Selan Exploration Technology, Insurance, Automobiles

Selan Exploration Technology, Insurance, Automobiles

Sharekhan Investor's Eye dated May 03, 2007

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs866

Price target revised to Rs1,173

Result highlights

• ICICI Bank’s fourth quarter results have been below expectations. Its profit after tax (PAT) has grown by 4% year on year (yoy) and declined by 9% quarter on quarter (qoq) to Rs825 crore compared with our estimate of Rs1,004 crore. The lower numbers are mainly on account of a lower than expected non-interest income.
• We had expected a much higher non-interest income due to the National Stock Exchange (NSE) stake sale that was likely to fetch around Rs500 crore and a sustained robust fee income growth witnessed during the previous quarters. However, despite the NSE stake sale the total treasury income stood at Rs446 crore adjusted for the marked-to-market loss on the corporate bond portfolio, which implies an insignificant contribution from any other treasury income source. The core fee income was also lower with a sequential growth of only 6% compared with 18% and 15% sequential growth witnessed in the previous two quarters.
• The core operations were in line with expectations. The net interest income was up by 30% yoy and 5% qoq to Rs1,789.7 crore compared with our estimate of Rs1,763 crore. The reported net interest margin (NIM) for Q4FY2007 stood at 2.66% compared with 2.6% in Q3FY2007 and 2.79% in Q4FY2006. However, excluding the one-time cash reserve ratio (CRR) interest of around Rs85 crore we feel there would be a sequential decline of five basis points in the NIM.
• The bank plans to come out with a follow-on public offer (FPO) in the domestic and international markets by June 2007 to raise Rs20,000 crore. We have factored in a dilution of 23.5 crore equity shares at an offer price of Rs850 which will help the bank to raise the desired amount. The huge FPO of Rs20,000 crore would loom large over the bank’s return on equity (RoE) for the next couple of years as the RoE is expected to decline from over 13% to 11% in FY2008. The same has affected our sum-of-the-parts (SOTP) valuations for the bank and hence we have reduced our price target for the stock by 4.4% to Rs1,173.
• After the bank announced its results the stock price declined by 7%, factoring in the lower than expected profit numbers and the unexpected announcement of an Rs20,000-crore FPO. We feel the correction in the stock price already captures these negatives and the downside risk is limited. However the upside potential based on the current market price of Rs866 remains at 35%. We continue to remain bullish on ICICI Bank due to the following facts. First, on the operational side, the Sangli Bank merger would add 195 branches, help to increase the low cost deposit base and improve the NIM going forward. Second, the possible listing of the insurance and asset management holding company would help to unlock significant value in the bank's subsidiaries.
• We have upgraded our FY2008E PAT and FY2009E PAT by 1.6% and 1.5% to Rs4,016 crore and Rs5,120 crore respectively. At the current market price of Rs866, the stock is quoting at 19.2x its FY2009E earnings per share (EPS), 8.5x its pre-provision profit (PPP) and 2x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the revised price target of Rs1,173.

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs250

On track

Result highlights

• Ahmednagar Forgings reported a strong performance for Q3FY2007. Its net sales grew by 69% to Rs175.2 crore during the quarter.
• The company has increased its capacity to 110,000 tonne per annum (tpa) and is currently operating at utilisation levels of about 64%. We expect the capacity ramp-up to strengthen the top line further in the coming quarters.
• The margins saw a slight improvement, as the same expanded to 21% led by better operating efficiencies. The operating profit rose by 72.6% to Rs36.8 crore. The company has been able to maintain good margins despite a steep rise in steel prices in the past two years (its raw material cost has risen from 63.5% to 67.9% as a percentage of sales).
• The interest cost was a bit higher due to the capital expenditure (capex) incurred by the company during the quarter. Stable depreciation and lower taxes aided the company to report an 86% improvement in its net profit to Rs20.5 crore.
• At the current levels, the stock is discounting its FY2008E earnings by 6.8x and quoting at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.7x. We maintain our Buy recommendation on the stock with a price target of Rs380.

