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Rakesh Jhunjhunwala - Sensex may never go below 11,500 levels

In Part-I of CNBC-TV18's exclusive interview with trader & investor, Rakesh Jhunjhunwala, he shared his perspectives on global markets, on where the Indian markets have reached in this rally; the fact that he believes there could be a period of consolidation right now but he expects there will not be a deep correction from here on, not more than 10% as he classified.

In Part-II of the same series Jhunjhunwala told CNBC-TV18 that the investors are likely to see a range-bound market, and it is unlikely to see a major move either way. He sees consolidation and feels that the market may not move 10% plus or minus.

Regarding volatility, he feels that the market must expect corrections from time to time. However, he assured that the Sensex might never go below the 11,500 levels and the he sees the Sensex EPS at Rs 840 this year. He hopes that the US rates will come down and the domestic inflation, in India, may not go above 5%. For present, he feels that the government may have achieved its tightening target.

Excerpts from CNBC-TV18's exclusive interview with Rakesh Jhunjhunwala:

Q: What could be the potential risks to that kind of expectations?

A: We have earned Rs 730-740 last year. The expectation in the context of what we have done in the last 4 years is not extremely high; it’s only 15-16%; but this is on a higher base.

Risks can be many - it can be demand in the software sector it could be a depreciation of the rupee; but by and large, it should come through.

Q: Do you think either technology, which is almost a fifth of the Index or autos, which have started showing some distressed signs - they could derail these earnings?

A: Autos is a very small part of the Index, really.

There could be other sectors which would compensate; some of the banks could do very well, Reliance could surprise - refining margins are at all time highs, some of the refining companies could do better; ONGC could do better.

And we cannot look only at the Index - maybe Index is around 16 - it could be 14. But if you look at the larger context of the quality of the earnings, the general growth, the potentiality - you have taken twenty years to come to USD 30 billion of a software exports; the projection is that we are going to double that in the next three years. What kind of a kicker that means for every other industry in India, whether it is for hotels or for housing or for retailing or for real estate!

How I structure my investment; rather than looking at year-to-year growth, I invest in the business model. And over that business model, do I feel the earnings have peaked, whatever investments I have made? I feel that the peak is far from here.

Also in terms of valuations, I do not think that we have had peaked valuations; we are going to have something like ’92, maybe in the next four-five years and that is where valuations are going to be.

Q: Have you taken any cash off the table; since you spoke about investing in a business and riding it till you believe it has peaked - in any of your significant investments, have you booked profits?

A: I have booked profits in all my investments. But I have reinvested that in the market, except maybe, buying a house or some small other assets. All my wealth is in equity and if I get money, I would put it back into equity.

Q: Not fixed maturity plans and stuff like that?

A: I have some Rs 40 lakhs lying in the public provident fund. Apart from that, I pay interest; I do not earn any interest.

Q: But in your top five businesses that you have - investments in stocks like Titan, Praj; you don’t believe they are anywhere close to their earnings peak yet?

A: They are surely not close to their earnings peak.

Q: Valuation peak?

A: Valuation peak, may be; but I personally feel in some of the investments, I don’t know whether Titan or Praj, earnings growth are going to really surprise on the upside and if the earnings growth is going to be extremely high, then the growth in the value of the investments - even if the valuations remain what they are, surely in some of my investments, I don’t expect the valuation or the P/Es to increase. But if the earnings growth is going to be very good and P/Es are maintained, then the appreciation can be quite good. That is at least what my hope is.

Q: You spoke about being surprised on the Budget day - the biggest nasty surprise was construction. Did you change your view at all on that sector, which you have been very bullish on after what came through on the Budget; and any of the interest rate concerns that are bounded?

A: No; effectively, you increase a dividend tax after such buoyancy in revenue - to have an increase in the dividend tax; and also the negative international factors played out a very big role just prior to the Budget day.

