Monetary policy review

Monetary policy review

RBI Policy Document - Mid 2007

RBI Policy Document - Mid 2007

Monetary Policy Review

Monetary Policy Review

Credit Suisse - India Monetary Policy

Credit Suisse - India Monetary Policy

Monetary policy review: Sharekhan Special dated April 24, 2007

Monetary policy review

The Reserve Bank of India (RBI) has kept the key interest rates, like the reverse repo rate, the repo rate and the bank rate, as well as the cash reserve ratio (CRR) unchanged in its Annual Monetary Policy for the year 2007-08. The policy is in line with our expectations. It continues to remain focused on maintaining price stability and anchoring inflation. However the importance of growth is once again visible in the RBI's statements and that is the key positive takeaway from this policy. The salient features of the policy are given below.

• The reverse repo rate and the repo rate have been kept unchanged at 6% and 7.75% respectively.
• The bank rate has been kept unchanged at 6%.
• The CRR has been kept unchanged at 6.5%.
• The risk weightage on residential housing loans has been reduced to 50% from 75% for home loans up to Rs20 lakh.
• The non-resident Indian deposit rate on foreign currency non-resident bank deposits and non-resident (external) rupee account deposits has been reduced by 50 basis points as per expectations. However the apex bank has made capital account outflows more relaxed for all categories, from corporates to individuals.

Monetary policy review: Sharekhan Special dated April 24, 2007

RBI Credit Policy

RBI Credit Policy

Sharekhan Investor's Eye dated April 19, 2007

Monetary policy preview

• The market is currently not expecting another 50-basis-point cash reserve ratio (CRR) hike and we also don't expect the same. The reason why we don't expect any further tightening is because we feel the RBI has already taken action on March 30, 2007, which was completely unexpected, by increasing the repo rate by 25 basis points and the CRR by 50 basis points.
• Further the inflation is expected to moderate going forward and the non-food credit and money supply growth have also shown some moderation, which favour a status quo. If the RBI goes ahead and hikes the CRR again it could be a setback for the markets.
• Liquidity management will remain high on the agenda for 2007-08, with the policy rates such as the repo rate, the reverse repo rate and the bank rate likely to remain unchanged.
• The gross domestic product (GDP) growth estimates for FY2008 could be in the range of 8-8.5% while the target zone for inflation may remain unchanged at 5-5.5%.
• A curb on foreign flows through the lowering of the NRI deposit rates to make them less attractive and lowering the external commercial borrowing limits may be undertaken to control capital inflows at least in the short term as long as the inflation is above the RBI's comfort zone.
• Some mention on the credit and fund flow to sensitive sectors like the commercial real estate may find its place in the policy, as the RBI is very concerned about the escalating real estate prices, which could lead to an asset price bubble.
• We feel the RBI should avoid excessive tightening so that concern over the economic growth potential in the next fiscal doesn't come under serious scrutiny.

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STOCK UPDATE

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs205

ONGC contract boosts Q1 performance

Result highlights

• South East Asia Marine Engineering & Construction (SEAMEC) has reported a 107.9% growth in its revenues to Rs56.1 crore for the first quarter ended March 2007. The growth was higher than expectation due to the two-month extension of the contract from Oil & Natural Gas Corporation (ONGC; with relatively high day rates) for one of its vessels.
• The operating profit margin (OPM) slipped from 61.3% to 48.2% primarily due to the incremental cost related to SEAMEC Princess (the fourth vessel that is undergoing modification and that didn't contribute to revenues in Q1). This coupled with the general wage inflation resulted in a four-fold jump in the staff cost to Rs20.2 crore as compared with Rs5.2 crore in Q1CY2006. Consequently, the earnings grew at a relatively lower rate of 61.2% to Rs24.4 crore.
• In terms of the outlook on charter rates, the company expects the day rates to remain firm on the back of the favourable demand environment. Even after the anticipated addition of multi-support vessels (MSVs) by some of the Indian companies (like Great Offshore) there would be a shortage of MSVs in the coming years due to the huge requirement to set up the required infrastructure to transport hydrocarbons produced from the large offshore fields discovered in India over the past few years.
• To factor in the robust performance of Q1 and the higher than expected dry docking expenses indicated by the management, we are revising downwards the CY2007 earnings estimates by 4.9% but maintaining the CY2008 earnings estimates.
• At the current market price the stock trades at 8.8x CY2007 and 5.8x CY2008 estimated earnings. We maintain our Buy call on the stock with a price target of Rs300.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,528
Current market price: Rs2,280