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs340
Current market price: Rs222

Price target revised to Rs340

Result highlights

• Subros' Q4FY2007 results are slightly below expectations both on the top line front and the profit margin front. The net sales for the quarter grew by 8.7% to Rs183.3 crore.
• Adjusting for the one time VRS expenditure, the operating margins of the company has increased slightly to 13% against 12.6% last year as higher raw material costs restricted margin growth. Consequently the operating profits for the year grew by 11.8% to Rs23.75 crore.
• Higher interest and depreciation costs due to the commissioning of its new plant at Gurgaon affected the profitability further. Consequently, the company reported a 4% growth in its adjusted net profits to Rs10.1 crore.
• Rising interest rates would have a negative impact on the whole automobile sector, which would also affect the volumes of companies like Subros. We are therefore downgrading our volume estimate for Subros and consequently cutting our earnings estimate for FY2008 by 23.5% to Rs32.8. We are introducing our FY2009 estimates for Subros and expect earnings of Rs40.1.
• We maintain our positive outlook on Subros. At the current levels, the stock is available at attractive valuations of 5.5x FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.2x. We maintain our Buy recommendation on the stock with a revised target of Rs340.

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs219
Current market price: Rs200

Price target revised to Rs219

Result highlights

• Bank of India's (BOI) Q4FY2007 profit after tax (PAT) was way above expectations. It grew by 76% year on year (yoy) to Rs447 crore compared with our estimate of Rs288.9 crore, mainly due to an unexpected 78.0% year-on-year (y-o-y) jump in the non-interest income.
• The net interest income (NII) grew by 28.8% yoy and 7.7% quarter on quarter (qoq) to Rs991 crore against our estimate of Rs973 crore. The NII figures are adjusted for one-off items to the tune of Rs40 crore and Rs107 crore in Q4FY2007 and Q4FY2006 respectively. Higher yields and controlled costs with a stable low cost deposit base have helped the bank to show an improvement in the margin sequentially.
• The non-interest income was a surprise as it grew by 78% yoy and 79% qoq to Rs576 crore. The 40.4% y-o-y and 38.5% q-o-q growth in the fee income is very promising and looks to be sustainable, as it was driven by a growth in the core fee income generating businesses like remittances, cash management, bank guarantees etc.
• The operating expenses grew by 22% yoy, in line with the business growth. The operating profit was up by 63.6% yoy and 49.5% qoq to Rs918.3 crore.
• Provisions increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore mainly on account of higher other provisions influenced by standard assets provision, as the non-performing asset (NPA) provisions reported a decline on y-o-y and q-o-q bases.
• The bank's asset quality has showed consistent improvement with the net NPA and gross NPA both showing a decline in percentage and absolute terms. The net NPAs stood at 0.74% as on March 2007 compared with 0.95% reported in December 2006 while the gross NPAs showed a decline to Rs2,100 crore from Rs2,186 crore in the previous quarter.
• We feel BOI has so far proved to be the best performing public sector bank (PSB) in FY2007 based on all parameters and its management has shown proper intent to maintain the improved performance. We have revised our FY2008E PAT by 15% to Rs1,352 crore, based on the improved earnings visibility for the bank. At the current market price of Rs200, the stock is quoting at 7.2x its FY2008E earnings per share (EPS), 3.1x pre-provisioning profit (PPP) and 1.5x FY2008E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs219.

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs393
Current market price: Rs243

Q4 results above our expectations

Result highlights

• Nicholas Piramal’s consolidated sales for the quarter were 52% higher at Rs645.2 crore on the back of a 13% increase in the domestic sales and a whopping 146% surge in the global revenues. The consolidation of businesses acquired from Avecia Pharmaceuticals and Pfizer's former Morpeth facility, UK has scaled up the global revenues.
• It has reported a 480-basis-point expansion in the OPM to 13.2% in Q4FY2007, but the same was much lesser than the expectation of an OPM of 15.6% due to one-time charge of Rs20 crore. Otherwise, if we discount the one-time charge, the OPM expanded by 790 basis points to 16.3%.
• It has reported an impressive growth of 260% year on year (yoy) in its consolidated net profit to Rs54.9 crore for Q4Y2007. The same is above our expectation of Rs50.5 crore.
• In full year FY2007, the company's consolidated sales grew by 55.0% to Rs2,470 crore, while its operating profit increased by 83.0% to Rs380 crore. The net profit for the year was up 80.7% to Rs220 crore.
• For FY2008, the company has guided for about a 100% growth in the contract manufacturing business and a 25% growth in the overall revenue. It expects to maintain the margin at 15.5%.
• We revised FY2008 estimates and introduce FY2009 numbers as per which the company’s net earnings stand at Rs297.0 crore (a 30.1% growth) and at Rs355.3 crore (a 20% growth) for FY2008 and FY2009 respectively. At the current market price of Rs256, Nicholas Piramal discounts its FY2009 estimated earnings by 15.1x. We maintain a Buy call with a price target of Rs393.

