Sharekhan ValueLine - May 2007

FROM SHAREKHAN'S DESK

Robust results but hurdles ahead

The Sensex companies (about 19 have announced their results so far) have reported a net profit growth of 36.3% against expectations of a 36.8% increase. However they have failed to exceed expectations unlike in the previous quarters. Moreover, there are signs of weakness in terms of auto volumes and the Q1 growth guidance dished out by leading IT companies. Consequently, there have been hardly any major upgrades in the earnings estimates after the announcement of the results, again unlike the trend in the previous quarters.

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Sharekhan top picks

In the April 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on May 3, 2007, the basket of stocks has given absolute return of 14% as compared to a 13% appreciation in the Sensex and a 14.2% rise in the S&P CNX Nifty.

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STOCK UPDATE

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs400
Current market price: Rs300

Price target revised to Rs400

Result highlights

• 3i Infotech has reported a growth of 22.5% quarter on quarter (qoq) and 75.2% year on year (yoy) in its consolidated revenues to Rs210.2 crore for the fourth quarter. The service business grew by 28.3% sequentially to Rs102.6 crore whereas the product business grew by 17.4% qoq to Rs107.6 crore.
• The operating profit margin (OPM) continued to firm up. The OPM improved by 20 basis points to 25% (the highest ever reported in any quarter) on the back of a sharp improvement in the margins of the service business.
• The benefits from the lower software product development charges were nullified by the higher depreciation and lower other income. However, an increase in the tax rate resulted in a relatively lower growth rate in the earnings of 16.7% qoq and 83.7% yoy to Rs32.2 crore, in line with our expectations of Rs32.3 crore.
• On a full year basis, the consolidated revenues and earnings have grown by 56.8% and 80.6% respectively. The OPM has shown an improvement of 370 basis points to 24.2% during the year.
• In terms of operational highlights, the company continues to show a healthy growth in the pending order book that has grown by 33% qoq to Rs568.7 crore. This is more than double of Rs266 crore as in March 2006.
• The growth guidance for FY2008 is also healthy. Revenues are guided in the range of Rs1,000-1,100 crore (a growth of 49-64% over the total turnover of Rs670.8 crore). The earnings per share (EPS) are guided in the range of Rs20.1-21.5 per share (on a fully diluted equity base as on March 2007).
• Along with the results, the company has rewarded the shareholders with a bonus issue of 1:1 and a dividend of 20% (or Rs2 per share).
• To factor in the healthy order backlog and robust growth guidance, we have revised our FY2008 earnings estimate by 3.9% and introduced our FY2009 estimate in the note. At the current market price the stock trades at 14.1x FY2008 and 11.2x FY2009 estimated earnings (based on fully diluted equity including the Euro 30-million foreign currency convertible bond [FCCB] issue closed in April 2007 and earnings are adjusted for dividend on the preference shares). We maintain our Buy call on the stock with a revised price target of Rs400.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,528
Current market price: Rs2,280

Price target revised to Rs2,528

Result highlights

• Aban Offshore (AOL) reported a marginal decline in its stand-alone revenues to Rs118.7 crore during Q4FY2007. This is in line with expectations as there was no re-pricing of any asset in the parent company. In fact, one of its assets Aban II was not operational for part of the quarter.
• The operating profit margin (OPM) slipped sharply to 40.2% (down from 57.1% in Q4FY2006) due to lower revenues from Aban II, increase in the staff cost (380 basis points) and insurance charges (430 basis points) as a percentage of sales, and extraordinary expenses of Rs7.5 crore (incurred towards the issue of foreign currency convertible bonds [FCCB] and preferential shares).
• However, the jump in the other income component to Rs34.9 crore (up from Rs3.7 crore) enabled the company to report a 34.5% growth in its earnings to Rs29.6 crore. The other income was boosted by the foreign exchange (forex) gains (on the forward hedges and FCCB proceeds) of around Rs17 crore. Moreover, the company would also have benefited from the interest on loans given to its Singapore subsidiary, Aban Singapore Pte (ASPL).
• On the full year basis also, the stand-alone revenue growth was largely flat at Rs497.5 crore as compared to Rs490.2 crore in FY2006. The OPM declined by 740 basis points to 49.8%. However, the huge jump in the other income to Rs59.2 crore (up from Rs15.3 crore) enabled the company to post a 9.2% growth in the stand-alone earnings to Rs91.5 crore. It should be noted that the stand-alone results do not reflect the complete picture, as the company has been valued at its FY2009 estimated earnings on a consolidated basis.
• Along with the results the company has announced the conversion of the $100 million FCCB at a price of Rs2,789 per share. Thus, the dilution in equity would be around 1.5 million equity shares (as against our base case estimate of the conversion at Rs1,400 per share.) Consequently, even though the estimates for FY2008 and FY2009 remain unchanged, the target price is revised upwards to Rs2,528 to factor in the lower than anticipated dilution in equity. We maintain our Buy call on the stock.

ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs880
Current market price: Rs791

Price target revised to Rs880

Result highlights

• ACC's pre-extraordinary net profit for the first quarter of CY2007 grew by 39% year on year (yoy) to Rs344 crore, in line with our expectations.
• The net sales grew by 26.7% yoy to Rs1,674 crore of which Rs1,619 crore came from selling cement. Even though cement volumes dipped by 3.8% yoy on account of maintenance and shut-downs during the quarter, the drop was more than offset by higher realisations (a growth of 30% yoy).
• The expenditure grew by 15% yoy but remained flat on a quarterly basis at Rs1,167 crore. On account of a higher realisation growth, the operating profit grew by 60.9% yoy. The operating profit margin (OPM) expanded by 650 basis points on a yearly basis and by 140 basis points on a sequential basis.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne for the quarter stood at Rs1,040, clocking a year-on-year (y-o-y) growth of 67% and a quarter-on-quarter (q-o-q) growth of 6.7%.
• The interest cost stood at Rs4 crore whereas the depreciation provision dropped to Rs62 crore.
• To enhance its focus on the ready-made concrete (RMC) business, the company's board approved the transfer of the RMC business to a 100% subsidiary called ACC Concrete.
• Cushioned by an other income component of Rs28 crore, the profit after tax (PAT) grew by 39% yoy to Rs344 crore. Considering an extraordinary income of Rs19 crore on account of the sale of ACC's residual stake in Everest Industries, the net profit stood at Rs363 crore.
• In order to boost its volume growth in future, the company is carrying out a slew of measures that will result in higher capacity in each of the next three years. By the end of the current year, the company's total capacity will expand by 4 million metric tonne (MMT) on account of de-bottlenecking at its various plants.
• Taking cognisance of the price freeze for the next one year and expecting the fresh capacities to start kicking in by the second half of the next financial year, we have assumed a realisation growth of 6% for CY2007 and no growth for CY2008. Thus, we are downgrading our CY2008 earnings per share (EPS) estimate by 16% to Rs66. But considering the lower depreciation provided by the company in the quarter, we are marginally upgrading our CY2007 EPS estimate to Rs71.4.
• At the current market price of Rs791 per share, ACC is trading at 11.0x its CY2007E earnings and 12.0x its CY2008E earnings. On an enterprise value (EV) per tonne basis, the stock currently trades at USD127 per tonne on CY2008E capacity. The last three months have been tumultuous for the cement industry on account of uncertainties over prices due to excise duty hikes, price freeze etc. It may be recalled that we had mentioned in our previous note that we would be reviewing our price target. Now considering the revised earnings estimates for CY2007 and CY2008, we are downgrading our price target to Rs880 per share.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs36

