Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs375
Current market price: Rs292
Strong performance continues
Result highlights
- Orchid Chemicals & Pharmaceuticals' (Orchid) top line grew by 39.4% year on year (yoy) to Rs332.7 crore in Q3FY2008. The top line growth was above our estimate of Rs302.5 crore and driven by the consolidation of market share in niche products such as Cefdinir, Cefepime and Cefoxitin.
- Orchid's operating profit margin (OPM) shrank by 310 basis points yoy to 29.5%, driven by significant escalations in the raw material and staff costs. Consequently, the operating profit grew by 26.1% to Rs98.1 crore.
- The reported net profit jumped up by 91.1% to Rs54.1 crore, powered by foreign exchange (forex) gains (on the outstanding foreign currency convertible bonds [FCCBs]) recorded during the quarter and the reduction in the interest expense. However, on excluding the net impact of the forex gain of Rs11.3 crore, the adjusted net profit of the company (derived solely from the operations) stood at Rs50.6 crore, up by 78.7% yoy. This was way above our estimate of Rs46 crore.
- Orchid's management has guided towards a 35% growth in the company's top line and a doubling of the operational net profit (excluding the forex gains on the outstanding foreign currency liabilities) in FY2008. To account for the better than expected performance in M9FY2008 and taking into account the guidance provided by the management, we have revised our revenue and earnings estimates for FY2008 and FY2009. We believe Orchid's revenues will grow by 28.8% to Rs1,175.6 crore in FY2008 and by 24% to Rs1,458.1 crore in FY2009. The pre-exceptional net profit (excluding the forex gains on the outstanding foreign currency liabilities) will grow by 64.4% to Rs158.9 crore in FY2008 and by 42.4% to Rs226.2 crore in FY2009. This will yield fully diluted earnings of Rs17.4 per share in FY2008 and Rs23.4 per share in FY2009.
- At the current market price of Rs292, Orchid is discounting its FY2008E earnings by 16.8x and its FY2009E earnings by 12.5x. The valuations at these levels seem absolutely compelling when viewed in context of the strong growth potential that awaits the company. We retain our positive stance on the stock and maintain our Buy call with a price target of Rs375.
Housing Development Finance Corporation
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,362
Current market price: Rs2,820
Q3FY2008 results: First-cut analysis
Result highlights
- For Q3FY2008 HDFC has reported a profit after tax (PAT) of Rs648.9 crore, which is marginally above our estimate of Rs626.2 crore. The Q3FY2008 PAT grew by a strong 82.5% year on year (yoy) driven by a strong year-on-year growth in the net interest income, other operating income and a gain of Rs120.9 crore from the sale of the 7.2% stake in HDFC Standard Life Insurance.
- The net interest income for the quarter came in at Rs665.6 crore, up 62% yoy and 8% quarter on quarter (qoq), buoyed by a strong growth in the disbursements. The interest income registered a growth of 46% yoy against which the interest expense was up 39% yoy.
- Our calculation indicates that the net interest margin for the quarter has improved by ten basis points qoq to 3.6% due to a higher prime lending rate and a lower cost of funds.
- The other operating income witnessed a whopping growth of 134% yoy to Rs65.4 crore owing to a jump in the gain from deployment of surplus cash in mutual funds—at Rs44.4 crore against Rs6 crore in Q3FY2007.
- On a year-to-date (YTD) basis, the loan approvals reached Rs29,376 crore, up 30% from Rs22,666 crore for the prior year period. Meanwhile, the YTD loan disbursements grew by 28% to Rs22,285 crore from Rs17,465 crore in the same period of the last year.
- Though the provisions as a percentage of the loan book went up to 1.2% as in December 2007 from 0.8% as in December 2006, the same were well under control.
- The asset quality improved as the gross non-performing asset percentage (GNPA as a percentage of the loan portfolio) declined by 14 basis points yoy to 1.12%. However, on absolute terms, the GNPA increased to Rs710.6 crore from Rs646.8 crore last year.