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs431

Results in line with expectations

Result highlights

• Wockhardt's net sales increased by 48.7% to Rs522.8 crore in Q1CY2007. The growth came on the back of a 35% growth in the domestic business and a 57% growth in the international business. The sales growth was ahead of our estimates.
• The sales in the European market grew by 93%, largely driven by the consolidation of the Pinewood acquisition. The sales in the US market grew by 15%.
• Wockhardt's operating profit margin (OPM) expanded by 260 basis points to 22.2% in Q1CY2007. However, the margin picture remains clouded due to the capitalisation of research and development (R&D) cost. Adjusting for the capitalised cost of Rs18.5 crore, the OPM actually showed a decline of 100 basis points. The company reported an operating profit (OP) of Rs115.9 crore, a growth of 68.2% year on year (yoy). The decline in the margin was also attributed to the acquisition of the lower-margin Dumex and Pinewood businesses.
• Wockhardt's pre-exceptional net profit rose by 17% to Rs66.3 crore. The growth was despite higher interest cost, depreciation charge and tax outgo. The profit was in line with our estimates.
• Wockhardt has announced the acquisition of France-based Negma Laboratories (Negma), with sales of $150 million and earnings before interest, tax, depreciation and amortisation (EBITDA) margin of around 18%, in an all-cash deal worth $265 million. This acquisition is in line with the company's aim to achieve a turnover of $1 billion by 2009. With its successful track record of creating value post-integration, we believe the acquisition of Negma too will be value accretive for Wockhardt. We await details of the acquisition, after which we will review our numbers to incorporate the same into our estimates.
• At the current market price of Rs431, the stock is available at 14.2x its CY2007E and 12.4x its 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.

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs101
Current market price: Rs84

Price target revised to Rs101

Result highlights

• Selan Exploration Technology (Selan) has announced a growth of 93.2% in its net sales for Q4FY2007 to Rs8.5 crore. The growth was higher than expectations due to a surge in the volumes during the last quarter. The average realisation of $55 per barrel was lower than the average of $58 per barrel realised for the full year.
• The operating profit margin (OPM) improved considerably to 61.6%, up from 43.7% in Q4FY2006. Consequently, the operating profit grew by 171.9% to Rs5.2 crore.
• The adjusted net profit grew by 134.7% to Rs3.4 crore, up from Rs1.4 crore in Q4FY2006 (adjusted for the one-time income of Rs1.9 crore).
• On a full year basis, the net sales grew by 39.8% to Rs26.2 crore, driven by a 39% increase in the volumes. The company crossed the mark of one lakh barrels of oil sold during FY2007. The margins were largely flat and the adjusted net profit grew by 60% to Rs10.6 crore.
• Encouraged by the positive results of the first phase of the development of its oil fields, the company intends to drill six to eight new wells during the current fiscal. The incremental volumes from the commercialisation of new wells (two wells in Bakrol during Q4) and the expected addition from the phase II of development in the current fiscal are expected to boost the overall production volume by 40-50% in the current year.
• At the current market price the scrip trades at 7.5x FY2008 and 5.8x FY2009 estimated earnings. We maintain Buy call on the stock with a revised price target of Rs101 (7x FY2009 estimated earnings and 1.2x enterprise value [EV]/oil reserves [proven and probable]).

