Stock Ideas Report Card

Aban Loyd Chiles Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,330
Current market price: Rs1,948

Well on growth track

Result highlights

• Aban Loyd Chiles Offshore's revenues from operations for Q4FY2005 were up by 52.6% year on year (yoy) and by 79.1% quarter on quarter (qoq) to Rs102.7 crore. For the full year the growth was 6% yoy in line with our expectations.
• The operating profit for Q4FY2005 was up by 103.5% yoy (226.6% qoq) to Rs60.8 crore. For FY2005 the performance was much ahead of our expectations with a growth of 14.6% yoy.
• The net profit for Q4FY2005 was up by 100.3% yoy (96.3% qoq) at Rs19.9 crore.
• However the net profit for FY2005 at Rs50.1 crore was below our expectation due to higher both depreciation and interest cost.

 

Alok Industries 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs120
Current market price: Rs63

Well woven

Alok Industries reported a 64% rise in the net profit for Q4FY2005, ahead of our expectations. A large part of the outperformance was on account of the additional export incentives given under the "Target Plus" policy announced in the last export-import policy. An impressive performance with regard to the exports of bed linen and a 100-basis-point expansion in the operating margin, primarily reflecting a change in the product mix, were the key highlights of the results. However the earnings per share have been short of our estimate as the majority of the dilution on account of the foreign currency convertible bonds and optionally fully convertible debentures issued to the Life Insurance Corporation was completed in FY2005. Additional capacities in bed linen and apparel wear are going on stream in the middle of FY2006 which should drive the earnings growth. We are marginally upgrading our FY2006 EPS estimates by 5.7%. The stock currently trades at 6.8x FY2006E earnings.

Bharat Bijlee 
Cluster: Apple Green
Recommendation: Buy
Price target: Rs4,550
Current market price: Rs4,000

Power-packed future 

While initiating coverage on Bharat Bijle in our report dated November 29, 2004 we had mentioned the following investment arguments:

• Reforms in the power sector to be the driver of Bharat Bijlee's transformer business;
• A high level of industrial activity to drive volumes of its electric motor business;
• The transfer of its lift division to improve its profitability and return ratios; and
• Cash and cash equivalent in its kitty shall provide safety.

All of these investment arguments are gradually materialising, thereby improving the business prospect and earnings outlook for Bharat Bijlee.

 

Cipla 
Cluser: Cannonball
Recommendation: Buy
Price target: Rs310
Current market price: Rs254

VAT blues
With the export strategy in place through tie-ups with companies based in the USA and the UK (as an outsourcing hub), the revenue streams for the company have now become stable. The company has also commissioned a new manufacturing unit in Baddi, Himachal Pradesh. The margins over the last few quarters have also shown an improvement. We maintain our buy on the stock with a price target of Rs310.

Corporation Bank 
Cluster: Apple Green
Recommendation: Buy
Price target: Rs370
Current market price: Rs346

Strong operating growth

Corporation Bank has reported a strong growth of 16.6% year on year (yoy) and of 3.9% quarter on quarter (qoq) in its net interest income (NII) for Q4FY2005. The growth in the NII rebounded after a meagre 3.3% growth posted by bank in Q3FY2005. However the net profit declined by 9.9% as the bank made a higher provision for bad loans against a write-back of Rs19 crore in Q4FY2004. The fee income also showed an impressive growth of 24% yoy and of 42.9% qoq for Q4FY20005. However the profit for the full year at Rs402.2 crore was lower than our estimates of Rs640 crore as during Q2FY2005 the bank transferred Rs4,930 crore of government securities from the Available for sale (AFS) category to the Held till maturity (HTM) category, providing an accounting loss of Rs205  crore. Adjusting for this one-time losses the net profit of the bank would have been Rs607 crore compared to our estimate of Rs640 crore. At the current market price of Rs346.5, the stock is quoting at 8x its FY2006E earnings and 1.4x its FY2006E book value. We maintain a Buy on the stock.