Price target revised to Rs2,528

Result highlights

Aban Offshore (AOL) reported a marginal decline in its stand-alone revenues to Rs118.7 crore during Q4FY2007. This is in line with expectations as there was no re-pricing of any asset in the parent company. In fact, one of its assets Aban II was not operational for part of the quarter.

The operating profit margin (OPM) slipped sharply to 40.2% (down from 57.1% in Q4FY2006) due to lower revenues from Aban II, increase in the staff cost (380 basis points) and insurance charges (430 basis points) as a percentage of sales, and extraordinary expenses of Rs7.5 crore (incurred towards the issue of foreign currency convertible bonds [FCCB] and preferential shares).

However, the jump in the other income component to Rs34.9 crore (up from Rs3.7 crore) enabled the company to report a 34.5% growth in its earnings to Rs29.6 crore. The other income was boosted by the foreign exchange (forex) gains (on the forward hedges and FCCB proceeds) of around Rs17 crore. Moreover, the company would also have benefited from the interest on loans given to its Singapore subsidiary, Aban Singapore Pte (ASPL).

On the full year basis also, the stand-alone revenue growth was largely flat at Rs497.5 crore as compared to Rs490.2 crore in FY2006. The OPM declined by 740 basis points to 49.8%. However, the huge jump in the other income to Rs59.2 crore (up from Rs15.3 crore) enabled the company to post a 9.2% growth in the stand-alone earnings to Rs91.5 crore. It should be noted that the stand-alone results do not reflect the complete picture, as the company has been valued at its FY2009 estimated earnings on a consolidated basis.

Along with the results the company has announced the conversion of the $100 million FCCB at a price of Rs2,789 per share. Thus, the dilution in equity would be around 1.5 million equity shares (as against our base case estimate of the conversion at Rs1,400 per share.) Consequently, even though the estimates for FY2008 and FY2009 remain unchanged, the target price is revised upwards to Rs2,528 to factor in the lower than anticipated dilution in equity. We maintain our Buy call

Sharekhan Investor's Eye dated April 19, 2007

Monetary policy preview: Sharekhan Special dated April 19, 2007

Monetary policy preview

• The market is currently not expecting another 50-basis-point cash reserve ratio (CRR) hike and we also don't expect the same. The reason why we don't expect any further tightening is because we feel the RBI has already taken action on March 30, 2007, which was completely unexpected, by increasing the repo rate by 25 basis points and the CRR by 50 basis points.
• Further the inflation is expected to moderate going forward and the non-food credit and money supply growth have also shown some moderation, which favour a status quo. If the RBI goes ahead and hikes the CRR again it could be a setback for the markets.
• Liquidity management will remain high on the agenda for 2007-08, with the policy rates such as the repo rate, the reverse repo rate and the bank rate likely to remain unchanged.
• The gross domestic product (GDP) growth estimates for FY2008 could be in the range of 8-8.5% while the target zone for inflation may remain unchanged at 5-5.5%.
• A curb on foreign flows through the lowering of the NRI deposit rates to make them less attractive and lowering the external commercial borrowing limits may be undertaken to control capital inflows at least in the short term as long as the inflation is above the RBI's comfort zone.
• Some mention on the credit and fund flow to sensitive sectors like the commercial real estate may find its place in the policy, as the RBI is very concerned about the escalating real estate prices, which could lead to an asset price bubble.
• We feel the RBI should avoid excessive tightening so that concern over the economic growth potential in the next fiscal doesn't come under serious scrutiny.

