Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs980
Current market price: Rs708
Price target revised to Rs980
Result highlights
- Tata Motors' Q4FY2007 results are slightly below are expectations, primarily on the margin front. The Q4FY2007 net sales (excluding a foreign exchange [forex] gain) of the company grew by 20.0% to Rs8,206.8 crore, driven by a volume growth of 16.2% and a realisation growth of 3.3%.
- Excluding the effect of the forex gain/loss, the operating profit margin (OPM) has fallen by 160 basis points year on year (yoy) and by 130 basis points sequentially to 11.0%. This was mainly owing to a higher raw material cost and a sequential drop in the realisation due to a change in the product mix. Consequently, the operating profit grew by just 5.1% to Rs906 crore.
- The other income was higher at Rs60.4 crore against Rs4.4 crore last year. Further, lower interest cost and taxes, and stable depreciation aided the company to record a 25.9% growth in its profit to Rs576.7 crore.
- For the full year, net revenues grew by 33% to Rs27,404.8 crore against Rs20,672 crore last year, while the net profit grew by 25% to Rs1,913.5 crore.
- The consolidated sales for the full year grew by 36.4% to Rs32,426.4 crore while net profit grew by 25.4% to Rs2,170 crore.
- We are taking a cautious view on the commercial vehicle (CV) industry and expect the slowdown to continue in the first half of FY2008 on the back of tightening liquidity and higher interest rates. However, we expect the situation to correct itself towards the second half of the fiscal with the peaking out of interest rates and better availability of funds.
- We are downgrading our FY2008 earnings estimate by 6.2% to Rs53.4 and are also introducing our FY2009 estimate. We expect stand-alone earnings of Rs60.8 and consolidated earnings of Rs70.3 in FY2009. At the current levels, the stock trades at 11.7x its FY2009 stand-alone earnings per share (EPS) and 10.1x its consolidated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs980.
Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs578
Current market price: Rs559
Q4FY2007 results: First-cut analysis
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 and provisions.
- The adjusted staff expenses (adjusted for Rs225 crore of write-back in pension liability expenses during Q4FY2006) grew by 35.2% yoy and 34.4% quarter on quarter (qoq) to Rs781 crore from Rs581 crore in December 2006 and Rs577.6 crore in March 2006. Such a sudden spike could be due to a one-off item, details of which are awaited.
- The reported net interest income (NII) was up 20.6% yoy but down by 1.6% 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 to Rs1,367 crore. The net interest margin (NIM) of the bank is likely to have declined on a sequential basis.
- The non-interest income was up 23% yoy and higher by 30.2% qoq to Rs518.4 crore.
- The adjusted operating expenses shot up by 27.8% yoy and 30.4% qoq mainly due to the jump in the staff expenses, which restricted the operating profit growth to 6.9% yoy. The provisions remained stable yoy but showed an increase of 41.6% qoq; a detailed break-up of the same is awaited.
- 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, largely due to a higher advances base because in absolute terms the gross NPA increased to Rs3,391 crore from Rs3,268 crore in December 2006.
- The bank management has said that it needs around Rs2,000 crore of additional capital in FY2008 for its overseas subsidiaries and to meet Basel-II compliance. It plans to raise Rs500 crore tier-II capital by June-end and additional equity capital could also be raised which will dilute the government's stake from the existing 57.8% to 51% in CY2008.
- At the current market price of Rs559, the stock is quoting at 8.4x its FY2008E earnings and 1.4x FY2008E book value. A detailed result update would follow.
NIIT Technologies
Cluster: Ugly duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs519
Price target revised to Rs720
Result highlights
- NIIT Technologies Ltd (NTL) reported a growth of 5.2% quarter on quarter (qoq) and 46.5% year on year (yoy) in its consolidated revenues to Rs243.5 crore during the fourth quarter. The organic revenues grew at a rate of 5.2% sequentially. The revenues of Room Solutions (acquired in May 2006) also grew by 5.2% qoq to Rs31.3 crore.
- The company reported an improvement of 70 basis points in its operating profit margin (OPM) to 21.9% on a sequential basis, despite the adverse impact of the appreciation of the rupee during the quarter. The margin improvement was driven by the cumulative impact of a favourable revenue mix, savings in the overhead cost as a percentage of sales, higher margins in the business process outsourcing (BPO) business and better profitability of Room Solutions.
- The increase in the other income (Rs5.6 crore as compared with the third quarters' Rs3.3 crore, which was driven by tax refund in its overseas subsidiary), lower depreciation charges and a steep decline in effective tax rate (down to 2% due to the write-back of the provisions made earlier) aided the earnings growth during the quarter. Consequently, the consolidated earnings grew at an explosive rate of 32.7% qoq and 138.9% yoy to Rs45.9 crore. This is the third consecutive quarter of over 20% sequential growth in the earnings.
- In terms of the outlook, the company is expected to maintain the growth momentum on the back of the record order intake of $72 million during the quarter and $209 million over FY2007. The pending order backlog of $103 million (executable over the next one year) is one of the highest ever reported by the company. The management expects the margin to also improve with the improving profitability of the BPO business, the efforts taken to increase the proportion of the high-margin offshore revenues and other cost levers like a lower overhead cost. There is enough scope for further improvement in the overhead cost (at 20% of its sales in FY2007). Consequently, the earnings estimate has been revised upwards by 16.4% for FY2008.
- Along with the results, the company has rewarded the shareholders with a bonus issue of one equity share for every two shares held and a dividend of 65% on the existing capital.
- At the current market price the stock trades at 12.2x FY2008 and 10.1x FY2009 estimated earnings. We re-iterate our Buy call on the stock with an upgraded price target of Rs720 (14x FY2009 earnings).
SECTOR UPDATE
Automobiles
Dream run interrupted
The commercial vehicle (CV) segment has been on a dream run, with FY2007 being its sixth straight year of positive growth. A strong growth in the economy, easy availability of finance, lower interest rates and high freight rates contributed to this phenomenal performance. We believe that the time has come for taking a slight breather. While the macro factors still appear to be strong, we expect the growth to slacken in the next 6-12 months.