Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs560
Current market price: Rs485
Price target revised to Rs560
Result highlights
- Satyam Computer Services (Satyam) reported a revenue growth of 7.1% quarter on quarter (qoq) and 35.4% year on year (yoy) to Rs1,779 crore during the fourth quarter of FY2007. The revenue growth was higher than expected and driven by a healthy volume growth of 9.5% on a sequential basis. On the other hand, the 1.7% appreciation in the rupee limited the sequential growth in the revenues during the quarter.
- The operating profit margin (OPM) declined by 162 basis points to 23.1% on a sequential basis, largely due to the adverse impact of the charges related to restricted stock units (RSU; impact of 90 basis points), higher personnel cost (bonus) and the rupee appreciation. It was partly mitigated by a 64-basis-point saving in the selling, general and administrative (SG&A) expenses as a percentage of sales. Thus, the operating profit was flat at Rs410 crore on a sequential basis.
- However, the earnings growth was boosted by the jump in the other income component to Rs70.4 crore (up from Rs10.1 crore in Q3) as the company accrued better yield on investments and reported a foreign exchange (forex) gain of Rs3.8 crore as compared to a forex fluctuation loss of Rs35.5 crore in Q3FY2007. Consequently, the consolidated earnings grew by 16.7% qoq and 38.3% yoy to Rs393.6 crore, which is much ahead of the consensus estimate of around Rs358 crore.
- On a full year basis, the consolidated revenues and earnings have grown by 35.3% to Rs6,485 crore and by 43.1% to Rs1,404.8 crore respectively. The OPM has declined by 60 basis points to 23.7% which is in line with the company's guidance.
- In terms of the guidance for FY2008, the consolidated revenues and earnings are guided to grow at a healthy rate in the range of 28-30% and 27-29% respectively, in dollar terms. The growth in rupee terms would be dented by the 600-basis-point appreciation in the rupee (an exchange rate of Rs42.3 per US Dollar assumed in the guidance), resulting in revenue and earnings growth of 20-22% and 18-20% respectively. What's heartening and has come as a positive surprise is that the management expects to maintain its margins in FY2008, in spite of the wage inflation, rupee appreciation and additional expenses related to RSUs. On the flip side, the growth guidance for Q1FY2008 is quite subdued and indicates a flat or a marginal decline in the earnings.
- We have revised upwards our FY2008 earnings estimate by 4% and introduced our FY2009 estimate. At the current price the stock trades at 18.6x FY2008 and 15.6x FY2009 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a revised price target of Rs560 (18x FY2009 earnings estimates).
Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs385
Current market price: Rs325
Price target revised to Rs385
Result highlights
- Tata Elxsi has reported a robust growth of 10.8% quarter on quarter (qoq) and 25.6% year on year (yoy) in its revenues to Rs89.1 crore for Q4FY2007. The growth was contributed by a 6.6% sequential growth in the software service (SS) business while the system integration (SI) business showed an exponential jump of 35.7% qoq to Rs15.7 crore. The fourth quarter generally tends to be strong for the SI business.
- The operating profit margin (OPM) improved by 160 basis points to 24.3% (the highest ever) on a sequential basis. The margin improvement was boosted by the steep improvement in the profitability of the SI business (margins doubled from 13.7% to 29.5%). On the other hand, the segmental margins of the SS business declined by 190 basis points sequentially.
- Consequently, the company was able to report a double-digit sequential growth in its earnings for the third consecutive quarter. Its earnings grew by 14.8% qoq and 38.8% yoy to Rs16 crore, ahead of our expectations.
- On a full year basis, the revenues grew by 30.7% to Rs308 crore (slightly higher than our estimate of Rs304 crore). The OPM improved by 260 basis points to 22.4%, resulting in a 51.8% growth in the earnings to Rs52.1 crore.
- The company has given a healthy dividend of 70% (or Rs7 per share) in line with our expectations, amounting to a dividend yield of 2.1% at the current market price.
- To factor in the better than anticipated performance, we have revised upwards the earnings estimate for FY2008 by 9.4% to Rs21.4 per share and introduced our FY2009 estimate. At the current market price the stock trades at 15.2x FY2008 and 12.3x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs385 (14.5x FY2009 earnings).
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs210
Current market price: Rs184
Q4FY2007�first cut analysis
Result highlights
- Bank of India's (BOI) Q4FY2007 profit after tax (PAT) was way above expectations at Rs447 crore, up 76% year on year (yoy) compared to our estimate of Rs288.9 crore. The PAT growth was ahead of our estimate mainly due to an unexpected 78.9% quarter-on-quarter (q-o-q) 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 figure is adjusted for the one-off cash reserve ratio (CRR) interest to the tune of Rs40 crore in Q4FY2007.
- The non-interest income was a surprise as it reported a 78% growth yoy and 79% rise qoq to Rs576 crore. However the detailed break-up of the same is still awaited.
- 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.
- The provisions increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore. The increase was mainly on account of higher other provisions as the non-performing asset (NPA) provision reported a decline both yoy and qoq.
- The bank's asset quality has shown a consistent improvement with the net NPAs and gross NPAs 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 sequentially.
- The higher non-interest component in this quarter has caused the bank's PAT to grow by 76% yoy to Rs447.4 crore compared to our estimate of Rs288.9 crore. We would provide our detailed result update later. At the current market price of Rs184, the stock is quoting at 7.6x its FY2008E earnings and 1.3x expected FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs210.
Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs190
Current market price: Rs137
A brilliant performance
Result highlights
- Ceat's Q4FY2007 numbers are way ahead of our expectations. The net sales have risen by a brilliant 16.2% to Rs562.9 crore on the back of a 3% tonnage growth and a very strong realisation growth. The original equipment manufacturer (OEM) sales recorded a significant improvement of 58.4% during the quarter. The replacement sales continue to grow at a good pace of 10%.
- The operating profit margin (OPM) expanded by 250 basis points to 7.8% as a result of a lower raw material cost during the quarter and other efficiencies. As a result the operating profit grew by 70.3% to Rs43.9 crore.
- The company was able to lower its raw material cost due to forward booking of rubber at lower prices. The company has made arrangements to procure rubber at lower prices in future as well, which would help it to maintain its margins in the coming quarters.
- A lower interest cost due to the ongoing debt restructuring exercise and stable depreciation cost helped the company to report a 390% growth in the net profit, which stood at Rs23.4 crore.
- The company has declared a dividend of Rs1.8 per share and the board has also approved the financial restructuring of the company. A holder of 100 shares in Ceat would be getting 75 shares of the company and 25 shares of the new investment company. We believe that this is a positive move and would lead to greater unlocking of value for the shareholders. The sale of part of the property at its Bhandup plant is expected to be finalised by Q2FY2008, and is expected to fetch the company about Rs80-100 crore.
- At the current market price of Rs137, the stock is trading at 8.2x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4x. We maintain our Buy recommendation on the sock with a price target of Rs190.