Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs63.4
Current market price: Rs55
Margins disappoint, but stay on course!!
Result highlights
- In Q4FY2007 the net revenues of Marico grew by 33% year on year (yoy) to Rs396 crore, as per our estimate. The top line growth was higher in this quarter on account of the full contribution from the acquired brands of Nihar, Manjal, Camelia, Aromatic and Fiancée, and the strong growth of 21% in the focused brand portfolio (organic growth).
- The operating profit margin (OPM) declined by 210 basis points to 10.1% on account of an increase in the selling and administrative expenses, and the other expenses as a percentage of sales. Consequently, the operating profit grew by 10% yoy to Rs40.1 crore. The same was below our estimate.
- The interest cost for Q4FY2007 grew to Rs4.68 crore from Rs2.3 crore in Q4FY2006, on account of the debt taken to achieve inorganic growth.
- The net profit after the extraordinary items grew by 17% yoy to Rs28.1 crore and the earnings per share (EPS) grew to Rs0.47 (share split to Rs1).
- Marico has acquired two brands (Fiancée and HairCode) in Egypt; these will generate revenues of Rs90-95 crore in FY2008. Significantly, these brands provide 15-18% of the profit after tax (PAT) margin against that of 7-7.5% for Marico. This indeed will help Marico expand its OPM next year. Higher advertising spend for new brands would help the company to fuel future growth.
- The Kaya business grew by an impressive 52% yoy to Rs22 crore. It managed to achieve a positive profit before tax (PBT) in the current quarter. The Kaya business broke even on a full-year basis. This is a big positive because going forward the business will be contributing to the bottom line and its higher margin profile will contribute to the margin of Marico. For the full year, revenue from the Kaya business stood at Rs75 crore. Marico plans to open roughly 15-20 new Kaya clinics in FY2008 and wants to concentrate on increasing the utilisation and penetration levels of the Kaya products going forward.
- The stock is trading at attractive valuations of a price/earnings ratio (PER) of 22.8x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 15.8x FY2008E. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs63.4.
SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs406
Current market price: Rs379
Solid performance
Result highlights
- SKF India's Q1CY2007 results are ahead of our estimates because of a strong improvement in its margins. The net sales for the quarter have risen by 21.6% to Rs359.8 crore.
- The margin improvement during the quarter was a positive surprise. We believe that the margin growth is a result of improved product mix, lesser contribution of the direct customer delivery (DCD) business and better utilisation of the new capacities.
- The operating profit margin (OPM) jumped up by 450 basis points to 16.8% during the quarter. Consequently, the OPM has improved by 450 basis points as the operating profit jumped up by 65.7% to Rs60.5 crore.
- A higher interest income and stable depreciation helped the company to post a profit growth of 62.8% to Rs36.7 crore.
- The capacity expansion plans of the company are on schedule. It would also be spending close to Rs150 crore to set up a plant in Uttarakhand. The company would also de-risk its business model going forward, by reducing its dependence on bearings, which currently contribute almost 90% of its sales. In the next three-four years, this proportion is expected to decline to 80%, while the contribution of the other business segments, namely seals, mechanotronics, and services would reach 20%.
- At the current levels, the stock quotes at 12.2x its CY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x. We maintain our Buy recommendation on the stock with a price target of Rs406.
Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs900
Current market price: Rs825
Price target revised to Rs900
Result highlights
- Bharti Airtel has announced a robust revenue growth of 9.8% quarter on quarter (qoq) and 58.1% year on year (yoy) to Rs5,393 crore for Q4FY2007. The sequential revenue growth was driven by a 12.9% rise in the mobile revenues whereas the non-mobile businesses grew at relatively lower rate of 5.6% sequentially to Rs1,871 crore.
- The operating profit margin (OPM) at 41.5% is the highest reported in any quarter. The sequential improvement of 70 basis points came as a positive surprise and was driven by a 160-basis-point sequential improvement in the OPM of the mobile business. The ability to boost margins in spite of the adverse impact of the reduction in the roaming charges (adverse impact of Rs50-60 crore) is quite commendable. Consequently, the operating profit grew by 11.8% qoq and 419.4% yoy to Rs2,241 crore.
- The profit before tax (PBT) grew by 4.5% qoq to Rs1,507 crore and was in line with expectations. However, the decline in the effective tax rate to 9% (as compared with 14.8% in Q3) resulted in a higher than expected net profit of Rs1,353 crore (up by 11.4% qoq and 98.3% yoy).
- For the full year, the consolidated revenues and earnings grew by 58.8% to Rs18,520 crore and 88.6% to Rs4,257 crore. The OPM improved by 320 basis points to 40.2% (contributed by a 160-basis-point improvement in the OPM of the mobile business and a 320-basis-point uptick in the margin of the non-mobile business). The total subscriber base grew by 86.4% to over 39 million in FY2007 (including 37.14 million mobile subscriber base, which grew by 89.7% during the year).
- In terms of key highlights, there were a number of regulatory changes introduced during the quarter. The reduction in the roaming charges was negative whereas the introduction of revised access deficit charge (ADC) regime and reduction in the port charges payable to state-owned telecom operators would have a positive impact on the earnings.
- In terms of business environment, the government announced the increase in the limit for foreign direct investment (FDI) from 49% to 74% and steps are being taken to implement the same. Another key development was the entry of Vodafone as a competitor through the acquisition of a controlling stake in Hutch Essar.
