Ranbaxy, Cadila Healthcare, Aurobindo Pharma, Divi's Labs, Wockhardt

 Ranbaxy, Cadila Healthcare, Aurobindo Pharma, Divi's Labs, Wockhardt

Tata Motors, Ashok Leyland, NIIT Technologies, Wockhardt

Tata Motors, Ashok Leyland, NIIT Technologies, Wockhardt

Wockhardt

Wockhardt

Wockhardt

We recommend a buy in the stock of Wockhardt from a short-term horizon. It is seen from the charts of the stock that it found support at Rs 115 in late May 2010, which is a significant long-term support and bounced upward. Since then, the stock has been on a short-term uptrend. On Tuesday, the stock jumped 7 per cent accompanied with heavy volume, breaking through its near-term resistance level of Rs 145. Further, the stock's bullish momentum accelerated and it penetrated 200-day moving average as well as key resistance at Rs 160 by surging 7 per cent on August 5. We notice that there has been an increase in volume over the past four trading sessions. The daily relative strength index is featuring in the bullish zone and weekly RSI has entered in to this zone from the neutral region. The weekly moving average convergence divergence indicator is on the brink of entering in to the positive territory. We are bullish on the stock from a short-term perspective. We anticipate the stock to rally further until it hits our price target of Rs 169 or Rs 172 in the forthcoming trading sessions. Short-term traders can buy the stock while maintaining stop-loss at Rs 157.

via BL

Wockhardt

Wockhardt

Wochardt, Infosys

Wochardt, Infosys

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

UTV, Suzlon Energy, Wockhardt, Yes Bank

UTV, Suzlon Energy, Wockhardt, Yes Bank

Wockhardt

Wockhardt

Monetary Policy, ITC, Balaji Telefilms, Ranbaxy Labs, Wockhardt,

Monetary policy preview

RBI expected to maintain a status quo
We expect the Reserve Bank of India (RBI) to keep the policy rates unchanged during its first quarter review of the annual credit policy on July 31, 2007. With inflation down below 4.5% and the annual credit growth moderating to 24%, the RBI is much more comfortably placed than it was in the previous couple of quarters. Thus we feel the monetary policy's focus is likely to shift from inflation management to liquidity and exchange rate management, as the current high annual growth of above 21% in the money supply continues to be above the central bank's comfort zone. The market also seems to be unanimously agreeing that the status quo on policy rates (reverse repo and repo rates) would be preserved. However, market estimates suggest that there exists a 10% chance of the cash reserve ratio (CRR) being increased by 50 basis points in the upcoming policy review meet.

---

STOCK UPDATE

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs172

Better than expected results

Result highlights

• The Q1FY2008 results of ITC were better than our expectations. In Q1FY2008 the net revenues of ITC grew by 16.7% year on year (yoy) as most of its businesses witnessed a strong growth: cigarettes (revenue up 9%), fast moving consumer goods (FMCG; revenue up 50.7%), hotels (revenue up 11.3%), paperboards (revenue up 5%) and agri-business (revenue up 27.6%).
• The operating profit grew by 16% to Rs1,127 crore in Q1FY2008 as against Rs970.5 crore in Q1FY2007. The company's earnings before interest and tax (EBIT) margin dipped slightly by 26 basis points to 17.8% in Q1FY2008, primarily because of the ongoing expansion in most of its businesses that resulted in higher fixed and depreciation costs. We consider this to be a short-term phenomenon as the incremental capacity in these businesses will help the company to fuel growth and improve its positioning in the respective markets.
• With a higher depreciation charge of Rs101 crore in Q1FY2008 as against Rs87.6 crore in Q1FY2007, the Q1FY2008 net profit grew by 20% yoy to Rs782 crore.
• We believe despite the imposition of a 12.5% value-added tax (VAT), a 5% increase in the excise duty and a 33.5% trade tax in Uttar Pradesh, the net realisation in the cigarette segment improved in this quarter due to an average increase of 20% in the selling price of most of the brands. There had been a marginal decline in the volumes in this quarter due to a major price hike in the last week of April 2007. We believe the volumes in second quarter will also remain affected and from the third quarter the volumes will recover.
• The non-cigarette FMCG business is the only business in ITC's portfolio that is not making a profit. However, its losses have come down in this quarter despite the roll-out of the Bingo brand of products throughout the country in March 2007. With the entry into new businesses and losses coming down, the improvement in the performance of the non-cigarette FMCG business is apparent.
• In the hotel segment, with the current properties working at peak occupancies, the 11% growth in the top line was driven by improved revenue per available room (RevPAR) and the stellar performance of the food and beverage (F&B) segment.
• The paperboard segment registered a slower growth of 5% due to the planned shutdown of a paperboard machine at Bhadrachalam in this quarter. With this machine getting fully operational again, the company expects the business to regain its growth trajectory going forward.
• We have always maintained that the fear of VAT may have a dampening effect on the stock but the same is likely to be a short-term aberration and one should look at the stock with a long-term perspective. At the current market price of Rs172, the stock is attractively quoting at 21.6x its FY2008E EPS and 13.7x FY2008E EV/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs200.