But those negative international cues; the expectation was that there will be a corporate tax cut. There was an effective increase in corporate taxes. I think that is what really disappointed the market.

Of course, the overall fiscal picture was very good and it has turned out to better than what he (the FM) had projected also. I was reading the Business Standard today in the morning; the growth in direct taxation in the first two months this year is 70%.

Q: What about construction as a sector, have you changed your views at all?

A: What has happened in Indian infrastructure? China added 1,10,000 megawatt of power last year, we added 8,500 megawatt.

This is the situation of the order book of our construction companies. When I think, the investment needed in infrastructure today is not 10% of what I think we will eventually have annually, after 4-5 years. I have retained my investments in Nagarjuna and in Punj Lloyd. I am bullish on this sector.

Q: You don’t think interest rates or margin concerns will derail growth or earnings visibility for this sector?

A: What has interest got to do with it?

Investment in infrastructure is going to take place, it’s at a very initial stage. There are big entry barriers in this sector. Although one negative aspect of this sector is that it is very capital intensive. But there are big entry barriers in terms of qualification, project management skills and I think there is going to be very good growth.

Q: What about oil? You said that refining margins are at an all-time high. How do you see crude panning out because the refining marketing companies are still laggards - HP, BP, IOC, all of them?

A: That is because of the subsidy policy of the Government of India. I personally, on oil price, I feel the range is between USD 50-70. I think ultimately price will be closer to USD 50 than to USD 70/bbl

Q: You have any investments in the oil sector?

A: None.

Q: What about other commodities like metals? I believe you turned quite bullish on Tata Steel after the hammering of stock post Corus?

A: Yes, if Tatas can bring the consolidated margins to 25%, then the kind of profitability they can do it on equity of 800 crore or the kind of profitability (they are) talking, is unbelievable.

In general, I feel over a period of time, commodity valuations will go up. Today, if you see, all commodity stocks they have valued at six times to seven times.

But with the increase in commodity prices, the base prices of commodities - the base valuations of commodities, stocks will go up; and they have done it in Tata Tea. What I feel personally is, as an investor, I will wait because the real efficiencies are going to take three years to kick in and three years is a long period of time.

Q: So you won’t buy now or would you buy, hold and wait - what are you saying?

A: I will wait but I will be alert.

Q: Your call there is on the management or on the steel cycle as such?

A: It’s more on a management than on a cycle.

Q: Are you bullish on the steel cycle even from these levels?

A: I don’t have much of ideas; I have only one investment, which is Bhushan Steel. In general, I think oil prices are going to remain good; they are not going to go down to the levels which people talk of.

Q: As an investor, have you ever taken a big contrarian kind of call? Or do you just identify growth businesses and stay with them for a long time? Sometimes do you think that nobody likes this sector? I think eventually value will emerge; it’s a good time to buy in and wait - have you ever approached investing like that?

A: I don’t know that. I think my whole call in 2001-2002 was a very contrarian call; most people were bullish.

The dogmatic emphatic bullishness that I have would be India and equity market itself is a contrarian call because I don’t think many people share it really and genuinely.

When markets are up, they all say - no, India is going to boom. But the moment there is weakness; everybody is out with a sword.

I don’t think in terms of contrarian or non-contrarian. If I think the stock has got prospects and the valuations are attractive, I will buy.

When I bought Praj, it was very difficult decision because in January of 2003 the price was Rs 10; I bought the stock at Rs 100 in December 2003. So the stock had appreciated 10 times in a period of one year before I bought the stock.

So, I don’t know; stock appreciated 10 times is a vast appreciation and I bought after that. So I am not buying anything to be different. I am only buying it if in my thinking, the earnings will grow and valuations are reasonable.

Q: Do you sometimes fear that your vision or investing wisdom might be clouded by your innate bullishness that you may have failed to spot some danger signs when they are coming up?

A: I am not an innate bull. I have made some of the biggest money in my life by being a bear, right?

Q: But that’s pre-2000 right?