Price target revised to Rs44

Key points

• Ashok Leyland's total vehicle sales during March dropped by 1.55% to 8,444 units as against 8,577 units in the same month a year ago. The bus sales rose by 5% to 1,671 vehicles while the truck sales marked a decline of 2% of 6,773 vehicles. The domestic sales declined slightly by 1.9% year on year (yoy) to 7,936 vehicles while the exports saw an improvement of 3.7% with sales of 508 vehicles.
• The decline can be attributed to the non-availability of finance in the month and a bandh being declared in Tamil Nadu on the last working day of the year. The sales in Tamil Nadu comprise of approximately 15%-18% of the overall sales volume.
• For the full year FY2007, the company has marked a sales growth of 34.8% yoy to 83,101 vehicles. The company has comfortably surpassed its sales target of 80,000 vehicles for the year.
• Going forward, the company expects the growth in the commercial vehicle industry to continue at 10-15%. However, with the rising interest rates, tightening liquidity and huge capital expenditure planned for the next 3-4 years, we would take a cautious outlook at the industry and the company.
• The company had a dream run in FY2007 as its volumes marked a brilliant growth of 35%. The growth rates are expected to moderate henceforth. Consequently we are reducing our volume growth estimates for the company from 15% to 11.9% for FY2008. The doubling of the capital expenditure for FY2008 to Rs1,000 crore is expected to restrict the profit after tax (PAT) growth. Consequently, we are downgrading our earnings per share (EPS) estimate for FY2008 by 10% from Rs4 to Rs3.6.
• At the current market price of Rs36, the stock discounts its revised FY2008E earnings by 10x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.3x. We maintain our Buy recommendation on the stock with a revised price target of Rs44.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs310
Current market price: Rs236

Q4FY2007 results—first-cut analysis

Result highlights

• Bank of Baroda's Q4FY2007 results are marginally below expectations; the profit after tax grew by 17.6% year on year (yoy) but declined 25.4% quarter on quarter (qoq) to Rs245.7crore compared with our estimate of Rs256.7crore.
• The net interest income was up by 27.5% yoy and 15% qoq to Rs1,104 crore and was better than our estimate of Rs1,002 crore. For FY2007 the reported net interest margin (NIM) stood at 3.23% compared with 3.21% for the nine months ended December 2006. This implies that the bank witnessed a marginal expansion in its NIM during Q4FY2007. However excluding the one-time interest on the cash reserve ratio balances, the margin appears to decline by four basis points to 3.19% in FY2007 which reflects that the NIM has remained under pressure.
• The non-interest income declined by 35.4% yoy and 28% qoq to Rs240.3 crore mainly due to a lower treasury income, core fee income grew by 36.4% yoy and 13.9% qoq.
• The operating profit was up 2.5% yoy but down by 10.7% qoq. However the core operating profit (operating profit excluding treasury) grew by 11.8% yoy and 12.1% qoq.
• The total business of the bank increased by 35.8% to Rs20,8537 crore. While the deposits increased by 33% to Rs12,4916 crore the advances increased by 40% to Rs83,621 crore of which retail credit was up 46.4%. The bank's overseas operation saw a phenomenal 72% year-on-year jump in the business.
• The asset quality of the bank continues to be healthy with the gross non-performing asset (NPA) at Rs2,092 crore, reporting a sequential decline of Rs300 crore, and the net NPA in percentage terms standing at 0.6%, down sequentially from 0.67%. The capital adequacy ratio remains at a comfortable 11.8% with Tier-I capital at 8.74%.
• At the current market price of Rs236, the stock is quoting at 6.6x its FY2008E earnings and 0.9x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs310.

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs219
Current market price: Rs200

Price target revised to Rs219

Result highlights

• Bank of India's (BOI) Q4FY2007 profit after tax (PAT) was way above expectations. It grew by 76% year on year (yoy) to Rs447 crore compared with our estimate of Rs288.9 crore, mainly due to an unexpected 78.0% year-on-year (y-o-y) 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 figures are adjusted for one-off items to the tune of Rs40 crore and Rs107 crore in Q4FY2007 and Q4FY2006 respectively. Higher yields and controlled costs with a stable low cost deposit base have helped the bank to show an improvement in the margin sequentially.
• The non-interest income was a surprise as it grew by 78% yoy and 79% qoq to Rs576 crore. The 40.4% y-o-y and 38.5% q-o-q growth in the fee income is very promising and looks to be sustainable, as it was driven by a growth in the core fee income generating businesses like remittances, cash management, bank guarantees etc.
• 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.
• Provisions increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore mainly on account of higher other provisions influenced by standard assets provision, as the non-performing asset (NPA) provisions reported a decline on y-o-y and q-o-q bases.
• The bank's asset quality has showed consistent improvement with the net NPA and gross NPA 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 in the previous quarter.
• We feel BOI has so far proved to be the best performing public sector bank (PSB) in FY2007 based on all parameters and its management has shown proper intent to maintain the improved performance. We have revised our FY2008E PAT by 15% to Rs1,352 crore, based on the improved earnings visibility for the bank. At the current market price of Rs200, the stock is quoting at 7.2x its FY2008E earnings per share (EPS), 3.1x pre-provisioning profit (PPP) and 1.5x FY2008E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs219.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,715
Current market price: Rs1,650

Exceeding expectations

Bharat Electronics (BEL) has announced its provisional results for FY2007. The gross sales have grown by 12% to Rs3,960.4 crore in FY2007, lower than our estimates of Rs4,191 crore. However, the improvement in its margins and a surge in the other income component have resulted in a relatively much higher growth of 21.8% in the profit before tax (PBT) to Rs1,041.6 crore (ahead of our estimates of Rs996 crore) during FY2007. This essentially implies that the PBT has shown a robust growth of 27.8% during the fourth quarter.

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,254

Targeting $10 billion turnover

Result highlights

• At Rs2,385 crore the FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) grew by 42% and the same is in line with our estimates. The turnover for FY2007 grew by 29% to Rs18,702 crore.
• Order inflows during the year grew by a whopping 88% to Rs35,633 crore. In the power business, BHEL secured orders worth Rs27,722 crore and in the industry sector, it secured the highest order ever worth Rs6,008 crore during the year. The order backlog at the end of March 31, 2007 stood at Rs55,000 crore, which is around 3x its FY2007 sales.
• In the international business, BHEL secured export orders of Rs1,903 crore during the year in comparison with an average yearly order book of Rs1,275 crore in the last five years.
• At the current levels, the stock is trading at 18.0x its FY2008E earnings and 10.7x its FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs2,650.