Monetary policy preview: Sharekhan Special dated April 19, 2007

Citigroup - Biocon, India Economics - Monetary Policy, Monsoons, Asia Macro View - Rupee

Citigroup - India Economics - Monsoons

Citigroup - India Economics - Monetary Policy

Citigroup - Asia Macro - Rupee View

Citigroup - Biocon

Sharekhan Reports

Monetary policy review: Sharekhan Special dated January 31, 2007Network18: Sharekhan Special dated February 01, 2007Sharekhan Investor's Eye dated February 01, 2007Sharekhan Daring Derivatives for February 02, 2007Sharekhan Eagle Eye (equities) & Derivatives Info Kit for February 02, 2007Indian Bank: Sharekhan IPO Flash dated February 01, 2007Sharekhan Investor's Eye dated January 31, 2007Sharekhan Investor's Eye dated January 29, 2007Sharekhan Investor's Eye dated January 25, 2007Monetary policy preview: Sharekhan Special dated January 25, 2007Power Finance Corporation: Sharekhan IPO Flash dated January 29, 2007

Indiainfoline - Dr. YV Reddy once again springs a surprise

Once again, Dr. Y.V. Reddy, the Governor of the Reserve Bank of India (RBI) surprised the market by hiking only the repo rate, its key lending rate, and leaving the reverse repo rate, at which it borrows from banks, unchanged. The central bank increased the repo rate by 25 basis points to 7.25%, but kept the reverse repo rate at 6%. The bank rate and CRR were also left unchanged at 6% and 5%, respectively. The bond market had not anticipated any rate hike at all. Bond prices, which had been volatile prior to the policy announcement fell amid hawkish statements from the RBI Governor. Prices remained under pressure amid concerns that the RBI could go for another rate hike before its scheduled January meeting. Those fears got compounded with Friday's release of Government report on inflation, which accelerated to a new four-month high. Finance Minister P. Chidambaram said inflation control was the most important goal for the Government. He also said that the Centre would take necessary steps to check spiraling prices. Reacting to the latest inflation data, Dr. Reddy said that the central bank would not revisit its monetary stance. "This is included in the basic premises of the policy," he said.

Clearly, the RBI and the Government are worried about the run-away growth in credit amid a fast expanding economy. Of particular concern to them is the surging demand for loans from sectors such as real estate, housing loans and consumer loans. Non-food credit grew by 30.5% as at Oct 13, 2006 on top of an increase of 31.8% a year ago. Year on year growth in money supply (M3) was higher at 19% versus 16.8% a year ago. So, to arrest the soaring demand for credit, especially in sectors that are appearing to be showing signs of overheating, the central bank has made borrowing more costly for banks. What the RBI and the Government want is that banks should rebalance their portfolio by leaning less towards real estate and retail loans. The central bank is indicating that loans from it would be much more expensive compared to the market rate. Dr. Reddy has also hinted that if the loan growth continues at the current pace, there could even be some liquidity crunch as the economy enters the busy season. In a nutshell, the RBI is telling banks to pull up their socks and be more prudent in lending. Otherwise, they will have to resort to the central bank for borrowings, which will come at a higher rate.

Govt gets serious about infrastructure

The Government seems to be bent on removing the biggest bugbear of the Indian economy, the infrastructure. This week, it approved a slew of projects in the power and road sector that underlines its commitment to improving the tardy infrastructure. The Cabinet Committee on Economic Affairs (CCEA) approved the waiving of the Rs10bn ceiling for equity investment by NTPC Ltd. to establish Joint Ventures and wholly owned subsidiaries in India or abroad for participating in the ultra mega projects. This will be subject to the implementation of maximum two projects. However, the CCEA retained the ceiling of 15% of the net worth of NTPC in one project and the overall ceiling of 30% of the net worth of NTPC in all such projects put together. This will facilitate participation of Joint Venture of NTPC and BHEL in the bidding for ultra mega power projects and result in technically and commercially optimum bid as well as facilitate tying up with world class mining operators, Finance Minister P. Chidambaram told reporters after a CCEA meeting.

