Monetary policy review
CRR hike a surprise, but market takes it in its stride
In the first quarter review of the annual monetary policy, the Reserve Bank of India (RBI) has kept the policy rates unchanged as per expectations but hiked the cash reserve ratio (CRR) by another 50 basis points to 7%, which has come as a surprise. Higher money supply and reserve money growth coupled with risks from higher commodity and oil prices to price stability and inflation are likely to have forced the RBI to take the rather pre-emptive step. In addition to price stability the RBI has added maintenance of financial stability in the policy stance.
STOCK UPDATE
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs3,700
Current market price: Rs3,328
Price target revised to Rs3,700
Result highlights
- In Q1FY2008, Madras Cements' top line grew by 37.7% year on year (yoy) to Rs469 crore on the back of a 5.8% growth in volumes and a 30% rise in realisations. The rise in realisation was because of a Rs10-15 increase in the price per bag of cement in May and June in the south.
- The operating expenditure rose sharply by 40% yoy to Rs286.6 crore on account of higher freight cost and higher employee expenditure. The costs per tonne grew by 32% yoy to Rs1,976 because of a 26% increase in the variable costs.
- The operating profit margin on a year-on-year (y-o-y) basis was lower by 100 basis points at 39.5% whereas on a sequential basis, it was higher by 830 basis points on account of a higher realisation growth. The higher realisations also helped the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne to grow by 26% yoy to Rs1,260.
- During the quarter, the interest cost doubled to Rs8 crore, thanks to higher borrowings, whereas the depreciation provision grew by 37.4% yoy to Rs23.9 crore.
- Consequently, the profit after tax (PAT) grew by 27.5% yoy to Rs100.5 crore, which was in line with our expectations.
- The company is incurring a capital expenditure (capex) of Rs1,474 crore to expand its capacity by 4 million metric tonne (MMT) in the next one year. The 2MMT expansion at Jayantipuram (including a 1MMT grinding unit at Kolkata) will be commissioned by the third quarter of FY2008, whereas the remaining 2MMT capacity at Ariyalur including an additional 56 megawatt (MW) wind power plant will be commissioned by the second quarter of FY2009.
- Taking cognisance of the higher volume growth and the improved pricing scenario after the price freeze, we are upgrading our FY2008 earnings per share (EPS) estimate by 18% to Rs368 per share and FY2009 EPS estimate by 23% to Rs443.
- The higher capacities will drive the volume growth of the company going forward whereas the improved pricing scenario will improve its profits. The captive power plants (CPPs) will help lower the power & fuel cost. The company will be able to save income tax in FY2009 to the extent of the accelerated depreciation available on wind power plants, which will positively increase the cash flows of the company. At the current market price (CMP) of Rs3,328,the stock is trading at a valuation of 7.5x its FY2009 earnings which almost captures the near-term opportunity. Thus we maintain our Buy recommendation with a revised price target of Rs3,700.
Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs340
Current market price: Rs238
Strong performance
Result highlights
- Subros' Q1FY2008 results are above our expectations, thanks to a strong improvement in its profitability. The net sales of the company grew by 11.4% to Rs157.7 crore in the quarter led by a volume growth of 17%. The strong performance of one of its key customers, Maruti Suzuki India, particularly contributed to Subros' impressive performance.
- The operating profit margin (OPM) improved by a good 150 basis points to 12.2% during the quarter due to rising efficiencies and savings in logistic cost as a result of better operations from its newly commissioned Gurgaon plant. Consequently, the operating profit for the quarter grew by 26.1% to Rs19.2 crore.
- Both interest and depreciation charges were higher due to the capital expenditure (capex) incurred by the company for the new plant and efforts to raise its capacity further. Consequently, the company reported a 10.1% growth in its net profit to Rs6.6 crore.
- We maintain our positive outlook on Subros. We also understand that the company has recently bagged a huge order from Suzuki for the export vehicle that shall be manufactured from the Japanese company's Manesar plant. Also, the company shall be supplying to Mahindra and Mahindra for the latter's yet to be launched Ingenio range.
- At the current levels, the stock is available at attractive valuations of 5.3x FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.5x. We maintain our Buy recommendation on the stock with a price target of Rs340.
Omax Autos
Cluster: Apple Green
Recommendation: Book Out
Current market price: Rs71.5
Book out
Result highlights
- Omax Auto's Q1FY2008 results were better than our expectations due to a higher than estimated top line and stable margins during the quarter.
- The net sales of the company grew by a good 7.5% to Rs172.3 crore in the quarter, led by an 8.3% growth in the domestic sales to Rs165 crore. The exports for the quarter were disappointing at Rs7.3 crore against Rs8 crore in the same quarter last year.
- The operating profit margin (OPM) for the quarter declined by 80 basis points year on year (yoy) and was flat sequentially at 9%. Consequently, the operating profit declined by a marginal 0.7% to Rs15.6 crore.
- A higher capital expenditure (capex) led to an increase in both the interest and the depreciation cost. This led to a 29.3% decline in the profit to Rs4 crore.
- Omax Auto has rendered a mixed performance in the past few quarters. Though its margins have improved a bit, the company has fallen short of meeting its export targets. The entry into the business of components for commercial vehicles would de-risk its business model a little. However, we expect the company to face the heat in the domestic market due to a slowdown in the two-wheeler industry. Moreover, the cut-throat competition in the ancillary industry might restrict the margin growth for Omax Auto. We thus expect FY2008 to be weak for Omax Auto, both in terms of top line and bottom line growth.
- We expect the company to report a 27.6% decline in its earnings in FY2008 but recover in FY2009, with better two-wheeler volumes as well as the commencement of supplies to Tata Motors. We expect its earnings per share to reach Rs11.3 in FY2009. At the current market price, the stock is trading at 6.3x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4x. Considering the slowdown in domestic market in FY2008, slower offtake in its exports and restricted margins, we are closing our recommendation on the stock. We recommend investors to book out.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792
Current market price: Rs699
Q1FY2008 results: First-cut analysis
Result highlights
- Tata Motors Q1FY2008 results were below our expectations due to lower than expected margins during the quarter. However, the bottom line was buttressed by a higher foreign exchange (forex) gain on account of the appreciation in the rupee during the quarter.
- The net sales for the quarter grew by 5.3% to Rs6,056.8 crore on the back of a 1.3% volume growth and a 3.9% realisation growth during the quarter.
- However, high raw material cost and lower volumes, particularly in the commercial vehicle segment, adversely affected the margin (excluding the forex gain/loss). The margin declined to 9% from 11.9% in the same quarter of the last year. Hence, the operating profit dropped by 19.9% to Rs546.3 crore.
- A little higher interest and depreciation charges led to a drop of 39.4% in the adjusted net profit to Rs259 crore. After accounting for the forex gain of Rs205.9 crore during the quarter, the net profit grew by 22.4% to Rs466.76 crore.
- On consolidated basis, the company's sales grew by 13.3% to Rs7,631.3 crore while the net profit excluding the forex gain declined by 27.7% to Rs308.2 crore. The profit after extraordinaries and forex adjustments increased by 35.7% to Rs516.1 crore.
- At the current levels, the stock trades at 10.6x its FY2009E consolidated earnings and is available at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs792.
VIEWPOINT
United Phosphorus
Focus on Latin American markets for growth
We attended the conference call of United Phosphorus Ltd (UPL) to discuss Q1FY2008 results. We present the key takeaways from the call.