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.

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.

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.

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs374
Current market price: Rs318

Q4FY2007 results—first-cut analysis

Result highlights

• Corporation Bank's Q4FY2007 results are in line with our expectations; the bank's profit after tax grew by 18.2% year on year (yoy) but declined 19.1% quarter on quarter (qoq) to Rs118.5 crore compared with our estimate of Rs116.1crore.
• The net interest income was up by 29.6% yoy and 20.9% qoq to Rs403 crore. The FY2007 net interest margin stood at 3.24% compared with 3.15% in M9FY2007 which implies that the bank witnessed a margin expansion during Q4FY2007. However, excluding the one-time interest on the cash reserve ratio balances, the margin appears to have remained stable.
• The non-interest income increased by 21.7% yoy and 1.6% qoq to Rs161.9 crore. The other income excluding treasury was up 23.8% yoy and 25.4% qoq.
• With the net income up 27.2% yoy and the operating expenses up only 11.3% yoy, the operating profit was up by 40.2% yoy to Rs343.2 crore.
• The total business of the bank increased by 27.2% to Rs72,306 crore while the deposits increased by 28.8% to Rs42,357 crore and the advances increased by 25% to Rs29,950 crore. Retail advances were up 17.9% yoy.
• The asset quality of the bank continues to be healthy with stable gross non-performing assets (NPA) at Rs624 crore and net NPA in percentage terms at 0.47%. The capital adequacy remains at a comfortable 12.7%.
• At the current market price of Rs318, the stock is quoting at 7.2x its FY2008E earnings and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs374.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs404

Another strong quarter

Result highlights

• Elder Pharmaceuticals (Elder) continued its strong performance during the fourth quarter of FY2007. The company's net sales rose by 26.6% to Rs118.2 crore in Q4FY2007, on the back of a steady momentum in its core brands, a ramp-up in the sales of the Fairone brand due to the launch of the product in south India and the growing revenues from the in-licenced portfolio. The sales were in line with our estimate.
• Elder reported a 65-basis-point drop in its operating profit margin (OPM) to 19.6% during the quarter, on account of a 35.8% rise in the other expenditure and a 29.7% increase in the staff cost. The other expenditure was higher on account of the higher selling and promotional expenses incurred for its new launches.
• Consequently, the company's operating profit rose by 25.4% to Rs23.7 crore in Q4FY2007.
• Despite a 26.6% drop in the other income, and an increase in the interest and depreciation costs, Elder's net profit grew by 17.6% to Rs15.0 crore. The net profit was in line with our estimate.
• For FY2007, Elder's revenues grew by 26.1% to Rs447.3 crore. The OPM expanded by 190 basis points to 19%, led by an improvement in the raw material cost, causing the operating profit to rise by 40% to Rs84.8 crore. Despite the increases in the depreciation and interest costs, the net profit showed a robust growth of 54.8% to Rs56.8 crore in FY2007. The net profit growth was aided by the sharp drop in the tax incidence (due to the shift of manufacturing to tax-free zones).
• In view of its strong growth potential, we remain positive on Elder's future growth prospects. At the current market price of Rs404, the stock is quoting at 10.0x its estimated FY2008 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.

Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs293

Price target revised to Rs380

Result highlights

• The Q4FY2007 results of Genus Overseas are ahead of our expectations.
• The net sales for the quarter grew by 35% to Rs152 crore on the back of a strong order book of Rs470 crore at the end of previous quarter. The net profit grew by 58% to Rs12.7 crore.
• The operating profit for the quarter grew by 55% to Rs19.9 crore. The operating profit margin (OPM) for the quarter improved by 170 basis points to 13.1% as against 11.4% on a year-on-year (y-o-y) basis as the raw material cost as a percentage of sales declined to 73.1% from 77.2%.
• The interest expense for the quarter rose by 34% while the depreciation cost declined by 33% to Rs0.67 crore.
• The order book of the company stood at Rs403 crore (including export orders worth Rs15 crore) at the end of March 2007.

HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs316

Price target revised to Rs425

Result highlights

• HCL Technologies (HCL Tech) has reported a revenue growth of 7.6% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,577.1 crore for the third quarter ended March 2007. This is the third consecutive quarter of close to double-digit sequential growth in revenues (a 9.4% growth in dollar terms) which is far ahead of street expectations. The sequential growth was contributed by a 16.4% growth in the business process outsourcing (BPO) revenues. On the other hand, the infrastructure management service (IMS) and core software service businesses grew at a relatively lower rate of 6.4% and 6.5% respectively, on a sequential basis.
• The earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved by 115 basis points to 23.3% on a sequential basis, despite the adverse impact of the steep appreciation of the rupee (1.6% appreciation in the average realised exchange rate against the US Dollar). The sequential improvement in the margin was largely aided by the cumulative impact of better realisations (including non-effort based gains), higher utilisation (especially in the BPO business) and a 70-basis-point saving in the selling, general and administration (SG&A) cost as a percentage of sales.
• In terms of segments, the EBITDA margin in all the three business lines improved on a sequential basis. The BPO business reported second consecutive quarter of a robust improvement in the margin, which was up by 360 basis points to 26.5%. The software service and IMS businesses reported an improvement of 85 basis points and 13 basis points respectively.
• The earnings grew at a robust rate of 15.9% qoq and 72.1% yoy to Rs331.8 crore (ahead of our expectation of Rs290 crore and the consensus estimate of a flat or negative growth sequentially, especially after the higher base resulting from the robust performance in the previous two quarters). The growth in the earnings was also aided by the foreign exchange (forex) gains of Rs41.8 crore on the open forward contracts, up from Rs34.7 crore reported in Q2FY2007.
• In terms of operational highlights, the ramp-up in the large deals is beginning to make a material impact on the overall performance. Moreover, the company continues to bag new multi-million, multi-year, multi-service deals and has announced six new deals in Q3—five in the range of $25-50 million each and one worth over $50 million.
• To factor in the higher than expected performance in the past three quarters and the continued traction in the intake of large deals, we have revised upwards the estimates for the FY2007 and FY2008 earnings per share (EPS) by 6.1% and 3.1% respectively. At the current market price the stock trades at 14.9x FY2008 and 12.6x FY2009 estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs425 (17x FY2009E earnings on a diluted equity base).

HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,174
Current market price: Rs1,014

Significant improvement in margins

Result highlights

• HDFC Bank's results have been slightly ahead of expectations with the profit after tax (PAT) reporting a growth of 30.5% to Rs343.6 crore compared with our estimate of Rs336 crore.
• The net interest income (NII) grew by 46.4% year on year (yoy) and 16.6% quarter on quarter (qoq) to Rs1,082.7 crore. The growth was driven by an average asset growth of 26% and margin expansion of around 35 basis points to 4.35%. The NII has been adjusted for the one-time cash reserve ratio (CRR) interest income of around Rs35 crore received by the bank during the quarter.
• The significant improvement in the net interest margin (NIM) was possible due to higher transactional floats, an increase in the lending rates and a tactical move to temporarily reduce bulk fixed deposits in the quarter due to the high interest rates prevailing then. As a result the bank's current and savings account (CASA) ratio stood at 55% of its deposits during the quarter compared with 50% in FY2007.
• The other income grew by 29.7% yoy and 5.7% qoq largely influenced by a Rs65.6-crore loss reported in the trading income. Losses on the sale & revaluation of investments during the quarter were primarily a result of the marked-to-market loss on the non-statutory liquidity ratio (SLR) investments. The core fee income growth slowed down to 5.8% on a year-on-year (y-o-y) basis and to 7.5% on a quarter-on-quarter (q-o-q) basis. However other foreign exchange (forex) and derivatives income grew by 91.2% yoy and 64.7% qoq.
• The operating profit grew by 41.3% yoy and 13.8% qoq to Rs793.2 crore while the core operating profit (operating profit excluding treasury) was up 32.5% yoy and 19.6% qoq to Rs858.8 crore.
• Provisions & contingencies were up 81.9% yoy and 24% qoq to Rs330.3 crore mainly due to a one-time provision of Rs121.1 crore made owing to an increase in the provisioning norms on certain categories of standard assets. Excluding the same the provisions are up by 15.2% yoy and down by 21.5% on qoq.
• The stock has not been among the outperformers recently with concerns over growth and high valuations. The bank added 150 new branches during the H2FY2007, which we feel will take care of its growth in FY2008 and with such stunning improvement in the margins at a time when the sector is witnessing a pressure on the NIM, we feel HDFC Bank deserves its premium valuations. At the current market price of Rs1,014 the stock is quoting at 22.6x FY2008E earnings per share (EPS), 9.4x FY2008E pre-provision profits (PPP) and 3.8x FY2008E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs1,174.

Hexaware Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs220
Current market price: Rs173

Q1 results meet expectations

Result highlights

• Hexaware Technologies (Hexaware) has announced a 10.1% quarter-on-quarter (q-o-q) and 50.1% year-on-year (y-o-y) growth in its revenues to Rs264.4 crore for Q1CY2007. This is in line with our expectations and the company's guidance. The sequential growth was aided by the incremental revenues from FocusFrame (FF), which was integrated with effect from the end of November 2006, and this was the first full quarter of consolidated performance.
• The operating profit margin (OPM) improved by 10 basis points to 15% on a sequential basis. The margin improved in spite of the additional expenses of around one million dollars related to the professional charges paid for the restructuring of the organisational structure (especially of FF), consolidation of low-margin FF financials and the adverse impact of the rupee appreciation. The significant improvement in the employee utilisation rate (up by 250 basis points to 70.7%) and better average realisation (onsite realisation up by 60 basis points; offshore realisation improved by 150 basis points) more than nullified the negative factors and boosted the overall profitability. Consequently, the operating profit grew by 10.7% quarter on quarter (qoq) to Rs39.5 crore.
• However, the decline in the other income component and higher tax rate resulted in a relatively lower growth of 4.3% qoq and 35.3% year on year (yoy) in its consolidated earnings to Rs35.2 crore (in line with our estimate of Rs35 crore).
• The revenue growth guidance for Q2 is indicated in the range of 6.5-8.1% to $64-65 million. However, the earnings growth would be adversely affected by the annual salary hikes and visa costs (a cumulative impact of $3.5 million). The guidance of $7-7.2 million implies a decline of 10-12.5% in its earnings in Q2. Moreover, the continued appreciation in the rupee would dent its performance in rupee terms.
• In terms of the operational highlights, the company has added 20 new clients that include two large orders (worth $10 million each) during the quarter. The order intake of $61 million during the quarters is the highest ever reported by the company.
• At the current market price the stock trades at 15.5x CY2007 and 12.2x CY2008 estimated earnings. We maintain Buy call on the stock with a price target of Rs220.

Hyderabad Industries
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs230

Book profit

Result highlight

• Hyderabad Industries Ltd (HIL) has delivered a disappointing performance yet again in Q3FY2007. Lower than expected sales, the company's inability to pass on the costs to the consumers and higher raw material costs affected its performance during the quarter.
• In Q3FY2007, the net sales rose by 4.7% to Rs100 crore. Not only was the company unable to pass on the higher costs to the consumers, but it also faced a lot of competitive pressures, leading to a loss in its market share. The operating margins have come down drastically from 11.7% to 3.5% due to the very high cement prices, as cement is the key raw material. Consequently, the operating profit for the quarter declined by 69% to Rs3.46 crore.
• With all the asbestos majors adding capacity, there is overcapacity in the industry, leading to more competitiveness. This has capped the pricing power of the companies, and they are unable to pass on the impact of the higher raw material costs to the consumers. We expect this scenario would continue to adversely affect the company going forward, and expect the margin pressure to continue as all the players gun for a higher market share.
• At the current levels, the stock discounts its FY2008E earnings by 10x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6x. At these levels, the stock does not look attractive and hence we are closing our recommendation on the stock. We had initiated the stock at a price of Rs163, and the stock has given a return of 41%.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs866

Price target revised to Rs1,173

Result highlights

• ICICI Bank's fourth quarter results have been below expectations. Its profit after tax (PAT) has grown by 4% year on year (yoy) and declined by 9% quarter on quarter (qoq) to Rs825 crore compared with our estimate of Rs1,004 crore. The lower numbers are mainly on account of a lower than expected non-interest income.
• We had expected a much higher non-interest income due to the National Stock Exchange (NSE) stake sale that was likely to fetch around Rs500 crore and a sustained robust fee income growth witnessed during the previous quarters. However, despite the NSE stake sale the total treasury income stood at Rs446 crore adjusted for the marked-to-market loss on the corporate bond portfolio, which implies an insignificant contribution from any other treasury income source. The core fee income was also lower with a sequential growth of only 6% compared with 18% and 15% sequential growth witnessed in the previous two quarters.
• The core operations were in line with expectations. The net interest income was up by 30% yoy and 5% qoq to Rs1,789.7 crore compared with our estimate of Rs1,763 crore. The reported net interest margin (NIM) for Q4FY2007 stood at 2.66% compared with 2.6% in Q3FY2007 and 2.79% in Q4FY2006. However, excluding the one-time cash reserve ratio (CRR) interest of around Rs85 crore we feel there would be a sequential decline of five basis points in the NIM.
• The bank plans to come out with a follow-on public offer (FPO) in the domestic and international markets by June 2007 to raise Rs20,000 crore. We have factored in a dilution of 23.5 crore equity shares at an offer price of Rs850 which will help the bank to raise the desired amount. The huge FPO of Rs20,000 crore would loom large over the bank's return on equity (RoE) for the next couple of years as the RoE is expected to decline from over 13% to 11% in FY2008. The same has affected our sum-of-the-parts (SOTP) valuations for the bank and hence we have reduced our price target for the stock by 4.4% to Rs1,173.
• After the bank announced its results the stock price declined by 7%, factoring in the lower than expected profit numbers and the unexpected announcement of an Rs20,000-crore FPO. We feel the correction in the stock price already captures these negatives and the downside risk is limited. However the upside potential based on the current market price of Rs866 remains at 35%. We continue to remain bullish on ICICI Bank due to the following facts. First, on the operational side, the Sangli Bank merger would add 195 branches, help to increase the low cost deposit base and improve the NIM going forward. Second, the possible listing of the insurance and asset management holding company would help to unlock significant value in the bank's subsidiaries.
• We have upgraded our FY2008E PAT and FY2009E PAT by 1.6% and 1.5% to Rs4,016 crore and Rs5,120 crore respectively. At the current market price of Rs866, the stock is quoting at 19.2x its FY2009E earnings per share (EPS), 8.5x its pre-provision profit (PPP) and 2x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the revised price target of Rs1,173.

