Banking, Union Bank of India, Nestle, Cement, Economy

Banking, Union Bank of India, Nestle, Cement, Economy

Thermax, Banking, HCL Infosystems

Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs700
Current market price: Rs610

Price target revised to Rs700

Result highlights

• Continuing its growth run, Thermax reported an increase of 101% year on year (yoy) in its consolidated sales to Rs713.6 crore during Q1FY2008.
• The operating profits jumped by 106.8% yoy to Rs76.5 crore. Increased raw material cost and higher proportion of lower margin project business restricted the operating profit margin (OPM) growth only to 30 basis points to 10.7% in Q1FY2008.
• The energy business recorded a robust growth of 101% yoy in revenues and bettered the profit before interest and tax (PBIT) margins by 70 basis points to 11.3%. Environment business also reported PBIT margins improvement by 130 basis points and contributing Rs119.2 crore to the top line.
• The consolidated net profit grew by a whopping 114.5% to Rs55.9 crore in Q1FY2008 much ahead of street expectations.
• In order to meet the rising demand company plans commissioning of two more manufacturing facilities in Salvi (Gujarat) and Zehjiang (China) which phase-wise will be fully operational between March-June 2008.
• The consolidated order book at the end of Q1FY2008 stood at Rs3,057 crore which is equivalent to 1.3x its FY2007 net revenues, which gives a clear visibility of earnings.

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SECTOR UPDATE

Banking

RBI uncomfortable with IHC structures
The Reserve Bank of India (RBI) has expressed concerns over the intermediate holding company (IHC) structures planned by Indian banks. It has released a discussion paper with a view to review its suitability in the Indian context. RBI has kept the discussion panel open for the next three weeks. RBI's main concerns are regarding regulatory supervision, risk assessment and legal aspects involving the parent, IHC and other subsidiaries.

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VIEWPOINT

HCL Infosystems

Technically sound
HCL Infosystems reported a tepid growth of 3.5% in its gross revenues to Rs11,855 crore for the fiscal ended June 2007. The growth was largely driven by a revenue growth of 13.9% in the computer systems segment to Rs2,614.5 crore. On the other hand, the revenues from the telecommunications & office automation (telecomm) segment remained flat at Rs9,049.5 crore largely due to the revision of agreement with Nokia.

Thermax, Banking, HCL Infosystems,

ESAB India, Banking, Information Technology, Ambuja Cement

Esab India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs484

Results ahead of expectations

Result highlights

• ESAB India's revenues grew by 35% to Rs87.3 crore in the Q2CY2007, which is ahead of our expectation.
• The operating profit grew by 36.8% to Rs21.7 crore in Q2CY2007 as against Rs15.8 crore in Q2CY2006. Consequently, the operating profit margin (OPM) also expanded by 30 basis points year on year (yoy) to 24.8%. The raw materials cost-to-sales increased by 130 basis points, while the staff cost-to-sales ratio increased by 290 basis points.
• The commissioning of a new plant at Chennai and capacity additions in its existing plants lead to an increased top line in Q2CY2007. The equipment division registered a whopping 65.5% growth in its revenues and the revenues from the consumables increased by 25.6%.
• The depreciation cost for the quarter increased by 26.7% as the company has commissioned its new plant.
• Elexvia group India B.V. along with Charter plc and ESAB Holding Ltd have made an open offer to the shareholder of ESAB India to acquire 30.78 lac shares (Fully paid up equity share of Rs10 each) at Rs426 per share. These represent 20% of the total fully paid up capital.
• For the first half of CY2007 the net sales grew by 32.1% to Rs168.5 crore and the bottom line grew by 36.4% to Rs26.4 crore, subsequently generating an earnings per share (EPS) of Rs17.2 per share.

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SECTOR UPDATE

Banking

Q1FY2008 earnings review
In this sector update we have analysed the banks under our coverage based on certain parameters that we feel are important for the overall banking sector’s performance going forward. We have also taken cognisance of the risks and positive triggers that the banking sector could face in the near to medium term. Based on our analysis we feel the risk/return ratio for banking stocks appears favourable for investors. We say so because we expect the USA to reduce rates in the near future and if that happens, the Reserve Bank of India (RBI) would not be able to sit on the sidelines for too long. A stable to falling interest rate scenario is generally best suited for the banking sector’s performance. Hence, although we remain cautions in the near term, yet we feel the banking sector provides good investment opportunities after the recent correction. Our top picks in the banking sector remain State Bank of India in the public sector, and ICICI Bank and HDFC Bank in the private sector.

