
Price target: Rs280
Current market price: Rs195
A little cold
- The Q4CY2006 net profit of Hindustan Lever Ltd (HLL) grew by 10.15% year on year (yoy) to Rs483.0 crore, which was below our expectations.
- The net revenues grew by 6% yoy on the back of a 7% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses.
- The profit before interest and tax (PBIT) margin showed a contraction of 40 basis points to 18.1%.The contraction in the PBIT margin was attributable to the lower growth in the personal care segment as well as higher input cost.
- The soap and detergent business has shown a growth of 10% whereas the personal care product business has reported a lower growth of 2.5%. The growth was lower in the personal care product business mainly on account of a shorter winter season in 2006 and the high base effect of Q4CY2005 (the sales of personal care products were higher due to the relaunch of Clinic shampoo in the quarter).
- The beverage business has shown a growth of 8.6% yoy whereas the processed food business has grown by 18% yoy.
- The operating profit margin (OPM) of HLL contracted by 36 basis points to 15.84% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales were maintained at 9% compared with 11% for M9CY2006, which helped it to prevent further erosion in the margin.
- The soap and detergent segment has been able to maintain its earnings before interest and tax (EBIT) margin at 15.6% yoy whereas the EBIT margin in the personal care product range has shown an improvement of 30 basis points to 31.9%.
- At the current market price of Rs195, the stock is quoting at 23x its CY2007E earnings per share (EPS) of Rs8.5. We maintain our Buy recommendation on the stock with a price target of Rs280.
Cluster: Ugly Duckling
Price target: Rs550
Current market price: Rs434
Colours shine bright
- ICI India's Q3FY2007 net profit (adjusted for extraordinary items) at Rs23.5 crore is ahead of our expectations. The net profit grew by 24.3% year on year (yoy).
- The net revenues have shown degrowth of 13% yoy to Rs224 crore due to the discontinuation of the rubber chemical and surfactant businesses (Uniqema).
- The paint business grew by 11.6% yoy to Rs192 crore. The continuing chemical business grew by 14.6% yoy to Rs32 crore.
- The profit before interest and tax (PBIT) in the paint business grew by 41% yoy with a 310-basis-point expansion in the margin. The PBIT in the residual chemical business grew 16% yoy with a 20-basis-point expansion in the margin.
- The overall operating profit (including all businesses) grew by 6% yoy with a 122 basis-point expansion in the operating profit margin (OPM).
- With a higher other income and stable depreciation, the net profit grew by 24.3% yoy to Rs23.5 crore.
- We have revised our earnings per share (EPS) estimates for the stock for FY2008, from Rs24.2 to Rs29 taking into account the selling off of Quest International as well as the higher non-operating income. Taking the cash per share of Rs232 and 17.5X FY2008 core EPS of Rs18 we have revised our price target upward to Rs550.
- At the current market price of Rs434, the stock trades at 15x its FY2008E EPS of Rs29. We maintain our Buy recommendation on the stock with a price target of Rs550.
International Combustion India
Price target: Rs519
Current market price: Rs324
Execution delay but well on course!
- The revenues of International Combustion India Ltd (ICIL) grew by 19.7% year on year (yoy) to Rs19.5 crore in Q3FY2007, below our estimates. The slowdown in the revenues can be attributed to a mere 6.7% increase in the gearbox & geared motor drive system division (GMGBD).
- The revenues of GMGBD grew by 6.7% yoy to Rs3.7 crore, below of our estimates. The the lower growth was caused by a few orders' execution spilling over to January. These orders have been executed in January and we expect the next quarter to be more robust. The heavy engineering division's (HED) revenues grew by 24.0% yoy to Rs16.0 crore, in line with our estimates.
- The operating profit margin (OPM) of the company improved by 260 basis points yoy to 19.5% in Q3FY2007, in line with our estimates. The margin expansion was largely driven by the leverage effect coming into play and lower material costs. Consequently, the operating profit grew by 38.1% to Rs3.8 crore.