ESAB India  
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs215
Current market price: Rs205

Earnings surge

• Esab's net sales for Q1CY2005 grew by 24% year on year (yoy) and stood at Rs54.1 crore.
• The operating profit margin (OPM) improved by 760 basis points yoy and by 140 basis points quarter on quarter on account of a drop in the consumption of raw material. The raw material cost as a percentage of sales fell from 50.1% to 46.9% yoy and dropped by 120 basis points sequentially.
• The improvement in the margins was primarily driven by a huge improvement in the margins of the Equipment division, which saw a rise of a whopping 1,280 basis points to 18.4%.
• During the quarter the operating profit zoomed by 89% to Rs12 crore as against Rs6.34 crore for the corresponding period last year.
• The net profit for the quarter registered a staggering growth of 155% and stood at Rs7.5 crore.

Geometric Software Solutions 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
CMP: Rs485.00

Growing in double-digits 

Result highlights

• Geometric Software Solutions' overall results are in line with our expectations.
• The top line is up by 14.7% in rupee terms quarter on quarter (qoq). In dollar terms the same is up by 17.2%.
• The operating profit margin fell during the quarter but if we ignore the one-time expenses incurred during the period the same is largely in line with expectations.
• The company has given a robust growth guidance for FY2006: a growth of 45-50% in the top line in US Dollar terms and a similar growth at the net profit level.
• At the current market price the stock is quoting at 12.3x FY2006E earnings.
• We maintain our Buy call on the stock.
  
  

Gujarat Ambuja Cement 
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs424.00

Reading between the lines 

Results highlights

• Gujarat Ambuja Cement's net sales registered a growth of 19.4% year on year on the back of a 15% growth in cement sales and a 4% growth in cement realisation.
• The operating profit margin (OPM) is down 280 basis points primarily because of a huge 26% rise in power and fuel costs, and a 19% increase in staff cost.
• The operating profit grew by 9.1% and stood at Rs199 crore as against Rs182.3 crore last year.
• A 19.6% increase in the depreciation charge resulted in a negative bottom line growth of -1.5%.
• Adjusted for an extraordinary foreign exchange loss, the stand-alone net profit is higher by 24% at Rs146.7 crore. The consolidated net profit registered a growth of 22.6% to Rs161.7 crore.
• The company has announced a dividend of 60% (Rs6 per share), a 1:2 bonus issue and a 1:5 stock split (face value to be split from Rs10 to Rs2).

HCL Technologies 
Cluser: Ugly Duckling
Recommendation: Buy
Price target: Rs400
Current market price: Rs347

BPO business drives growth 

Result highlights

• HCL Technologies' revenues grew by 7.1% quarter on quarter (qoq) in Q3FY2005.
• Its software services business grew at a disappointing 3.3% qoq in rupee terms.
• The business process outsourcing (BPO) business continues to record a strong growth and grew by 17.9% qoq.
• The infrastructure management business grew by 24% sequentially.
• The overall EBITDA margins were maintained again.
• The stock trades at 14.0x FY2006E and at 4.6% dividend yield. We maintain our Buy call.

HDFC Bank 
Cluster: Evergreen
Recommendation: Buy
Price target: Rs600
CMP: Rs558.55

A "30%" machine

Result highlights

• HDFC Bank's net interest income (NII) grew by 42.4% year on year (yoy) for Q4FY2005 and by 33.2% yoy for the full year ended March 31, 2005.
• During FY2005 the net advances grew by 44.1% to Rs25,566 crore driven by a 47.5% growth in the retail advances.
• The bank's deposits grew by 19.6% yoy during FY2005 on the back of a 46.3% growth in the saving account deposits.
• The capital adequacy ratio (CAR) improved from 9.7% in Q3FY2005 to 12.2% in Q4FY2005 on account of an American depository share (ADS) issue of $293.4 million.
• The bank has declared a dividend of Rs4.50 per share for FY2005.

 

Hyderabad Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs300
Current market price: Rs210

A clean(-up) exercise

Result highlights

• Net sales of Hyderabad Industries Ltd (HIL) in Q4FY2005 rose 30.5% to Rs114.7 crore, driven by a 28% increase in the sales from the Asbestos division.
• The operating profit stood at Rs13.97 crore in Q4FY2005 as compared to Rs7.09 crore in Q4FY2004.
• HIL reported a net loss of Rs5.73 crore in Q4FY2005. However the net profit before extraordinary items stood at Rs4.9 crore, registering an increase of 129%
• The net sales increased by 25.8% to Rs407 crore in FY2005.
• The operating profit in FY2005 rose by 332% to Rs49.34 crore.
• The net profit before extraordinary items stood at Rs20.4 crore as compared to a loss of Rs4.2 crore in FY2004.