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs231
Current market price: Rs171

Price target revised to Rs231

Result highlights

• India Cements' profit after tax (PAT) grew by a mammoth 481% year on year (yoy) to Rs140 crore in the fourth quarter of FY2007. The growth was much higher than expected.
• Though the volumes remained stagnant yoy, the top line grew by 36% yoy to Rs575 crore on the back of a 35% year-on-year (y-o-y) growth in the realisations.
• On account of strict cost-control measures, the expenditure growth remained muted at 11.2% yoy. Though the selling expenses increased by 27% yoy, the rise was more than offset by the reduction in the power cost and a marginal growth in the raw material cost.
• The operating profit zoomed by 127% yoy to Rs190 crore on account of the company's high leverage to cement prices. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne expanded by Rs160 on a quarter-on-quarter (q-o-q) basis to Rs921.
• The interest cost and depreciation provision remained flat at Rs33 crore and Rs19 crore respectively. With the company continuing to enjoy a tax holiday, the PAT ballooned by 481% yoy to Rs140 crore, much higher than expected.
• The company's board has approved its merger with Visaka Cements wherein the company will issue one share for every five shares of Visaka Cements held, diluting its equity by Rs40 crore to Rs260 crore. Visaka Cements enjoys better margins as compared to India Cements. India Cements will also be able to avail of a tax benefit for the Rs330 crore worth of accumulated losses on the books of Visaka Cements.
• India Cements is carrying out a de-bottlenecking exercise at its various facilities at a cost of Rs350 crore which will augment its capacity by 3 million metric tonne (MMT) to 12MMT at the end of FY2009.
• As a result of the price freeze announced by cement manufacturers, we are downgrading our FY2008 earnings estimate by 31% to Rs21.4 per share and introducing our FY2009 earnings per share (EPS) estimate at Rs19.8.
• At the current market price of Rs171 per share, the stock trades at 8x its FY2008 EPS estimate and 8.6x its FY2009 EPS estimate. The enterprise value (EV) per tonne on FY2009 capacity stands at USD92. We thus maintain our Buy recommendation on India Cements with a reduced price target of Rs231 per share.

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs175
Current market price: Rs139

Another acquisition

Key points

• Indian Hotels Company Ltd has acquired Hotel Campton Place, San Francisco through its 100% US subsidiary company. The acquisition would be made at a cost of US$60 million (including estimated transaction costs).
• Indian Hotels will acquire Hotel Campton Place in partnership with financial investors. The sale purchase agreement was signed on April 02, 2007 and the transaction closure is scheduled for April 30, 2007. The structure of the deal is yet to be disclosed.
• At the current market price of Rs139 Indian Hotels is quoting at a price/earnings ratio (PER) of 22.5x FY2007E consolidated earnings per share (EPS) of Rs6.2. We maintain our Buy recommendation on the stock with a price target of Rs175.

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs325

Price target revised to Rs375

Result highlights

• The Q4FY2007 results of Indo Tech Transformers Ltd (ITTL) are above our expectations.
• The company has reported strong numbers for the fourth quarter. Revenues for the quarter grew by 80% to Rs56.7 crore against our expectations of Rs50 crore on the back of a 26% volume growth and better realisation. The realisation was up an impressive 43% as the realisation per mega voltage ampere (MVA) in Q4 was Rs7.68 lakh against Rs5.38 lakh in Q4FY2006. The net profit grew by a whopping 170% to Rs10.3 crore against our expectations of Rs7.8 crore.
• The operating profit margin (OPM) for the quarter improved by 1,360 basis points to 27.1% as against 13.5% in Q3FY2006, as a result of lower raw material cost and other operational efficiencies. The raw material cost as a percentage of sales declined to 63.3% as compared to 71.5% on a year-on-year (y-o-y) basis.
• The interest expense for the quarter stood at Rs0.32 crore, higher by 3.2% on a y-o-y basis, and the depreciation cost for the quarter stood at Rs1.16 crore, higher by 31.8% on a y-o-y basis.
• The order backlog at the end of this quarter stood at Rs148 crore.
• For the full year ended March 2007, the net sales grew by 68% to Rs155.6 crore and the net profit grew by 117% to Rs25.4 crore.

Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,520
Current market price: Rs2,088

Chinks in the armour

Key points

• For the fourth quarter of FY2007, the consolidated revenue of Infosys Technologies (Infosys) grew at a tepid rate of 3.2% quarter on quarter (qoq) and 43.8% year on year (yoy) to Rs3,772 crore. The company has not been able to meet the consensus estimate of a 5-6% sequential growth in the revenue and, for the first time, it could not achieve even the lower end of its own guidance. This essentially means that the company, known for its conservatism, couldn't manage even an unexpected 0.8% higher appreciation in the rupee (an average realisation of Rs43.75 against an assumption of Rs44.11).
• The sequential decline of 100 basis points in its operating profit margin (OPM) to 31.7% has been largely contributed by the adverse impact of the appreciation in the rupee, higher selling, general and administration (SG&A) expenses and the sequential decline in the utilisation rate. On the other hand, the 1.7% sequential improvement in the billing rates positively affected the margins.
• The other income more than doubled to Rs119 core (up from Rs59 crore in Q3FY2007) due to significantly higher yield on investments during the quarter. The translation loss was also limited to just Rs5 crore which is quite commendable given the 1.8% appreciation in the rupee and sundry debtors in excess of $500 million.
• Consequently, the consolidated earnings grew at a relatively higher rate of 3.8% to Rs1,020 crore (excluding the tax write-back of Rs124 crore related to overseas locations in earlier years). This is again lower than street expectation of around Rs1,040 crore.
• On the full year basis, the revenue and earnings grew by 45.9% and 51.6% respectively. The OPM declined by 90 basis points to 31.6% in FY2007. However, the jump of 167.6% in the other income component boosted the overall growth in the earnings and resulted in a 100-basis-point improvement in the net margin to 26.8% (excluding one-time items).
• In terms of the FY2008 guidance, the company has been able to meet the street expectations for the growth in dollar terms. It has guided for consolidated revenue of $3.95-4.02 billion (a growth of 28-30%) and an earnings per share (EPS) growth in the range of 25.7-27.7%. However, given the rupee appreciation, the consolidated revenue in rupee terms is guided to grow at a relatively much lower rate of 22.6-24.6% (Rs17,038-17,308 crore). The EPS growth in rupee terms is guided in the range of 20-22% (Rs80.3-81.6) which factors in the adverse impact of the exchange rate fluctuations and around 3% dilution in the equity base during the fourth quarter. The EPS growth guidance is lower than the street expectations.
• The guidance for Q1FY2008 is all the more muted with the earnings guided to remain flat and EPS guided to decline by 1.4% (due to dilution of equity). The consolidated revenues are guided to grow in the range of 3.3-3.7% sequentially.
• We have revised downwards the earnings estimate for FY2008 by around 7% to factor in the dilution of the equity capital and appreciation of the rupee. We maintain the Buy call on the stock with a revised price target of Rs2,520 (24x its FY2009 earnings estimate of Rs105 per share).