- The margins of the HED grew by 460 basis points yoy to 30.7%. The GMGBD's margins were down to a mere 6% compared to 22.7% last year largely due to the muted top line growth.
- The other income grew to Rs0.3 crore compared to Rs0.1 crore in Q3FY2006 and the interest cost declined by 66.7% yoy to Rs0.1 crore. The net profit grew by 37.6% yoy to Rs1.9 crore, below our estimates.
- The outstanding order book stands at Rs64 crore as against Rs50.2 crore in Q2FY2007, a growth of 27% quarter on quarter (qoq). The current order backlog stands at 1x its FY2006 revenues, imparting a strong visibility to the earnings.
- The muted top line in the current quarter led to the overall result being below our estimates and we are downgrading our FY2007 earnings estimates by 7.8% to Rs36.7 . We expect the performance to be better in FY2008 and we are upgrading our FY2008 earnings estimates by 1.7% to Rs48.1.
- ICIL is currently trading at a PER of 6.7x its FY2008E earnings and 3.9x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy recommendation on the stock with a price target of Rs519.
Cluster: Apple Green
Price target: Rs220
Current market price: Rs176
- ITC's Q3FY2007 net profit grew by 33% year on year (yoy) to Rs717 crore, which was above our expectations.
- The net revenues for the quarter grew by 24% yoy as most of its businesses grew strongly: cigarettes (14%), fast moving consumer goods (FMCG; 67%), hotels (28.5%), paperboards ( 11.0%) and agri-business (19.5%).
- The earnings before interest, tax, depreciation and amortisation (EBITDA) margin during the quarter remained stable at 34.2%, though the product mix shifted away from the cigarette business. This was primarily due to the improvement in the margin of every individual business segment and a sharp rise in the margin of the hotel business. The margin in the hotel business moved up from 35% in Q3FY2006 to 42% in Q3FY2007.
- The non-cigarette FMCG business is the only business in ITC's portfolio that is making losses. However, with a strong growth in the revenues, the magnitude of losses, ie the loss margin, has come down considerably. The losses remained flat at Rs46 crore during the quarter.
- We have always liked the way ITC has channelised the strong cash flows generated from its cigarette business into the other businesses without affecting its return on capital employed (RoCE). However, the fear of value-added tax (VAT) may have a dampening effect on the counter in the short term.
- At the current market price of Rs176, the stock is attractively quoting at 20x its FY2008E earnings per share (EPS) and 13.6x FY2008E enterprise value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs220.
Price target: Rs4,000
Current market price: Rs3,548
Results below expectations
- Madras Cements Ltd (MCL) reported a net profit of Rs68.6 crore for Q3FY2007, below our expectations.
- The cement volumes at 1.38 million tonne witnessed a growth of 26% year on year (yoy) whereas on a sequential basis the volumes declined marginally as Tamil Nadu and Andhra Pradesh witnessed heavy monsoons during the quarter.
- The realisations jumped by 29% yoy to Rs2,800 per tonne on the back of the tight demand-supply situation in the region though on a quarter-on-quarter (q-o-q) basis the realisations dropped by Rs100 per tonne thanks to the monsoons. On a year-on-year (y-o-y) basis, the net revenues increased by a healthy 61% to Rs391 crore.
- The operating expenditure grew by 30.9% yoy to Rs263.1 crore driven by a 37% rise in the raw material costs, a 36% increase in the power costs and a 27% rise in the transportation costs. On a per tonne basis, the power costs increased by 8.9% quarter on quarter (qoq) to Rs585 per tonne whereas the transportation costs increased by 12% qoq on account of an increase in the freight costs to Rs397.8 per tonne.
- The cumulative impact of the higher volumes and realisations resulted in the company's operating profit jumping by 207.7% yoy to Rs127.9 crore whereas the operating margins expanded by 1,560 basis points to 32.7%. The EBITDA per tonne rose 2.5x yoy to Rs922.
- The interest costs have doubled qoq to Rs8.5 crore on account of a rise in the interest rates on the short-term loans whereas the depreciation stood flat qoq at Rs17.9 crore.