Indian Petrochemicals Corporation 
Cluster: Apple Green
Recommendation: Buy
Price target: Rs230
Current market price: Rs170

Another quarter of growth

Result highlights

• Indian Petrochemicals Corporation Ltd's (IPCL) net sales for Q4FY2005 are higher by 1% compared to that in the corresponding quarter of last year because of a drop in the revenue from the chemical trading business.
• However the operating profit for the quarter grew by 71.5% as the operating profit margin (OPM) expanded by 826 basis points
• The interest cost was lower by 42% year on year (yoy).
• The net profit adjusted for extraordinary items is up by 239.4% yoy.

Infosys Technologies 
Cluster: Evergreen
Recommondation: Buy
Price target: Rs2,500
CMP: Rs1,957.00

Top line grows by 6% 

Result highlights

• Infosys Technologies' top line grew by 6.0% on a sequential basis, at a rate lower than our expectations but higher than the company's guidance.
• The operating profit grew by 7.9% on a sequential basis. 
• The operating profit margin (OPM) improved for the second consecutive quarter.
• The provision for post-sales customer support, the higher depreciation cost and the lower other income affected the bottom line, which grew at just 3.2% sequentially.
• Although there will be apprehensions with regard to the company's performance in the short term (considering the muted first quarter guidance given by the company), yet the long-term outlook for the information technology giant remains positive.
• At the current market price the stock is quoting at 21.2x FY2006E earnings.
• We maintain our Buy call on the stock with a 12-month price target of Rs2,500.

Jaiprakash Associates 
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs240
Current market price: Rs186

Raising the target
At current levels the stock is discounting its FY2006 consolidated estimated EPS of Rs21.5 by 8.7x. We believe that the stock's valuations are attractive, considering the robust order book of the construction business and firm cement prices across the company's key markets. We reiterate our Buy recommendation on the stock with a revised price target of Rs240.

 

Mahanagar Telephone Nigam 
Cluser: Vulture's Pick
Recommendation: Buy
Price target: Rs170

Current market price: Rs121

Numbers ahead of expectations 

Result highlights

• The top line is up 4.5% quarter on quarter (qoq) ahead of expectations.
• EBITDA margins declined, but are not comparable qoq.  
• Valuations are attractive at a dividend yield of 4.1-4.5%.
• We maintain our buy with a reduced price target of Rs170.

NDTV 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs245
Current market price: Rs175

Encouraging numbers 

Result highlights

• NDTV's overall numbers are ahead of expectations.
• The company's top line for Q4FY2005 was up 76% year on year (yoy)--5.5% higher than our expectations.
• The operating profit for Q4FY2005 is 28.8% higher than our expectations.
• NDTV's future looks more promising following the announcement of the results.
• We maintain our Buy call.

 

Reliance Industries  
Cluster: Evergreen
Recommendation: Buy
Price target: Rs660
Current market price: Rs539

Results above expectations

Result highlights

• Reliance Industries' revenues for Q4FY2005 are up by 29.6% year on year (yoy) (by 0.6% quarter on quarter or qoq) to Rs19,840 crore on the back of buoyant refining margins and a surge in the petrochemicals cycle.
• The operating profit is up by 34% yoy (7.8% qoq) to Rs3,546 crore.
• The net profit has risen by 61.5% due to a one-time adjustment of Rs300 crore in the deferred tax liability.
• Reliance Infocomm broke even at the net profit level during the quarter.
  