Information Technology

Concerns overdone
The tech sector has grossly underperformed the benchmark indices over the past few months. Going by the historic trend, the tech stocks tend to lag behind the overall markets in Q1. However, the underperformance has been much more pronounced this year, due to the added concerns related to the steep appreciation in the rupee, subprime issue and its possible fallout on the overall demand environment, and the slowdown in the earnings growth momentum (compounded annual growth rate [CAGR] over the next three years) on the back of technical issues such as higher tax rate in FY2010.

These issues are largely related to external environment and consequently, not in the control of the domestic tech companies. However, the concerns appear to be overblown and more than priced in the current valuations.

In fact, the premium commanded by the tech stocks over the Sensex valuations (on one year forward basis excluding tech stocks) have reduced from a high of around 120% in the mid of 2004 to a historic low of 20%. This appears to be an overdoing given the fact that one of the key concerns of rupee appreciation is under control now and the performance of the tech sector is not likely to impacted by the rising political risk in the country.

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VIEWPOINT

Ambuja Cement

Holcim picks up 3.94% in Ambuja Cements
Continuing with the creeping acquisition of Ambuja Cements' shares, Holcim Mauritius has announced the acquisition of 6 crore equity shares of the company from its promoter and promoter companies (Narotam Sekhsaria, and Radha Madhav Investments and RKBK Fiscal Services). The acquisition has been carried out at a price of Rs154 per share and amounts to 3.94% of the equity capital of Ambuja Cements.

Banking Review

Banking Review

Sun TV, Pfizer, TVS Motors, Banking

Sun TV, Pfizer, TVS Motors, Banking

Edelweiss - Banking & Financial Services

Edelweiss - Banking & Financial Services

SSKI India Strategy Reports

USE: deadpresident.blogspot.com as the password

SSKI - India Strategy SSKI - India Strategy - Alcohol

SSKI - India Strategy - Automotive Components

SSKI - India Strategy - AutomobilesSSKI - India Strategy - BankingSSKI - India Strategy - Cement SSKI - India Strategy - Construction SSKI - India Strategy - Engineering SSKI - India Strategy - FMCG SSKI - India Strategy - IT Strategy SSKI - India Strategy - Logistics SSKI - India Strategy - Media SSKI - India Strategy - Metals SSKI India Strategy - Oil and Gas SSKI India Strategy - Pharma SSKI India Strategy - Pipes SSKI India Strategy - Power SSKI India Strategy - Power Equipment SSKI India Strategy - Retail SSKI India Strategy - Telecom SSKI India Strategy - Textiles

Kotak - Bharti Airtel, ICICI Bank, Cairn India, Container Corporation, Ranbaxy, Glaxo, Bank of Baroda, Sesa Goa, Pantaloon, OBC, Nicholas Piramal, Cor

Bharti Airtel

ICICI Bank

Cairn India

Container Corporation

Ranbaxy

Glaxo

Bank of Baroda

Sesa Goa

Pantaloon

OBC

Nicholas Piramal

Corporation Bank

Polaris

Energy

Banking

Economy

Motilal Oswal - Results Reports - Apr 2007

Aventis

Banking

Dishman Pharma

Infosys Technologies

HCL Technologies

Tata Consultancy

UTI Bank

Kotak - Max India, Banks/Financial Inst, Economy - IIP

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Man Impact Analysis(Banking And Telecom)

Man Impact Analysis(Banking And Telecom)

Kotak - India Daily: Updates - Bharti Airtel, Reliance Communications,Satyam Computer Services, Banking

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Sharekhan Investor's Eye dated March 07, 2007