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs268
Current market price: Rs226

Q4FY2007—first-cut analysis

Result highlights

• Canara Bank's results have been much above our and market's expectations with the profit after tax reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year decline to Rs444 crore. The profit growth is higher mainly due to a very high growth witnessed in the non-interest income category.
• The net interest income (NII) is up by 7.7% to Rs1,059 crore compared to our estimate of Rs1,083 crore.
• The non-interest income has zoomed by 51% year on year (yoy) and 109% quarter on quarter (qoq) to Rs626.2 crore. However a detailed break-up of the same is still awaited.
• The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 36.4% yoy and 50% qoq to Rs1,052 crore. The growth was primarily driven by a higher non-interest income.
• Provisions increased by 66.1% yoy and 89% qoq to Rs497 crore mainly on account of higher depreciation on investments provided on the marked-to-market investment book. Higher standard assets provisioning requirement also kept the provisions elevated as the non-performing asset (NPA) provisions declined by 67% yoy to Rs102 crore from Rs306 crore in Q4FY2006.
• Higher cash recoveries during the year to the tune of Rs1,025 crore as against Rs972 crore during the previous financial year helped the bank to bring down its gross NPAs. In absolute terms, the gross NPAs have reported a sequential decline of Rs380 crore while the net NPA ratio has declined sequentially from 0.96% to 0.94%.
• Canara Bank's global business grew by 23% yoy to Rs240,887 crore as in March 2007. Aggregate deposits grew by 22% to Rs142,381 crore and advances were up 24% yoy to Rs98,506 crore.
• The higher non-interest component in this quarter has caused the bank's PAT to grow by 2.3% yoy to Rs505 crore compared to our estimate of Rs444 crore. We would provide our detailed result update later. At the current market price of Rs226, the stock is quoting at 6x its FY2008E earnings per share, 3x pre-provisioning profit and 1x FY2008E book value. We maintain our Buy recommendation on the stock with the price target of Rs268.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,020
Current market price: Rsx1,740

Price target revised to Rs2,020

Result highlights

• For Q4FY2007, Bharat Electronics Ltd (BEL) has announced a growth of 10.1% in its net sales to Rs1,734.2 crore, which is lightly lower than our expectations.
• The operating profit margin (OPM) has improved smarty by 150 basis points to 28%, primarily due to the saving of 460 basis points in the raw material cost as a percentage of the sales. On the other hand, the higher staff cost and the other expenses had an adverse impact of 210 basis points on the margin.
• In addition to the margin expansion, the 62.8% growth in the other income resulted in a robust growth of 27.1% in the earnings to Rs357.1 crore, which is ahead of our expectations of around Rs330 crore.
• On a full year basis, the net sales have grown by 9.4% to Rs3,894.3 crore. The OPM has improved by 50 basis points to 24.2%, largely due to the savings in the raw material cost as a percentage of sales. Moreover, the jump of 69.1% in the other income component aided the growth in the earnings, which grew at a relatively higher rate of 22.4% to Rs713.9 crore.
• The highlight of the performance was the much higher than expected jump in the order backlog to Rs9,000 crore. This coupled with the recent alliances/tie-ups with global defence companies has vastly improved the growth visibility in the revenues.
• To factor in the same, we have revised upwards the earnings estimate of FY2008 by 10.9% and have also introduced our FY2009 estimate in the note. At the current price, the stock trades at 12.5x FY2008 and 9.9x FY2009 estimated earnings (price has been adjusted for cash on the books). We maintain the Buy call on the stock with a revised price target of Rs2,020 (rolling over the target price on FY2009 estimates; 12.5x FY2009 earnings plus the estimated free cash on the books).

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SECTOR UPDATE

Automobiles

Interest rate blues
The downfall in the two-wheeler segment continued in the month of April, with only the market leader Hero Honda Motors recording positive growth numbers. The slow-down can also be seen in the commercial vehicle (CV) segment, particularly in the medium and heavy commercial vehicle (M&HCV) segment. The same is evident from the 14.2% drop in the M&HCV sales of Tata Motors for the month. Led by strong performance of its new launches, Maruti Udyog continued to report strong numbers in April.

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Sharekhan Investor's Eye dated May 03, 2007

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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