ESAB India

ESAB India

YES Bank, ESAB, DCB

YES Bank, ESAB, DCB

ESAB, India IT Services

ESAB, India IT Services

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.

Sharekhan Investor's Eye dated May 04, 2007

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.

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: Rs263

Q4FY2007 results�first-cut analysis

Result highlights

• Orchid Chemicals & Pharmaceuticals (Orchid) reported a 3.4% increase year on year (yoy) in its net sales to Rs248.0 crore in Q4FY2007. The sales growth was above our expectations. The growth in the sales 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 maintain a healthy market share in excess of 20-25%. Further, being the sole generic supplier of Cefoxitin and Cefazolin in the USA, Orchid continues to maintain 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 profit 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.
• At the current market price of Rs263, Orchid is quoting at 9.3x its estimated FY2008E 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.

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

Q4FY2007 results�first-cut analysis

Result highlights

• Ashok Leyland 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 were positively surprised with the operating profit margin, which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison to last year, the operating profit margin has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profit for the quarter has grown by 21.1% to Rs264.9 crore.
• Lower interest cost and tax outgo helped the company grow its net profit by 28.8% to Rs174.6 crore.
• For FY2007, the net sales for the company grew by 36.5% led by a volume growth of 35%. The operating profit margin came down slightly by 30 basis points to 9.9% while the profit for the year grew by 46% to Rs436.3 crore.
• We are adopting a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country which would affect its sales volumes. Consequently, after a dream run in FY2007, we expect the company's growth rates to moderate. We expect a volume growth of 11.9% for FY2008.
• At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.
  

Sharekhan Investor's Eye dated May 04, 2007

Geojit - HCC, CRISIL, MICO, ESAB, SKF India

Geojit - HCCGeojit - CRISILGeojit - MICOGeojit - ESAB IndiaGeojit - SKF India

Geojit - ESAB

Esab India Limted

Esab India, 37% subsidiary of Charter PLC, UK, has reported decent performance for Q4 CY 2006.

Net Sales (excl. excise) grew by 32.4% to Rs. 78.7 crore (Rs. 59.4 crore) led by almost doubling of Equipment sales to Rs. 23.87 crore (Rs 12.07 crore). Consumables sales were up by 15.9% to Rs. 54.80 crore (Rs. 47.3 crore). OPM% improved noticeably to 19.4% (16.2%) mainly due to lower other expenses (to 11.16% from 15.07% of sales), thereby offsetting impact of spurt in raw material cost to Rs. 62.3% (59.9%) of sales. PBIT% of Equipment division has improved considerably to 17.5% (5.1%). Consequently, PBT (before extra ordinary income) jumped up by 49.5% to Rs. 15.1 crore (Rs. 10.1 crore). However almost doubled average tax rate of 32.2% (16.8%) restricted growth in PAT of Rs. 10.1 crore (Rs. 8.3 crore) to 21.6%.



For CY 2006 as a whole, net sales were up by 20.6% to Rs. 287.2 crore (RS. 238.2 crore). OPM% stood at 22.6%. PBT (before extra ordinary items) rose by 20.9% to Rs. 64.8 crore (Rs. 53.6 crore). PAT increased by 7.5% to Rs. 42.7 crore (Rs. 39.7 crore) in absence of extra ordinary income (Rs. 4.5 crore) as in CY 2005.



In CY 2006, company has introduced new products in both segments i.e. equipment & consumables. More impact of these introductions will be reflected going forward. Profitability will be good because these are niche products. A greenfield project for manufacture of Welding and Cutting equipments at Irungattukottai, near Chennai commissioned from June 2006. All new products will be made at new factory.



Since company’s future is linked to consumption of steel, fabrication industry is expected to perform well over next 5 years. Commissioning of new factory coupled with rigorous cost control initiatives under taken by the company is expected to boost profitability in near future.



At CMP of Rs. 346.35, the share (Rs. 10/- paid up) is trading at 12.5 times CY 2006 actual EPS of Rs. 27.7 and 10 times CY 2007 expected EPS of Rs. 34.6. Considering bright future prospects, we recommend to “BUY” the share at CMP.

Sharekhan Investor's Eye

Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs360

Impressive numbers

Result highlight

• Esab India's Q3CY2006 results are good and in line with our expectations. In the quarter the company achieved the much-needed top line growth aided by both its businesses, ie equipment and consumables.
• The top line for the quarter grew by a handsome 26% year on year (yoy) to Rs81 crore, driven by a 24.3% growth in the consumable segment and a 30.7% growth in the equipment segment.
• The operating profit for the quarter grew by a decent 24% to Rs20.33 crore, driven by a 29.5% growth in the earnings before interest and tax (EBIT) of the consumable segment.
• The overall operating profit margin (OPM) declined by 40 basis points primarily because of a 420-basis-point decline in the EBIT margin of the equipment division. The division incurred significant overheads in expanding its capacity during the quarter. The new unit has just started operations and gradually as the revenues of the division begin to move up as a result of the additional capacity, the margins would improve again.
• However the EBIT margin of the consumable division improved by 120 basis points and stood at 30.1%, the highest in the last 10-12 quarters.
• The other income for the quarter grew by 200% to Rs1.23 crore primarily because of the commission earned from its parent Esab AB, Sweden, on an ISRO order secured earlier this year.
• With the depreciation charge remaining flat yoy (an increase of 14% sequentially because of the commissioning of the new equipment plant), the net profit for the quarter grew by an impressive 26.7%.
  