The Government also cleared the proposal by AES Corp. of USA to set up a coal-based power plant in Chhattisgarh at an investment of US$1.22bn. The CCEA gave its approval to AES OPGC Holding Mauritius for setting up a wholly owned subsidiary to undertake a green field coal based power generation plant and to undertake coal mining for captive consumption. AES expects to bring in US$ 370mn as FDI while the balance US$ 852mn would be raised through loan from domestic and/or International banks and Financial Institutions. The CCEA approved a plan to undertake construction of 1000 km of expressways under Phase VI of the National Highway Development Programme (NHDP). The projects would cost Rs166.8bn. While the private sector will contribute Rs90bn the balance Rs76.8bn will be provided by the Government as viability gap funding. The expressways would be built through Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis. The projects are likely to be completed by December 2015.

Thanks Dhruv

Sharekhan Investor's Eye - Nov 1 2006

SHAREKHAN SPECIAL

Monetary Policy Review
In its mid-term review of the Annual Monetary Policy for 2006-07, the Reserve Bank of India (RBI) has raised the repo rate by 25 basis points from 7% to 7.25%, leaving the reverse repo and bank rates unchanged.

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STOCK UPDATE

Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,386

Price target revised to Rs4,000

Result highlight

• At Rs90 crore the Q2FY2007 net profit of Madras Cement Ltd (MCL) is in line with our expectations. Cement prices for the year till date have remained extremely strong and on account of the same we are upgrading MCL's FY2007 and FY2008 earnings estimates by 28.1% and 21.4% respectively. Our earnings per share (EPS) estimates now stand at Rs257.7 for FY2007 and Rs303.7 for FY2008.
• The revenues for the quarter grew by a whopping 66% year on year (yoy) to Rs407.2 crore driven by a 19% growth in the cement volumes and a staggering 39.4% growth in the cement realisation.
  
• As the cement realisation improved sharply, MCL's operating leverage came into play and consequently the operating profit for the quarter grew by a huge 208% yoy to Rs158.2 crore. The operating profit margin (OPM) for the quarter improved by 1,800 basis points to 38.9%.
  
• On the cost front, MCL implemented strict cost-control measures as the total cost per tonne saw a rise of just 7.7% compared with a 39.4% growth in the cement realisation. Hence most of the Rs800-increase in the realisation per tonne flowed into the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne. As a result the EBIDTA per tonne jumped to Rs1,127, one of the highest in the entire industry.

• With a 40% decline in the interest cost and a 66% increase in the other income, the net profit for the quarter grew by a staggering 378% to Rs90 crore.

Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs350

Above expectations on net profit front

Result highlight

• The net sales of Cadila Healthcare increased by 25.2% year on year (yoy) to Rs467.3 crore in Q2FY2007, driven by a 97% growth in the formulation exports and a 56% rise in the exports of active pharmaceutical ingredients (APIs). The improved performance of the French (growth of 87% year on year [yoy]) and US (growth of 352% yoy) businesses also aided the robust sales growth. The sales growth was in line with our expectations.

• The operating profit margin (OPM) expanded by 200 basis points to 23.0% in the quarter. The margin improvement was driven by a sharp decline of 380 basis points in the company's raw material cost, on account of an improved product mix (a higher share of formulations and exports in the overall sales mix). Consequently, the operating profit (OP) of the company rose by 34.1% to Rs109 crore in the quarter under review.
• The reported profit after tax (PAT) of the company grew by a whopping 46.9% to Rs70.5 crore in Q2FY2007. The profit growth surpassed our expectations. The earnings for the quarter stood at Rs5.6 per share as against Rs4 per share in Q2FY2006.
• The company has signed three new contracts during the quarter under review for contract manufacturing with international companies, taking the cumulative number of contracts to 17, with peak revenue potential of $25.5 million.
• Cadila has filed 2 abbreviated new drug applications (ANDAs) and 5 drug master files (DMFs) in Q2FY2007, taking the total number of filings to 45 ANDAs and 45 DMFs.
• At the current market price of Rs350, the company is quoting at 15.0x its FY2008E estimated earnings. We maintain our Buy recommendation on the company with a price target of Rs425.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs550

Results below expectations

Result highlight

• KSB Pumps' Q3CY2007 results are below our expectations primarily because of lower-than-expected top line growth and lesser operating profit margin (OPM).
  
