Saturday, May 12, 2007
IDBI Capital - Andhra Bank, Everest Kanto, IndoAsian Fusegear, Jupiter Bioscience, Monnet Ispat Energy, Tata Elxsi, Usher Agro
The markets this week were driven by global cues with interest rates globally seeing change. Global markets were steady for most part of the week. However, there was major weakness by the end of the week with US economic data pointing to negatives. The global markets also reacted the same way but Indian Markets stood out though they started off very weak too.
Indian Markets showed typical behaviour remaining choppy. They seem to have decoupled from the global markets for now. A strong start was ended with a weak close and a weak start was invariably ended in a strong close and this happened almost every day of the week. Some of the banks reported numbers which were good. It was the UP elections which kept the markets on tenterhooks. The results came in line with market expectations. The fact that BSP will be able to form a government on its own and has less dependence on the Congress is somewhat negative. The Congress which is ruling in the Centre has not been able to make its presence felt in any major state and thats not positive at all for policy making. We expect that policy making could suffer as sound economics could be given a go by for populism. Maruti balance stake was sold off this week. The buyers were the Institutions including Insurance companies and Mutual funds. The stock was priced at Rs 796. The stock was strong during the week but came off post the sale as really this sale does not have any impact on fundamentals which face increasing cost pressures and also competition.
Inflation was placed at 5.68% and that was lower than 5.77% of the previous week. Though inflation is now at a more comfortable level, a CRR / SLR cut seems unlikely. The first thing we expect the RBI will do in the face of lower inflation is to make the Rupee a bit weaker by buying Dollars. The Rupee ended the week at Rs 41.31 to a Dollar somewhat weaker than last week. Industrial Production for March came in at 12%+ and that is a strong positive for the markets. The refinery stocks had a good rally. On one hand the crude prices were lower and secondly the sharing of the subsidy was changed in favour of the refineries and to the detriment of ONGC.
Sensex ended the week down about 80 points this week. Banks were strong during the week on the hopes of a CRR / SLR cut which we think is away from reality. Many Mid caps were bouyant which included Rolta, Educomp, India Infoline, Financial Tech, Everest Kanto etc on the back them being included in the FNO segment starting next week.
Major movers in the indices were refineries and banks.The gainers in the week included Bajaj Auto + 6% BPCL +7%. State Bank +3%, The tech stocks and auto stocks were some of the losers / drags on the index. Infosys -3%, Mahindra -9%, ONGC -3%, Satyam -3%, Tata Power -4%, Wipro -4% were on the losing side. topnew.gif (1104 bytes)
Bajaj Auto does a wheely. ; Sugar found Mayawati sweet ; SKF seems set for a frictionless performance !
Bajaj Auto news of demerger of the auto and Finance business had the stock rallying. Well we had a quickie call and it was much before the markets talked about. The stock is about to deliver close to 8% on the call. Merill downgraded Bajaj Auto to a sell and upgraded Hero honda on the back of Bajaj Losing marketshare in the last couple of months. However, we think that this view is being short sighted and is more reactive. Bajaj has launched a wonderful vehicle Discover DTSi 135 cc and pricing close to 100 cc we believe could take the 'splendour' out of Hero Honda.
Sugar stocks rallied on Friday. BSP head, Mayawati made a statement that sugar cane prices should be linked to the sugar prices. It is a certainty that Mayawati would form the Government in state of UP which is the largest sugar producing states. The sugar companies have been reeling under losses with sugar prices unable to even meet the cane prices. Such a formula would do wonders for the industry. Sugar stocks rallied strongly. We had a BTST call on Renuka Sugar futures and the call booked Rs 12000 in a matter of minutes.
SKF bearings had an analyst meet. The management gave us incremental confidence on the companies strategy and outlook. The stock has been a wonder over the last 4 months delivering over 50% returns. We had a wow call here and have covered it over the last 6-8 months. What was disappointing was that India, though being among the most competitive amongst the SKF global basket, is not being focussed on for global production. "This could happen and remains a possibility" so in a sense the big growth from that avenue is not immediate. However, the most exciting part of this company is the comprehensive approach to deliver solutions to the clients.. rather than products. The company's Direct consumer Delivery (DCD) model is one which makes SKF as a one window for any product made by SKF globally. This ensures higher revenues. Near term the margins will fall off as the March quarter margins were helped by a stronger Rupee and the kick off in the DCD model. Lower duties for imported bearings came in the first quarter itself but will no longer be there henceforth. Another negative is that slower growth of 2 wheeler impacts them and thats been the story for now. The CEO however heldforth the view that he believed that 2 wheeler growth will remain in the 12-14% range.. The story is a good steady one. A stock to accumulate on weakness. Given the interest of investors.. for the analyst meet, really the weakness will be tough to come by. The stock is now close to Rs 400. Our wow call delivered 30% returns in this one.
Technically Speaking: Sensex recovery from the lows on Friday was encouraging. However, the Sensex for now is making lower tops. Sensex is now ranged between 13910 and 13450. Break out of these levels will give the direction on that side.
Fundamentally speaking : Its the liquidity in the system which will be put under pressure in the next couple of weeks. ICICI bank's issue of Rs 20000 crores plus the DLF issue of Rs 5000 crores and then a couple of thousand crores in NHPC etc are the big ones tapping the market. Not to forget the Rs 2000 cr plus that the Maruti selloff has removed from the market. Interesting to note that ICICIs issue will have to have a dominant share of domestic money given the FII restrictions. Such a large issue will surely have to have the issue at a big discount. Thus the players will short the ICICI future and look to take the issue at the discount. This will keep pressure on the Index. The State bank results are slated for tomorrow and they will impact the beginning of the week. So all in all the fundamental triggers are lacking. Global cues in terms of the US economic news is not positive. Inflation is getting under control. However, now that UP elections are behind us the Government may look to hike fuel prices which could have its impact on inflation negatively.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Price target: Rs390
Current market price: Rs259
Results in line with expectations
- 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
Price target: Rs67
Current market price: Rs55
Results in line with expectation
- 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).
Cluster: Ugly Duckling
Price target: Rs935
Current market price: Rs816
Price target revised to Rs935
- 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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