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs370

Beating expectations

Result highlights

• Wockhardt's Q4CY2006 net sales grew by 43.7% to Rs526.4 crore, led by a 22.1% growth in its domestic business and a 56.6% rise in its international business. The sales growth was above our expectations. The massive increase in the international business was largely due to the Pinewood acquisition.
• Despite sharp escalations in the material cost and the staff cost, the company's operating mazgins remained flat at 23.2%. This was due to the lower research and development (R&D) expenses, which were capitalised instead of being expensed. On excluding the R&D costs, the company's margins actually declined by 190 basis points year on year (yoy). The decline in the margins was on account of the low-margin Pinewood & Dumex acquisitions. Back-of-the-envelope calculations indicate that the Pinewood acquisition alone has impacted the margins by approximately 150 basis points. Wockhardt reported an operating profit (OP) of Rs122.1 crore, a growth of 43.6% yoy.
• The net profit grew by 19.5% to Rs87.1 crore in Q4CY2006. The net profit was impacted by substantially higher interest and depreciation costs, but was nevertheless much higher than our estimate of Rs77.1 crore.
• For CY2006, Wockhardt's net sales grew by 22.4% to Rs1,729.1 crore, as against our expectation of a 17.0% growth. The Dumex and Pinewood acquisitions contributed significantly to the growth. Excluding the acquisitions, the like-to-like growth stood at 14%. The reported net profit grew by 17.3% to Rs301.7 crore. However, the company had incurred extraordinary expenses to the tune of Rs60 crore in the beginning of the year, due to which the adjusted net profit declined by 6.1% to Rs241.3 crore.
• Wockhardt plans to achieve sales of $1 billion by 2009. Of this $1 billion, $700 million will come through organic growth while $300 million will come as contribution from inorganic initiatives. For CY2007, the company is targeting to cross sales of $500 million and maintain the net margins in the range of 16-18%.
• Based on the management's vision and strategy presented at the recently held analyst meet, we are introducing our CY2008 estimates for Wockhardt. We believe that Wockhardt's top-line will grow at a compounded annual growth rate (CAGR) of 21.3% over CY2006-08E, with revenues touching Rs2,544.3 crore in CY2008E. Over the same period, the net profit is estimated to grow at a CAGR of 31.3%, with the profits reaching Rs415.8 crore in CY2008E, translating into earnings of Rs34.8 per share.
• At the current market price of Rs370, the stock is available at 12.2x its estimated CY2007E earnings and at 10.6x its estimated 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.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs39

Good growth at attractive valuations

Key points

• Ashok Leyland Ltd (ALL) has reported good vehicle sales numbers for the month of February 2007 with an overall growth of 33%. The truck segment recorded a 33% growth and the bus segment grew by 27% during the month.
• The company is all set to surpass its sales target of 80,000 vehicles for the current fiscal. We maintain our positive outlook on the growth prospects of Ashok Leyland on the back of the continuing buoyancy in the commercial vehicle segment.
• The company is expected to spend about Rs4,000 crore in the next three-four years, including about Rs1,200 crore for setting up a plant in Uttaranchal.
• ALL is also a front runner for the acquisition of a stake in Punjab Tractors Ltd (PTL). The acquisition, in case it goes through, would give ALL an entry into the fast growing tractor market in India, and the acquirer would also be able to take advantage of the strong brand equity of PTL and its strong distribution network. However, the acquisition would come at a high price, and the acquirer would have to shell out anything between Rs1,200 crore and Rs1,500 crore, which would necessitate further raising of funds by the company.
• A sharp correction on the bourses following a global meltdown has seen the stock price of Ashok Leyland take a heavy beating. Considering its strong growth outlook, we believe that this is a good buying opportunity, as the stock is available at very attractive valuations, which are at a considerable discount to its peers. At the current market price of Rs39, the stock discounts its FY2008E earnings by 9.5x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs56.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,780

Price target revised to Rs2,430
Aban Offshore Ltd (AOL) has announced the signing of a contract with affiliates of Addax Petroleum and Sinopec to deploy its deepwater drill ship, Aban Abraham, in the offshore block located at the Gulf of Guinea. The contract to drill five firm wells (with an option to drill another five wells) over a duration of 300 days is worth $123 million (can be increased to $246 million). It works out to a charter rate of $410,000 per day (around 36.6% higher than the charter rate of $300,000 for its contract starting from July 2007). The recently acquired contract is effective from end of May 2008 and would positively affect the earnings of FY2009.

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SECTOR UPDATE

Banking

RBI seeks to limit inter-bank lendings
The Reserve Bank of India (RBI) has asked banks to put in place a comprehensive framework for managing its inter-bank liabilities (IBL). Currently there are no defined limits on IBL for banks and with this measure the RBI wants banks to be aware of the potential risks associated with such a liability and contain the liquidity risk arising out of excessive dependence on such liabilities.