- To factor in the better than expected performance, we have revised upwards our earnings estimates by 2.8% for FY2008 and introduced our FY2009 estimates. At the current market price the stock trades at 25.8x FY2008 and 20.2x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised one-year price target of Rs900.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs318
Mixed bag
Result highlights
- The total operating income of Cadila Healthcare increased by 26.4% year on year (yoy) to Rs437.2 crore in Q4FY2007, driven by a 25.8% growth in the formulation exports and a 22.1% rise in the exports of active pharmaceutical ingredients (APIs). The sales growth was ahead of our expectations.
- The 105.1% jump in the formulation exports was driven by the improved performance of the French (growth of 48.8% yoy) and US businesses (growth of 96.4% yoy).
- The operating margins shrank by 270 basis points, largely due to a 35.8% rise in the staff cost and a 54.8% rise in the research and development (R&D) costs. Consequently, the operating profits grew by 8.4% to Rs71.1 crore.
- Cadila's adjusted net profit grew by 27.1% to Rs38.9 crore. The profit growth was slightly below our expectation.
- For FY2007, Cadila's revenues jumped by 23.2% to Rs1,829 crore, driven by a 91% growth in the formulation exports, a 31% growth in the API exports and a 54% rise in the consumer business. The sales growth was ahead of our estimates. The 91% rise in the formulation exports came on the back of a 186% growth in the US business, a 103% growth in France and a 26% surge in the exports to the rest of the world (ROW) markets.
- The net profit for FY2007 increased by 53.7% to Rs233.8 crore. The growth in the profit was slightly below our expectations.
- At the current market price of Rs318, the company is trading at 14.4x its FY2007E and at 11.9x its FY2008E estimated earnings. With all the growth drivers in place and on track, we reiterate our Buy recommendation on Cadila with a price target of Rs425.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs370
Q1CY2007 results—first cut analysis
Result highlights
- Ranbaxy Laboratories (Ranbaxy) reported a 78.7% year-on-year (y-o-y) growth in its earnings to Rs127.60 crore for the first quarter ended March 2007. The earnings were marginally below our expectation of Rs131.52 crore.
- On the other hand, the revenues, which were up by 23% to Rs1,553.50 crore, were better than our expectation of Rs1,437.16 crore. The revenue growth was largely driven by the consolidation of Terapia, which resulted in a 78% jump in the European business. The markets in the Commonwealth of Independent States showed a 61% growth while the Asia Pacific and Middle-Eastern markets witnessed a 34% growth. The performance of the domestic business was impressive, with a growth of 26%, which is way ahead of the industry growth of about 9-10% during the quarter.
- The operating profit margin expanded by 150 basis points year on year (yoy), but showed a contraction of 60 basis points on a sequential basis to 10.4% yoy. The pricing pressures in the USA and Europe continued to hit the margins during the quarter. However, the company reported a 43.3% growth in the operating profit to Rs162.2 crore.
- During the quarter, the depreciation was up by 30% and the tax incidence increased to 21.6% from 15.8%. Despite this, the net profit grew by an appreciable 78.7% to Rs127.6 crore in Q1CY2007. The net profit was boosted by a foreign exchange gain of Rs55 crore.
- Based on the performance in Q1CY2007 and the improved outlook for the future, the management has revised its growth guidance upwards to 20% from the earlier 15%.
- At the current price of Rs370, the stock is trading at 17.7x its estimated CY2007 earnings. We maintain our Buy recommendation on Ranbaxy with a price target of Rs558.
Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Under review
Current market price: Rs217
Q4FY2007 results—first cut analysis
Result highlights
- Cipla reported lower than expected results for Q4FY2007 with a net profit of Rs125.7 crore against the expectation of Rs199.6 crore. The earnings have been lower due to the disappointing exports of active pharmaceutical ingredients (APIs) and significant contraction in the operating profit margin (OPM).
- The revenues were marginally higher by 6.3% to Rs938.5 crore. The sales growth was lower due to a 27% decline in the API exports to Rs141.46 crore mainly on account of higher sales to the regulated markets in the corresponding quarter of the previous year. Also, the formulation exports moderated to 16.8% during the quarter to Rs387.87 crore. The exports growth was the cause for concern during the quarter. However, the only cushion was that the domestic formulation business reported a 14.4% growth to Rs399.70 crore, which was slightly better than the industry's.
- The OPM witnessed a 590-basis-point decline to 15.7% in the quarter. The contraction in the margin was due to a change in the product mix (higher volume of anti-retrovirals where the margins are low) and lower API sales to the regulated markets. Also, a higher other expenditure due to higher factory overhead, selling expenses, professional fees etc affected the margins. Consequently, the operating profit stood at Rs147.0 crore, down by 22.8%.
- Subsequently, the other income was lower by 40%, depreciation higher by 4.3% and the tax incidence up from 4.0% to 11.3%, resulting in a 40.3% decline in the net profit to Rs125.7 crore.
- The full-year numbers reported a 19% growth in the top line at Rs3,438.1 crore, as the domestic formulation sales and exports saw a growth of 16.4% and 17.6% respectively. With the increasing share of the low-margin business of anti-retrovirals, the margins remained almost flat at 20% and resulted in a just 9% rise in the net profit to Rs660.8 crore.
- Though Cipla delivers better than industry growth in the domestic market, it struggles hard to maintain the growth in its exports, particularly of its APIs. While the API exports keep fluctuating, the growth of the formulation exports has moderated. Further, with the increased focus of Cipla on the low-margin business of anti-retrovirals, the OPM has been subdued in past couple of quarters. We believe the margin pressure would also sustain going forward.
- Cipla reported disappointing numbers for both Q4FY2007 and FY2007, largely due to the lower than expected performance of the export business and the decline in the margin. Hence, we are reviewing our FY2008 estimate. We shall downgrade the FY2008 estimate and introduce the FY2009 estimate in a detailed note shortly.