A: Yes. But the qualities I have as a human have not changed after ‘pre-2000’; this is the same Rakesh Jhunjhunwala.

Q: In this whole bull run, from the mistakes that you have made in investing, have you learnt a lot or have you approached investing differently from the few stocks, which have not quite worked the way you thought they would have worked out?

A: I think what I have learnt in the last four years is more than what I have learnt in the previous 43, because whatever has happened in the last four years, has led me to a lot of introspection. I have realized that some of the worst mistakes I have made, (are) in the best of the times.

Q: Give us a couple of examples.

A: In the sense, that god has been kind; my portfolio has really appreciated in the last four years. Sometimes that could lead me to extremely high commitments or try and feel that whatever I have done is right or that why should I review what I am doing? But, in fact, I feel I have now become more careful and more alert than ever.

Q: Are you saying that at some points your arrogance has crept in? You think you are bigger than the market.

A: No, no. I feel I am alert, but that should not creep in.

Q: But has it crept in?

A: Never. The first thing I learnt from Mr. Radhakrishna Damani from whom I learnt so much, that the market is supreme. So we never approach the market with the thinking that what we are thinking is right. When we go there at 10 o’clock, what the screen is doing is right. But the biggest lesson I have learnt also, is that I should approach things without prejudice.

Q: Is it difficult to do? Easier said than done.

A: I think it is easier said than done. Also, what happens, that sometimes if you have been right, you tend to be dismissive. Not tend to be dismissive of the market, but tend to be dismissive about some ideas which you have.

Maybe I was dismissive of real estate 15 months ago, right? That no, I don’t want to invest in this sector. I think I should have paid greater attention. But I console myself with the fact that this quest to learn as an investor is a journey, not a destination.

Q: Has it happened in the last four years that sometimes you have closed your mind to an opportunity too early and have missed out on an opportunity?

A: That has happened and it happens all the time. In fact, in the technology boom - because I am not computer savvy myself, I never understood what software was, I never made the attempt to understand what it is; because I only understood in 1997-1998.

Q: You were telling us about some of the other lessons, what else it taught you?

A: The other lesson is that do not expect that you will have this kind of return constantly. Some of the worst mistakes are made when you get an abnormal return and then you start feeling that you must take steps so that this return can be replicated. We must realize that these returns have arisen also because of external circumstances, which may not be prevalent today.

And therefore, all of the investors must realize that returns in Indian equity are now going to dilute. The low hanging fruit has been taken. But still I think returns are going to be better than lot of other asset classes. And if I see the risk profile, I think Indian equity may still offer the best returns over a period of time.

Q: But what you are saying does not gel very well with your prediction that in three-four years, there will be mass hysteria and euphoria in the market - 15% annualize for the next three years would not lead to mass euphoria; do you see a blow out at the end of this run then?

A: I hope we will have better returns on that.

Q: You think it will be little more than 15%? I am not talking about you as an expert investor, but for people who are less sophisticated and more passive in their investing styles?

A: I do not know about them.

Q: How can everybody generate a Praj and a Titan kind of returns every year? You cannot be the benchmark for the average investor?

A: No, but I personally feel that there could be a consolidation in earnings growth this year.

But I think we will have better earnings growth post-2007-2008. I am personally of the opinion that economic growth in India will kick off to double-digit figures; it may take twenty-four months. I see no reason why we should not.

We are a domestic base consumption story; now we got to go in the investment move and these capital investments combined with the consumption, should take us to 10% double-digit growth.

We have very low FDI levels of investment; our saving rates are going up.

Q: Where do you see politics in the midst of all of this; next couple of years that’s one constant refrain that we won’t see too much by way of reform where they are leading upto another general election - does it worry you?

A: No, we talk of reforms; Mr. Chidambaram made a very important observation after the Budget. He said my growth in tax collections budgeted this year, is more than what my tax collections have been in five years.

Was it possible India without reforms?

