Sharekhan - Vishal Retail IPO

Sharekhan - Vishal Retail IPO

Sharekhan Investor's Eye dated June 11, 2007

Volatile times ahead

• We have seen a sustained one-way rise in the Sensex since early April with the easing of the domestic concern over hardening interest rates. However, globally the uncertainty over interest rates (particularly in the USA) persists which could give rise to volatility in the emerging markets. Some other factors like mega initial public offerings (IPOs), earnings downgrades (possible in sectors such as automobiles, information technology [IT] and cement) and the availability of liquidity would dictate the market direction, at least in the near term.
• Our first base case assumption that domestic inflation would moderate by mid May—highlighted in our previous Market Outlook report, "Markets dance to local tunes", dated April 9, 2007—has come true. The latest inflation number of 4.85% for the week ended May 26 is a welcome relief for the equity markets, as it has reduced the upward pressure on interest rates and also provided the Reserve Bank of India (RBI) with that extra elbow room to go slow on the inflation control exercise via exchange rate management.
• Our second base case assumption of a slowdown (but not a recession) in the USA has held steady. In the first quarter of CY2007 the US gross domestic product (GDP) grew at 0.6% compared with an average 2.5% growth in the previous fiscal. Economic growth is expected to pick up going forward but the same will remain sluggish.
• On the global front, we need to be cognisant of certain risks, such as a possible interest rate hike in the USA due to firm inflation numbers. However, this will take another two to three months to come about, as the market would wait for more data before taking a view on interest rate hikes.
• Some leading indicators continue to point towards a slowdown in certain domestic sectors (viz automobiles, retail home loan disbursements, cement dispatches and exports). The earnings growth is expected to slow down in FY2008 and FY2009. We feel the FY2008 earnings expectations in certain sectors like automobiles, IT and cement remain too high. Hence there's a possibility of an earnings downgrade in these sectors, which is likely to put pressure on the market in the short term, ie in the run-up to the Q1FY2008 earnings season.
• The Sensex' valuation at 16.3x FY2008E earnings is not cheap and we have seen that at these levels the markets are prone to some sort of correction. After the sharp run-up in the Sensex (the benchmark index has gained 16.8% in the last two months), the valuation gap between the large-cap companies and the mid-cap companies looks attractive despite the fact that the CNX Mid-cap Index has clocked a gain of 20.4% in the same period. We continue to like sectors where the earnings visibility is strong, eg infrastructure, capital goods and engineering sectors and the leading private sector banks. Quality mid-cap companies from these sectors could outperform their larger counterparts going forward.

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SECTOR UPDATE

Automobiles

Thrown out of gear for a while

• The automobile sector has been on a dream run since 2004. A strong economy, easy and cheap availability of finance, rising income levels, lifestyle changes and low penetration levels led to this phenomenal performance. While all the other macro factors remain intact, the rising interest rates and liquidity crunch are severely affecting the sector’s growth, forcing it to take a breather.
• Overall, the sector's sales are expected to pick up with the beginning of the busy season, ie October onwards. Sales for June are also expected to be affected due to the presence of Adhik mahina, an inauspicious period for buying any new product, in this month. The slowdown in the automobile industry will surely affect the earnings of all the major players.
• Considering this we are downgrading our estimates for all the stocks under our coverage. At the current prices, most of the stocks are trading at a discount to the valuations of the Sensex. We expect stocks from this sector to continue to trade at a discount to the index in the medium term and hence continue to underperform the market. However, considering the long-term potential of individual stocks, we maintain our Buy recommendation on the stocks, save for Bajaj Auto, which is being downgraded to a Hold. Our preferred bets are Maruti Udyog, and Mahindra and Mahindra.

Sharekhan Investor's Eye dated June 11, 2007

India Economics

India Economics

Reliance Industries

Reliance Industries

Emkay - SAIL

Emkay - SAIL

Sharekhan Commodities, Daring Derivatives, Eagle Eye Commodities, High Noon

Sharekhan Commodities, Daring Derivatives, Eagle Eye Commodities, High Noon

Sharekhan Valueline(Hindi) - June 2007

Sharekhan Valueline(Hindi) - June 2007

Sharekhan Eagle Eye (equities) & Derivatives Info Kit for June 12, 2007

Sharekhan Eagle Eye (equities) & Derivatives Info Kit for June 12, 2007

Anand Rathi - Weekly Wrap

Anand Rathi - Weekly Wrap

Vishal Retail IPO Analysis

Vishal Retail IPO Analysis

DLF IPO - Day 1 Subscription Details

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Sharekhan Valueline - June 2007

Sharekhan Valueline - June 2007(PDF)

Sharekhan Valueline - June 2007

THE STOCK IDEAS REPORT CARD

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FROM SHAREKHAN'S DESK

Domestic concerns easing but watch out for earnings

Last month the country’s leading stock exchange, the Bombay Stock Exchange, achieved an important milestone. The market capitalisation of all the companies listed on the bourse crossed the “one trillion dollar” mark on May 28. Of course the feat was possible thanks to the rupee’s relentless rise against the dollar that resulted in a 60% increase in the combined market capitalisation of all these companies in dollar terms in a year. But the 42% gain in rupee terms over the same period is no mean achievement either and reflects the buoyancy in the Indian stock market. The question is: What is filling the market with so much buoyancy even when it is fairly priced at the current levels?

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Sharekhan top picks

In the May 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on June 1, 2007, the basket of stocks has given absolute return of 7.9% as compared to a 3.5% appreciation in the Sensex and a 3.52% rise in the S&P CNX Nifty.

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STOCK IDEA

Aurobindo Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs914
Current market price: Rs684

Betting big on formulation growth

Key points

• Formulation business grows at 62.2% CAGR: Aurobindo Pharma (Aurobindo) has created a robust product pipeline of 1,172 formulation dossiers for various markets and expects major growth in its speciality generic formulation business. The formulation sales are expected to gallop at a CAGR of 62.2% over FY2006-09.
• Robust product pipeline: During FY2007, Aurobindo filed 32 ANDAs and 41 DMFs, taking the cumulative DMF filings to 110 and ANDA filings to 82 in the US market. With the recent USFDA approval for products like Bisoprolol, Simvastatin and Zolpidem tartarate, we estimate incremental revenue of Rs100 crore from the US generic business during FY2008.
• European business to expand at over 50%: Aurobindo expects to deliver over 50% growth in Europe on the back of increased product registrations and synergetic benefits flowing from the recent acquisitions of Milpharm in the UK and Pharmacin in the Netherlands. It is also contemplating a couple of mid-sized acquisitions in Europe.
• Steady growth in ARV business: With most of the registrations taking place in the recent past, we expect Aurobindo to see steady growth in its ARV formulation revenues. We estimate the ARV formulation business would generate revenues worth $99 million and $128.7 million in FY2008 and FY2009 respectively.
• Consolidated PAT to grow at 70% CAGR: Going forward, the increasing traction in formulation exports would help the consolidated revenue to grow at a 24.3% CAGR during FY2006-09E(Rs3,143.1 crore in FY2009E). The adjusted net profit would gallop at a CAGR of 70% during FY2006-09 (Rs348.4 crore in FY2009E), translating into earnings of Rs57.1 per share.
• Buy with price target of Rs914: At the current market price of Rs684, Aurobindo is trading at 14.9x its FY2008E and 12.0x its FY2009E earnings. We initiate coverage on Aurobindo with a Buy recommendation and a one-year price target of Rs914 (an upside of 34% from the current levels). The price target discounts the FY2009E earnings by 16x.

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STOCK UPDATE

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs250

On track

Result highlights

• Ahmednagar Forgings reported a strong performance for Q3FY2007. Its net sales grew by 69% to Rs175.2 crore during the quarter.
• The company has increased its capacity to 110,000 tonne per annum (tpa) and is currently operating at utilisation levels of about 64%. We expect the capacity ramp-up to strengthen the top line further in the coming quarters.
• The margins saw a slight improvement, as the same expanded to 21% led by better operating efficiencies. The operating profit rose by 72.6% to Rs36.8 crore. The company has been able to maintain good margins despite a steep rise in steel prices in the past two years (its raw material cost has risen from 63.5% to 67.9% as a percentage of sales).
• The interest cost was a bit higher due to the capital expenditure (capex) incurred by the company during the quarter. Stable depreciation and lower taxes aided the company to report an 86% improvement in its net profit to Rs20.5 crore.
• At the current levels, the stock is discounting its FY2008E earnings by 6.8x and quoting at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.7x. We maintain our Buy recommendation on the stock with a price target of Rs380.

Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs101
Current market price: Rs89

Growth at the cost of margins

Result highlights

• Allahabad Bank's net profit for Q4FY2007 declined by 16.5% year on year (yoy) to Rs125.7 crore. The same was lower than our estimate of Rs143.8 crore mainly due to a higher than expected tax liability of the bank during the quarter.
• During the quarter the bank's adjusted net interest income (NII) marginally declined by 1% yoy. Adjustment has been made for the one-time cash reserve ratio (CRR) interest income of Rs31 crore received during the quarter. The net interest margin (NIM) adjusted for the one-off item has decreased on year-on-year (y-o-y) and sequential bases. A significant increase in the cost of funds unmatched by a commensurate increase in the asset yields has resulted in a 73-basis-point
  y-o-y decline and a four-basis-point sequential decline in the NIM. The bank's aggressive loan growth policy funded by high-cost bulk deposits is taking a huge toll on its margins.
• The bank had booked Rs49.5 crore (credit balances in sundry accounts) as other income in FY2006. However, on Reserve Bank of India's (RBI) direction it reversed the entry during this quarter. Thus adjusted for the same the non-interest income was up by 19.9% yoy to Rs174.7 crore.
• The operating performance was not exciting despite a sedate 6.3% y-o-y rise in the operating expenses. The operating profit was up only 2.2% yoy with the core operating profit (excluding treasury) up by 9.2% on a y-o-y basis.
• Although provisions and contingencies declined by 23.4% yoy, yet tax provisions increased by 395% during the quarter. This resulted in a 16.5% y-o-y decline in the profit after tax (PAT) as against a 17.6% y-o-y rise at the profit before tax level.
• At the current market price of Rs89, the stock is quoting at 4.7x its FY2008E earnings per share, 2.8x pre-provision profits and 0.9x book value. The bank is available at attractive valuations compared with its peers, given its low price to book multiple and high return on equity. We maintain our Buy call on the stock with a price target of Rs101.

Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs101
Current market price: Rs82.4

Stable performance

Result highlights

• For Q4FY2007 Andhra Bank reported a stable year-on-year (y-o-y) growth in its net profit to Rs138.8 crore. The same is better than our profit after tax (PAT) expectation of Rs123 crore. The PAT growth was driven by a lower than expected operating expenditure.
• During the quarter, the bank’s net interest income (NII) grew by 18.4% year on year (yoy) to Rs362.2 crore. However there was some sequential pressure on the net interest margin (NIM) as the bank’s cost of funds increased at a much faster pace than its asset yields. Also, its low cost deposit base declined sequentially.
• The non-interest income increased by 9% yoy to Rs138.4 crore despite a 40.4% y-o-y decline in the treasury income. The non-interest income excluding treasury was up 20.3% yoy.
• A 15.7% growth in the net income coupled with a 7.3% y-o-y decline in the operating expenses helped the bank to report a 46.7% y-o-y growth in the operating profit to Rs270 crore. The core operating profit (operating profit excluding treasury) reported further improvement of 59.6% yoy to Rs256 crore.
• Provisions and contingencies showed a decline of 23% yoy to Rs81 crore but increased 25.7% quarter on quarter (qoq) mainly due to higher non-performing assets (NPA) and standard asset provisions charged during the quarter.
• The PAT growth was marginal although the profit before tax (PBT) grew by 158.7% yoy. This was mainly due to a Rs76 crore of tax charge in Q4FY2007 compared to a tax write-back in Q4FY2006.
• Its full year tax provision has gone up significantly by 208% to Rs247 crore compared to Rs80 crore. The higher tax incidence is due to a 32.5% jump in the operating profit coupled with the absence of the investment provision amount (which reduces a bank’s tax liability) in FY2007.
• We had witnessed a jump in the net NPAs during Q3FY2007. The bank made higher NPA provisions during the fourth quarter and the asset quality, already at healthy levels, showed further improvement during the quarter. The net NPAs improved to 0.17% from 0.44% on a sequential basis.
• The bank has shown an improvement in its operating performance, its capital adequacy ratio (CAR) is comfortable at 11.3% with the Tier-I CAR at 9.98% and its asset quality continues to remain among the best in the industry. At the current market price of Rs82.4, the stock is quoting at 6.5x its FY2008E earnings per share (EPS), 3.6x pre-provision profit (PPP) and 1.1x book value. The bank is available at attractive valuations, given its low price to book multiple compared with its peers, and an average return on equity of 18.1%. We maintain our Buy call on the stock with a price target of Rs101.

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

Good show

Result highlights

• Ashok Leyland Ltd (ALL) 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 are positively surprised by the operating profit margin (OPM), which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison with last year, the OPM has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profits for the quarter have grown by 21.1% to Rs264.9 crore.
• Lower interest cost and taxes helped the company to post a net profit growth of 28.8% to Rs174.6 crore.
• For FY2007 the net sales for the company have grown by 36.5% led by a volume growth of 35%. The OPM has come down slightly by 30 basis points to 9.9% while the profit for the year has grown by 46% to Rs436.3 crore.
• For FY2008 the company has earmarked a capital expenditure of Rs1,000 crore for capacity expansions and new product developments; another Rs400 crore may be spent on acquisitions.
• We would take a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country, which would affect the sales volumes. Consequently, after a dream run in FY2007, we expect the growth rates to moderate and expect a volume growth of 11.9% for FY2008. The company expects the industry to grow at 10-12% in FY2008 and has set a target of reaching the 100,000-vehicle mark during the current fiscal.
• At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,500
Current market price: Rs2,248

Bruised by demerger, disclosures

Result highlights

• The Q4FY2007 results of Bajaj Auto Ltd (BAL) are in line with our expectations. The net sales grew by 6.8% to Rs2,313.6 crore.
• The operating profit of the company declined by 23.2% to Rs326.3 crore as the operating profit margin (OPM) declined by 550 basis points to 14.1%. However, the margins are stable on a sequential basis. The net profit before extraordinary items for the quarter declined by 3.9% to Rs320.75 crore.
• The company announced its long pending demerger, through which two new companies would be created, namely Bajaj Auto Ltd (BAL; new), comprising the manufacturing business, and Bajaj Finserv Ltd (BFL), comprising the insurance, auto finance and wind power businesses. The existing company would be renamed as Bajaj Holdings and Investment Ltd (BHIL). The shareholders would hold 70% in the new companies directly, while 30% of their holding would be routed through the holding company BHIL. We view this process as a negative, as the listed holding company would suffer from a holding company discount.
• For every one share held in the existing BAL (future BHIL), the shareholders would continue to hold one share in BHIL, get one share of the new BAL of Rs10 each and one share of BFL of Rs5 each.
• In another disclosure, BAL has also declared that Allianz has a call option to raise its stake in the life insurance business to 74% from the current 26% at a nominal pre-determined price till 2016. In all likelihood, the foreign direct investment (FDI) norms for insurance are expected to get relaxed till then and hence BAL's stake is likely to get reduced.
• We are downgrading our sum-of-the-parts (SOTP) target on BAL to Rs2,500, valuing the new BAL at Rs1,254 per share and BFL at Rs449 per share. Taking into account the cash and investment portfolio of BAL and also BHIL's stake in the two new companies, we value BHIL at Rs835. We maintain our Buy call on the stock.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs310
Current market price: Rs285

Improved performance

Result highlights

• Bank of Baroda's (BoB) results are marginally below expectations. The profit after tax (PAT) grew by 17.6% year on year (yoy) but declined 25.4% quarter on quarter (qoq) to Rs245.7 crore compared with our estimate of Rs256.7 crore.
• The adjusted net interest income (NII) was up by 21.5% yoy and 9.6% qoq to Rs1,052.6 crore, better than our estimate of Rs1,002 crore. The net interest margin (NIM) has shown a sequential improvement of nine basis points, driven mainly by an improvement in the asset yields.
• The non-interest income grew by only 6.9% yoy to Rs397.8 crore; the growth was restricted mainly due to a 61.7% decline in the treasury income. However the core fee income grew by 36.4% yoy and 13.9% qoq.
• The operating profit was up 21% yoy but the core operating profit (operating profit excluding treasury and recovery) grew by 37.4% yoy.
• Although provisions and contingencies remained stable on a year-on-year (y-o-y) basis, yet the bank's tax liability for the current quarter went up significantly. This restricted the overall profit growth to only 17.6% on a y-o-y basis.
• The asset quality of the bank continues to be healthy with the gross non-performing assets (NPA) at Rs2,092 crore, down Rs300 crore sequentially. The net NPA in percentage terms stood at 0.6%, down from 0.67% in the previous quarter. The capital adequacy ratio (CAR) remains at a comfortable 11.8% with the Tier-I CAR at 8.74%.
• The bank has shown strong business growth with comfortable asset quality levels. However the profitability has not improved in proportion to the growth in the business, thereby leading to a lower return on equity. We feel the bank has successfully made structural changes required to show consistent business growth and the management has now focused on improving the profitability, which should lead to better numbers going forward. At the current market price of Rs285, the stock is quoting at 8x its FY2008E earnings and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs310.

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs219
Current market price: Rs200

Price target revised to Rs219

Result highlights

• Bank of India's (BOI) Q4FY2007 profit after tax (PAT) was way above expectations. It grew by 76% year on year (yoy) to Rs447 crore compared with our estimate of Rs288.9 crore, mainly due to an unexpected 78.0% year-on-year (y-o-y) jump in the non-interest income.
• The net interest income (NII) grew by 28.8% yoy and 7.7% quarter on quarter (qoq) to Rs991 crore against our estimate of Rs973 crore. The NII figures are adjusted for one-off items to the tune of Rs40 crore and Rs107 crore in Q4FY2007 and Q4FY2006 respectively. Higher yields and controlled costs with a stable low cost deposit base have helped the bank to show an improvement in the margin sequentially.
• The non-interest income was a surprise as it grew by 78% yoy and 79% qoq to Rs576 crore. The 40.4% y-o-y and 38.5% q-o-q growth in the fee income is very promising and looks to be sustainable, as it was driven by a growth in the core fee income generating businesses like remittances, cash management, bank guarantees etc.
• The operating expenses grew by 22% yoy, in line with the business growth. The operating profit was up by 63.6% yoy and 49.5% qoq to Rs918.3 crore.
• Provisions increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore mainly on account of higher other provisions influenced by standard assets provision, as the non-performing asset (NPA) provisions reported a decline on y-o-y and q-o-q bases.
• The bank's asset quality has showed consistent improvement with the net NPA and gross NPA both showing a decline in percentage and absolute terms. The net NPAs stood at 0.74% as on March 2007 compared with 0.95% reported in December 2006 while the gross NPAs showed a decline to Rs2,100 crore from Rs2,186 crore in the previous quarter.
• We feel BOI has so far proved to be the best performing public sector bank (PSB) in FY2007 based on all parameters and its management has shown proper intent to maintain the improved performance. We have revised our FY2008E PAT by 15% to Rs1,352 crore, based on the improved earnings visibility for the bank. At the current market price of Rs200, the stock is quoting at 7.2x its FY2008E earnings per share (EPS), 3.1x pre-provisioning profit (PPP) and 1.5x FY2008E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs219.

Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,730
Current market price: Rs1,637

Q4FY2007 results: first-cut analysis

Result highlights

• The Q4FY2007 results of Bharat Bijlee Ltd (BBL) are much ahead of our expectations.
• The revenue for the quarter grew by 73% to Rs179 crore on the back of a strong order book. The net profit increased by a superb 123% to Rs29.07 crore, much ahead of our expectations.
• The operating profit for the quarter grew by 105% to Rs44.5 crore, as the operating profit margin (OPM) for the quarter improved by 370 basis points to 24.8% against 21.1% on a year-on-year (y-o-y) basis.
• The improvement in the OPM is on account of a lower raw material/sales ratio, which stood at 62.8% as against 64.9% in the same quarter last year. The OPM also improved because of other operational efficiencies as the other expenses/sales ratio declined to 5.9% from 7.6% on a y-o-y basis.
• The interest cost for the quarter decreased by 20% while the depreciation charge increased by 89%.
• The company has declared a dividend of Rs25 (250%) per share.
• The timely expansion of its transformer manufacturing capacity, by 3000MVA to 8000 MVA per annum, has benefited the company. Going forward, the huge investments lined up in the power sector and the continuing activity in the industrial sector will drive BBL's order book.
• At the current market price of Rs1,637, the stock is discounting its FY2007 earnings by 16.3x and earnings before interest, depreciation, tax and amortisation by 8.6x. Excluding the value of the cash and cash equivalents, the stock is trading at 13x its FY2007 earnings. In view of the better than expected results and strong order backlog, we maintain our Buy recommendation on the stock with a price target of Rs1,730. We shall be upgrading our FY2008 earnings estimates and price target after analysing the annual report of the company. Watch this space.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,020
Current market price: Rs1,740

Price target revised to Rs2,020

Result highlights

• For Q4FY2007, Bharat Electronics Ltd (BEL) has announced a growth of 10.1% in its net sales to Rs1,734.2 crore, which is lightly lower than our expectations.
• The operating profit margin (OPM) has improved smarty by 150 basis points to 28%, primarily due to the saving of 460 basis points in the raw material cost as a percentage of the sales. On the other hand, the higher staff cost and the other expenses had an adverse impact of 210 basis points on the margin.
• In addition to the margin expansion, the 62.8% growth in the other income resulted in a robust growth of 27.1% in the earnings to Rs357.1 crore, which is ahead of our expectations of around Rs330 crore.
• On a full year basis, the net sales have grown by 9.4% to Rs3,894.3 crore. The OPM has improved by 50 basis points to 24.2%, largely due to the savings in the raw material cost as a percentage of sales. Moreover, the jump of 69.1% in the other income component aided the growth in the earnings, which grew at a relatively higher rate of 22.4% to Rs713.9 crore.
• The highlight of the performance was the much higher than expected jump in the order backlog to Rs9,000 crore. This coupled with the recent alliances/tie-ups with global defence companies has vastly improved the growth visibility in the revenues.
• To factor in the same, we have revised upwards the earnings estimate of FY2008 by 10.9% and have also introduced our FY2009 estimate in the note. At the current price, the stock trades at 12.5x FY2008 and 9.9x FY2009 estimated earnings (price has been adjusted for cash on the books). We maintain the Buy call on the stock with a revised price target of Rs2,020 (rolling over the target price on FY2009 estimates; 12.5x FY2009 earnings plus the estimated free cash on the books).

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,125
Current market price: Rs2,724

Price target revised to Rs3,125

Result highlights

• At Rs1,150 crore the Q4FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) saw a growth of 33%. The same is in line with our estimates. The turnover for the quarter grew by 25% to Rs7,576 crore driven by higher order backlog of Rs46,700 crore at the end of Q3FY2007.
• The order backlog during the quarter grew by an impressive 45% to Rs55,000 crore driven by a strong 56% increase in order inflows of Rs16,300 crore on a year-on-year (y-o-y) basis.
• The power division registered a 23% growth in revenues whereas the industry division recorded a growth of 30% in revenue.
• The operating profit margin (OPM) for the quarter improved by 135 basis points year on year (yoy). Consequently the operating profit for the quarter grew by 33% to Rs1,587 crore.
• The other income increased by 34% to Rs286 crore mainly on account of the rising yields on the huge cash reserves of the company.
• On a full year basis, the turnover for FY2007 grew by 29% to Rs18,702 crore and the net profit grew by 42% to Rs2,385 crore.
• Order inflows during the year grew by a whopping 88% to Rs35,633 crore. In the power segment, BHEL secured orders worth Rs27,722 crore. In the industry business BHEL secured the biggest ever order worth Rs6,008 crore during the year. The order backlog at the end of March 31, 2007 stood at Rs55,000 crore, which is around 3x its FY2007 sales.
• In international business, BHEL secured export orders of Rs1,903 crore during the year in comparison with an average yearly order book of Rs1,275 crore in the last five years.

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs268
Current market price: Rs251

Higher provisions restrict profit growth

Result highlights

• Canara Bank's results have been much above our and market expectations with the profit after tax (PAT) reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year (y-o-y) decline to Rs444 crore. The profit growth was higher than expected mainly due to a substantial jump in the non-interest income driven by a higher treasury income and cash recoveries.
• The net interest income (NII) was up by 11.3% year on year (yoy) and 5.5% quarter on quarter (qoq) to Rs1,014 crore compared with our estimate of Rs1,030 crore. The NII has been adjusted for a one-time cash reserve ratio (CRR) interest income and the interest received on the income tax refund. Our calculations suggest that the adjusted net interest margin (NIM) declined on both y-o-y and sequential bases due to a rise in the cost of funds, as the low-cost deposits remained stable but bulk deposits increased, putting pressure on the cost of funds.
• The non-interest income zoomed by 58% yoy and 120% qoq to Rs626.2 crore, primarily driven by a 172% y-o-y and 186% sequential growth in the trading income to Rs92 crore. The miscellaneous income, which increased by 57% yoy and 247% qoq to Rs343 crore, also contributed to the growth in the non-interest income.
• The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 48% yoy and 65% qoq to Rs1,007 crore, driven primarily by the higher non-interest income.
• The provisions increased by 66.1% yoy and 54% qoq to Rs497 crore mainly on account of higher depreciation on investments provided on the marked-to-market investments book. A higher standard asset provisioning requirement also kept the provisions elevated as the non-performing asset (NPA) provisions declined by 67% yoy to Rs102 crore from Rs306 crore in Q4FY2006. Although the operating profit increased by 48% yoy, yet the higher provisions restricted the overall profit growth to 2.3%.
• Higher cash recoveries to the tune of Rs1,025 crore during the year as against Rs972 crore during the previous financial year helped the bank to bring down its gross NPAs. In absolute terms, the gross NPAs have reported a sequential decline of Rs380 crore while the net NPA ratio has declined sequentially from 0.96% to 0.94%.
• The margins may remain under slight pressure, however the business growth is likely to boost the NII. The bank has also reduced the interest rate risk on its book by bringing down the duration of its "available-for-sale" category to 2.48 years from 3.76 years earlier and stated that the duration is expected to further come down below two years. At the current market price of Rs251, the stock is quoting at 6.6x its FY2008E earnings per share, 3.3x pre-provisioning profits and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs268.

Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs256
Current market price: Rs215

Price target revised to Rs256

Result highlights

• Cipla reported lower than expected results for Q4FY2007 with a net profit of Rs125.7 crore against the expectation of Rs199.6 crore. The earnings have been lower due to the disappointing exports of active pharmaceutical ingredients (APIs) and significant contraction in the operating profit margin (OPM).
• The revenues were marginally higher by 6.3% to Rs938.5 crore. The sales growth was lower due to a 27% decline in the API exports to Rs141.46 crore.
• The OPM witnessed a 590-basis-point decline to 15.7% in the quarter due to the higher contribution of low-margin anti-retrovirals and lower API sales to the regulated markets. Consequently, the operating profit stood at Rs147.0 crore, down by 22.8%. With the 40% fall in other income and the higher tax incidence (up from 4.0% to 11.3%), the net profit declined by 40.3% in the net profit to Rs125.7 crore.
• The FY2007 numbers saw a 19% growth in the top line at Rs3,438.1 crore, the margins remained almost flat at 20% and resulted in a mere 9% rise in the net profit to Rs660.8 crore.
• Cipla reported disappointing numbers for both Q4FY2007 and FY2007, largely due to the lower than expected performance of the export business and the decline in the OPM. Hence, we are revising down our FY2008 earning estimate by 17.4%; we are also introducing our FY2009 estimate. As per our revised estimate, the earnings per share (EPS) estimates for FY2008 and FY2009 stand at Rs10.9 and Rs12.8 respectively.
• At the current price of Rs215, the stock trades at 19.7x and 16.7x of its FY2008 and FY2009 earnings respectively. Though, we have toned down our estimate, positive earnings surprises for the company at frequent intervals from exports are not ruled out. We maintain our Buy recommendation on the stock with a revised price target of Rs256 (ie 20x of FY2009E EPS of Rs12.8).

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs374
Current market price: Rs317

Numbers in line with expectations

Result highlights

• Corporation Bank’s results are in line with our expectations; the profit after tax (PAT) grew by 18.2% year on year (yoy) but declined 19.1% quarter on quarter (qoq) to Rs118.5 crore compared with our estimate of Rs116.1crore.
• Adjusted net interest income (NII) was up by 31.2% yoy and 16.1% qoq to Rs387 crore. A moderate loan growth and significant increase in float balances helped the bank to improve its margins by 25 basis points to 3.06% on a sequential basis.
• The non-interest income increased by 14.4% yoy and 13% qoq to Rs180 crore. The core fee income was up 15.9% yoy and 5% qoq.
• With the net income up 25.4% yoy and the operating expenses up only 11.3% yoy, the operating profit was up by 36.4% yoy to Rs345.3 crore. The core operating profit (operating profit less treasury and recovery income) showed a good growth of 36.2% yoy and 29.2% qoq.
• Provisions and contingencies grew by 55.5% yoy and 103.7% qoq due to higher non-performing assets (NPA) and standard asset provisioning during the quarter. The significant increase in the provisions on a sequential basis resulted in a 19.1% sequential decline in the PAT although the operating profit grew by 17.8% qoq.
• The asset quality of the bank continues to be healthy with stable gross NPA at Rs624 crore and the net NPA at 0.47% in percentage terms. The capital adequacy ratio (CAR) remains at a comfortable 12.7% with Tier-I CAR at 11.3%.
• At the current market price of Rs317, the stock is quoting at 7.4x its FY2008E earnings per share (EPS), 3.4x pre-provision profit (PPP) and 1.1x book value. We maintain our Buy call on the stock with a price target of Rs374.

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.

Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs182

Results in line with expectations

Result highlights

• Gateway Distriparks Ltd's (GDL) revenues from the container business grew by 24% year on year (yoy) to Rs41 crore in Q4FY2007. With Snowman Frozen Foods, the cold chain subsidiary, contributing Rs6.65 crore for the quarter, the total revenues for the quarter stood at Rs47 crore.
• The operating profit grew by 22% yoy to Rs22.6 crore whereas the operating profit margin (OPM) declined by 840 basis points to 47.4%. Snowman Frozen Foods continued to remain unprofitable at the earnings before interest, tax, depreciation and amortisation (EBITDA) level, registering a loss of Rs0.17 crore for the quarter.
• The interest cost decreased by 66% yoy to Rs0.20 crore, thanks to the repayment of debt whereas the depreciation provision increased by 62.6% yoy to Rs4.57 crore on account of higher capital expenditure (capex) during the quarter.
• The tax provision stood at 17% as the company continued to enjoy the 80 IA benefit for investment in inland container depots (ICDs). The net profit increased by 8.5% yoy to Rs19.27 crore.
• Last month, GDL through its subsidiary GatewayRail had formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
• We are in the process of revising our numbers and will update you soon on the revised numbers. Meanwhile we maintain our Buy recommendation on the stock with a price target of Rs250 per share.

Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,975
Current market price: Rs2,505

Price target revised to Rs2,975

Result highlights

• The stand-alone revenues of Grasim Industries (Grasim) grew by a robust 37.4% year on year (yoy) to Rs2,490 crore, driven by strong cement realisations and higher volume in viscose staple fibre (VSF) and sponge iron businesses.
• The operating profit grew by 66% yoy to Rs771 crore largely on account of a 77% year-on-year (y-o-y) rise in cement earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs470 crore. Cement margins expanded by 800 basis points on the back of a strong realisation growth. The VSF business witnessed a lower growth of 29% yoy in profits to Rs201 crore as the pulp prices remained high during the quarter.
• The interest expenses were up by 55% yoy to Rs36 crore in the quarter on account of higher borrowings in the period. Depreciation increased by 15% yoy to Rs87.6 crore.
• Boosted by an other income component of Rs78 crore (on account of the deployment of surplus funds), Grasim's net profit rose by 69.1% yoy to Rs437 crore.
• As mentioned in our previous updates, Grasim is augmenting its cement capacity at Kotputli and Shambhupura units by 4 million metric tonne (MMT) each by putting up greenfield plants. The capital expenditure (capex) is progressing well and the new capacities are expected to get commissioned in the first quarter of FY2009.
• The company is expanding its VSF capacity at Kharach, Gujarat from 45,625 tonne to 63,725 tonne and is in the process of getting regulatory clearances for expanding the capacity by 31,000 tonne at Harihar. On completion of both these projects, the company's VSF capacity will expand to 350,000 tonne.
• Looking at the better than expected performance of the VSF and sponge iron businesses, we are upgrading our consolidated FY2008 earnings per share (EPS) estimate by 3.8% to Rs245 and introducing our FY2009 EPS estimate of Rs208.
• At the current market price of Rs2,505 the stock is trading at 10.1x FY2008E EPS and 11.9x FY2009E EPS. Looking at the stability imparted to the company by the higher cash flows from the VSF business, we maintain our Buy recommendation with a price target of Rs2,975 per share.

Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs195

Good sales growth but disappointing margins

Result highlights

• The Q1CY2007 net profit of Hindustan Lever Ltd (HLL) grew by 13.6% year on year (yoy) to Rs333.9 crore, which is slightly below our expectations.
• The net revenues grew by 13.8% yoy on the back of an 8.73% 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 lower growth in the personal product range is disappointing but is expected to pick up in the coming quarters.
• The profit before interest and tax (PBIT) margin showed a contraction of 70 basis points to 13.6%. The contraction in the PBIT margin is attributable to the lower growth in the personal care segment.
• The soap and detergent business has shown a growth of 9.6% whereas the personal care product business has reported a lower growth of 7.4%. Adjusting for the disposal of the Nihar brand, personal products grew by 10.5%.
• The beverage business has shown a growth of 16.6% yoy whereas the processed food business has grown by 26% yoy.
• The operating profit margin (OPM) of HLL contracted by 44 basis points to 11.37% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales increased by 35 basis points which led to further erosion in the margin.
• The soap and detergent segment was able to maintain its earnings before interest and tax (EBIT) margin at 12.1% yoy whereas the EBIT margin in the personal care product range recorded an improvement of 30 basis points to 24.7%.
• At the current market price of Rs195, the stock is quoting at 22.8x its CY2007E earnings per share (EPS) of Rs8.5 and 20x its CY2008E EPS of Rs9.6. We maintain our Buy recommendation on the stock with a price target of Rs280.

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs165

Strong growth across segments

Result highlights

• In Q4FY2007 the net revenues of ITC grew by 24.4% year on year (yoy) as most of its businesses saw a strong growth: cigarettes (revenue up 14.3%), fast moving consumer goods (FMCG; revenue up 63%), hotels (revenue up 15.6%), paperboards (revenue up 12%) and agri-business (revenue up 16%).
• The company's earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped by 220 basis points to 23.9% in Q4FY2007 primarily due to higher other expenditure.
• The tax provisioning was on the higher side during the quarter which along with a decline in the operating profit margin (OPM) led to a lower than expected profit after tax (PAT). The Q4FY2007 net profit grew by 14.7% yoy to Rs650 crore.
• We believe that the company's cigarette business would see a stable growth despite the slowdown in demand witnessed by the cigarette industry earlier in the year.
• The non-cigarette FMCG business is the only business in ITC's portfolio that is not making a profit. However, its losses were stable despite the roll-out of the Bingo brand of products throughout the country which led to higher sales and promotion expenses during the quarter. We expect this business to break even by FY2009.
• In the hotel segment, the profitability was lower primarily due to a one-time transition cost incurred on account of upgrading 7 Sheraton Hotel to Starwood Hotels and Resorts' The Luxury Collection brand.
• At the current market price of Rs165, the stock is attractively quoting at 20.6x FY2008E earnings per share (EPS) and 13.1x FY2008E enterprise value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs200.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs850
Current market price: Rs667

Cement division boosts overall performance

Result highlights

• The overall revenue growth of Jaiprakash Associates (Jaiprakash) was muted at 3.6% year on year (yoy) to Rs886 crore during the quarter.
• The cement revenues increased by 45.8% yoy to Rs602 crore whereas the construction revenues fell by 34% yoy to Rs330 crore as the new projects were in the ramp-up phase while the old projects were close to completion during the quarter.
• Jaiprakash's overall operating margin (OPM) improved sharply by 1,170 basis points to 29.7%, thanks to the sharp jump in the earnings before interest and tax (EBIT) margin of the cement business by 1,660 basis points yoy to 35% on the back of strong realisations and cement volumes during the quarter.
• The interest expenses increased by 12% yoy to Rs65 crore during the quarter while the depreciation charge increased by 11% yoy to Rs42 crore mainly due to the commissioning of the 38-megawatt (MW) captive power plant (CPP) in Q2FY2007. The other income during the quarter fell by 44% yoy to Rs30 crore.
• The net profit witnessed a strong growth of 87% yoy to Rs130 crore.
• The cement business will contribute increasingly to the revenues of the company. The construction revenues will provide the stability to the company's overall business with the cement cycle turning downwards in FY2009. The Taj project as well as the real estate business will add value to the company's share. We are keeping our FY2008 earnings per share (EPS) estimate of Rs29.5 unchanged and introducing our FY2009 EPS estimate at Rs33.2. At the current market price of Rs671, the stock is trading at 20x its FY2009 EPS. We continue to remain positive on the company's outlook and maintain our sum-of-the-parts (SOTP) price target of Rs850 per share.

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs200
Current market price: Rs162

Price target revised to Rs200

Result highlights

• The overall revenues of JK Cement grew by 49% year on year (yoy) to Rs366 crore, as the overall volumes grew by 11% yoy and the realisations improved by 34.9% yoy.
• The expenditure for the quarter increased by 27% yoy to Rs255 crore mainly on account of a 13% year-on-year (y-o-y) increase in the raw material cost and a 31% y-o-y rise in the freight cost.
• The company's high leverage to cement prices resulted in a 145% y-o-y surge in its operating profits to Rs111.7 crore which helped the operating profit margin (OPM) to expand by 1,200 basis points yoy to 30.5%.
• As the interest cost and depreciation provision remained flat, the profit after tax (PAT) ballooned by 274% yoy to Rs61.4 crore.
• We had mentioned in our previous reports, the company is incurring a capital expenditure (capex) of Rs290 crore for setting up three captive power plants (CPPs). But as there has been a delay in the commissioning of all the projects, we don't expect the company to avail of the complete savings in the power cost in FY2008 as expected earlier.
• Consequently, we are revising our earnings estimate downwards by 5.2% to Rs211 crore from Rs222 crore. We are also introducing our FY2009 earnings estimate at Rs180 crore.
• At the current market price of Rs162 per share, JK Cement is trading at 5.3x its FY2008 earnings and 6.2x its FY2009 earnings. We maintain our Buy recommendation on the stock with a reduced price target of Rs200 per share.

KEI Industries
Cluster: Ugly Ducking
Recommendation: Buy
Price target: Rs140
Current market price: Rs75

Q4FY2007 results: First-cut analysis

Result highlights

• KEI Industries' (KEI) net sales grew by 123% to Rs207.4 crore in Q4FY2007, in line with our expectations. However the net profit grew by 37.3% to Rs11.4 crore and the growth was below our expectations on account of rising raw material prices and a higher interest cost.
• The power cable segment's revenues grew by a robust 125% to Rs208 crore while the stainless steel wire segment's revenues grew by 97% to Rs25 crore.
• The operating profit margin (OPM) for the quarter declined by 490 basis points to 12.1% due to a rise in raw material prices. The raw material cost as a percentage of sales increased to 76.6% from 63.9% in Q4FY2006.
• The operating profit for the quarter grew by 59% to Rs25.1 crore.
• The interest expense for the quarter increased by 148% to Rs7.5 crore due to a rise in the interest rates and also because the company availed of higher working capital loans since the business is growing at a rapid pace. The depreciation cost for the quarter increased by 31% to Rs1.2 crore.
• For the full year, the net sales grew by 99% to Rs681.5 crore and the net profit grew by 54.3% to Rs40.1 crore.
• At the current market price of Rs75, the stock is quoting at around 11x its FY2007 earnings per share and 6.6x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs140. We shall be upgrading our FY2008 earnings estimates after analysing the annual report of the company. Watch this space.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs625
Current market price: Rs490

Price target revised to Rs625

Result highlights

• KSB Pumps' Q1CY2007 results are below our expectations on the margin front. The company's net sales grew by 13.5% to Rs109.6 crore during the quarter. A higher inventory of Rs9.3 crore during the quarter reflects that there was a delay the implementation of certain orders and the same are expected to materialise in the next quarter.
• On segmental basis, the revenues of the pump business went up by 7.1% to Rs78.9 crore while that of the valve business grew by a strong 35.6% to Rs30.1 crore. However, the margin in the pump business declined to 11.4% from 19.8% last year, as last year's sales included the supply of nuclear pumps, which carry higher margins. The profit before interest and tax (PBIT) margin in the valve business continued to be strong and grew by 220 basis points to 25.6%.
• On the back of higher raw material cost and lower contribution of the high-margin project business, the overall operating profit margin (OPM) declined by 590 basis points to 15.9% as the operating profit declined by 17.1% to Rs17.4 crore. The raw material cost as a percentage of sales went up from 40.1% to 49%.
• On the back of stable interest and depreciation costs, the profit after tax (PAT) for Q1CY2007 declined by 4.6% to Rs12.5 crore. The management remains bullish on the prospects of the company, which is witnessing a 40% growth in its order book. The margins are also expected to be maintained at last year's levels or show a slight improvement due to a better product mix.
• The pump industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a market share of 12-14%, would stand to gain from this and hence is expected to sustain the growth momentum going forward. However, considering the high raw material cost and lower than expected margin in the first quarter, we are downgrading our CY2007 earnings estimate by 6.8% to Rs34.8 and our CY2008 earnings estimate by 9.1% to Rs41.8. At the current market price of Rs490, the stock quotes at CY2008E price/earnings ratio (PER) of 12x and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of Rs6.5x. We maintain our Buy recommendation on the stock with a revised price target of Rs625.

Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs840
Current market price: Rs707

Price target revised to Rs840

Result highlights

• Lupin's net sales increased by 22.8% year on year (yoy) to Rs518.1 crore in Q4FY2007. The growth in the top line is above our expectations. The sales growth was driven by a 12% rise in the domestic formulation business to Rs144.3 crore and a 53.4% increase in the formulation exports to Rs165.9 crore.
• Lupin's operating profit margin (OPM) expanded by 460 basis points yoy to 14.5% in Q4FY2007; the same was lower than our expectation of 15.7%. The OPM was below expectations on account of a higher than anticipated rise in the company's raw material cost and higher research and development (R&D) expenses. Consequently, the company's operating profit grew by 80.0% yoy to Rs75.0 crore in Q4FY2007.
• The company's reported net profit stood at Rs137.1 crore, up by 173.1% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs61.3 crore, a jump of 22% yoy. The same was above our estimate of Rs57.5 crore.
• For FY2007, the company's net sales increased by 22.7% to Rs1,970.9 crore, which was above our estimate. The OPM expanded by 70 basis points to 14.9% as against our estimate of 15.7%, driven largely by higher R&D expenses. The company's reported net profit stood at Rs302.1 crore, up by 65.3% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs226.2 crore, a jump of 23.8% yoy. The same was in line with our estimate of Rs228.4 crore.
• Lupin ’s FY2007 profit performance (exclusive of the one-time gain) was just in line with our expectations. Hence, we are maintaining our FY2008 sales and profit estimates at Rs2,600 crore and Rs328.9 crore respectively. For FY2009, we expect the revenue to grow by 18% to Rs3,054.4 crore and the profit to rise by 25% to Rs410.5 crore. As per FY2009 estimates, the revenue and profit (exclusive of the one-time gain from the patent sale) would grow at compounded annual growth rate (CAGR) of 24% and 35% respectively. We have not included the earnings upside from the R&D pipeline in our estimates.
• The management has given an impressive revenue guidance of Rs3,000 crore for FY2008 (a 50% growth) and of Rs4,200 crore (a 40% growth) for FY2009. The growth would be achieved through various initiatives in the USA, Europe and semi-regulated markets. As per the management, a small part of the growth would also come from acquisitions. However, as per our organic growth estimates, at the current price Rs707 the stock is available at Rs19x its FY2008E and 15.2x its FY2009E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs840 (18x of FY2009E earnings).

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs765

In investment mode

Result highlights

• Mahindra and Mahindra's (M&M) stand-alone net sales grew by 20% year on year (yoy) to Rs2,747 crore in Q4FY2007. The operating profit margin (OPM) for the quarter declined by 48 basis points to 11.4% yoy. Higher other income and interest income resulted in a 59% growth in the pre-exceptional profit after tax (PAT) to Rs247.1 crore. An extraordinary income of Rs166 crore realised from the sale of shares of Mahindra and Mahindra Financial Services Ltd (MMFSL) last year depressed the reported PAT. The reported PAT declined by 21% to Rs233 crore from Rs255 crore in Q4FY2006.
• On a stand-alone basis, the net sales for FY2007 grew by 22% to Rs10,050 crore. The operating profit rose by 30% to Rs1,263 crore. In the automotive business, the domestic volumes grew by 17.8% while the exports surged by 45%. The tractor segment however recorded a strong growth of 22%.
• On a consolidated basis, the net sales for FY2007 grew by 43% to Rs17,617 crore. The OPM surged to 15.3% from 14.0% in FY2006. Consequently, the operating profit grew by 56% to Rs2,704 crore. The consolidated pre-exceptional PBT for the year stood at Rs2,320 crore, marking a growth of 50.7% yoy.
• The company plans to increase its capital expenditure (capex) for the year to Rs2,000 crore, which is going to be utilised for capacity expansions, new product launches and research and development (R&D) activities. Apart from this, the company also needs to carry out the Punjab Tractor Ltd (PTL) and Swaraj Engine acquisitions, and invest in joint ventures. All these projects would be financed through a combination of debt and equity which would lead to nominal equity dilution.
• The contribution of the non-automotive business has increased significantly in the recent years. For FY2007, the non-automotive business contributed 39% to the top line and 51% to the bottom line.
• We expect FY2008 to be the year of consolidation for the company while all new product launches would take place in FY2009. At the current market price of Rs764, the stock discounts its consolidated FY2009 earnings by 8.7x. We maintain our Buy recommendation on the stock with a sum-of-the-parts (SOTP) price target of Rs1,050.

Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs67
Current market price: Rs55

Results in line with expectation

Result highlights

• 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).

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs393
Current market price: Rs243

Q4 results above our expectations

Result highlights

• Nicholas Piramal’s consolidated sales for the quarter were 52% higher at Rs645.2 crore on the back of a 13% increase in the domestic sales and a whopping 146% surge in the global revenues. The consolidation of businesses acquired from Avecia Pharmaceuticals and Pfizer's former Morpeth facility, UK has scaled up the global revenues.
• It has reported a 480-basis-point expansion in the OPM to 13.2% in Q4FY2007, but the same was much lesser than the expectation of an OPM of 15.6% due to one-time charge of Rs20 crore. Otherwise, if we discount the one-time charge, the OPM expanded by 790 basis points to 16.3%.
• It has reported an impressive growth of 260% year on year (yoy) in its consolidated net profit to Rs54.9 crore for Q4Y2007. The same is above our expectation of Rs50.5 crore.
• In full year FY2007, the company's consolidated sales grew by 55.0% to Rs2,470 crore, while its operating profit increased by 83.0% to Rs380 crore. The net profit for the year was up 80.7% to Rs220 crore.
• For FY2008, the company has guided for about a 100% growth in the contract manufacturing business and a 25% growth in the overall revenue. It expects to maintain the margin at 15.5%.
• We revised FY2008 estimates and introduce FY2009 numbers as per which the company’s net earnings stand at Rs297.0 crore (a 30.1% growth) and at Rs355.3 crore (a 20% growth) for FY2008 and FY2009 respectively. At the current market price of Rs256, Nicholas Piramal discounts its FY2009 estimated earnings by 15.1x. We maintain a Buy call with a price target of Rs393.

NIIT Technologies
Cluster: Ugly duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs519

Price target revised to Rs720

Result highlights

• NIIT Technologies Ltd (NTL) reported a growth of 5.2% quarter on quarter (qoq) and 46.5% year on year (yoy) in its consolidated revenues to Rs243.5 crore during the fourth quarter. The organic revenues grew at a rate of 5.2% sequentially. The revenues of Room Solutions (acquired in May 2006) also grew by 5.2% qoq to Rs31.3 crore.
• The company reported an improvement of 70 basis points in its operating profit margin (OPM) to 21.9% on a sequential basis, despite the adverse impact of the appreciation of the rupee during the quarter. The margin improvement was driven by the cumulative impact of a favourable revenue mix, savings in the overhead cost as a percentage of sales, higher margins in the business process outsourcing (BPO) business and better profitability of Room Solutions.
• The increase in the other income (Rs5.6 crore as compared with the third quarters' Rs3.3 crore, which was driven by tax refund in its overseas subsidiary), lower depreciation charges and a steep decline in effective tax rate (down to 2% due to the write-back of the provisions made earlier) aided the earnings growth during the quarter. Consequently, the consolidated earnings grew at an explosive rate of 32.7% qoq and 138.9% yoy to Rs45.9 crore. This is the third consecutive quarter of over 20% sequential growth in the earnings.
• In terms of the outlook, the company is expected to maintain the growth momentum on the back of the record order intake of $72 million during the quarter and $209 million over FY2007. The pending order backlog of $103 million (executable over the next one year) is one of the highest ever reported by the company. The management expects the margin to also improve with the improving profitability of the BPO business, the efforts taken to increase the proportion of the high-margin offshore revenues and other cost levers like a lower overhead cost. There is enough scope for further improvement in the overhead cost (at 20% of its sales in FY2007). Consequently, the earnings estimate has been revised upwards by 16.4% for FY2008.
• Along with the results, the company has rewarded the shareholders with a bonus issue of one equity share for every two shares held and a dividend of 65% on the existing capital.
• At the current market price the stock trades at 12.2x FY2008 and 10.1x FY2009 estimated earnings. We re-iterate our Buy call on the stock with an upgraded price target of Rs720 (14x FY2009 earnings).

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: Rs259

Results in line with expectations

Result highlights

• 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.

Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs578
Current market price: Rs535

Higher one-time provisions affect numbers

Result highlights

• The Q4FY2007 results of Punjab National Bank (PNB) are much below our expectations with the profit after tax (PAT) reporting a decline of 17.7% year on year (yoy) to Rs237 crore compared with our estimate of Rs460 crore. The PAT declined mainly due to higher than expected staff expenses (Rs300 crore of one-time AS-15 related prudential provisions) and higher marked-to-market (MTM) investment depreciation.
• The reported net interest income (NII) was up 20.6% yoy but down by 1.6% quarter on quarter (qoq) to Rs1,423 crore. However, adjusted for a one-time cash reserve ratio (CRR) interest income of around Rs56 crore the NII was up 15.8% yoy and down 5.5% qoq. Our calculations suggest that the net interest margin (NIM) of the bank has declined on a sequential basis by 36 basis points due to a decline in the asset yields (as interest on investments declined) combined with an increase in the cost of funds.
• The non-interest income was up 23% yoy. The 29.5% yoy growth in the core fee income was one of the highlights of the current quarterly results.
• Provisions for the quarter were high at Rs613 crore, of which Rs330 crore was on account of the MTM losses on the bond portfolio.
• The asset quality of the bank has shown some deterioration with the net non-performing asset (NPA) in percentage terms at 0.76% in March 2007 compared with 0.42% in December 2006 and 0.29% in March 2006. However, the gross NPA stood at 3.45% compared with 3.65% in December 2006. This was largely due to a higher advance base because in absolute terms the gross NPA increased to Rs3,391 crore from Rs3,268 crore in December 2006.
• We have reduced our earnings estimate for FY2008 by 6% to Rs1,971 crore mainly due to higher NPA related provisions. Despite the decline in the NIM on a sequential basis the bank's NIM still continues to be among the highest in the industry. We expect the NIM to stabilise going forward and improve the profitability of the bank. At the current market price of Rs535, the stock is quoting at 8.6x its FY2008E earnings and 1.4x FY2008E book value. We maintain our Buy call on the stock with a price target of Rs578.

Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs818

Results in line with estimates

Result highlights

• The Q4FY2007 results of Sanghvi Movers Ltd (SML) are in line with our expectations. The company's revenues increased by 23.6% to Rs52.1 crore and the net profit grew by 70% to Rs15.1 crore year on year (yoy).
• We had mentioned in our previous update that the Q3FY2007 performance was not up to the mark because of the high base effect. The company had got an additional order of around Rs20 crore from Reliance Industries in Q3FY2006 due to a shutdown in the latter's refinery; this boosted the base of the previous year. The fourth quarter's splendid performance after the subdued Q3FY2007 numbers reaffirms our faith in the company. On a sequential basis, the revenues grew by 34% and the net profit grew by 80%.
• The operating profit margin (OPM) for the quarter improved by 680 basis points to 75.5% against 68.6% in Q3FY2006 yoy and by 330 basis points on a sequential basis. The operating profit for the quarter grew by 36% to Rs39.3 crore.
• The interest expense for the quarter increased by 43% to Rs6.3 crore, while the depreciation cost for the quarter declined by 3.8% to Rs10 crore.
• For the full year, the net revenue grew 19.8% to Rs170 crore and the net profit rose by 99.8% to Rs64.3 crore. Adjusting for the extraordinary item to the tune of Rs17.1 crore (on account of a change in the deprecation policy) in the current financial year, the net profit grew by 46.6%.
• The company has announced a stock split in the ratio of five equity shares of Rs2 each for every existing equity share of Rs10.
• The company did a capital expenditure (capex) of Rs70 crore during this quarter and of Rs189 crore in the full year. It now plans to add more cranes worth Rs150 crore in FY2008.
• The company added 21 new cranes and a total of 42 cranes in this year. What's more, it has already placed order for 15 new cranes to be added in FY2008.

Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs295

Hitting a musical note

Result highlights

• The business mix of Saregama India Ltd (SIL) is undergoing a change. Until now the company used to generate the bulk of its revenues by selling cassettes, CDs and DVDs (physical sales). However with the increasing preference of consumers for non-physical formats like radio and the continuing high rate of piracy, the physical sales business is witnessing a downtrend. At the same time, SIL has found a new high-margin revenue stream in radio stations and telecom companies that pay it royalty for use of its content (non-physical sales). This new revenue stream is going to be the driver of SIL's growth in future as is evident from its results for the fourth quarter and FY2007.
• In the fourth quarter, the revenue from operations remained almost flat year on year (yoy) at Rs29.3 crore. As expected physical sales declined by 23.8% yoy to Rs19.1 crore while non-physical sales grew sharply by 117.4% yoy to Rs9.5 crore.
• The share of the non-physical sales for the quarter increased to 33.3% from 14.9% in Q4FY2006; the same rose to 30.2% in FY2007 from 14.9% in FY2006. This is a big positive as the revenue mix of the company is shifting towards this high-margin business.
• The operating profit margin (OPM) improved manifold yoy, from a meagre 1.7% in Q4FY2006 to 10.1%. The margin improvement was possible because the total cost declined during the quarter despite flat revenues. Also, the contribution of non-physical sales to total revenues was higher yoy. Consequently, the operating profit grew from Rs0.5 crore in Q4FY2006 to Rs3.0 crore.
• With flat depreciation and interest charges, a slightly lower other income and a higher tax outgo, the company recorded a pre-exceptional net profit of Rs1.6 crore for Q4FY2007 against a loss of Rs0.4 crore in Q4FY2006.
• Several growth triggers are in the offing which make the SIL stock an attractive investment. These triggers include (1) the expected roll-out of many new radio stations by H1FY2008; (2) the increase in the music content rate; (3) a rapid growth in the number of telecom subscribers and the inclination of telecom customers towards value-added services (ring tones, caller tunes etc); (4) the expected commissioning of its portal in Q1FY2008 (containing its large portfolio of musical tracks); and (5) the value creation on listing of Global Wholesale Club.
• At the current market price of Rs295, the stock is quoting at 18.4x its FY2008E earnings per share (EPS) of Rs16 and 12.9x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs375.

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs101
Current market price: Rs84

Price target revised to Rs101

Result highlights

• Selan Exploration Technology (Selan) has announced a growth of 93.2% in its net sales for Q4FY2007 to Rs8.5 crore. The growth was higher than expectations due to a surge in the volumes during the last quarter. The average realisation of $55 per barrel was lower than the average of $58 per barrel realised for the full year.
• The operating profit margin (OPM) improved considerably to 61.6%, up from 43.7% in Q4FY2006. Consequently, the operating profit grew by 171.9% to Rs5.2 crore.
• The adjusted net profit grew by 134.7% to Rs3.4 crore, up from Rs1.4 crore in Q4FY2006 (adjusted for the one-time income of Rs1.9 crore).
• On a full year basis, the net sales grew by 39.8% to Rs26.2 crore, driven by a 39% increase in the volumes. The company crossed the mark of one lakh barrels of oil sold during FY2007. The margins were largely flat and the adjusted net profit grew by 60% to Rs10.6 crore.
• Encouraged by the positive results of the first phase of the development of its oil fields, the company intends to drill six to eight new wells during the current fiscal. The incremental volumes from the commercialisation of new wells (two wells in Bakrol during Q4) and the expected addition from the phase II of development in the current fiscal are expected to boost the overall production volume by 40-50% in the current year.
• At the current market price the scrip trades at 7.5x FY2008 and 5.8x FY2009 estimated earnings. We maintain Buy call on the stock with a revised price target of Rs101 (7x FY2009 estimated earnings and 1.2x enterprise value [EV]/oil reserves [proven and probable]).

Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Under review
Current market price: Rs1,091

Q4FY2007 results: First-cut analysis

Result highlights

• Shree Cement's Q4FY2007 net revenues grew by 68% year on year to Rs378 crore on the back of a 36% year-on-year growth in its volumes and a 24% year-on-year growth in its realisations.
• The expenditure (adjusting for the depreciation) grew by 67% year on year to Rs226.9 crore on account of a higher power fuel cost, which witnessed a 51% year-on-year increase (due to the rising pet coke prices) and increased freight cost, which jumped by 35% year on year.
• The operating profit grew by 69% year on year to Rs151 crore whereas the operating profit margin stood at 40%, adjusting for the pre-operative expenses of Rs20 crore pertaining to the earlier years (the company reversed the same in the current quarter).
• The interest cost remained flat on a year-on-year basis but declined sequentially. For the quarter the company provided a depreciation of Rs154 crore, which included Rs114 crore on Unit IV commissioned in March 2007 and Rs20 crore of amortisation of the pre-operative expenditure.
• The tax provision for the quarter was marginal at Rs0.3 crore. On account of the higher depreciation provision, the net profit was lower at Rs23.8 crore.
• The net sales for FY2007 grew by 104% year on year to Rs1,367 crore whereas the net profit grew by 862% year on year to Rs177 crore. Adjusting for the additional depreciation provision of Rs199 crore pertaining to Unit II, the net profit stood at Rs376 crore.
• We are in the process of revising our earnings estimates for the company. We shall update you with the revised earnings and price target as soon as we meet with the management.

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,325
Current market price: Rs1,227

Strong core operating performance

Result highlights

• State Bank of India's (SBI) results have been far ahead of expectations with the profit after tax (PAT) growing by 75% to Rs1,493 crore compared to our estimate of Rs1,260 crore. The higher than expected growth in the PAT was driven mainly by a Rs950-crore write-back of the provisions on the bond portfolio.
• The reported net interest income (NII) increased by 21.5% to Rs4,320 crore, however adjusted for the one-time items the NII was up 23.9% year on year (yoy). Our calculations suggest that the net interest margin (NIM) improved by 17 basis points on a sequential basis and by 29 basis points yoy to 3.24%, driven by better yields and controlled costs.
• The reported non-interest income grew by 22.6% yoy to Rs2,894.3 crore. However there was a Rs950-crore of write-back due to excess provisions on its books.
• The operating expenses were up 9.9% yoy, in line with expectations; the reported operating profits were up 34% yoy and the core operating profits (excluding treasury, others & amortisation/write-back) were higher by 40.1% yoy. However, the adjusted operating profits were up by 20.7% yoy.
• The provisions went up by 38% yoy mainly due to higher non-performing asset (NPA) provisions and standard asset provisions.
• The asset quality of the bank has shown some deterioration, the gross NPA declined by 4% sequentially to Rs9,998 crore whereas the net NPA increased by 17% on a sequential basis to Rs5,258 crore despite higher provisions.
• The results have been a mixed bag. While improvement was seen in the core operating performance driven by the NII and fee income growth, higher provisions restricted the overall profit growth. But it's mainly the one-off write-back of Rs950 crore that resulted in a higher than expected growth in the profits. We have downgraded FY2008E PAT by 2.6% to Rs5,377.9 crore mainly due to the adjustment made for the higher dividend income received by SBI in FY2007 (the bank would have normally received the same in FY2008) and slightly higher NPA provisions which we feel should be factored in due to the uptick in the credit cycle. At the current market price of Rs1,226, the stock is quoting at 13x its FY2008E stand-alone earnings per share (EPS), 1.7x FY2008E stand-alone book value and 1.3x FY2008E consolidated book value. We maintain our Buy recommendation on the stock with a price target of Rs1,325.