- The net profit on a y-o-y basis witnessed a mammoth growth of 619% to Rs68.6 crore, but was below our expectations on account of higher operating costs and interest expenditure.
- As the cement demand has picked up in the southern region post the monsoons, the prices have started rising in the fourth quarter of FY2007. In the month of January, the southern region witnessed a price hike of Rs10 per bag and in February Tamil Nadu and Andhra Pradesh have already witnessed a hike in the prices by Rs5 per bag.
- MCL's capital expenditure (capex) plans to expand capacity by 4 million metric tonne (2MMT in Jayanthipuram and 2MMT at Ariyalur) are in progress. Going ahead from FY2009, the expanded capacity will provide the much needed volume growth and consequently drive the profits.
- Considering the fact that the expanded capacity at Jayanthipuram will be available for nine months of FY2008,we are upgrading our estimates for FY2008.The PAT and earnings estimates have been upgraded by 10.4% to Rs405 crore and Rs335.3 per share respectively.
- The southern region remains extremely positive for the next one year as the demand-supply gap is expected to persist on account of lower capacity addition. This will positively impact MCL as it is one of the most profitable companies in the industry commanding an EBITDA per tonne in excess of Rs1,000. The incremental capacity of 4MMT will continue to drive the company's growth going ahead and consequently the company's earnings are expected to witness a compounded annual growth rate (CAGR) of 125% over FY2006-08. At the current market price of Rs3,548, MCL is discounting its FY2007E earnings by 12.9x and FY2008E earnings by 10.6x. On an enterprise value (EV) per tonne basis, the stock is trading at USD130 per tonne (FY2008E), which is at a discount considering its size and profitability. We thus remain bullish on the stock and maintain our Buy recommendation with a price target of Rs4,000.
Mahindra & Mahindra
Cluster: Apple Green
Price target: Rs1,050
Current market price: Rs900
Results below expectations
- The Q3FY2007 results of Mahindra and Mahindra (M&M) are below our expectations, due to a decline in the profit margin of the automotive segment. The stand-alone net sales grew by 16.7% to Rs2,576.1 crore. The automotive revenues grew by 9.7% to Rs1,510.3 crore. The farm equipment division (FED) reported a stronger revenue growth of 27%.
- The profit before interest and tax (PBIT) margin of the automotive segment declined by 170 basis points to 10.0% while that of the FED rose by 260 basis points to 15% in Q3FY2007. Consequently, the overall operating profit margin (OPM) remained stable at 12.0%, leading to a 17% year-on-year (y-o-y) growth in the operating profit to Rs309.6 crore.
- A higher interest income and stable depreciation helped the company to report a 30% growth in its pre-extraordinary net profit to Rs242.3 crore. The same quarter last year consisted of extraordinary items including the profit on sale of the light commercial vehicle (LCV) division and an octroi refund of Rs20 crore. Consequently, the reported profit after tax (PAT) grew by just 4.1% to Rs242.9 crore.
- M&M's Q3FY2007 consolidated revenues grew by 30.7% to Rs4,757.4 crore, due to the strong performance of all the subsidiaries. The consolidated PAT after exceptional items rose by 102% to Rs530.6 crore.
- Considering the continuing good growth in the utility vehicle (UV) segment; the strong growth expected in the tractor segment; the entry into the passenger car segment and the strong performance of its subsidiaries, we remain positive on the prospects of M&M. At the current market price of Rs900, the stock discounts its consolidated FY2008E earnings by 13.5x. We believe that the valuations are very attractive and maintain our Buy call on the stock with our sum-of-parts price target of Rs1,050.
Orient Paper and Industries
Cluster: Vulture's Pick
Price target: Rs800
Current market price: Rs573
A quarter of robust performance
- Orient Paper and Industries' net revenues grew by a robust 31.9% year on year (yoy) to Rs274 crore in Q3FY2007. This was driven by the cement division, whose revenues grew by 46.8% to Rs142 crore on the back of a 47.3% year-on-year (y-o-y) jump in the realisations to Rs2,591 per tonne.