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs94
Current market price: Rs73.5

Growth driven by higher realisations

Result highlight

• Selan Exploration Technology (Selan) reported a 30.7% year-on-year (y-o-y) growth in its net revenues to Rs6.3 crore during the second quarter ended September 2006. The revenue growth was driven by the cumulative impact of the incremental volumes from the commercialisation of two new wells in the first half (one in June 2006 and the second well in September 2006) and relatively higher realisations.
• The operating profit margin (OPM) at 65.8% was higher than 65.3% reported in Q2FY2006. This is despite the higher provisioning for the development of hydrocarbon properties (Rs0.94 crore as compared with Rs0.35 crore in Q2FY2006) during the quarter. The operating profit grew 31.6% to Rs4.1 crore.
• The earnings of Rs2.7 crore grew by 47.5% year on year (yoy) but were slightly below our estimates due to the higher provisioning for the development of hydrocarbon reserves in Q2FY2007.
• On a sequential basis, the revenues grew by 3.8% and the earnings were largely flat (a growth of 0.8%). The decline in the OPM on a sequential basis was largely due to the higher provisioning for the development of hydrocarbon reserves.
• In terms of the outlook, the revenue growth is likely to be driven largely by the growth in volumes. The production volume would be boosted by the full impact of the incremental volumes from the two new wells already commercialised in the first half of FY2007. Moreover, the planned commercialisation of two more wells in the second half of the fiscal would further aid the overall growth in revenues. On the other hand, the lower realisation is likely to limit the growth in the third quarter.
• At the current price the stock trades at 13x FY2007E and 6x FY2008E earnings. In terms of the enterprise value (EV) by proven and probable (2P) barrel of oil & oil equivalents (boe) reserves, Selan trades at an attractive valuation of $0.9 per boe (as compared to the global benchmark of around $8 per boe). We maintain our Buy recommendation on the stock with the price target of Rs94.
  

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs394

Margins remain under pressure

Result highlight

• Wockhardt's net sales increased by 21.8% to Rs437.7crore in Q3CY2006. The growth came on the back of a 38.5% growth in the domestic business and a 10.4% growth in the international business.
• The sales in the European market grew by 9.7%. The European sales were buoyed by the strong performance of the UK business. The sales in the US market grew by 19.6%, showing a substantial turnaround from the previous quarter.
• Wockhardt's operating profit margin (OPM) shrank by 220 basis points to 22.2% in Q3CY2006. The contraction in the margin was on account of an increase in the staff cost as the company increased its domestic field force. The decline in the margin was also attributed to the acquisition of the lower-margin Dumex business and the commissioning of the company's biotech facility (which raised the other expenditure by 460 basis points). Consequently, the company's operating profit (OP) increased by 10.8% to Rs97.1 crore in the quarter.
• The company's margins have been clouded by the capitalisation of ANDA development costs, which would have been otherwise added to the operating expenses. Adjusting for the capitalised costs, the company's OPM stands at 18.3% for the quarter (a decline of 610 basis points), whereas the OP shows a decline of 8.6% to Rs80.1 crore.
• Wockhardt's net profit rose by 13.7% to Rs74 crore. The growth in the net profit was aided by a higher other income (which doubled in the quarter). A higher tax outgo of 17.4% as compared to 12.7% in Q3CY2005 restricted the company's net profit growth. The tax outgo was higher on account of an increase in the minimum alternative tax (MAT) rate effected in the previous quarter.
• Wockhardt recently acquired Pinewood Laboratories, an Irish generic firm, for $150 million. The acquisition is expected to be complementary to Wockhardt's existing business in Europe and add marginally to its earnings.
• At the current price of Rs394, Wockhardt is quoting at 14.2x its CY2007 estimated earnings on a fully diluted basis. We reiterate our Buy recommendation on Wockhardt, with a price target of Rs552.
  