  

Satyam Computer Services 
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs450
Current market price: Rs405

Results meet expectations 

Result highlights

• Among the Indian information technology (IT) companies that have declared their Q4FY2005 results so far Satyam Computer Services has reported the highest volume growth of 8.7%.
• During the quarter the company's top line grew by a good 8.8% in US Dollar terms and by 7.0% in Indian Rupee terms, both on a sequential basis.
• The operating margins improved by 10 basis points (despite a 1.8% appreciation in the rupee against the dollar) due to a higher growth in the offshore business.
• The net profit grew at 22% on a sequential basis due to a higher other income and lower taxation.
• The company has acquired Citisoft, a UK based company.
• At the current market price the stock is quoting at 13.6x FY2006E earnings.
• We maintain our Buy call on the stock.

Tata Metaliks

Cluster: Emerging star
Recommendation: Book Profit
Current market price: Rs161

Disappointing results

Result highlights

• Tata Metaliks Ltd's (TML) revenues grew by 101.7% to Rs71.5 crore year on year (yoy); the revenues however declined by 3.7% sequentially due to lower realisations.
• The margins came under pressure with the operating profit margin (OPM) down from 41.5% in M9FY2005 to 21.6% in Q4FY2005.
• The cost of its raw materials rose in Q4FY2005, with the cost as a percentage of sales rising from 47.9% in M9FY2005 to 60.5% in Q4FY2005.
• The profit after tax (PAT) growth was lower at 30.2% to Rs8.8 crore and failed to meet our implied Q4FY2005 estimates of Rs14.3 crore.
• The earnings for FY2005 at Rs25.3 per share were also lower than our estimates of Rs27.6 per share by Rs2.3 per share.
• In view of the pressure on the company's margins, we revise our FY2006 estimates downwards by 14.6%. We recommend investors book profit at the current market price. (The stock is up 284% from our recommended price of Rs41.9).

Upper Ganges Sugar Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs210

Against all odds

Result highlights

• Upper Ganges Sugar Industries Ltd's (UGSIL) revenues for Q3FY2005 grew by 28.7% year on year (yoy) and by 44.4% quarter on quarter (qoq) to Rs104.9 crore.
• The operating profit grew by a strong 34.8% yoy (by 76.9% qoq) to Rs36.7 crore.
• The pre-exceptional profit was up by 144.8% yoy; however exceptional items marred the show. Post-exceptional items the profit was down by 22.2% yoy.
• About 1,325,000 quintal of sugar stock was carried forward to the last quarter of the year with unrealised gains of Rs43 crore.

UTI Bank 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs300
Current market price: Rs238

Bank on it

Result highlights

• UTI Bank's advances have grown strongly by 67% year on year (yoy) in Q4FY2005; deposits too have grown by 52% yoy though at the expense of net interest margins (NIM).
• The net interest income (NII) has grown a tad slower at 19.6% yoy during Q4FY2005.
• The other income has however grown by 62.4% yoy on the back of a strong growth in the fee income and treasury profits.
• The bank's net non-performing assets (NPAs) as a percentage of its net advances was stable yoy—it improved by 27 basis points quarter on quarter (qoq).
• A global depository receipt (GDR) issue of $239 million improves the bank's Tier-I capital adequacy ratio (CAR) to 8.87%; its overall CAR was at 12.66%.

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SECTOR UPDATE

Cement 

The road ahead... 

The cement industry on a whole had a fairly decent run in FY2005, when it witnessed a rather rare phenomenon of a growth in excess of 6% in both volumes and cement prices. However FY2006 and FY2007 will be very crucial for the industry, as we believe the industry is on the verge of a demand-supply equilibrium and any significant amount of greenfield capacity addition could disrupt the parity and adversely affect cement prices which in turn could affect the profitability of the cement manufacturers.

Sugar

Pick your sweets

Exit Oudh Sugar, buy KCP Sugar and Upper Ganges
Oudh Sugar Mills, which is based in Uttar Pradesh, too faces the risk of being made to pay the huge arrears for the 2002-03 season. Looking at this risk and the declining probability of another hike in the price of sugar we recommend investors exit the company.

On the other hand a higher carried forward stock (at a cost of Rs13-14) should work as a near-term trigger for Upper Ganges Sugar. The incremental earnings per share from the carried forward stock would be even higher due to the lower equity base of the company.