- The fan business continued to grow at a healthy rate of 30% yoy and recorded a top line of Rs54.1 crore. After the previous quarter's lacklustre performance the paper business recovered with an 8.3% y-o-y growth in the top line to Rs73 crore.
- The earnings before interest and tax (EBIT) of the cement division grew by a whopping 343.9% yoy to Rs51.5 crore on account of the higher realisations and the company's strong leverage to cement prices. The other two divisions too contributed positively to the EBIT, thereby boosting the overall EBIT by 190.1% to Rs62.1 crore yoy.
- The interest cost continued to decline in the quarter. On a sequential basis the interest cost reduced by Rs3 crore to Rs5.67 crore. On the other hand, with the company not adding any assets in the quarter, the depreciation provision stood flat at Rs7 crore.
- These two factors coupled with the stellar performance at the operating level led to a 543% y-o-y growth in the net profit to Rs36.55 crore, which was higher than expectations.
- The company will be adding close to one million tonne of capacity in FY2009 through de-bottlenecking. Of this 0.27 million tonne of capacity will be set up by March 2007. To meet its power requirements, the company is also putting up a captive power plant of 30 megawatt (MW).
- To finance the capital expenditure (capex) as well as to reduce its long-term debt, the company has decided to raise Rs175 crore through a rights issue. We have factored the same in our estimates, assuming a price of Rs400 per share.
- Considering the better than expected performance for M9FY2007, we are upgrading our FY2007 profit after tax (PAT) estimate by 18.7% to Rs122.7 crore. We are also upgrading our FY2008 PAT estimate by 29% to Rs182.4 crore, taking cognisance of the higher than expected rise in cement prices in Andhra Pradesh and Maharashtra. After factoring in the equity dilution on account of the rights issue at a price of Rs400 per share, the diluted earnings per share (EPS) estimates stand at Rs63.9 and Rs94.9 for FY2007 and FY2008 respectively.
- At the current market price of Rs580 the stock is trading at 9.1x its FY2007E EPS and 6.1x FY2008E EPS. On an enterprise value (EV)/tonne basis, the stock is trading at $62 per tonne of cement (without considering the value of the investments in Century Textiles and Hyderabad Industries), which is less than the replacement cost of $80 per tonne. With cash and cash equivalent of Rs160 per share on its books, Orient Paper and Industries offers adequate margin for safety. We maintain our positive view on the stock with a price target of Rs800.
Punjab National Bank
Cluster: Ugly Duckling
Price target: Rs600
Current market price: Rs448
Strong operating numbers
- The Q3FY2007 results of Punjab National Bank (PNB) are below our expectations. The profit after tax (PAT) for Q3FY2007 grew by 16.6% year on year (yoy) to Rs429.9 crore as against our estimate of Rs479.9 crore mainly due to higher than expected non-performing assets (NPAs) and investment depreciation related provisions. However, the core operating performance of the bank for the quarter on a year-on-year (y-o-y) basis remains one of the best in the industry.
- The net interest income (NII) was up 20.8% yoy and 6.1% quarter on quarter (qoq) to Rs1,445.9 crore compared to our estimate of Rs1,439.3 crore.
- The net interest margin (NIM) of the bank has improved on a sequential basis as its M9FY2007 NIM stood at 4.22% compared to 4.16% as on H1FY2007.
- The non-interest income was up 25.1% yoy and 10.9% qoq. The treasury income declined by 6.3% yoy and 5% qoq while the fee income grew by 19% yoy but declined by 2.2% qoq.
- During Q3FY2006 the operating expenses included an amount of Rs92 crore related to the higher one-time pension liability costs. We have excluded the same to compare the quarterly results. The operating profit was up 46.6% yoy and 7% qoq while the core operating profit (ie the operating profit excluding the treasury gains) was up 60.1% yoy and 9.1% qoq.
- The provisions showed an increase of 157.2% yoy and 144.7% qoq mainly due to the higher NPA and investment depreciation related provisions.