• The top line is lower because of a delay in the dispatch of some orders, as is reflected by the inventory, which stood at Rs6.3 crore. The revenues for the quarter grew by a meagre 2.9% to Rs90.2 crore.
  
• The operating profit for the quarter stood flat year on year (yoy) at Rs16.4 crore, as the OPM declined by 40 basis points to 18.2%. The OPM declined on account of higher raw material cost (adjusted for stocks) and other expenditure.
  
• The interest and depreciation charges declined by 65% and 5.6% respectively.
  
• However the tax rate jumped up significantly from 34.2% in Q3CY2005 to 39.3% in Q3CY2006. Consequently, the net profit for the quarter declined by 4.2% yoy to Rs9.4 crore.
  
• On account of the lower-than-expected top line growth and OPM we are downgrading our CY2006 earnings estimates by 9% to Rs33.7 per share. We maintain our CY2007 EPS estimates at Rs40.4.

Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs570
Current market price: Rs457

Price target revised to Rs570

Result highlight

• For Q2FY2007 Ratnamani Metals and Tubes Ltd (RMTL) reported a whopping growth of 135% in its net profit year on year (yoy) to Rs16.4 crore, far ahead of our expectations.
• The net revenues grew by 90% yoy to Rs143.1 crore driven by a four-fold jump in the exports. The domestic sales grew by 10% yoy.
• The operating profit grew by 116% yoy to Rs32.4 crore with a 273-basis-point expansion in the operating profit margin (OPM), again much ahead of our expectations.
  
• The OPM expanded because of controlled other expenses, which grew by 21.6% and as a percentage of sales declined by 620 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 340 basis points as a percentage of sales.

• The net profit increased by 135% yoy to Rs16.4 crore driven by operational efficiency.
• We have upgraded our earnings per shares (EPS) estimates for FY2007 and FY2008 by 8.0% and 5.4% to Rs47.7 and Rs57.0 respectively to take into account the better-than-expected earnings growth and margin expansion.
• At the current market price of Rs457, the stock is trading at 7.5x its FY2008E EPS and 4.6x its FY2008E enterprise value (EV)/earnings before interest, depreciation, taxes and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs570.

Television Eighteen India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs850
Current market price: Rs776

Price target revised to Rs850

Result highlight

• The Q2FY2007 net profit of Television Eighteen India (TV18) at Rs16.2 crore is in line with our expectations.
• The net revenues grew by a strong 72% year on year (yoy) and 27.8% quarter on quarter (qoq) to Rs53 crore. During the quarter under review, TV18 consolidated the revenues from the Awaaz channel.
• Even after excluding the revenues from the Awaaz channel, the revenues grew by a strong 44.1% yoy and 8.0% qoq to Rs45 crore, in line with our estimates.
• The operating profit grew by a slower 43.3% yoy and 16.8% qoq to Rs23.5 crore as the operating profit margin (OPM) declined by 820 basis points yoy and 400 basis points qoq. The decline in the OPM was on account of the inclusion of the numbers of Awaaz, which is still at a nascent stage.
• With stable deprecation and interest expenses, the net profit grew by 42.6% yoy and 17% qoq to Rs16.2 crore, in line with our estimates.
• During the quarter under review, Web18 Caymans (a TV18 group company) raised $10 million from Tracer Capital Management LP (TCML), valuing Web18 at more than Rs460 crore.
• At the current market price of Rs776, the stock is quoting at 21.3x its FY2008E earnings per share (EPS) and 13.3x FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA).
  
• We like the way TV18 has been monetising its various media properties. The TCML deal, for instance, which gives a rough idea of the valuations that its other Internet ventures may enjoy. TV18 is also bringing out the initial public offering (IPO) of Global Broadcast News (GBN). We reiterate our Buy recommendation on the stock with a revised price target of Rs850 which captures the unlocking of the value of its media ventures that are still at a nascent stage.

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs219

Upgrading earnings

Result highlight

• India Cements Ltd (ICL) achieved a net profit of Rs117 crore for Q2FY2007, much ahead of our expectations.
  