We are coming to GST, Goods and Service Tax; I know in some of the consumer durable companies, companies will save upto one-one percent by GST logistics. So there is going to be infrastructure dividend; there is going to be logistics. So I don’t see there is no reform in India, only maybe the pace is slower than what we desired and as far as politics are concerned, I think it is immaterial.

Look at the way Mayawati has changed; I think it is very important she wants to make an all-inclusive India; means, she wants to carry everybody with her. So ultimately, whether Jayalalitha or Mayawati, it’s not going to make much difference as long as they don’t have communist support. I only wish we have a government in which there is no communist support. I don’t think politics is really going to disturb India’s economic story.

Q: What is your expectation for the next three quarters? Would you be surprised if the Index broke 12,000 on the way down?

A: Nothing in the market ever surprises me.

Q: Are you expecting it to happen?

A: I cannot say that it will not happen. It could break those levels, but in the absence of earnings. Damage to earnings growth - I don’t think it’s going to retain that loss; it will bounce back. You went to 8500 levels and you bounce back. So I feel, it could break. But if there is no earnings damage, I think it will bounce back with vengeance.

Q: What could break it then - some liquidity contraction, global even; what is the potential risk to this market, which can break it below those supports?

A: Anything can happen, maybe fears about worldwide economic growth abrupt appreciation of the rupee, maybe some political event in India; lot of things would kick it up. The biggest protection I think the market is having against a big fall is that people are not going in for extreme commitments. You are not seeing that kind of commitment in the market, which we saw in 2005.

Q: You don’t find the futures market terribly overbought or leveraged right now?

A: Not at all; when Reliance was at Rs 700, it had got 2 crore shares outstanding. At Rs 1600, it has got 60 lakh shares outstanding. In a market with this kind of market cap, what is the futures commitment of Rs 30,000 crore?

I don’t look at the Index and don’t look at the options; I only look at the plain stock futures.

I don’t think in the cash markets, there is any extreme commitment, because there is no extreme belief itself; nobody is telling me that sell your wife’s bangles and buy stocks.

So you have this big mighty falls and whatever falls we have had in the last three days, in two days the FIIs have sold 3100 crore of Index futures and I think they are going to sell another 1000-1500 crore today also. So there has been substantial amount of hedging and short selling also.

Q: Would you be surprised if the Index went on to break 16,000 this year?

A: It’s a tall order, but I won’t rule it out.

Q: What is your expectation - nothing can be ruled out in a market?

A: I have no expectations. I have an investment. I am confident about the economic growth in India and about the profit growth in those companies. I think valuations in India have not peaked. If my company is constantly growing profit, their size grows, then PEs will grow. So Indian PEs will grow because of size and constant growth in profit.

It is that feeling then; I am retaining my investments and I have absolute confidence there. Not that I don’t have right to change my opinion; I can always change my opinion and I approach the markets everyday with the scare. I also don’t know what’s going to happen in the markets tomorrow. I know only as much you know and we trade with price there. So I won’t be surprised, I won’t rule out anything.

Q: But are you getting that sense looking at the screen that this year we could form a significantly higher top from what we have formed already?

A: It is difficult this year itself. But I won’t rule it out.

Q: But 2008, you think will be a better trajectory for the markets?

A: I don’t think so; the slow down in the auto industry and the worrying thing is slow down in commercial vehicle industry.

Cars have done well and will do well. Let’s see, it is in very initial stage. If interest rates ease, then demand could shoot back in the commercial vehicle industry.

Q: On balance, you are bullish?

A: I am bullish, absolutely and my commitment reflects.

Q: Both long-term and short-term or short-term skeptical, long-term bullish?

A: Let’s leave the short-term part separate. I have all my wealth in equity and that is the biggest commitment and as of now, I need to retain. I don’t know about tomorrow.