Balaji Telefilms
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs303
Current market price: Rs249

True on expectations

Result highlights

• The Q1FY2008 results of Balaji Telefilms Ltd (BTL) are in line with our expectations. The company reported stand-alone numbers (our preview estimates were based on consolidated numbers) that do not include the results of its film business and subsidiary in the UAE.
• The revenues for the quarter were almost flat year on year (yoy) at Rs74.5 crore, as was expected. The realisation from the commissioned programming business showed an impressive growth of 49.3% yoy to Rs33.5 lakh. However lower programming hours at 204.5 hours compared with 298 hours in Q1FY2007 led to a marginal increase in the revenues from this segment.
• As per its strategy of finally exiting the sponsored programming business the company reduced its programming under this format from 220.5 hours to 142 hours, while the realisation improved by 39.3% yoy to Rs4.2 lakh per hour. This led to a drop in the revenue from this segment to Rs6 crore against Rs6.6 crore in Q1FY2007.
• The operating profit margin (OPM) showed a good growth of 418 basis points yoy to 39.6% as the programming cost as a percentage of sales declined by 802 basis points on account of higher realisations. Thus the operating profit grew by 13.3% yoy to Rs29.5 crore.
• Consequently, on account of a higher tax outgo the adjusted net profit grew by 6.1% yoy to Rs18.4 crore.
• During the quarter BTL launched "Kasturi" on Star Plus and its overseas offering "Khwaish" on ARY channel while "Kesar" (Star Plus) and "KumKuma Bhagya" (Udaya TV) went off air. In July 2007 it also launched "Khwaish" on Sony. Considering that these new shows went on air and several other new launches have been planned in the coming quarters, we expect the commissioned programming volumes to pick up, especially on the launch of channels proposed under its joint venture with Star.
• BTL's co-production "Shootout at Lokhandwala" (released on May 25, 2007) was a big hit and one of the top revenue grossers on the box office.
• At the current market price of Rs249 the stock discounts its FY2009E earnings by 13.6x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.5x. We maintain our Buy recommendation on the stock with a price target of Rs303, based on our sum-of-the-parts (SOTP) valuation.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs375

Valtrex settlement improves earnings visibility

Key points

• Ranbaxy Laboratories has reached an out of court settlement with GlaxoSmithKline (GSK) on Valtrex® (Valacyclovir Hydrochloride tablets), as per which Ranbaxy will enjoy the 180-day exclusivity for marketing the generic version Valtrex® in US market in late 2009 (after the expiry of the patent in June 2009). Valacyclovir Hydrochloride is used in the treatment of herpes virus infection
• The total annual market sales of Valtrex were around $1. 3 billion, which the management expects to, touch $1.5 billion by late 2009 (we have considered $1.4 billion market size for our estimate). Anticipating Ranbaxy to garner at least 55% market share and 40% profit margin during the exclusivity period in late 2009, the product can generate $269 million in revenues and $107.8 million (Rs442 crore) in profits. This will translate into incremental EPS of Rs11.1 per share during the exclusivity.
• At the current market price of Rs375, the stock trades at 18.0x its CY2007E earnings. Anticipating earnings surprises from its first-to-file product pipeline, we maintain our Buy recommendation on the stock with a price target of Rs558.