• The net revenues grew by a healthy 31.9% to Rs517 crore and the net profit grew by a staggering 1,900% year on year (yoy) to Rs117 crore. (For detailed quarterly analysis refer to our report dated October 23, 2006).
  
• Cement consumption in the southern region has grown at 18% in the first six months of the current fiscal as against the industry growth rate of 10%. As a result, the cement capacity utilisation levels stand at 92-95% which is reflected in the cement prices that are hovering at Rs200-210 per 50kg bag as against Rs135-140 per 50kg bag last year.
• The company has also lined up a capital expenditure (capex) plan of Rs350 crore to augment its production capacity by 2 million metric tonne by December 2007.
  
• The company has also revamped its balance sheet by infusing capital in bouts. Consequently, the debt:equity ratio reduced to a much respectable 1.8:1 at the end of FY2006. Now with a strong free cash flow, we expect the debt:equity ratio to reduce further to 0.8:1 by FY2007 and to 0:3:1 by FY2008.
  
• Also the date for the conversion of 13.5% optionally convertible debentures (OCDs) worth Rs109 crore into equity shares (convertible at a price of Rs125) elapsed in September 2006. Consequently, the company has redeemed these high-cost OCDs. This in effect is a positive, as it not only reduces the company's interest cost but also adds value to its shareholders on account of the lower-than-expected equity dilution. For example, we had expected the conversion of these OCDs to result in higher equity capital of Rs229 crore. However on non-conversion of the OCDs, the equity capital stands at Rs220 crore.
• Encouraged by the stellar performance of ICL we are upgrading our net profit estimates for FY2007 and FY2008 by 14% and 10% respectively. Our earnings per share (EPS) estimates now stand at Rs20 for FY2007 and Rs28.6 for FY2008. Our EPS estimates have been upgraded by 19% for FY2007 and by 14% for FY2008 on account of the non-conversion of the OCDs.

• At the current market price of Rs219, ICL is trading at 7.7x its FY2008E earnings and 5.4x its EV/EBITDA. On an EV/tonne basis, it is trading at USD105/tonne, which is a huge discount of 30% to its peers. We maintain a Buy on the stock with a price target of Rs315.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs281

Asset growth drives numbers

Result highlight

• Bank of Baroda’s net profit grew by 11.3% year on year (yoy) in line with our estimates of a growth of 12.1% as the lower-than-expected net interest income (NII) growth was compensated by higher other income growth and flat operating expenses.

• During the quarter the bank’s NII grew by 13.9% yoy to Rs890.8 crore, driven by a robust growth of 45% yoy in the advances.
• The net interest margins (NIMs) declined by 26 basis points yoy to 3.1% for H1FY2006 mainly due to lower investment yields due to a change in the accounting practice.
• The other income increased by 3.9% yoy to Rs321.7 crore due to a lower treasury income. However, the core fee income has shown a robust growth of 24.3% yoy.
  
• With the net income growing by 11.1% and the operating expenses remaining flat yoy, the operating profit was up by 24.3% yoy to Rs615.7 crore. The core operating profit reported a 43.1% year-on-year (y-o-y) growth.
• We have downgraded our earnings per share (EPS) estimates for FY2008 from Rs38.1 to Rs35.1 mainly on account of the pressure on the margins and higher expected non-performing asset (NPA) provisioning required going forward.
  
• At the current market price of Rs281, the stock is quoting at 8x its FY2008E EPS, 3.6x pre-provision profits (PPP) and 1.1x book value. The bank is available at attractive valuations given its low price to book multiple compared to its peers and earnings upside possibilities if we see the margins improving going ahead. We maintain our Buy call on the stock with a price target of Rs327.

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs269

A stellar performance

Result highlight

• Ahmednagar Forgings has reported a stellar performance for Q1 and the results are better than our expectations.
  