- The asset quality deteriorated marginally as the gross NPAs increased by 6% qoq while the net NPAs increased from Rs150 crore to Rs370 crore qoq. The bank reclassified some NPA provisions as investment related provisions, which also increased the net NPAs. The net NPAs increased from 0.2% to 0.5% qoq, despite Rs220 crore NPA related provisions.
- PNB's strong deposit profile with a 47% current and savings account (CASA) ratio, moderate loan growth targets and comfortable capital adequacy makes it one of the preferred bets in the banking space. However, its relatively higher duration on the available for sale (AFS) book at 3.5 years remains a concern as to the stock's performance in the short term.
- At the current market price of Rs448, the stock is quoting at 6.8x its FY2008E earnings and 1.1x expected FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs600.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Price target: Rs700
Current market price: Rs595
Price target revised to Rs700
- The Q3FY2007 results of Ratnamani Metals & Tubes Ltd (RMTL) are above our expectations.
- The company reported strong quarterly results; its revenues for the quarter grew by 63% to Rs193.6 crore and net profit grew by 119% to Rs21.7 crore.
- The operating profit for the quarter grew by 111% to Rs42.3 crore, as the operating profit margin (OPM) improved by 450 basis points to 22.5% from 18% in Q3FY2006. The improvement in the OPM was on account of controlled other expenses and lower power cost due to windmill operations. The other expenses as a percentage of sales declined by 915 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 418 basis points as a percentage of sales.
- The interest expense for the quarter increased by 29% to Rs3.5 crore, while the depreciation cost for the quarter increased by 38.9% to Rs3.3 crore.
- The order book at the end of the quarter stood at Rs451 crore, registering a strong growth of 125% on a year-on-year (y-o-y) basis.
- The strong order book and increasing demand for its products from its key user industries, which are in a capital expansion phase, impart strong visibility to the future earnings of RMTL. We maintain our Buy recommendation on the stock with a revised price target of Rs700.
Cluster: Ugly Duckling
Price target: Rs1,050
Current market price: Rs781
Price target revised to Rs1,050
- The Q3FY2007 results of Sanghvi Movers Ltd (SML) are slightly below our expectations, the company's revenues declined by 12.7% year on year (yoy) to Rs38.9 crore.
- In addition to the regular orders from Reliance Industries Ltd (RIL), SML had secured an additional order worth Rs20 crore from the company in Q3FY2006 due to a shutdown in the RIL refinery during that quarter. Adjusting for this one-time order, we believe the company has done reasonably well.
- Also the business flow from windmill customers remains low during the third quarter as most of these customers install windmills by September to avail of tax benefits. SML had got a Rs9-crore order from Suzlon alone in Q2FY2007 but in the third quarter it received orders of only Rs1 crore from the same company.
- The operating profit for the quarter declined by 5.6% to Rs28.3 crore due to lower top line growth. However the operating profit margin (OPM) improved by 520 basis points to 72.2% from 67% in Q3FY2006.
- The interest expense for the quarter increased by 74% to Rs6.7 crore whereas the depreciation cost for the quarter increased by 13.7% to Rs8.8 crore.
- Consequently the net profit for the quarter declined by 30.7% to Rs11.7 crore.
Cluster: Apple Green
Price target: Rs406
Current market price: Rs327
Expansion to drive growth
- SKF India's Q4CY2006 net sales stood at Rs379.3 crore, marking a growth of 52.25% year on year (yoy). The company had increased the capacity at its Bangalore and Pune units during Q3CY2006. The combined capacity has been enhanced to 100 million ball bearings per year from 74 million ball bearings and the company is increasing its taper roller bearing capacity to 20 million units per year.
- The operating profit margin (OPM) for the fourth quarter declined by 70 basis points to 13.5% on a like-to-like basis. However, on a sequential basis, the margin marked a significant improvement of 210 basis points. The operating profit for the quarter increased by 45.5% yoy to Rs51.4 crore.
- The pre-exceptional net profit stood at Rs31.7 crore against Rs10.3 crore in the fourth quarter of last year. However, the last year's numbers had contained two extraordinary items of Rs10.2 crore, relating to the cost of traded goods for the previous quarters,