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs154

ITC ties up with Starwood
The speculation over the state of alliance between ITC-Welcomgroup and its international partner Starwood Hotels & Resorts has ended. The two companies have announced a tie-up under which Starwood Hotels & Resorts will bring its premium brand Luxury Collection to India. This new alliance will help ITC to climb up the value chain.

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs711

Logan unveiled

Key points

• Mahindra Renault has made the much-awaited launch of its passenger car Logan. Three variants of the car have been launched—two in the petrol segment and one in the diesel segment.
• The vehicle has been priced aggressively as its petrol version is priced between 4.28 lakh and 5.69 lakh, and its diesel version is priced between Rs5.47 lakh and Rs6.44 lakh.
• Currently, the vehicle is being manufactured at the company's Nasik plant. With the setting up of a new greenfield plant near Chennai by mid-2009, the capacity would be scaled up by 300,000 units. Also, the localisation content would improve from 50% currently to about 80-90%.
• We expect the car to do well in the Indian markets, mainly on account of its pricing. We expect the launch of Logan to have a negative impact on models like Maruti's Esteem, Tata Motors' Indigo, and Hyundai's Getz. The launch of the passenger cars also further diversifies M&M's business model.
• At the current market price of Rs711, the stock discounts its FY2008E consolidated earnings by 10.4x. We maintain our Buy recommendation on the stock with a price target of Rs1,050.

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.

Maruti Udyog
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs790

Profits impacted due to higher costs

Result highlights

• Maruti Udyog Ltd's (MUL) Q4FY2007 results are ahead of our expectations on the profits front, but below expectations on the operating margins front.
• The net sales for the quarter marked a growth of 35.4% year on year (yoy) led by a volume growth of 30% and a realisation growth of 4.5%.
• On account of higher raw material prices, the losses at the new Manesar plant and higher power and fuel expenses, the operating margins for the quarter declined by 250 basis points to 12.4%. For the quarter under review, the Manesar plant recorded a loss of Rs58.5 crore at the net level.
• However, a higher other income of Rs205 crore and stable depreciation costs saw the company post a net profit growth of 24% to Rs448.6 crore.
• For the year FY2007, the volume growth was 20.1% yoy. The total income grew by 22% to Rs14,654 crore. The operating profit margin (OPM) for the year was stable at 13.6% as compared to 13.5% in FY2006. The profit after tax (PAT) for the year was Rs1,562 crore, registering a growth of 30%.
• The sales volume for H1FY2007 was very low. MUL launched three new products in Q4FY2007. Hence, we do not expect MUL to witness a sharp slowdown in the growth in FY2008. The profitability could be impacted due to rising raw material prices and higher expenditure on account of the new Manesar plant.
• Considering MUL's dominant position in the Indian car market, Suzuki's plans of making India its hub for small cars, and potential of exports, which shall commence in a big way starting FY2009, we maintain our positive view of the company. At the current market price of Rs790, the stock is quoting at 10.7x its FY2009E earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.

New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs375
Current market price: Rs330

Price target revised to Rs375
With funding tie-ups in place for its much-awaited entry into the general entertainment space New Delhi Television (NDTV) is all set for the big bang launch of its general entertainment channel (GEC) by the end of the year. NDTV Imagine, the subsidiary that would house the entertainment venture, has roped in Sameer Nair, the ex-CEO Star India who is believed to be the best programming brain in Indian general entertainment business, to make NDTV Imagine a success. Mr Nair's entry follows Karan Johar's new association with NDTV's GEC as a creative consultant and an ambassador for the NDTV brand. Mr Johar is on the board of NDTV Imagine with his production house Dharma Productions having a stake in the company.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs265

Orchid enters Canada

Key points

• Orchid Chemicals & Pharmaceuticals (Orchid) has received the approval from the Canadian Therapeutic Product Directorate for two of its abbreviated new drug submission (ANDS)—Cefoxitin and Ceftriaxone.
• These approvals mark Orchid's foray into the Canadian formulation market.
• Both Cefoxitin and Ceftriaxone are niche injectable products and have been generic for a couple of years. The size of the Canadian market for Cefoxitin is $5 million and that for Ceftriaxone is $30 million.
• As per company sources, Ceftriaxone has five competitors (Roche, Mayne Pharma, Sandoz, Nova Pharma and Pharmaceutical Partners of Canada Inc) while there is no generic competition for Cefoxitin.
• As per our back-of-the-envelop calculation, the product approval would add Rs0.4 per share to the FY2008 earnings.
• At the current market price of Rs265, Orchid is trading at 10.2x its FY2008E earnings. In view of the company's strong fundamentals and an improving balance sheet we remain positive on the stock and maintain our Buy call with a price target of Rs390.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs370

Q1 results marginally below expectations

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 same was marginally below our expectations of Rs131.52 crore.
• But 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 CIS countries showed a 61% growth whereas the Asia Pacific and Middle Eastern markets witnessed a 34% growth. The point worth noting is that the domestic business reported a 26% growth which was way ahead of the industry growth of about 9-10% during the quarter.
• The OPM witnessed a 150-basis-point expansion to 10.4% over the corresponding previous quarter but was down by 60 basis points sequentially. The pricing issues in the USA and EU continued to hit the margin during the quarter. However, the company reported a 43.3% growth in the operating profit to Rs162.2 crore
• During the quarter, the depreciation cost was up by 30% and the tax incidence increased to 21.6% from 15.8%. Thanks to a forex gain of Rs55 crore, the net profit grew by 78.7% to Rs127.60 crore in Q1CY2007.

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).

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.

