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Sharekhan Investor's Eye dated May 04, 2007
Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs378
Beating expectations
Result highlights
- Esab India's Q1CY2007 results are ahead of our expectations. Its top line grew by 29% to Rs81.2 crore and bottom line grew by a strong 38% to Rs12.3 crore during the quarter.
- The higher top line growth was aided by the company's new facility as Chennai, which on a fully operational basis can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 29% growth as the equipment division's revenue increased by 31.7% and the consumable division's revenue grew by 28.1%.
- The operating profit for the quarter grew by 44% to Rs19.6 crore as operating profit margin (OPM) improved by 250 basis points to 24.1%. The improvement in the OPM was on account of better profitability of both the divisions. The earnings before interest and tax (EBIT) margin of the equipment division improved by 396 basis points to 16.5% and that of the consumable division improved by 282 basis points to 27.7%.
- The depreciation for the quarter increased by 24% as the company has commissioned its new plant at Chennai.
- The interest cost was negligible as the company has repaid its entire debt and become a debt-free company.
Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs1,020
Current market price: Rs1,010
Put on Hold
Result highlights
- Nucleus Software Exports (Nucleus) has announced a growth of 7.1% quarter on quarter (qoq) and 42.9% year on year to Rs60.2 crore. The product revenues have grown at a robust rate of 12.3% sequentially whereas the project and service business remained flat sequentially during the fourth quarter.
- The operating profit margin (OPM) improved by 60 basis points sequentially to 28.5%, in spite of the 230-basis-point increase in the selling, general and administration expenses as a percentage of the sales (up from 15.7% to 18% in Q4). The OPM was boosted by a 290-basis-point improvement in the gross margin due to a favourable revenue mix (even after accounting for Rs1.8 crore of a one-time expense due to the penalty related to the delay in project execution).
- However, the earnings were largely flat at Rs13.9 crore (sequentially) due to a lower other income, higher depreciation cost and tax rate during the quarter. The same are lower than our expectations of around Rs15.5 crore.
- The order backlog of Rs330 crore continues to be healthy (up from Rs131 crore as on March 2006). Moreover, the expected execution of the ACOM order (around $35 million) is likely to boost the overall revenue growth in the coming quarters.
- Along with the results, the company has rewarded the shareholders with a bonus issue of 1:1 and dividend payout of 35% (Rs3.5 per share).
- In addition to the subdued performance in the past two quarters (a flat growth for two consecutive quarters), the scrip has appreciated by over 100% since our Buy recommendation on December 12, 2007 (@Rs497) and appears fairly valued at around 14.8x FY2009 earnings estimate (introduced in the note). Consequently, we are downgrading the stock to Hold recommendation and would review our estimates if the ramp up in the business is much faster than our expectations.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs263
Q4FY2007 results�first-cut analysis
Result highlights
- Orchid Chemicals & Pharmaceuticals (Orchid) reported a 3.4% increase year on year (yoy) in its net sales to Rs248.0 crore in Q4FY2007. The sales growth was above our expectations. The growth in the sales 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 maintain a healthy market share in excess of 20-25%. Further, being the sole generic supplier of Cefoxitin and Cefazolin in the USA, Orchid continues to maintain 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 profit 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.
- At the current market price of Rs263, Orchid is quoting at 9.3x its estimated FY2008E 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.
Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs318
Strong performance
Result highlights
- Apollo Tyres' Q4 results are ahead of our expectations, on both the top line and the margin front.
- The net sales for the quarter saw a strong growth of 22% year on year (yoy) to Rs910.2 crore. The growth was achieved on the back of a 7% growth in the volumes and about a 14.6% growth in the realisation yoy.
- On the back of numerous price hikes undertaken by the industry, softening rubber prices and improved operating efficiencies the margins also improved. The operating profit margin (OPM) expanded by 340 basis points yoy to 11% as the operating profit increased by 78% to Rs100.4 crore.
- Stable interest and depreciation charges helped the company to post a brilliant net profit growth of 141.4% to Rs42.7 crore. The reported profit is up by 62% due to an extraordinary item last year.
- At the current market price of Rs318, the stock discounts its FY2008E earnings by 10.1x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x. We maintain our Buy recommendation on the stock with a price target of Rs425.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs39.5
Q4FY2007 results�first-cut analysis
Result highlights
- Ashok Leyland has delivered strong results for Q4FY2007 and the same are ahead of our expectations on the margin front. The top line has grown by 32.1% for the quarter driven by a volume growth of 28.4% and a realisation growth of 2.9%.
- We were positively surprised with the operating profit margin, which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison to last year, the operating profit margin has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profit for the quarter has grown by 21.1% to Rs264.9 crore.
- Lower interest cost and tax outgo helped the company grow its net profit by 28.8% to Rs174.6 crore.
- For FY2007, the net sales for the company grew by 36.5% led by a volume growth of 35%. The operating profit margin came down slightly by 30 basis points to 9.9% while the profit for the year grew by 46% to Rs436.3 crore.
- We are adopting a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country which would affect its sales volumes. Consequently, after a dream run in FY2007, we expect the company's growth rates to moderate. We expect a volume growth of 11.9% for FY2008.
- At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.
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