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs383

Acquisition-led growth

Result highlights

• Wockhardt's net sales increased by 52.7% to Rs630.3 crore in Q2CY2007. The growth was achieved on the back of a 16.2% growth in the domestic business and a 79.4% growth in the international business. On a like-to-like basis (excluding the impact of the acquisitions made during the year), the growth stood at about 9.2% during the quarter. The sales growth was in line with our estimates.
• Wockhardt's European business almost doubled during the quarter to Rs361.2 crore, driven by a healthy performance across the existing markets of the UK and Germany, and the consolidation of Pinewood and the recently acquired Negma Laboratories (Negma).
• The formulation sales in the US market grew by 50.7%, driven by five new product launches and strengthening of the existing product portfolio in the USA.
• Wockhardt's operating profit margin (OPM) expanded by 240 basis points to 26.1% in Q2CY2007, driven by an improvement in the gross margin and a reduction in the research and development (R&D) cost. Adjusting for the capitalised R&D cost of Rs17 crore, the OPM remained flat at 21.5%. The company reported an operating profit (OP) of Rs152.2 crore, a growth of 69.7% year on year (yoy).
• Wockhardt's net profit stood at Rs102.4 crore in the quarter, growing by 61.5% yoy. The profit growth was way ahead of our estimates, despite a 15-fold increase in the interest expense (on account of an increase in debt for funding acquisitions and foreign exchange [forex] loss), a 22.9% rise in the depreciation charge and a 180-basis-point increase in the tax incidence. On adjusting for the net forex gain recorded by the company during the quarter, the net profit stood at Rs96.4 crore, up 52.1% yoy.
• During the quarter, Wockhardt completed the acquisition of France-based Negma, which has sales of $150 million and an 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 the company's successful track record of creating value post-integration, we believe the acquisition of Negma too will be value accretive for Wockhardt.
• In order to account for the Negma acquisition and the appreciation in the rupee against all the other major currencies, we are revising our revenue and earnings estimates for Wockhardt. We have upgraded our revenue forecasts by 19.6% and 21.8% to Rs2,272.8 crore and Rs3,098.8 crore for CY2007 and CY2008 respectively. Our earnings per share (EPS) estimates have been upwardly revised by 2.6% and 2.9% to Rs31.0 and Rs35.8 for CY2007E and CY2008E respectively.
• At the current market price of Rs383, the stock is available at 12.4x its CY2007E and 10.7x 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.

NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs690
Current market price: Rs495

Price target revised to Rs690

Result highlights

• For Q1FY2008, NIIT Technologies Ltd's (NTL) consolidated revenues reported a decline of 5.8% quarter on quarter (qoq) and growth of 20.1% year on year (yoy) to Rs229.4 crore. The revenue growth in the quarter was dented by 4.8% due to the appreciation of the rupee and seasonal weakness in the domestic business (which declined by 26.7% qoq to Rs16.1 core).
• The operating profit margins (OPM) plummeted by 340 basis points to 18.5% on a sequential basis. During the quarter, the OPM declined by 480 basis points due to the cumulative impact of the rupee appreciation (negative impact of 240 basis points), annual wage hikes (average hikes of 16% resulted in negative impact of 200 basis points) and increase in rentals (impact of 40 basis points). The same was partially mitigated by 100-basis-point improvement in the blended realisations and 40-basis- point gain from an increase in offshore component and better operational efficiencies.
• The increase in the other income to Rs6.2 crore (up from Rs5.6 crore in Q4FY2007) was aided translation gains of Rs3.6 crore. The consolidated earnings declined by 23.5% qoq and grew by 60.3% yoy to Rs35.1 crore.
• In terms of the outlook, the order backlog executable over the next 12 months grew to $105 million (up from $103 million in Q4FY2007) and the fresh order intake stood at $40 million. Apart from this, the joint venture (JV) with Adecco has become operational in the current month and would add to the company's overall growth in revenues. The management expects the margin to improve in the coming quarters and has guided for flat margins on a full year basis (as compared to its earlier guidance of improvement in the margins).
• To factor in the effect of rupee appreciation, the earnings estimates is revised downwards by 3% and 4.3% in FY2008 and FY2009 respectively. At the current market price the stock trades at 12x FY2008 and 10.1x FY2009 estimated earnings. We reiterate our Buy call on the stock with a revised price target of Rs690 (14x FY2009 earnings).

