ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs165
Strong growth across segments
Result highlights
- In Q4FY2007 the net revenues of ITC grew by 24.4% year on year (yoy) as most of its businesses saw a strong growth: cigarettes (revenue up 14.3%), fast moving consumer goods (FMCG; revenue up 63%), hotels (revenue up 15.6%), paperboards (revenue up 12%) and agri-business (revenue up 16%).
- The company's earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped by 220 basis points to 23.9% in Q4FY2007 primarily due to higher other expenditure.
- The tax provisioning was on the higher side during the quarter which along with a decline in the operating profit margin (OPM) led to a lower than expected profit after tax (PAT). The Q4FY2007 net profit grew by 14.7% yoy to Rs650 crore.
- We believe that the company's cigarette business would see a stable growth despite the slowdown in demand witnessed by the cigarette industry earlier in the year.
- The non-cigarette FMCG business is the only business in ITC's portfolio that is not making a profit. However, its losses were stable despite the roll-out of the Bingo brand of products throughout the country which led to higher sales and promotion expenses during the quarter. We expect this business to break even by FY2009.
- In the hotel segment, the profitability was lower primarily due to a one-time transition cost incurred on account of upgrading 7 Sheraton Hotel to Starwood Hotels and Resorts' The Luxury Collection brand.
- At the current market price of Rs165, the stock is attractively quoting at 20.6x FY2008E earnings per share (EPS) and 13.1x FY2008E enterprise value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs200.
Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs295
Hitting a musical note
Result highlights
- The business mix of Saregama India Ltd (SIL) is undergoing a change. Until now the company used to generate the bulk of its revenues by selling cassettes, CDs and DVDs (physical sales). However with the increasing preference of consumers for non-physical formats like radio and the continuing high rate of piracy, the physical sales business is witnessing a downtrend. At the same time, SIL has found a new high-margin revenue stream in radio stations and telecom companies that pay it royalty for use of its content (non-physical sales). This new revenue stream is going to be the driver of SIL's growth in future as is evident from its results for the fourth quarter and FY2007.
- In the fourth quarter, the revenue from operations remained almost flat year on year (yoy) at Rs29.3 crore. As expected physical sales declined by 23.8% yoy to Rs19.1 crore while non-physical sales grew sharply by 117.4% yoy to Rs9.5 crore.
- The share of the non-physical sales for the quarter increased to 33.3% from 14.9% in Q4FY2006; the same rose to 30.2% in FY2007 from 14.9% in FY2006. This is a big positive as the revenue mix of the company is shifting towards this high-margin business.
- The operating profit margin (OPM) improved manifold yoy, from a meagre 1.7% in Q4FY2006 to 10.1%. The margin improvement was possible because the total cost declined during the quarter despite flat revenues. Also, the contribution of non-physical sales to total revenues was higher yoy. Consequently, the operating profit grew from Rs0.5 crore in Q4FY2006 to Rs3.0 crore.
- With flat depreciation and interest charges, a slightly lower other income and a higher tax outgo, the company recorded a pre-exceptional net profit of Rs1.6 crore for Q4FY2007 against a loss of Rs0.4 crore in Q4FY2006.
- Several growth triggers are in the offing which make the SIL stock an attractive investment. These triggers include (1) the expected roll-out of many new radio stations by H1FY2008; (2) the increase in the music content rate; (3) a rapid growth in the number of telecom subscribers and the inclination of telecom customers towards value-added services (ring tones, caller tunes etc); (4) the expected commissioning of its portal in Q1FY2008 (containing its large portfolio of musical tracks); and (5) the value creation on listing of Global Wholesale Club.
- At the current market price of Rs295, the stock is quoting at 18.4x its FY2008E earnings per share (EPS) of Rs16 and 12.9x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs375.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs765
In investment mode
Result highlights
- Mahindra and Mahindra's (M&M) stand-alone net sales grew by 20% year on year (yoy) to Rs2,747 crore in Q4FY2007. The operating profit margin (OPM) for the quarter declined by 48 basis points to 11.4% yoy. Higher other income and interest income resulted in a 59% growth in the pre-exceptional profit after tax (PAT) to Rs247.1 crore. An extraordinary income of Rs166 crore realised from the sale of shares of Mahindra and Mahindra Financial Services Ltd (MMFSL) last year depressed the reported PAT. The reported PAT declined by 21% to Rs233 crore from Rs255 crore in Q4FY2006.
- On a stand-alone basis, the net sales for FY2007 grew by 22% to Rs10,050 crore. The operating profit rose by 30% to Rs1,263 crore. In the automotive business, the domestic volumes grew by 17.8% while the exports surged by 45%. The tractor segment however recorded a strong growth of 22%.
- On a consolidated basis, the net sales for FY2007 grew by 43% to Rs17,617 crore. The OPM surged to 15.3% from 14.0% in FY2006. Consequently, the operating profit grew by 56% to Rs2,704 crore. The consolidated pre-exceptional PBT for the year stood at Rs2,320 crore, marking a growth of 50.7% yoy.
- The company plans to increase its capital expenditure (capex) for the year to Rs2,000 crore, which is going to be utilised for capacity expansions, new product launches and research and development (R&D) activities. Apart from this, the company also needs to carry out the Punjab Tractor Ltd (PTL) and Swaraj Engine acquisitions, and invest in joint ventures. All these projects would be financed through a combination of debt and equity which would lead to nominal equity dilution.
- The contribution of the non-automotive business has increased significantly in the recent years. For FY2007, the non-automotive business contributed 39% to the top line and 51% to the bottom line.
- We expect FY2008 to be the year of consolidation for the company while all new product launches would take place in FY2009. At the current market price of Rs764, the stock discounts its consolidated FY2009 earnings by 8.7x. We maintain our Buy recommendation on the stock with a sum-of-the-parts (SOTP) price target of Rs1,050.