Cluster: Emerging Star
Price target: Rs184
Current market price: Rs109
In line with expectations
- ORG Informatics’ performance was in line with expectations during Q1FY2008. Its consolidated revenues grew by 76% to Rs84.3 crore largely driven by 89.3% increase in the revenues from the telecom segment.
- The operating profit margin (OPM) during the quarter stood at 9.5%, which is slightly higher than 9.4% in Q1FY2007 but significantly higher than 1.3% reported in Q4FY2007. The low OPM in Q4FY2007 was an aberration resulting from the cumulative impact of high contribution from the low-margin hardware supply part of the Mahanagar Telephone Nigam Ltd (MTNL) order, restructuring cost related to recent acquisitions and one-time write-off and provisions for debt. Consequently, the operating profit grew by 77.7% to Rs8 crore in Q1FY2008.
- The consolidated earnings of the company during the quarter grew at a relatively slower rate of 60.1% to Rs4.1 crore due to the increase in the interest outgo, higher depreciation charge and higher effective tax rate.
- In terms of the outlook, the management expects to maintain the growth momentum on the back of a healthy order pipeline and the margins in the 9-10% range. It has a pending order backlog of over Rs400 crore as in June 2007. Moreover, the company would continue to actively scout for inorganic opportunities and has given the mandate to Standard Chartered Bank for its proposed foreign currency convertible bond (FCCB) issue to raise $20 million to fund its inorganic initiatives.
- At the current market price the stock trades at 10.6x FY2007 and 7.7x FY2008 estimated earnings (on a diluted equity base of Rs17.1 crore). We maintain our Buy call on the stock with a price target of Rs184 (13x FY2008 earnings).
Price target: Rs200
Current market price: Rs161
In line with expectations
- JK Cement’s top line in Q1FY2008 grew by 17% year on year (yoy) to Rs326 crore on the back of a 25% growth in realisations to Rs3,564 per tonne. The volumes , however, declined by 7% yoy to 915,820 tonne as the grey cement plant remained shut for 20 days for maintenance.
- On the costs front, the fixed costs increased by 33% yoy on the back of a 25% rise in employee costs and 38% yoy surge in the operating expenditure. The variable cost per tonne, which increased marginally by 3% yoy to Rs1,770 per tonne during the quarter, along with the drop in volumes resulted in the overall operating expenditure growing slower by 8% yoy to Rs229 crore.
- On the back of a higher realisation growth during the quarter, the operating profit jumped by 47% yoy to Rs96.5 crore whereas the operating profit margin (OPM) improved by 610 basis points to 29.6%. The higher realisations and flat variable cost structure caused earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne expanding to Rs1,051 per tonne during the quarter from Rs280 per tonne in the corresponding quarter last year.
- The interest cost increased by 11% yoy to Rs9.1 crore due to the higher interest rates, whereas the depreciation provision increased by 11% yoy to Rs9.1 crore.
- Thanks to the excellent performance at the operating level, the net profit grew by 59% yoy to Rs52.5 crore.
- The company’s 20 mega watt (MW) pet coke power plant commenced its trial production in July 2007 and will be fully operational from August 2007. The 10MW turbine will get commissioned by August 2007, whereas the 13.5MW waste heat recovery plant will get commissioned in two phases from September to December 2007.
- The company expects a power savings of Rs150-200 per tonne once the captive power plants (CPP) get fully commissioned. In our calculations, we are assuming savings of Rs150 per tonne for the entire fiscal year FY2009.
- The company will be able to get the full benefit of the savings from the power plants in the fiscal FY2009, which will augur well for the company in the wake of a fall in the pricing power. We are maintaining our earnings per share (EPS) estimates of Rs30.2 per share for FY2008 and Rs25.8 per share for FY2009. At the current market price of Rs161, the stock is trading 5.3x its FY2008 earnings and 6.2x its FY2009E EPS. We maintain our Buy recommendation on the stock with a price target of Rs200.
Cluster: Ugly Duckling
Price target: Rs375
Current market price: Rs281
Results not upto the mark
- Q1FY2008 results of Saregama India Ltd (SIL) are slightly below our expectations. Our preview estimates for the quarter were based on the expectation that the management of the company would include the film business in the stand-alone numbers post its amalgamation with the parent. However, SIL has indicated that it would possibly report such numbers from Q2FY2008.
- The revenues of the company were down 14.9% year on year (yoy) to Rs28.7crore due to a sharp 32.2% decline in the physical sales to Rs16.2 crore. The physical sales were down as there were no major audio, video or movie releases during the quarter and due to continuing trend of decline in the physical sales. On the positive side the non-physical sales (license fees) increased by 27.1% yoy to Rs12.5crore.
- Despite lower than expected costs the operating profit margin (OPM) of the company in Q1FY2008 stood at 13.5% as against 16.8% in Q1FY2007. Thus the operating profits were down 31.8% yoy to Rs3.9crore.
- A much higher tax rate of 14.7% during the quarter as against 2.2% in the corresponding quarter last year led the adjusted profit after tax (PAT) decline to Rs3crore compared with Rs5.4crore for the corresponding period last year.
- In Q1FY2007, SIL had written off Rs2.6crore worth of inventory and debts, thus the reported net profit stood at Rs3crore in Q1FY2008 as against Rs2.8 crore in Q1FY2007.
- We believe SIL stands in a sweet spot with its vast repertoire of music content experiencing strong growth in demand from radio and telecom industries and other opportunities available in the digital music space. However, the growth in demand is going to be counterbalanced by declining sales in the physical format. With margins being much better in the non-physical format, the profit growth will outpace growth in top line in the coming years.
- We realign our estimates for FY2008 taking into account a sharper than expected de-growth in physical sales and also introduce our FY2009 estimates through this update.
- At the current market price of Rs281, the stock is trading at 14.7x its FY2009E earnings per share (EPS) of Rs19.1 and an enterprise value (EV)/ earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.5x. We maintain our Buy recommendation on the stock with a price target of Rs375.
Gujarat NRE Coke
Realisation reflects strong coke market
We attended the analyst meet of Gujarat NRE Coke. Following are the key takeaways from the meet:
- The net sales of the company grew by a whopping 130% year on year (yoy) to Rs149 crore mainly driven by a strong rise in coke prices (FOB china), which rose to US$260 in the current quarter from US$150 in June 2006. However the volumes during the quarter were subdued due to increase in the inventory. The company currently has an inventory of ~ 25,000 tonne.
- The Earnings before interest, depreciation, tax and amortisation (EBIDTA) of the company during the quarter grew by 564% yoy to Rs59.2 crore on the back of the increased realisation (a 22% yoy) and the reduced cost of coal to the company. The average cost of coal to the company during the quarter was in the range of $100 per tonne as against landed cost of $170 per tonne, which rose by 14% in last ten months.
- The profit after tax (PAT) of the company during the quarter was Rs43 crore as against the loss of Rs9.7 crore in the corresponding last quarter. The loss was mainly due to the bad coke market and one time deferred tax of Rs10 crore.
- The current market value of the total investment of the company is close to Rs1,157 crore, which on expanded equity comes to Rs34 per share.