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs326
Current market price: Rs265

Price target revised to Rs326

Result highlights

• The net sales of Nicholas Piramal India Ltd (NPIL) grew at a subdued rate of 15.5% year on year (yoy) to Rs603.5 crore in Q1FY2008. The same were much below our expectation of Rs660 crore.
• The revenue growth was lower because the company lost about Rs25 crore worth of business from its largest brand Phensedyl, as Codeine, one the key raw materials, was in short supply. Further, the rise in the rupee and delay in revenue realisation also affected the top line growth.
• NPIL's operating profit margin (OPM) contracted by 360 basis points to 13.2% during the quarter, largely due to the lost business and the rising rupee. The sharp increase in the staff cost also affected the margin, which was below our expectation of 15.3%. Consequently, the operating profit declined by 9.4% to Rs79.5 crore.
• There was an incremental other income of Rs6.6 crore (including Rs4.6 crore of foreign exchange [forex] translation gain). But the interest cost jumped by 144.8% and the tax incidence shifted up from 11% in Q1FY2007 to 13%, resulting in a 19.4% fall in the consolidated net profit to Rs43.4 crore. The net profit too was below our estimate of Rs59.3 crore.
• However, considering the rupee's appreciation and the lower than expected growth in the contract manufacturing operations (CMO), we have downgraded our estimates for the company. As per our revised estimates, NPIL's revenues and profit would grow at compounded annual growth rates (CAGRs) of 15.8% and 22.4% to Rs3,248.1 crore and Rs342.1 crore respectively in FY2009. Our revised EPS estimates for FY2008 and FY2009 stand at Rs13.4 (down by 5%) and Rs16.3 (down by 3.7%) respectively.
• Based on our revised estimates, we have downgraded our price target to Rs326. In fact, we have valued the base business at Rs293 per share (ie 18x FY2009 EPS) and maintained the value of the research and development (R&D) deal with Eli Lilly at Rs33 per share.
• At the current market price of Rs265, NPIL is discounting its FY2009 estimated earnings by 16.3x. In view of the traction in the operations of both the Indian businesses, the improvement in the operating leverage and the steady progress in the domestic business of formulations, we remain positive on the stock.

Sharekhan Investor's Eye dated May 24, 2007

Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs406

Annual report review
Wockhardt has set a target of achieving sales of $1 billion by 2009. The company believes that it would benefit from the market potential of India's population of over one billion, the projected boom in health insurance (an area in which the country is currently woefully underdeveloped) and new government initiatives to enable the majority of the population to access the life saving drugs. On the other hand, the company's outlook for regulated markets like the EU and USA is robust. Both the organic and inorganic initiatives would drive the growth of the company in the regulated markets.

However, the company has already given a revenue guidance of $1 billion for 2009; out of this $700 million will come through organic growth while $300 million will come as contribution from the inorganic initiatives. For CY2007, the company is targeting to cross sales of $500 million and maintain the net margin in the range of 16-18%.

Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs95

Q4 results beat expectations

Result highlights

• Universal Cables Ltd's (UCL) Q4FY2007 results are ahead of our expectations.
• UCL's net sales grew by 51% to Rs129 crore; and the net profit grew by 77% to Rs6.2 crore as against our expectation of Rs5 crore.
• The operating profit margin (OPM) for the quarter improved by 137 basis points to 10.84% on account of operational efficiencies as the other expenses to sales ratio declined to 10.78% from 14.43% last year. The operating profit for the quarter grew by just 74% to Rs12.2 crore.
• We had mentioned in our previous update that we expect the OPM to improve, as the company focuses on the high-end products that have better margins and as its 100% subsidiary Optic Fibre Goa Ltd (OFGL) turns profitable. On a full year basis this optic fibre business recorded a turnover of Rs15 crore, growing by 100% over the last year. Its PBIT stood at Rs1.4 crore as against the loss of Rs1.6 crore in the previous year.
• The interest expense for the quarter increased by 50% to Rs1.79 crore and the depreciation cost for the quarter increased by 94% to Rs2.25 crore. The interest and depreciation charges increased because the first phase of the technological upgradation-cum-expansion project was commissioned and commenced commercial production during the quarter ended March 31, 2007. The project uses Vertical Continuous Vulcanization (VCV) process for manufacture of XLPE Power Cables.
• For the full year ended March 31, 2007, the net sales grew by 27% to Rs377 crore and the net profit grew by 33% to Rs22 crore.
• The company has recommended a payment of dividend for the year @ Rs2.40 per share (ie 24%), thus the stock also offers good dividend yield.
• At the current market price of Rs95, the stock is quoting at 7.2x its FY2008E earnings per share (EPS) and 5x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with price target of Rs179.

Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs578
Current market price: Rs535

Higher one-time provisions affect numbers

Result highlights

• The Q4FY2007 results of Punjab National Bank (PNB) are much below our expectations with the profit after tax (PAT) reporting a decline of 17.7% year on year (yoy) to Rs237 crore compared with our estimate of Rs460 crore. The PAT declined mainly due to higher than expected staff expenses (Rs300 crore of one-time AS-15 related prudential provisions) and higher marked-to-market (MTM) investment depreciation.
• The reported net interest income (NII) was up 20.6% yoy but down by 1.6% quarter on quarter (qoq) to Rs1,423 crore. However, adjusted for a one-time cash reserve ratio (CRR) interest income of around Rs56 crore the NII was up 15.8% yoy and down 5.5% qoq. Our calculations suggest that the net interest margin (NIM) of the bank has declined on a sequential basis by 36 basis points due to a decline in the asset yields (as interest on investments declined) combined with an increase in the cost of funds.
• The non-interest income was up 23% yoy. The 29.5% yoy growth in the core fee income was one of the highlights of the current quarterly results.
• Provisions for the quarter were high at Rs613 crore, of which Rs330 crore was on account of the MTM losses on the bond portfolio.
• The asset quality of the bank has shown some deterioration with the net non-performing asset (NPA) in percentage terms at 0.76% in March 2007 compared with 0.42% in December 2006 and 0.29% in March 2006. However, the gross NPA stood at 3.45% compared with 3.65% in December 2006. This was largely due to a higher advance base because in absolute terms the gross NPA increased to Rs3,391 crore from Rs3,268 crore in December 2006.
• We have reduced our earnings estimate for FY2008 by 6% to Rs1,971 crore mainly due to higher NPA related provisions. Despite the decline in the NIM on a sequential basis the bank's NIM still continues to be among the highest in the industry. We expect the NIM to stabilise going forward and improve the profitability of the bank. At the current market price of Rs535, the stock is quoting at 8.6x its FY2008E earnings and 1.4x FY2008E book value. We maintain our Buy call on the stock with a price target of Rs578.

Sharekhan Investor's Eye dated May 24, 2007

Motilal Oswal - State Bank of India, Bhushan Steel, Wockhardt

Motilal Oswal - State Bank of IndiaMotilal Oswal - Bhushan SteelMotilal Oswal - Wockhardt

JP Morgan - Tata Motors, Suzlon Energy, United Spirits, Automobile Manufacture, Wockhardt

JP Morgan - Tata MotorsJP Morgan - Suzlon Energy

JP Morgan- United SpiritsJP Morgan - Automobile Manufacture

JP Morgan - Wockhardt

ISEC - Indraprastha Gas, Colgate Palmolive, Wockhardt

Indraprastha Gas

Colgate Palmolive

Wockhardt

Kotak - Reliance Petroloeum, Banks/Financial Institutions, HDFC, Sterlite, Aditya Birla Nuvo, Sintex Industries, M&M, Sesa Goa, Wockhardt

Reliance Petroloeum

Banks/Financial Institutions

HDFC

Sterlite

Aditya Birla Nuvo

Sintex Industries

M&M

Sesa Goa

Wockhardt

Citigroup- Canara Bank, Colgate, United Phosphorous, Wockhardt

Canara Bank

Colgate

United Phosphorous

Wockhardt

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).

---

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.

Download

Sharekhan Investor's Eye dated May 03, 2007