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs205

ONGC contract boosts Q1 performance

Result highlights

• South East Asia Marine Engineering & Construction (SEAMEC) has reported a 107.9% growth in its revenues to Rs56.1 crore for the first quarter ended March 2007. The growth was higher than expectation due to the two-month extension of the contract from Oil & Natural Gas Corporation (ONGC; with relatively high day rates) for one of its vessels.
• The operating profit margin (OPM) slipped from 61.3% to 48.2% primarily due to the incremental cost related to SEAMEC Princess (the fourth vessel that is undergoing modification and that didn't contribute to revenues in Q1). This coupled with the general wage inflation resulted in a four-fold jump in the staff cost to Rs20.2 crore as compared with Rs5.2 crore in Q1CY2006. Consequently, the earnings grew at a relatively lower rate of 61.2% to Rs24.4 crore.
• In terms of the outlook on charter rates, the company expects the day rates to remain firm on the back of the favourable demand environment. Even after the anticipated addition of multi-support vessels (MSVs) by some of the Indian companies (like Great Offshore) there would be a shortage of MSVs in the coming years due to the huge requirement to set up the required infrastructure to transport hydrocarbons produced from the large offshore fields discovered in India over the past few years.
• To factor in the robust performance of Q1 and the higher than expected dry docking expenses indicated by the management, we are revising downwards the CY2007 earnings estimates by 4.9% but maintaining the CY2008 earnings estimates.
• At the current market price the stock trades at 8.8x CY2007 and 5.8x CY2008 estimated earnings. We maintain our Buy call on the stock with a price target of Rs300.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,508
Current market price: Rs1,250

Disappointing performance

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 5.9% quarter on quarter (qoq) and 38.2% year on year (yoy) in its consolidated revenues to Rs5,146.4 crore during Q4FY2007. The sequential revenue growth was largely driven by a 6.42% growth in the volumes and a cummulative growth of 1.33% in the billing rates (0.89%) and employee productivity (0.44%). On the other hand, the appreciation of the rupee adversely affected the revenue growth by 1.87% sequentially.
• The earnings before interest and tax (EBIT) margin declined by 47 basis points to 25.6% sequentially, largely due to the adverse impact of the rupee's appreciation.
• The other income stood at Rs89.8 crore and included a one-time extraordinary income of Rs66.3 crore from the sale of the stake in Sitel. Excluding the one-time income (adjusted for tax), the consolidated earnings have grown at a disappointing rate of 1.1% qoq to Rs1,116.8 crore, which is much lower than the consensus estimate of around Rs1,185 crore.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it has indicated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (12,000 campus offers have been made). The TCS management also expects to maintain the margins around the level of 25% reported in FY2007, in spite of the aggressive salary hikes in FY2008 (13-15% for the offshore employees and 3-5% for the onsite employees).
• The key operational highlights for Q4 are: an addition of 43 clients; a healthy sequential growth of 9.3% in revenues from the Top 10 clients; the attrition rate in the information technology service sector at a comfortable level of 10.6%; closure of two large deals worth over $50 million each and one deal of $35 million; and a healthy pipeline of large deals. On the flip side, there has been a slowdown in the sequential growth of revenues from the banking, financial services and insurance (BFSI) and manufacturing industry verticals.
• Given the lower than expected performance and the steep appreciation in the rupee, we have revised down our FY2008 earnings estimate by 0.5% and have also introduced the FY2009 estimates. We maintain the Buy call on the stock with a price target of Rs1,508 (around 23x FY2009 earnings per share).

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).

Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs774

Upside from stake in Glacèau
According to Reuters, Coca-Cola Co is in talks to acquire all or part of the vitamin water maker Energy Brands Inc (EBI), valuing the company at about $3 billion. It may be recalled that Tata Tea Ltd (TTL) and Tata Sons Ltd (TSL) have together acquired a 30% stake in EBI for $677 million or Rs3,110 crore, ie at a valuation of $2.2 billion.

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs575
Current market price: Rs465

Robust growth continues

Result highlights

• UTI Bank's Q4FY2007 profit after tax (PAT) was better than our expectations at Rs211.9 crore, up 39.6% year on year (yoy) compared to our estimate of Rs186.2 crore mainly due to a higher than expected net income and lower operating expenses during the quarter.
• The net interest income (NII) was up by 48.4% to Rs464.2 crore compared to our estimate of Rs435.9 crore. UTI Bank's reported net interest margins (NIMs) expanded by 10 basis points yoy and by 6 basis points quarter on quarter (qoq). However the same included a one-time cash reserve ratio (CRR) interest of around Rs22 crore received during the quarter otherwise the NIMs would have had a downward bias on a quarter-on-quarter (q-o-q) basis.
• The non-interest income was up 32% yoy and 8% qoq to Rs301.1 crore and the fee income growth remained robust at 58.8% yoy and 29% qoq. However the treasury income declined by 34.3% yoy and 46% qoq.
• The operating expenses grew in line with the overall business growth; however the provisions were up 56.3% yoy and 40% qoq mainly due to the increased provisioning requirement on the standard assets for Rs68.1 crore, which is a one-off item.
• Although UTI Bank has grown at a robust pace in the last couple of years there are no visible signs in the deterioration of its asset quality yet. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.61% from 0.68% in Q3FY2007.
• Currently the bank's capital adequacy ratio (CAR) is at 11.57% with Tier-I at 6.42%. The bank has also aggressively raised its hybrid capital and has left itself very little headroom to grow its balance sheet. The bank plans to come out with a follow-on offer in FY2008 to boost its CAR. We have factored in an equity dilution of 3.6 crore shares (12.8%) of the pre-issue equity capital at an issue price of Rs500 per share.
• The bank opened 80 new branches during the quarter. Its deposits grew by 46.5% to Rs58,785.6 crore of which savings and current deposits grew by 50.3% and 41.8% respectively. The current and savings account (CASA) ratio remained stable on a year-on-year (y-o-y) basis but improved on a q-o-q basis to 40% from 37.1% reported in Q3FY2007 mainly due to an increase in the current account deposits, which as a proportion of deposits increased from 16.6% in Q3FY2007 to 19.2% in Q4FY2007. Advances reported a strong growth of 65.3% to Rs36,876 crore of which the retail advances were up by 37.6% to Rs8,928 crore. However on a q-o-q basis the retail advances have declined by 2.7% mainly due to a sell down in the personal loan portfolio.
• The actual PAT for FY2007 was 4% above our estimates at Rs659 crore and we have upgraded our FY2008 numbers by 4.8% to Rs851.1 crore mainly on account of lower operating expenses estimated for FY2008. At the current market price of Rs465 the stock is quoting at 17.4x its FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provisioning profits (PPP) and 2.5x its FY2008E book value (BV). We feel the dilution would be book value accretive and maintain our Buy recommendation on the stock with a price target of Rs575.

Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs708
Current market price: Rs580

Price target revised to Rs708

Result highlights

• Wipro's global information technology (IT) service business reported a growth of 5.1% quarter on quarter (qoq) and 32.6% year on year (yoy) to Rs3,035.7 crore (under US GAAP) for Q4FY2007. The numbers are largely in line with our expectations. In dollar terms, the revenues grew at a reasonably healthy rate of 7.8% sequentially to $690.7 million, which was contributed by a 7.4% growth in the IT service business and an 11.3% growth in the business process outsourcing (BPO) business. The sequential growth in the IT service business was driven by a volume growth of 5.4% and an improvement of 2% in the average realisations. On the other hand, the sequential growth in the BPO business was purely driven by a 13.9% improvement in the average realisation with a decline of 1.4% in the volumes.
• In terms of its operating profit margin (OPM), the adverse impact of wage hikes (a 3-4% hike to the onsite employees with effect from January 2007; a net impact of 60 basis points) and the rupee appreciation (a negative impact of 80 basis points) was partially mitigated by the smart improvement in realisation (in both the IT service and BPO businesses), an improvement in employee utilisation, lower losses in the acquired entities and other cost efficiencies. This resulted in a net impact of 20-basis-point sequential decline in the OPM (to 23.5%) of the global IT service business.
• On the flip side, the revenue growth guidance of $711 million implies a muted sequential growth below 3% in the revenues of the global IT service business during Q1. In fact, given the appreciation of the rupee, the growth in rupee terms could be flat or even negative during Q1FY2008. However, the first quarter tends to be generally slow for the company and doesn't reflect the robust demand environment and strong visibility of its revenue growth.
• In addition to a decent growth in the global IT service business, the robust sequential growth of 15.8% in the Indian IT service business enabled the company to report a healthy growth of 9.3% qoq and 42% yoy in its consolidated revenues to Rs4,334.5 crore. The OPM declined by 50 basis points to 18.9% largely due to higher sales, general and administrative (SG&A) expenses, resulting in a relatively lower growth of 6.2% qoq in its consolidated earnings to Rs791.4 crore (after adjusting for the tax write-back of Rs70 crore) during the quarter.
• We have slightly revised down the FY2008 earnings estimates to factor in the lower exchange rate and introduced the FY2009 earnings estimates. At the current market price the scrip trades at 23.5x FY2008 and 18.8x FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs708 (23x FY2009E earnings).

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SHAREKHAN SPECIAL

Monetary policy review

The Reserve Bank of India (RBI) has kept the key interest rates, like the reverse repo rate, the repo rate and the bank rate, as well as the cash reserve ratio (CRR) unchanged in its Annual Monetary Policy for the year 2007-08. The policy is in line with our expectations. It continues to remain focused on maintaining price stability and anchoring inflation. However the importance of growth is once again visible in the RBI's statements and that is the key positive takeaway from this policy. The salient features of the policy are given below.

• The reverse repo rate and the repo rate have been kept unchanged at 6% and 7.75% respectively.
• The bank rate has been kept unchanged at 6%.
• The CRR has been kept unchanged at 6.5%.
• The risk weightage on residential housing loans has been reduced to 50% from 75% for home loans up to Rs20 lakh.
• The non-resident Indian deposit rate on foreign currency non-resident bank deposits and non-resident (external) rupee account deposits has been reduced by 50 basis points as per expectations. However the apex bank has made capital account outflows more relaxed for all categories, from corporates to individuals.

Q4FY2007 earnings preview

Key points

• The Sensex earnings are expected to grow by 37% year on year (yoy) for Q4FY2007. However, excluding oil the earnings are expected to grow by 34% driven by the earnings in the software, cement and banking sectors. These three sectors are expected to contribute 42% of the Q4FY2007 Sensex earnings excluding oil. On a quarter-on-quarter (q-o-q) basis the expected growth is only 1.2%, which indicates expectations of some slowdown in the earnings momentum.
• Strong earnings growth is expected in the pharma sector mainly due to a very low base. On the other hand information technology (IT) earnings will be affected due to the sharp appreciation in the rupee. Auto numbers are not expected to be great due to margin pressure and a slowdown in the volumes.
• Strong year-on-year (y-o-y) earnings growth is expected from Reliance Communications, Bharti Tele, Ranbaxy, Dr Reddy's Laboratories, Grasim and Tata Steel.
• Two-wheeler majors Hero Honda and Bajaj Auto are expected to report a y-o-y decline in the profits.
• Some of the non-Sensex companies where high growth is expected are Dabur Pharma, Syndicate Bank, Polaris and India Cements.
• In the absence of any major surprises, the fourth quarter results of the Indian companies may not be a trigger for the market, but the market will keenly await the guidance on the FY2008 prospects of the corporate sectors, especially automobiles, banks and the other interest rate sensitive sectors.

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MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.

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SECTOR UPDATE

Cement

Government cuts CVD on cement imports

Key point

• The government on Tuesday scrapped the 16% countervailing duty (CVD) as well as the 4% additional duty on cement imports into the country, which is a sequel to the import duty cut in January (refer to our note dated January 23, 2007).
• With this move, the import parity price, which acts as a pricing benchmark for the domestic prices, will come down from Rs245-255 per bag to Rs210-215 per bag.
• The government has also expressed a possibility of a roll-back of the excise duty hike affected in the budget. If that happens, then the retail prices will come down to Rs210-215 per bag in line with the import prices.

Information Technology

Rupee pangs
For the front-line information technology (IT) companies, it is likely to be a tough year in terms of margin pressure due to the cumulative impact of wage inflation, higher visa costs and the appreciation of the rupee. Given the tightening supply of quality manpower, the salary hikes are indicated to be aggressive this year too. The average hikes are estimated to be in the range of 13-15% for offshore employees and 4-5% for the onsite workforce. This would translate into an adverse impact of 250-350 basis points on the operating margins. The abnormally high demand for visas this year (application window was closed on the first day itself) would result in higher visa costs.

To factor in a much higher than expected appreciation in the rupee, we have revised downwards the earnings estimates and accordingly the target prices of the front-line IT service companies.

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VIEWPOINT

Allcargo Global Logistics

Interesting times ahead
Allcargo Global Logistics (Allcargo) had hosted an analyst meet on Tuesday (April 24, 2007) to discuss its Q1CY2007 performance. We attended the same and present the key takeaways.

Infrastructure Development and Finance Company

Plans to raise equity capital
Infrastructure Development and Finance Company (IDFC) was established in 1997 sponsored by the Government of India, Reserve Bank of India (RBI) and Infrastructure Development Bank of India as a private sector enterprise with the sole objective of promoting infrastructure financing. The company's future plans are based on the four-by-four strategy. It would pursue four objectives (profitability, balance sheet expansion, innovation and thought leadership) focus on four sectors (transport, energy, telecom and industrial/commercial infrastructure), its portfolio would comprise four products (treasury/structured products, equity/asset management, project finance and advisory) and it would also like to explore four frontiers (urban services, rural infrastructure, health and education).

Macmillan India

Gearing up
We expect Macmillan India to grow at the rate of 15-20% in the next two years. The competitive landscape is undergoing a change as more and more players are getting into this segment. Moreover, significant investments in 2007 in the book and ad design business will affect the company's profitability this year, but we believe that these investments will help in boosting the top line as well as the bottom line in the future.

Phoenix Mills

Flying high
Phoenix Mills Ltd (PML), promoted by the Atul Ruia group, has pioneered the concept of developing mill land (of defunct mills) into shopping-cum-entertainment-cum-commercial hubs. This is being done through the phased development of 21 acre of land parcel located in the heart of the Mumbai city (Lower Parel).