Angel - CNBC - Investment Opportunities 2008

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Sharekhan Investor's Eye - Nov 1 2006

SHAREKHAN SPECIAL

Monetary Policy Review
In its mid-term review of the Annual Monetary Policy for 2006-07, the Reserve Bank of India (RBI) has raised the repo rate by 25 basis points from 7% to 7.25%, leaving the reverse repo and bank rates unchanged.

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STOCK UPDATE

Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,386

Price target revised to Rs4,000

Result highlight

• At Rs90 crore the Q2FY2007 net profit of Madras Cement Ltd (MCL) is in line with our expectations. Cement prices for the year till date have remained extremely strong and on account of the same we are upgrading MCL's FY2007 and FY2008 earnings estimates by 28.1% and 21.4% respectively. Our earnings per share (EPS) estimates now stand at Rs257.7 for FY2007 and Rs303.7 for FY2008.
• The revenues for the quarter grew by a whopping 66% year on year (yoy) to Rs407.2 crore driven by a 19% growth in the cement volumes and a staggering 39.4% growth in the cement realisation.
  
• As the cement realisation improved sharply, MCL's operating leverage came into play and consequently the operating profit for the quarter grew by a huge 208% yoy to Rs158.2 crore. The operating profit margin (OPM) for the quarter improved by 1,800 basis points to 38.9%.
  
• On the cost front, MCL implemented strict cost-control measures as the total cost per tonne saw a rise of just 7.7% compared with a 39.4% growth in the cement realisation. Hence most of the Rs800-increase in the realisation per tonne flowed into the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne. As a result the EBIDTA per tonne jumped to Rs1,127, one of the highest in the entire industry.

• With a 40% decline in the interest cost and a 66% increase in the other income, the net profit for the quarter grew by a staggering 378% to Rs90 crore.

Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs350

Above expectations on net profit front

Result highlight

• The net sales of Cadila Healthcare increased by 25.2% year on year (yoy) to Rs467.3 crore in Q2FY2007, driven by a 97% growth in the formulation exports and a 56% rise in the exports of active pharmaceutical ingredients (APIs). The improved performance of the French (growth of 87% year on year [yoy]) and US (growth of 352% yoy) businesses also aided the robust sales growth. The sales growth was in line with our expectations.

• The operating profit margin (OPM) expanded by 200 basis points to 23.0% in the quarter. The margin improvement was driven by a sharp decline of 380 basis points in the company's raw material cost, on account of an improved product mix (a higher share of formulations and exports in the overall sales mix). Consequently, the operating profit (OP) of the company rose by 34.1% to Rs109 crore in the quarter under review.
• The reported profit after tax (PAT) of the company grew by a whopping 46.9% to Rs70.5 crore in Q2FY2007. The profit growth surpassed our expectations. The earnings for the quarter stood at Rs5.6 per share as against Rs4 per share in Q2FY2006.
• The company has signed three new contracts during the quarter under review for contract manufacturing with international companies, taking the cumulative number of contracts to 17, with peak revenue potential of $25.5 million.
• Cadila has filed 2 abbreviated new drug applications (ANDAs) and 5 drug master files (DMFs) in Q2FY2007, taking the total number of filings to 45 ANDAs and 45 DMFs.
• At the current market price of Rs350, the company is quoting at 15.0x its FY2008E estimated earnings. We maintain our Buy recommendation on the company with a price target of Rs425.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs550

Results below expectations

Result highlight

• KSB Pumps' Q3CY2007 results are below our expectations primarily because of lower-than-expected top line growth and lesser operating profit margin (OPM).
  
• The top line is lower because of a delay in the dispatch of some orders, as is reflected by the inventory, which stood at Rs6.3 crore. The revenues for the quarter grew by a meagre 2.9% to Rs90.2 crore.
  
• The operating profit for the quarter stood flat year on year (yoy) at Rs16.4 crore, as the OPM declined by 40 basis points to 18.2%. The OPM declined on account of higher raw material cost (adjusted for stocks) and other expenditure.
  
• The interest and depreciation charges declined by 65% and 5.6% respectively.
  