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs340
Current market price: Rs222

Price target revised to Rs340

Result highlights

• Subros' Q4FY2007 results are slightly below expectations both on the top line front and the profit margin front. The net sales for the quarter grew by 8.7% to Rs183.3 crore.
• Adjusting for the one time VRS expenditure, the operating margins of the company has increased slightly to 13% against 12.6% last year as higher raw material costs restricted margin growth. Consequently the operating profits for the year grew by 11.8% to Rs23.75 crore.
• Higher interest and depreciation costs due to the commissioning of its new plant at Gurgaon affected the profitability further. Consequently, the company reported a 4% growth in its adjusted net profits to Rs10.1 crore.
• Rising interest rates would have a negative impact on the whole automobile sector, which would also affect the volumes of companies like Subros. We are therefore downgrading our volume estimate for Subros and consequently cutting our earnings estimate for FY2008 by 23.5% to Rs32.8. We are introducing our FY2009 estimates for Subros and expect earnings of Rs40.1.
• We maintain our positive outlook on Subros. At the current levels, the stock is available at attractive valuations of 5.5x FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.2x. We maintain our Buy recommendation on the stock with a revised target of Rs340.

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,297
Current market price: Rs1,064

Q4 first-cut analysis and acquisition highlights

Result highlights

• The consolidated net sales of Sun Pharmaceutical Industries (Sun Pharma) grew by 33.8% year on year (yoy) to Rs544.2 crore in Q4FY2007. The strong growth was driven by an increase of 43.4% in the domestic business and a 22.4% growth in the exports.
• Its US subsidiary, Caraco Pharma (Caraco), continued its growth momentum. Caraco's sales grew by 32% yoy to $32.7 million in Q4FY2007 and by 41% to $117 million in FY2007.
• Sun Pharma's operating profit margin (OPM) expanded by 610 basis points on a lower base to 28.3%, resulting in a 70% spike in its operating profit to Rs154.5 crore.
• Sun Pharma's other income was higher by 24.2% to Rs94.2 crore, which was more than double of our estimate of Rs42.7 crore for the quarter.
• With an impressive revenue growth in both domestic formulation and export businesses, a 610-basis-point expansion in the OPM and a higher than expected other income, Sun Pharma's net profit for Q4FY2007 stood at Rs212.1 crore, up 48.4% yoy. The net profit was ahead of our estimate of Rs184.4 crore.
• For the full year, the company's sales were up 30% at Rs2,132.1 crore and the OPM expanded by 190 basis points to 31.9%, resulting in a net profit of Rs774.1 crore (up 35%). The full-year net profit was above our expectations of Rs737.2 crore.
• Between Sun Pharma and its US subsidiary Caraco 34 abbreviated new drug applications (ANDAs) are now approved compared with 22 at the end of 2006. A total of 16 ANDAs have been filed during the fourth quarter (eight each by Sun Pharma and Caraco). With this, 77 ANDAs await the approval of the US Food and Drug Administration (USFDA) including seven tentative approvals.
• The company has guided for a conservative 15-18% consolidated revenue growth for FY2008 (which is less than our estimate of a 30% growth) whereas Caraco has guided to a growth of 30% during the year. Sun Pharma expects to maintain the OPM in FY2008.

Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,350
Current market price: Rs847

Beating expectations with strong margins

Result highlights

• Sundaram Clayton Ltd’s (SCL) Q4 results are ahead of our estimates because of a positive surprise on the operating profit margin (OPM) front.
• The net sales for the quarter grew by 25.3% to Rs218.4 crore, with both the die-casting and the air-brake division rendering a strong performance.
• The OPM improved by 160 basis points year on year (yoy) to 18.2% because of strong improvement in the operating performance of the company. The company was able to achieve better operating efficiencies due to higher volumes that led to considerable savings in the employee cost and other expenses.
• Both interest cost and depreciation charge rose due to high capital expenditure (capex) incurred by the company last year. Consequently, the adjusted net profit grew at 21% to Rs27.8 crore.
• The company has increased its capex for the next year to Rs175 crore, which shall be spent on both the divisions for capacity expansions and new product development.
• SCL has a huge investment portfolio, as it holds 56.8% in TVS Motors and also has holdings in other companies like TVS Electronics and TVS Finance & Services. In valuing the company we have assumed a 75% discount to the total investment value per share. After adjusting for the investments, the stock is currently trading at around 11.3x its stand-alone FY2008E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs1,350.

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs980
Current market price: Rs708

Price target revised to Rs980

Result highlights

• Tata Motors' Q4FY2007 results are slightly below are expectations, primarily on the margin front. The Q4FY2007 net sales (excluding a foreign exchange [forex] gain) of the company grew by 20.0% to Rs8,206.8 crore, driven by a volume growth of 16.2% and a realisation growth of 3.3%.
• Excluding the effect of the forex gain/loss, the operating profit margin (OPM) has fallen by 160 basis points year on year (yoy) and by 130 basis points sequentially to 11.0%. This was mainly owing to a higher raw material cost and a sequential drop in the realisation due to a change in the product mix. Consequently, the operating profit grew by just 5.1% to Rs906 crore.
• The other income was higher at Rs60.4 crore against Rs4.4 crore last year. Further, lower interest cost and taxes, and stable depreciation aided the company to record a 25.9% growth in its profit to Rs576.7 crore.
• For the full year, net revenues grew by 33% to Rs27,404.8 crore against Rs20,672 crore last year, while the net profit grew by 25% to Rs1,913.5 crore.
• The consolidated sales for the full year grew by 36.4% to Rs32,426.4 crore while net profit grew by 25.4% to Rs2,170 crore.
• We are taking a cautious view on the commercial vehicle (CV) industry and expect the slowdown to continue in the first half of FY2008 on the back of tightening liquidity and higher interest rates. However, we expect the situation to correct itself towards the second half of the fiscal with the peaking out of interest rates and better availability of funds.
• We are downgrading our FY2008 earnings estimate by 6.2% to Rs53.4 and are also introducing our FY2009 estimate. We expect stand-alone earnings of Rs60.8 and consolidated earnings of Rs70.3 in FY2009. At the current levels, the stock trades at 11.7x its FY2009 stand-alone earnings per share (EPS) and 10.1x its consolidated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs980.

Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs914

Implications of Glacèau stake sale
Coca-Cola Company has approved the purchase of vitamin water maker Glacèau for $4.2 billion in cash and coke stock. It may be recalled that Tata Tea Ltd (TTL) and Tata Sons Ltd (TSL) had together acquired a 30% stake in Energy Brands Inc (EBI), a company based in the USA, for $677 million (Rs3,110 crore) and the deal had resulted in an enterprise value of $2.2 billion for the company.

Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs585
Current market price: Rs488

Price target revised to Rs585

Result highlights

• The consolidated revenues of Thermax grew by a whopping 65% year on year (yoy) to Rs856.5 crore in Q4FY2007, sharply ahead of our expectation. The revenue of the energy segment grew by a strong 74% yoy to Rs685.5 crore and that of the environment segment grew by a robust 53.7% yoy to Rs205 crore.
• The company's operating profit margin (OPM) declined by 70 basis points yoy to 12.4% in the quarter. The dip in the margin was due to a rise in the raw material prices and a change in the product mix. On a full year basis, the OPM stood at 12.4% as against 13.1% in Q4FY2006 and we expect the company to maintain the OPM in FY2008. The operating profit grew by 56% to Rs106 crore.
• The energy segment continued its robust performance with a revenue growth of 74% yoy. Although the profit before interest and tax (PBIT) margin for this segment declined by 240 basis points yoy in this quarter, yet we don't see this as a cause for concern. That's because the margin declined more because of a change in the product mix and rupee appreciation. The company has said in its conference call that it has taken adequate measures to tackle the rupee appreciation. The environment segment reported an impressive 53.7% growth in its revenue and a 230-basis-point improvement in the PBIT margin on a year-on-year (y-o-y) basis.
• The consolidated net profit grew by 66% yoy to Rs69.7 crore in Q4FY2007, in line with our expectation.
• The order backlog grew at 79% yoy to Rs3,100 crore. It is equivalent to 1.3x FY2007 consolidated revenues and order inflows during the quarter were up by 38% to Rs894 core. This imparts a very strong visibility to the revenues.
• The company has done a capital expenditure (capex) of Rs80 crore in this year and will further do a capex of around Rs150 crore in FY2008 as it is setting up a factory in Vadodara at a cost of Rs175 crore. So far it has invested Rs50 crore in this factory. The factory will start production in a phased manner. The production from the first phase of the project will commence from July this year and full production would start by March 2008.
• The company has guided for a stable to better OPM in FY2008, which, in our opinion, is indicative of the improving outlook of its business.
• In light of the continued growth traction over the last few quarters, the closure of the loss-making subsidiary ME Engineering and the revised guidance of a 40% top line growth for FY2008, we are revising our FY2008 earnings estimate upwards by 2.4%. We are also revising our one-year price target upwards to Rs585. The Rs50 per share of cash and cash equivalent on the company's books provides a margin of safety to our price target. We maintain a Buy on the stock with a revised price target of Rs585.

UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs935
Current market price: Rs816

Price target revised to Rs935

Result highlights

• 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.

Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs265

Q4 results above expectations

Result highlights

• In Q4FY2007 Unichem Laboratories (Unichem) reported a sales growth of 26.7% to Rs134.1 crore, which is much higher than our expectations of Rs124.2 crore. The sales growth was achieved on the back of a superb 71% jump in the exports to Rs41.4 crore and an 11.8% rise in its domestic sales to Rs94.4 crore.
• The operating profit margin (OPM) narrowed by 210 basis points to 16.0% in the quarter, largely due to a higher product filing cost which restricted the growth in the operating profit to 12.2% at Rs21.4 crore.
• Subsequently, an over five-fold jump in the other income, an 18% fall in the interest expenses and a lower than expected tax provisioning during the quarter resulted in a 32.1% growth in the profit after tax (PAT; profit before extraordinary items) to Rs20.5 crore in Q4FY2007. The net profit was above our expectation of Rs15.5 crore for the quarter.
• For FY2007, Unichem reported a 20% growth in its net sales to Rs545.60 crore, a flat OPM of 20% and a 26.9% growth in the bottom line to Rs88.9 crore. For FY2007, both sales and net profit were higher than our expectations of Rs530 crore and Rs85.5 crore respectively.
• At the current market price of Rs265, the stock is trading at 9.3x its estimated FY2008 earnings. In view of the positive outlook for the company, we maintain our Buy recommendation on Unichem, with a price target of Rs360.