- HDFC's capital adequacy ratio (CAR) as at the end of December 2007 stood at 17.6% compared with 13.7% in the previous year, whereas its tier-I capital ratio stood at 15.3%. Both, the CAR and the tier-I capital ratio were well above the minimum requirement of 12% and 6% respectively.
- The strong quarterly results of HDFC reinforce our bullish stance on the company. In addition, the expected initial public offering of HDFC Standard Life in 2009, any increase in the cap on foreign holdings in insurance companies and value unlocking from HDFC's general insurance business through a stake sale to ERGO (Germany) should act as triggers in future.
- At the current market price of Rs2,820, the stock is trading at 20.7x its 2009E earnings and 3.7x its 2009E book value, and 17x its 2010E earnings and 3.2x its 2010E book value. Based on the various positives and the attractive valuations, we reiterate our Buy rating on the stock with a price target of Rs3,362.
Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs554
Current market price: Rs455
Price target revised to Rs554
Result highlights
- Wipro's global information technology (IT) service business reported a revenue growth of 11.4% quarter on quarter (qoq) and 24.6% year on year (yoy) to Rs3,597.3 crore (under US GAAP) for Q3FY2008. In dollar terms, the revenues grew at a reasonably healthy rate of 14.3% sequentially to $910.1 million (ahead of its guidance of $905 million). However, it included incremental revenues of $61.4 million contributed by the recent acquisitions (as compared with $6.4 million in Q2 as acquisitions were effective from September 20, 2007). Adjusting for the same, the revenue growth in the global IT service organic business stood at 7.4% qoq in dollar terms, which was contributed by a 7.2% sequential growth in the IT service business and a 9.3% sequential growth in the business process outsourcing (BPO) segment. The volume growth of 6.4% qoq in the IT service business was in line with expectations, whereas the improvement of 0.5% qoq in the blended realisations was ahead of expectations.
- The operating profit margin (OPM) declined by 150 basis points sequentially to 20.7%, largely because of (1) The adverse impact due to the consolidation of Infocrossing (impact of 1.1%); (2) The full impact of wage hikes (12-13% hike given to offshore employees in IT service segment with effect from August 1,2007 and to BPO employees with effect from October, 2007)and (3) The appreciation in rupee (impact of 80 basis points). This was more than nullified by the improvement in the blended realisation (0.5% sequential improvement) and the leverage in the overheads cost as a percentage of sales (down to 3.4% of sales as compared with 9.1% in Q2).
- The company has given a revenue guidance of $955 million for the global IT service business in Q4, which amounts to a growth of around 4.9% sequentially (and is relatively muted as compared with the revenue growth guidance of 7.7% and 6.9% in Q4FY2006 and Q4FY2007 respectively). The margins are expected to remain in a narrow range in spite of the adverse impact of around 1% due to the annual wage hikes to onsite employees in January. In terms of the overall demand environment, the management has not felt any impact of the weak economic conditions in the US on its deal flow or the deal pipeline as of now. However, it indicated that some of the clients were looking at reducing their total IT budgets in 2008 and that a clear picture would emerge only by the end of the quarter. This further added to the continued uncertainty about the demand environment that has been dragging down the tech stocks.
- In case of other businesses run by the company, the Indian IT service business reported a sequential growth of 5.1% in the revenues to Rs920.7 crore and it bagged some large deals (including the total outsourcing deal from a cellular operator in India close to $350-400 million). The consumer care business and the other business segment also reported healthy double-digit sequential growth of 13.7% and 17.2% respectively.
- Consequently, Wipro's consolidated revenues grew at a healthy rate of 10.7% qoq and 32.1% yoy to Rs5,236.1 crore (as per the US GAAP). The OPM declined by 30 basis points sequentially to 17.0% (with gross margins declining by 110 basis points). The earnings grew marginally by 1.7% qoq to Rs826.1 crore. The lower than expected growth in earnings was largely contributed by the unexpected decline of 38.8% in the other income component to Rs45.5 crore in Q3FY2008.