• However the tax rate jumped up significantly from 34.2% in Q3CY2005 to 39.3% in Q3CY2006. Consequently, the net profit for the quarter declined by 4.2% yoy to Rs9.4 crore.
  
• On account of the lower-than-expected top line growth and OPM we are downgrading our CY2006 earnings estimates by 9% to Rs33.7 per share. We maintain our CY2007 EPS estimates at Rs40.4.

Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs570
Current market price: Rs457

Price target revised to Rs570

Result highlight

• For Q2FY2007 Ratnamani Metals and Tubes Ltd (RMTL) reported a whopping growth of 135% in its net profit year on year (yoy) to Rs16.4 crore, far ahead of our expectations.
• The net revenues grew by 90% yoy to Rs143.1 crore driven by a four-fold jump in the exports. The domestic sales grew by 10% yoy.
• The operating profit grew by 116% yoy to Rs32.4 crore with a 273-basis-point expansion in the operating profit margin (OPM), again much ahead of our expectations.
  
• The OPM expanded because of controlled other expenses, which grew by 21.6% and as a percentage of sales declined by 620 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 340 basis points as a percentage of sales.

• The net profit increased by 135% yoy to Rs16.4 crore driven by operational efficiency.
• We have upgraded our earnings per shares (EPS) estimates for FY2007 and FY2008 by 8.0% and 5.4% to Rs47.7 and Rs57.0 respectively to take into account the better-than-expected earnings growth and margin expansion.
• At the current market price of Rs457, the stock is trading at 7.5x its FY2008E EPS and 4.6x its FY2008E enterprise value (EV)/earnings before interest, depreciation, taxes and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs570.

Television Eighteen India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs850
Current market price: Rs776

Price target revised to Rs850

Result highlight

• The Q2FY2007 net profit of Television Eighteen India (TV18) at Rs16.2 crore is in line with our expectations.
• The net revenues grew by a strong 72% year on year (yoy) and 27.8% quarter on quarter (qoq) to Rs53 crore. During the quarter under review, TV18 consolidated the revenues from the Awaaz channel.
• Even after excluding the revenues from the Awaaz channel, the revenues grew by a strong 44.1% yoy and 8.0% qoq to Rs45 crore, in line with our estimates.
• The operating profit grew by a slower 43.3% yoy and 16.8% qoq to Rs23.5 crore as the operating profit margin (OPM) declined by 820 basis points yoy and 400 basis points qoq. The decline in the OPM was on account of the inclusion of the numbers of Awaaz, which is still at a nascent stage.
• With stable deprecation and interest expenses, the net profit grew by 42.6% yoy and 17% qoq to Rs16.2 crore, in line with our estimates.
• During the quarter under review, Web18 Caymans (a TV18 group company) raised $10 million from Tracer Capital Management LP (TCML), valuing Web18 at more than Rs460 crore.
• At the current market price of Rs776, the stock is quoting at 21.3x its FY2008E earnings per share (EPS) and 13.3x FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA).
  
• We like the way TV18 has been monetising its various media properties. The TCML deal, for instance, which gives a rough idea of the valuations that its other Internet ventures may enjoy. TV18 is also bringing out the initial public offering (IPO) of Global Broadcast News (GBN). We reiterate our Buy recommendation on the stock with a revised price target of Rs850 which captures the unlocking of the value of its media ventures that are still at a nascent stage.

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs219

Upgrading earnings

Result highlight

• India Cements Ltd (ICL) achieved a net profit of Rs117 crore for Q2FY2007, much ahead of our expectations.
  
• The net revenues grew by a healthy 31.9% to Rs517 crore and the net profit grew by a staggering 1,900% year on year (yoy) to Rs117 crore. (For detailed quarterly analysis refer to our report dated October 23, 2006).
  