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs870
Current market price: Rs762

Price target revised to Rs870

Result highlight

• The Q2FY2007 results of Mahindra and Mahindra (M&M) are way ahead of our expectations. The stand-alone net sales grew by 30.1% to Rs2,490.5 crore. The strong growth was led by the brilliant performance of the farm equipment division (FED) and higher margins of the automotive division due to an improved product mix.
• On a segmental basis, the automotive revenues rose by 21.7% to Rs1,556.5 crore. The FED reported a stellar performance, marking a revenue growth of 45.1%. The profit before interest and tax (PBIT) margin of the automotive segment improved by a whopping 470 basis points to 14.9% while that of the FED rose by 240 basis points to 14.3% in Q2FY2007. Consequently, the overall operating profit margin (OPM) grew by 345 basis points to 14.8% and the operating profit rose by 69.4% year on year (yoy) to Rs369.6 crore.
• A higher interest income aided the pre-extraordinary net profit to grow by 54.6% to Rs245.4 crore. If you consider the special dividend received from Tech Mahindra, the profit on the sale of the stake in Tech Mahindra and an octroi refund received during the quarter, the reported profit after tax (PAT) grew by 146% to Rs386.5 crore.
• M&M's Q2FY2007 consolidated revenues were also strong and grew by 46% to Rs4,617.6 crore. The consolidated PAT after minority interest rose by 133% to Rs510 crore.
• Considering the growth in the various business segments, higher realisations and higher OPM for Q2FY2007, we have upgraded our FY2007 earnings estimates (consolidated) for M&M by 5% to Rs57.8. We have maintained our FY2008 earnings estimates at Rs64.1.
• Using the sum-of-parts model, we have valued M&M's core business at Rs607 (14x FY2008E earnings) and its subsidiaries at Rs263, arriving at a higher price target of Rs870.
  

ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs430
Current market price: Rs342

Price target revised to Rs430

Result highlight

• ICI India's Q2FY2007 net profit (adjusted for extraordinary items) at Rs19.2 crore is in line with our expectations. The net profit has grown by 23.7% year on year (yoy).
• The net revenues have grown by 6.1% yoy to Rs244 crore due to the discontinuation of the rubber chemical and surfactant businesses.
• The paint business has grown by 27% yoy to Rs217.2 crore. The continued chemical business has grown by 28.4% yoy to Rs33.7 crore.
• The profit before interest and tax (PBIT) in the paint business has grown by 54% yoy with a 157-basis-point expansion in the margin. The PBIT margin in the residual chemical business has risen by 52% yoy with a 200-basis-point expansion in the margin.
• The overall operating profit (including all businesses) grew by 12.4% yoy with a 73-basis-point expansion in the operating profit margin (OPM).
• With a higher other income and stable depreciation charge, the net profit grew by 23.7% yoy to Rs19.2 crore.
• We have upgraded our earnings per share (EPS) estimates for the stock for FY2007 and FY2008, from Rs17.4 and Rs23.2 to Rs18.3 (5.5%) and Rs24.2 (4.3%) respectively, to take into account the better-than-expected margins in the paint business. Accordingly we have revised our price target on the stock to Rs430.
• At the current market price of Rs342, the stock is quoting at 15.1x its FY2008E EPS and 5.9x FY2008E enterprise value (EV)/earnings before interest depreciation tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with the revised price target of Rs430.
  

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs402

Price target revised to Rs425

Result highlight

• Corporation Bank's Q2F2007 net profit at Rs127 crore is up 20.3% year on year (yoy) and is below our expectations.
• The net interest income (NII) grew by a modest 3.3% yoy to Rs316.7 crore due to a 69-basis-point fall in the net interest margin (NIM), even as the advances grew by 38.5% yoy.
• The fall in the NIM was due to a lower yield on investments (down 27 basis points) and a higher cost of funds (up 88 basis points; mainly on account of a sharp rise of 77 basis points in the deposit costs).
• The other income declined by 18.1% yoy to Rs113.1 crore due to losses on treasury operation and a sedate 11.4% growth in the fee and other incomes.
• With the net income declining by 3.3% yoy and the operating expenses increasing by 7.4%, the operating profit declined by 10.7% yoy to Rs235.7 crore.
• With a significant fall in the provisioning requirement the net profit grew by 20.3% to Rs127 crore. The provisioning requirement for the non-performing assets (NPAs) declined due to a fall in the gross NPAs on account of higher recoveries and upgradations as well as a write-back of investment depreciation.
• Going forward, we expect the bank's NIM to remain stable or show some marginal improvement over Q2FY2007, as some of its high-priced deposits are likely to mature over the coming fortnight and some of its low-yielding advances are due for re-pricing.
• We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs35.1 and Rs43.1 to Rs36.7 and Rs46.5 respectively to take into account the lower provisioning requirement and stable NIMs going forward.
• At the current market price of Rs402, the stock is quoting at 8.7x its FY2008E EPS, 4.3x pre-provision profit (PPP) and 1.3x book value (BV).
• Although the upside to the current market price is limited, the same could come from a better-than-expected improvement in the NIM. Further, Corporation Bank is best placed to leverage its balance sheet due to its high Tier-I capital adequacy ratio (CAR) of 13.3%. It is also the best bank in the industry to implement the Basel II norms due to its high Tier-I CAR and would not require an equity dilution. We would like to wait and watch the improvement in the NIM before factoring the same into our numbers. We maintain our Buy recommendation on the stock with price target of Rs425.
  

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