- We have fine-tuned our earning estimates for FY2008 and FY2009 to factor in the lower than expected other income. At the current market price, the stock trades at 20.2x FY2008 and 16.8x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs554 (20.5x FY2009E earnings).
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs241
Current market price: Rs213
Q3FY2008 results: First-cut analysis
Result highlights
- ITC's operating performance for Q3FY2008 was in line with our expectations. The sales growth of 9.2% year on year (yoy) was below our expectations primarily on account of a decline in the agri-business revenues due to restrictions imposed on the export of non-basmati rice.
- The operating profit margin (OPM) for the quarter stood at a strong 34.7% against 34.2% in the corresponding period last year (Q3FY2007) and 31.5% in the previous quarter (Q2FY2008). The operating profit thereby grew by 10.8% to Rs1,199.7 crore.
- A jump of 96.9% in the other income to Rs137.4 crore, which was above the expectations, helped the net profit grow by a handsome 15.8% yoy to Rs830.7 crore.
- The cigarettes segment made a comeback in volume terms as it saw a dip of just about ~1% in the volumes, which was ahead of the expectations. We expect the volumes to catch up the normal growth rate of 5-7% in FY2009. The gross revenues for the segment increased by 7.6% yoy and the profit before interest and tax (PBIT) rose by a good 16% yoy.
- The non-cigarette fast moving consumer goods (FMCG) business continued its remarkable progress with a 50.1% revenue growth. The segment loss increased to Rs64.5 crore (a loss margin of 9.8%) on account of spends on new product launches particularly those in the personal care category. The agri-business' profitability rebounded with a PBIT margin of 4.2% after a one-off slip in the previous quarter. However the segment revenues showed a year-on-year (y-o-y) de-growth of 9.4% due to restrictions on the export of non-basmati rice.
- We continue our bullish stance on the stock with a price target of Rs241. At the current market price of Rs213, the stock discounts its FY2009E earnings per share (EPS) of Rs9.6 by 21.3x and trades at FY2009E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.7x.
BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs330
Current market price: Rs280
Price target revised to Rs330
Result highlights
- BASF India (BASF) has registered good results for Q3FY2008, which is in line with our expectations. The net sales grew by 22% year on year (yoy) to Rs222.7 crore, mainly driven by a strong 27% growth in the sales of agricultural products and a 27.9% growth in the sales of plastics.
- The operating profit margin (OPM) expanded by 60 basis points yoy driven by better profitability of the agricultural product division. Consequently, the operating profit grew by 29.9% to Rs20.7 crore.
- Inspite increased interest and depreciation charges, the company's net profit increased by 24.6% to Rs11 crore.
- We expect the consumption boom in the company's user industries (white goods, home furnishings, paper, construction and automobiles) to continue and hence we remain optimistic on the company's growth prospects. BASF has already expanded its polymer dispersion capacity at Mangalore from 20,000 tonne per annum (tpa) to 65,000tpa in March 2007 to cater to the growing demand.
- We believe the company is trading at an attractive valuation of 8.9x FY2009E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.0x. We maintain our Buy recommendation on the stock with a revised price target of Rs330 valued at 10.5x its FY2009E earnings.
SECTOR UPDATE
Cement
Industry dispatches up 4% in December
The cement industry maintained the growth in cement dispatches in December 2007. Cement dispatches grew at 4.4% year on year (yoy) in the month. Among the major players, ACC registered a 6% year-on-year fall in dispatches at 1.56 million metric tonne (MMT), mainly because one of its plant in south India was undergoing maintenance during the month. Ambuja Cements achieved a healthy 6% rise in dispatches to 1.48MMT on account of better capacity utilisation. Grasim Industries' dispatches were flat yoy at 1.27MMT. Dispatches at UltraTech Cement grew by 11% yoy at 1.34MMT mainly because of capacity expansion that happened during FY2008.