• The top line for the quarter grew by 72.5% to Rs122 crore. The company’s additional capacity of 40,000 tonne per annum (tpa) commenced operations from June 2006 and hence was operational for the whole quarter.
• The operating profit margin (OPM) has improved by 140 basis points to 19.3% as the operating profit rose by 86.5% year on year (yoy) to Rs23.6 crore. The margin improved despite a rise in the raw material cost from 60.7% to 66.7% as a percentage of sales. However, the company made savings in its staff cost and other expenditures.
• Stable depreciation charge and taxes caused the profit to grow by a stellar 92.2% to Rs13.5 crore for the quarter.
• The company has an order book of Rs850 crore which is to be executed in the next twelve months, triggering a strong top line growth going forward. A higher contribution from the machined products and higher non-automotive revenues should also trigger a growth in the margins going forward.
  
• At the current market price of Rs269, the stock discounts its FY2008E earnings by 7.1x and trades at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.9x. We believe that the valuations are very attractive and maintain our Buy on the stock with a price target of Rs380.

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs171

Book profits

Result highlight

• Godrej Consumer Products Limited's (GCPL) stand-alone revenues grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007--below our expectations. The soaps business grew by 16.5% yoy to Rs127.2 crore whereas the personal care business grew by 15.4% yoy to Rs55.3 crore.
• GCPL's operating profit (OP) grew by a meagre 3.8% yoy to Rs33.8 crore in Q2FY2007, which is below our expectations. The operating profit margins (OPM) contracted by 220 basis points to 18.5%. This mediocre growth in the OP was attributable to a sharp increase in the material cost by 27.8% to Rs92.2 crore. The material cost as a percentage of sales spiked to 50.5%, up 460 basis points yoy and 120 basis points sequentially, due to the hardening of the vegetable oil prices. Vegetable oil is a key ingredient for fast moving consumer goods (FMCG) companies.
• The profit before interest and tax (PBIT) margins of the soaps division reduced by 400 basis points yoy to 10.8%, while the PBIT margins of the personal care division increased by 60 basis points yoy to 42.7%.
• The interest cost zoomed by 87.1% to Rs1.6 crore. The effective tax rate also increased from 5.8% in Q2FY2006 to 12.7% Q2FY2007, leading to a 122.9% year-on-year (y-o-y) increase. The higher-than-expected interest cost and tax expenses coupled with the lower-than-expected operating performance led to a 6% decline in the profit after tax to Rs26.1 crore, which is below our expectations.
• GCPL's consolidated revenues for Q2FY2007 were Rs231.8 crore, the operating profit was Rs39.7 crore and the net profit was Rs31.0 crore. GCPL's consolidated numbers reflect the stand-alone numbers, Keyline, UK's numbers and the numbers of Rapidol, South Africa (the subsidiary company, which was acquired this quarter).
• Though we like the space in which GCPL is operating, we are concerned over GCPL's continued subdued growth for the last three quarters in the high-margin hair colour business. In the soaps business, while we see GCPL sustaining its robust growth traction, the profitability in the business will remain limited as the mass segment brand (Godrej No. 1) continues to outpace the other brands besides the margins pressures due to the increase in the vegetable oil prices. In light of its muted H1FY2007 performance, we are downgrading our consolidated earnings estimates for FY2007 and FY2008 by 12.7% and 10.6% and recommend booking profits on the stock.

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SECTOR UPDATE

Automobiles

Subdued growth despite festive season

• Bajaj Auto reported decent numbers for October, with an overall growth of 15.7% year on year (yoy).
• Hero Honda Motors’ sales bounced back in the festive season as the company reported a strong sales growth of 20.4% yoy to 363,480 units.
• TVS Motors' sold 142,325 vehicles in the month, posting a disappointing growth of just 3.2% yoy even though October is usually a good month for the automobile industry.
• Maruti Udyog sold overall 60,163 vehicles in October as compared with 51,543 units in last October, marking a growth of 16.7% yoy.
• The utility vehicle (UV) segment of Mahindra and Mahindra (M&M) marked a decline of 3.8% for the month due to lower Scorpio sales as the total UV sales stood at 11,789 units. The Scorpio sales declined by 13.3% to 2,947 units for the month.
• Tata Motors overall sales stood at 43,540 vehicles (including exports) for the month of October 2006, growing by 5.6% compared to 41,219 vehicles sold last year.

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