KCP Sugar and Industries has the advantage of being located in the coastal Andhra Pradesh belt and the risk of SAP doesn't affect the company except for presenting a meagre liability of Rs2 crore for the 2002-03 season. A 6-megawatt power plant that is expected to be commissioned in September 2005 would also augment the company's revenues.

We maintain our Buy call on Upper Ganges and KCP Sugar Industries.

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SHAREKHAN SPECIAL

Consumer power

Is the FMCG sector coming out of hibernation? Yes, if the sector trends are to be believed:

• A handsome growth in volumes across segments in the fourth quarter of the calendar year 2004.
• The capital expenditure cycle is turning upwards after a long time--companies are heading north to take advantage of tax breaks.
• A good south-west monsoon to be crucial for the sector.
  

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VIEWPOINT

Ador Welding
Current market price: Rs121.80

Impressive results
Based on Ador's results, ESAB India is likely to post equally impressive numbers.

Result highlights

• During Q4FY2005, the net sales of Ador Welding have registered a smart growth of 43% to Rs66.65 crore. The net sales have maintained the momentum even on a sequential basis registering a growth of 43%.
• The operating profit margin (OPM) has registered an increase of 510 basis points sequentially and stood at 19.5%, primarily because of a sharp drop of 420 basis points in the raw materials/sales ratio (on a sequential basis)  from 51.6% to 47.4%.
• This combined with a 43% rise in the sales has pushed up the operating profit by a whopping 112% on a sequential basis.
• The net profit for the quarter (adjusted for extraordinary items) has registered a huge growth of 229% sequentially and a 64% growth year on year to Rs11.28 crore.
  

Bharti Tele-Ventures

Current market price: Rs207

Ringing in good numbers

Result highlights

• Bharti Tele-Ventures' Q4FY2005 results-a growth of 16.0% in the earnings before interest, tax, depreciation and amortisation (EBITDA) quarter on quarter (qoq) and a growth of 17.2% in the net profit qoq—were ahead of estimates.
• The operating leverage effect in the mobile business and the margin gains in the long distance business from the cut in the access deficit charge (ADC) and bad debt write-backs led to the positive surprise.
• The revenue per minute of mobile business declined from Rs1.5 to Rs1.4 on a quarter-on-quarter (q-o-q) basis on account of the ADC cut and higher pre-paid mix but the EBITDA per minute remained stable at Rs0.47/minute.

 

Sona Koyo Steering Systems
Current market price: Rs60

On growth path

Sona Koyo Steering Systems (Sona Koyo) has reported strong Q4FY2005 results with a profit after tax (PAT) of Rs6.2 crore, exceeding our estimates mainly due to a higher other income. The PAT grew by a record 73.7% year on year (yoy) despite higher interest and depreciation charges, boosted mainly by the other income of Rs2 crore. Despite a steep increase in its input costs, the company managed to improve its earnings before interest, depreciation, tax and amortisation (EBIDTA) margin by ten basis points to 11.8%, driven by higher economies of scale. Its net sales increased by 30.6% yoy and by 12.7% quarter on quarter (qoq) to Rs87.4 crore (as against the industry average of 18% yoy) owing to higher export sales of Rs11.1 crore.

 

Tata Consultancy Services           

Current market price: Rs 1,115

TCS belies expectations

Q4FY2005 result highlight

• The overall results of Tata Consultancy Services (TCS) are significantly below market expectations.
• The company's top line grew by just 0.2% quarter on quarter (QoQ); even in US Dollar terms the growth was low at 2.3%.
• The operating profit margin declined by 250 basis points while the operating profit declined by 8.6% QoQ.
• At the current market price the stock is quoting at 22.8x FY2005 earnings; the earnings exclude the Rs102 crore provided towards economic value added linked variable compensation and a one-time expense of Rs204 crore.

 

Wipro
Current market price: Rs648

Report card reads good

Result highlights

• Wipro's overall numbers are in line with street expectations.
• The top line of the Global IT Services business grew by 6.3% (in $ terms) sequentially led by a good volume growth of 8.5%.
• The operating margins in the Global IT Services business were stable.
• Another quarter of muted performance by Spectramind.
• The management's guidance for Global IT Services business implies a growth of 5.3% in the next quarter.
• The stock trades at 21.6x FY2006E earnings.