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Banking on banks

The bulls have taken a liking to the banks, with the Indian economy clocking an impressive GDP growth of more than 8% in the first quarter

The current rally has seen the BSE banking index outperform the main indices. The bulls have taken a liking to the banks, with the Indian economy clocking an impressive GDP growth of more than 8% in the first quarter.

Banks are seen as a proxy to the economy, and they generally tend to do better in good times. ICICI Bank, SBI, HFC Bank, OBC, PNB and Bank of India have been the biggest winners.

Banks seem to have regained pricing power after a lull of 3-4 years. Also, their treasury portfolio has done well on the back of the improvement in government bond prices this year. As a result, most banks have reported stellar results for the first two quarters of the current fiscal year, with aggregate profits rising by 19%.

Though private banks like ICICI Bank and HDFC Bank have done better due to higher net interest margins and increased fee-based income, the public sector banks are not too far.

Banks have witnessed a huge jump in credit growth, thanks to the rapid economic expansion across sectors and regions. This has been the main driver for the rally in bank stocks. All banks have seen their yields on advances move higher, resulting in expansion of net interest margins.

Shares of ICICI Bank and other banks surged this week, pushing the 18-member BSE Bankex to a record high, after Government bonds yields dropped to six-month lows. With the credit demand pegged at 30%, the bull run in bank stocks is likely to continue for a while. The only concern would be if the RBI hikes interest rates too a much higher level.

As given in the table above, in the last two weeks, the BSE Bankex has logged double-digit gains, to be precise around 10%, compared with the 1.84% increase in the BSE Sensex and 1.14% rise in the NSE Nifty.

Over last two weeks, ICICI Bank has gained smartly, hitting a life time high of Rs925 on 16th November. The stock has rallied almost 7%. In Q2 FY07, the private sector bank posted an increase of 30% in its net profit. It has also received approval from the RBI to open new branches and ATMs.

Others like HDFC Bank, SBI and Bank of India have gained by over 6% each during the same period.

Banking Q2FY2007 earnings review

* After two relatively dull quarters, the latest quarterly results truly justified the run-up in the banking stock prices. The exuberance in the banking sector is based on the core fundamentals and improved visibility in the earnings of the sector, a glimpse of which we have seen during Q2FY2007.

* The net interest income (NII) witnessed a handsome growth, backed by a strong advances growth and the relatively stable net interest margins (NIMs). Higher growth in the fee income helped a commendable growth in the core operating profits.

* With the benchmark yields down almost 50 basis points from the quarter ended June 30, 2006, instead of a mark-to-market provisions charge that was seen in the previous couple of quarters, we saw most banks writing back excess provisions. This kept the overall provisions down and helped the robust growth in profits.

* Based on the improved visibility in the earnings for the banking sector, we have revised the earnings for certain banks. We feel that with the busy season ahead the banking sector is poised to see better times. Our top picks among the public sector banks remain Bank of India, Canara Bank and Punjab National Bank while in the private banking space UTI Bank is our preferred choice.

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Anagram Banking Earnings Preview

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Banking Earnings Preview

Key points

• We expect Indian public sector banks (PSBs) excluding State Bank of India (SBI), to report a healthy year-on-year (y-o-y) growth of 20% in their net interest income (NII) and a strong growth of 32.5% in their earnings for Q2FY2007. SBI, an exception, is likely to report a decline in its earnings due to high loan recoveries in the same quarter last year.
• The private sector banks are likely to continue their strong performance, as their earnings are likely to grow at 27.4% year on year (yoy) for the same period.
• We expect the loan book of the PSBs to grow at a healthy rate of 18-20% and that of the private sector banks at 40-50%.
• The net interest margins (NIMs) are expected to remain stable as most of the banks have raised their prime lending rates over the last two quarters. The same should help them to mitigate the loss of income on account off non-payment of interest on cash reserve ratio (CRR) balances with the Reserve Bank of India.
• The strong performance at the operating level is likely to be aided by the declining 10-year government bond yield, which should help the PSBs to reduce their mark-to-market losses to nil or a negligible level.
  

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