• Cement consumption in the southern region has grown at 18% in the first six months of the current fiscal as against the industry growth rate of 10%. As a result, the cement capacity utilisation levels stand at 92-95% which is reflected in the cement prices that are hovering at Rs200-210 per 50kg bag as against Rs135-140 per 50kg bag last year.
• The company has also lined up a capital expenditure (capex) plan of Rs350 crore to augment its production capacity by 2 million metric tonne by December 2007.
  
• The company has also revamped its balance sheet by infusing capital in bouts. Consequently, the debt:equity ratio reduced to a much respectable 1.8:1 at the end of FY2006. Now with a strong free cash flow, we expect the debt:equity ratio to reduce further to 0.8:1 by FY2007 and to 0:3:1 by FY2008.
  
• Also the date for the conversion of 13.5% optionally convertible debentures (OCDs) worth Rs109 crore into equity shares (convertible at a price of Rs125) elapsed in September 2006. Consequently, the company has redeemed these high-cost OCDs. This in effect is a positive, as it not only reduces the company's interest cost but also adds value to its shareholders on account of the lower-than-expected equity dilution. For example, we had expected the conversion of these OCDs to result in higher equity capital of Rs229 crore. However on non-conversion of the OCDs, the equity capital stands at Rs220 crore.
• Encouraged by the stellar performance of ICL we are upgrading our net profit estimates for FY2007 and FY2008 by 14% and 10% respectively. Our earnings per share (EPS) estimates now stand at Rs20 for FY2007 and Rs28.6 for FY2008. Our EPS estimates have been upgraded by 19% for FY2007 and by 14% for FY2008 on account of the non-conversion of the OCDs.

• At the current market price of Rs219, ICL is trading at 7.7x its FY2008E earnings and 5.4x its EV/EBITDA. On an EV/tonne basis, it is trading at USD105/tonne, which is a huge discount of 30% to its peers. We maintain a Buy on the stock with a price target of Rs315.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs281

Asset growth drives numbers

Result highlight

• Bank of Baroda’s net profit grew by 11.3% year on year (yoy) in line with our estimates of a growth of 12.1% as the lower-than-expected net interest income (NII) growth was compensated by higher other income growth and flat operating expenses.

• During the quarter the bank’s NII grew by 13.9% yoy to Rs890.8 crore, driven by a robust growth of 45% yoy in the advances.
• The net interest margins (NIMs) declined by 26 basis points yoy to 3.1% for H1FY2006 mainly due to lower investment yields due to a change in the accounting practice.
• The other income increased by 3.9% yoy to Rs321.7 crore due to a lower treasury income. However, the core fee income has shown a robust growth of 24.3% yoy.
  
• With the net income growing by 11.1% and the operating expenses remaining flat yoy, the operating profit was up by 24.3% yoy to Rs615.7 crore. The core operating profit reported a 43.1% year-on-year (y-o-y) growth.
• We have downgraded our earnings per share (EPS) estimates for FY2008 from Rs38.1 to Rs35.1 mainly on account of the pressure on the margins and higher expected non-performing asset (NPA) provisioning required going forward.
  
• At the current market price of Rs281, the stock is quoting at 8x its FY2008E EPS, 3.6x pre-provision profits (PPP) and 1.1x book value. The bank is available at attractive valuations given its low price to book multiple compared to its peers and earnings upside possibilities if we see the margins improving going ahead. We maintain our Buy call on the stock with a price target of Rs327.

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs269

A stellar performance

Result highlight

• Ahmednagar Forgings has reported a stellar performance for Q1 and the results are better than our expectations.
  
• The top line for the quarter grew by 72.5% to Rs122 crore. The company’s additional capacity of 40,000 tonne per annum (tpa) commenced operations from June 2006 and hence was operational for the whole quarter.
• The operating profit margin (OPM) has improved by 140 basis points to 19.3% as the operating profit rose by 86.5% year on year (yoy) to Rs23.6 crore. The margin improved despite a rise in the raw material cost from 60.7% to 66.7% as a percentage of sales. However, the company made savings in its staff cost and other expenditures.
• Stable depreciation charge and taxes caused the profit to grow by a stellar 92.2% to Rs13.5 crore for the quarter.
• The company has an order book of Rs850 crore which is to be executed in the next twelve months, triggering a strong top line growth going forward. A higher contribution from the machined products and higher non-automotive revenues should also trigger a growth in the margins going forward.
  