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs141
Current market price: Rs120

Strong operating performance

Result highlights

• The Q4FY2007 results of Union Bank of India (UBI) are below our expectations with the profit after tax (PAT) reporting a growth of 57.4% year on year (yoy) to Rs228.1 crore compared with our estimate of Rs254.7 crore. The profit is lower mainly due to higher than expected provisions made by the bank during the quarter.
• The adjusted net interest income (NII) was up 29.4% yoy and 9.4% quarter on quarter (qoq) at Rs750.4 crore. The net interest margin (NIM) of the bank improved on a sequential basis by 38 basis points to 3.37% for Q4FY2007. Controlled increase in costs coupled with improvement in yields helped the bank to improve its margins both yoy and qoq.
• The improvement in the NIM was a fall-out of the strategy adopted by the bank's management in the previous quarters. The bank shed low yielding advances and focused on quality advances to improve the yields on the asset side. On the liability side, the bank reduced the high-cost term deposits and improved its low-cost deposits, which helped in containing the costs.
• The operating profit was up 49.4% yoy and 30.7% qoq, while the core operating profit (ie the operating profit excluding the treasury gains and others) reported a growth of 56.4% yoy and 31.4% qoq. The growth was driven by a good core income growth and controlled operating expenses.
• Provisions and contingencies rose by 48.1% yoy and 148.3% qoq mainly due to higher non-performing asset (NPA) and standard asset provisions made during the quarter to improve the asset quality levels.
• As a result of higher provisioning the bank's NPA level improved to 0.96% from 1.12% in the previous quarter. The gross NPA level also declined to 2.94% from 3.24% on a sequential basis.
• The management's renewed focus on profitable businesses and asset quality is a welcome move for the bank's future performance, which is aptly reflected in its improved NIMs and low NPA levels. The bank is currently available at attractive valuations compared to its peers. At the current market price of Rs120, the stock is quoting at 5.6x its FY2008E earnings and 1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs141.

Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs95

Q4 results beat expectations

Result highlights

• Universal Cables Ltd's (UCL) Q4FY2007 results are ahead of our expectations.
• UCL's net sales grew by 51% to Rs129 crore; and the net profit grew by 77% to Rs6.2 crore as against our expectation of Rs5 crore.
• The operating profit margin (OPM) for the quarter improved by 137 basis points to 10.84% on account of operational efficiencies as the other expenses to sales ratio declined to 10.78% from 14.43% last year. The operating profit for the quarter grew by just 74% to Rs12.2 crore.
• We had mentioned in our previous update that we expect the OPM to improve, as the company focuses on the high-end products that have better margins and as its 100% subsidiary Optic Fibre Goa Ltd (OFGL) turns profitable. On a full year basis this optic fibre business recorded a turnover of Rs15 crore, growing by 100% over the last year. Its PBIT stood at Rs1.4 crore as against the loss of Rs1.6 crore in the previous year.
• The interest expense for the quarter increased by 50% to Rs1.79 crore and the depreciation cost for the quarter increased by 94% to Rs2.25 crore. The interest and depreciation charges increased because the first phase of the technological upgradation-cum-expansion project was commissioned and commenced commercial production during the quarter ended March 31, 2007. The project uses Vertical Continuous Vulcanization (VCV) process for manufacture of XLPE Power Cables.
• For the full year ended March 31, 2007, the net sales grew by 27% to Rs377 crore and the net profit grew by 33% to Rs22 crore.
• The company has recommended a payment of dividend for the year @ Rs2.40 per share (ie 24%), thus the stock also offers good dividend yield.
• At the current market price of Rs95, the stock is quoting at 7.2x its FY2008E earnings per share (EPS) and 5x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with price target of Rs179.

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs431

Results in line with expectations

Result highlights

• Wockhardt's net sales increased by 48.7% to Rs522.8 crore in Q1CY2007. The growth came on the back of a 35% growth in the domestic business and a 57% growth in the international business. The sales growth was ahead of our estimates.
• The sales in the European market grew by 93%, largely driven by the consolidation of the Pinewood acquisition. The sales in the US market grew by 15%.
• Wockhardt's operating profit margin (OPM) expanded by 260 basis points to 22.2% in Q1CY2007. However, the margin picture remains clouded due to the capitalisation of research and development (R&D) cost. Adjusting for the capitalised cost of Rs18.5 crore, the OPM actually showed a decline of 100 basis points. The company reported an operating profit (OP) of Rs115.9 crore, a growth of 68.2% year on year (yoy). The decline in the margin was also attributed to the acquisition of the lower-margin Dumex and Pinewood businesses.
• Wockhardt's pre-exceptional net profit rose by 17% to Rs66.3 crore. The growth was despite higher interest cost, depreciation charge and tax outgo. The profit was in line with our estimates.
• Wockhardt has announced the acquisition of France-based Negma Laboratories (Negma), with sales of $150 million and earnings before interest, tax, depreciation and amortisation (EBITDA) margin of around 18%, in an all-cash deal worth $265 million. This acquisition is in line with the company's aim to achieve a turnover of $1 billion by 2009. With its successful track record of creating value post-integration, we believe the acquisition of Negma too will be value accretive for Wockhardt. We await details of the acquisition, after which we will review our numbers to incorporate the same into our estimates.
• At the current market price of Rs431, the stock is available at 14.2x its CY2007E and 12.4x its CY2008E earnings, on a fully diluted basis. The valuations seem very attractive at these levels and should be viewed as a strong buying opportunity. We maintain our Buy recommendation on the stock with a price target of Rs552.

WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs87
Current market price: Rs43

No surprises

Result highlights

• WS Industries’ (WSI) Q4FY2007 results are in line with our expectations.
• The revenues for the quarter grew by 16% to Rs44.8 crore while the net profit grew by 113% to Rs2.2 crore on the back of its high operating leverage and lower depreciation expense.
• The operating profit for the quarter grew by 37% yoy to Rs5.3 crore as the operating profit margin (OPM) expanded by 180 basis points to 11.9%. The OPM expanded because of lower power & fuel cost and other operational efficiencies. The power & fuel cost as a percentage of sales declined to 15.5% from 18.4% in Q4FY2006 and the other expenses, as a percentage of sales, dropped to 17.4% from 19.4% in Q4FY2006.
• The interest cost increased by 25.7% while the depreciation cost decreased by 10.6%.
• The order book at the end of March 2007 stood at a healthy Rs200 crore.
• The Q4FY2007 results of WSI are in line with our estimates; the company is having a good order book of Rs200 crore, which is around 1.2x its FY2007 sales and provides good earnings visibility. We have valued WSI using the sum-of-the part (SOTP) valuation method, wherein we have valued WSI’s core insulators business at 10x its FY2008E earnings per share (EPS). This gives the fair value Rs58 per share. Further, we have valued WSI’s realty subsidiary at the current realisable value of Rs3,500 per square feet. Taking WSI’s current 59% stake in the realty venture, we arrive at a value of Rs29 per share. This gives us a fair value of Rs87 per share of WSI.

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MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.

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SECTOR UPDATE

Automobiles

Dream run interrupted
The commercial vehicle (CV) segment has been on a dream run, with FY2007 being its sixth straight year of positive growth. A strong growth in the economy, easy availability of finance, lower interest rates and high freight rates contributed to this phenomenal performance. We believe that the time has come for taking a slight breather. While the macro factors still appear to be strong, we expect the growth to slacken in the next 6-12 months.

Banking

Possibility of another CRR hike remains alive
The continued growth momentum, easy liquidity driven by strong foreign inflows and concerns over increase in global commodity prices could prompt the Reserve Bank of India (RBI) to suck out the excess liquidity from the banking system. Expectations are building up that the RBI may be prompted to take a pre-emptive action as the system is again flush with funds and the government is all set to resume spending.

Amidst this developing situation, the comforting factors have been the moderation in inflation (down to 5.27% from 5.44%) and non-food credit growth (lower at 27.1% compared with 30.5% growth in the previous year). However, money supply growth at 20.2% (RBI's FY2008 target being 17%) is the only factor that could prompt the RBI to step in and suck out liquidity from the system to keep the money supply growth in check.

FMCG

Price hikes across the board
The rising prices of vegetable oils has forced fast moving consumer goods (FMCG) companies to effect price hikes across products. The price of palm oil is at ten-year high and the same has risen by over 20% in the past one year on account of a drop in supply and rise in global demand. As a result, the soap manufacturing industry has had little option but to pass on the price hike to consumers.

Pharmaceuticals

Omnicef loses patent protection
The patent for Omnicef, the antibiotic used to treat various infections, expired on May 6, 2007, paving the way for generic companies to enter the cefdinir market in the USA. In this regard, Lupin and Sandoz (the generic arm of Swiss drug maker Novartis) have received the final approval from the US Food and Drug Administration (USFDA) for manufacturing and marketing cefdinir in both capsule and solution forms. On the other hand, Orchid Chemicals (Orchid), Ranbaxy Laboratories (Ranbaxy) and Teva—the world’s largest generic companies—are awaiting approval from the USFDA.

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VIEWPOINT

Page Industries

Riding on retail revolution
Page Industries Ltd (PIL) commenced operations in 1995 to manufacture and sell inner wear (for men and women) under the Jockey brand name. With a distribution network of 14,000 outlets in 1,100 cities, the company has emerged as one of the largest organised players in this segment. It has around 9% share of the total market and around 23% market share in the premium brand segment.

Patel Engineering

Unlocking value of land bank
We attended the analyst meet of Patel Engineering Ltd (PEL) held on May 09, 2007 in Mumbai. Following are the key takeaways from the meet.

Real estate plans

• For the first time, the company unveiled its real estate plans and strategy for its land bank.
• The current land bank stands at around 500 acre, located in four places.
• The important thing about the company's land bank is that the entire land bank is situated in urban areas and hence commands higher realisation.
• The company has floated a wholly owned subsidiary called Patel Realty India Ltd (PRIL) under which all its real estate activities will take place.