• At the current market price of Rs269, the stock discounts its FY2008E earnings by 7.1x and trades at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.9x. We believe that the valuations are very attractive and maintain our Buy on the stock with a price target of Rs380.

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs171

Book profits

Result highlight

• Godrej Consumer Products Limited's (GCPL) stand-alone revenues grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007--below our expectations. The soaps business grew by 16.5% yoy to Rs127.2 crore whereas the personal care business grew by 15.4% yoy to Rs55.3 crore.
• GCPL's operating profit (OP) grew by a meagre 3.8% yoy to Rs33.8 crore in Q2FY2007, which is below our expectations. The operating profit margins (OPM) contracted by 220 basis points to 18.5%. This mediocre growth in the OP was attributable to a sharp increase in the material cost by 27.8% to Rs92.2 crore. The material cost as a percentage of sales spiked to 50.5%, up 460 basis points yoy and 120 basis points sequentially, due to the hardening of the vegetable oil prices. Vegetable oil is a key ingredient for fast moving consumer goods (FMCG) companies.
• The profit before interest and tax (PBIT) margins of the soaps division reduced by 400 basis points yoy to 10.8%, while the PBIT margins of the personal care division increased by 60 basis points yoy to 42.7%.
• The interest cost zoomed by 87.1% to Rs1.6 crore. The effective tax rate also increased from 5.8% in Q2FY2006 to 12.7% Q2FY2007, leading to a 122.9% year-on-year (y-o-y) increase. The higher-than-expected interest cost and tax expenses coupled with the lower-than-expected operating performance led to a 6% decline in the profit after tax to Rs26.1 crore, which is below our expectations.
• GCPL's consolidated revenues for Q2FY2007 were Rs231.8 crore, the operating profit was Rs39.7 crore and the net profit was Rs31.0 crore. GCPL's consolidated numbers reflect the stand-alone numbers, Keyline, UK's numbers and the numbers of Rapidol, South Africa (the subsidiary company, which was acquired this quarter).
• Though we like the space in which GCPL is operating, we are concerned over GCPL's continued subdued growth for the last three quarters in the high-margin hair colour business. In the soaps business, while we see GCPL sustaining its robust growth traction, the profitability in the business will remain limited as the mass segment brand (Godrej No. 1) continues to outpace the other brands besides the margins pressures due to the increase in the vegetable oil prices. In light of its muted H1FY2007 performance, we are downgrading our consolidated earnings estimates for FY2007 and FY2008 by 12.7% and 10.6% and recommend booking profits on the stock.

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SECTOR UPDATE

Automobiles

Subdued growth despite festive season

• Bajaj Auto reported decent numbers for October, with an overall growth of 15.7% year on year (yoy).
• Hero Honda Motors’ sales bounced back in the festive season as the company reported a strong sales growth of 20.4% yoy to 363,480 units.
• TVS Motors' sold 142,325 vehicles in the month, posting a disappointing growth of just 3.2% yoy even though October is usually a good month for the automobile industry.
• Maruti Udyog sold overall 60,163 vehicles in October as compared with 51,543 units in last October, marking a growth of 16.7% yoy.
• The utility vehicle (UV) segment of Mahindra and Mahindra (M&M) marked a decline of 3.8% for the month due to lower Scorpio sales as the total UV sales stood at 11,789 units. The Scorpio sales declined by 13.3% to 2,947 units for the month.
• Tata Motors overall sales stood at 43,540 vehicles (including exports) for the month of October 2006, growing by 5.6% compared to 41,219 vehicles sold last year.

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