Godrej land bank unlocking

The Godrej business group recently commissioned a London marketing agency to redesign its brand image. The aim was to dust down the dowdy Godrej of Almira cupboards to something smarter befitting New India.

Though the sprawling Godrej empire is vast (sales last year totalled an estimated Rs246.57 billion), the group seemed to lack the sparkling edge of New India as represented by financial services, mass retail, telecoms, even foreign acquisitions. Godrej only went down that path recently, and modest it was too. That has now changed with the revaluation of the group's huge and historically most passive asset — property.

With the repeal of the Urban Land (Ceiling and Regulation) Act, long regarded as a drag on property-driven economic growth in Mumbai, Adi Godrej, chairman, is expected to gain control over nearly 3,000 acres of land in and around Mumbai. That will make him a significant player in Mumbai's real estate market.

The traditional landed elite of Mumbai — many, such as Godrej, from the Parsi community—has watched as its unproductive land assets have in recent years been lifted, first, by a low interest regime and a revolution in financial products such as mortgages, and, more recently, by the ditching of a law that most analysts believe will be transformational for such businesses. Godrej stands at the head of this queue.

The self-effacing and gentlemanly Godrej remains calm as his historic business is changed beyond the rewording of his evidently redundant branding agency. Market estimates suggest that the group is in various stages of developing 20m sq ft of property and that the Godrej property unit, growing by a fifth annually, will be the group's fastest-growing business in a couple of years.

But for all the fundamental change within his business, Godrej is simple at heart. Citing an early morning drive to his corporate office at Vikhroli, he is more likely to excuse himself from one of his wife Parmesh's glamorous parties.

Catch him on an average weekend and he'll be wind surfing, jet skiing or racing a couple of his kids and their friends around on a speed boat. Adi's ruggedness and adventurous streak have given Parmesh sleepless nights. Once when he eschewed the car and chose to sail back from Madh Island he was even given up for dead - until search parties rescued him.

His office at Vikhroli is modest, he adheres to strict protocol and his matronly Parsi and Goan secretariat add a homely fuddy-duddy air. He talks with pride of his strong mother who was a keen Gandhian, a freedom fighter and a passionate philanthropist.

His unstinting support of his wife Parmesh's legendary flamboyance speaks of a genuine liberal attitude. He is as committed in promoting his daughters' careers in the Godrej company as he is of his son's.

Zee Entertainment, Shree Cement, PTC India, Bhushan Steel, Satyam Computers, Ashok Leyland, Godrej, Welspun India, Union Bank of India, NALCO, Suzlon

Zee Entertainment, Shree Cement, PTC India, Bhushan Steel, Satyam Computers, Ashok Leyland, Godrej, Welspun India, Union Bank of India, NALCO, Suzlon Energy, Glaxo, Eicher Motors, TVS Motors

Britannia, Godrej, Glaxo, Indiabulls, Suzlon, Zee

Britannia, Godrej, Glaxo, Indiabulls, Suzlon, Zee

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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Sharekhan Investor's Eye - Oct 30

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,440

Unexciting performance

Result highlight

• At Rs360 crore the Q2FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) is marginally below our expectations, primarily because of higher-than-expected staff and other expenses.
• BHEL’s revenues for the quarter grew by a smart 35% year on year (yoy) to Rs3,341 crore driven by the order backlog of Rs45,700 crore. The power division registered a 29% growth in its revenues whereas the industry division recorded a revenue growth of 35%.
• However the operating profit margin (OPM) for the quarter declined by 100 basis points to 13.7%, as its staff cost increased by 21% and the other expenditure rose by 38.6%. The staff cost increased on two counts. One, the company made an additional outlay of Rs45 crore during the quarter for gratuity provision on an actuarial basis, according to the new AS 15 norms. Two, the company also paid additional performance incentive of Rs15 crore during the quarter.
• The other income increased by 61% to Rs170 crore mainly on account of the rising yields on the huge cash reserves of the company. Also as BHEL’s export revenue was higher during the quarter, the export incentive (which BHEL shows in the other income) boosted the other income.
• The net profit for the quarter grew by 38% yoy to Rs360 crore.
• The order backlog during the quarter maintained its momentum and grew by a very impressive 42% yoy to Rs45,700 crore, resulting in an order inflow of Rs10,035 crore.
  

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,120

Better performance in H2

Result highlight

• Bharat Electronics Ltd (BEL) has reported a lacklustre performance for the second quarter. On a stand-alone basis, its net revenues grew marginally by 0.7% to Rs834.3 crore.
• The operating profit margin (OPM) declined by 240 basis points to 22.4% from 24.8% in Q2FY2006. The OPM was dented by an increase in the employee cost as a percentage of sales (up from 12.1% in Q2FY2006 to 13.9% in Q2FY2007) and a jump of 38.8% in the other expenses. On the other hand, the raw material cost as a percentage of sales declined by 50 basis points and supported the margins.
• The other income more than doubled to Rs50.8 crore, which enabled the company to report a marginal growth (1.1% year on year [yoy]) in the net profit to Rs148.3 crore.
• On a half-yearly basis, the net revenues grew marginally by 0.7% to Rs1,317.4 crore. The OPM declined by 180 basis points to 19.6% during the period. The earnings grew by 2.6% to Rs208.6 crore aided by a 65.8% jump in the other income to Rs89.2 crore.
• Notwithstanding the lower-than-expected performance, the company is likely to achieve the stated gross revenue target of Rs4,200 crore during the current fiscal. The fresh order intake of over Rs800 crore during H1FY2007 was much better than that of Rs285 crore in H1FY2006. Moreover, the company generally accrues the bulk of its revenues (especially from the government segment) in the second half of the fiscal.
• In terms of valuations, the company trades at attractive valuations of 13.3x FY2007 and 11.8x FY2008 estimated earnings (without adjusting for the free cash of Rs229 per share on its books at the end of FY2006). We maintain our Buy call with a price target of Rs1,525.
  

Omax Autos
Cluster: Apple Green
Recommendation: Buy
Price target: Rs134
Current market price: Rs100

Price target revised to Rs134

Result highlight

• Omax Auto's Q2FY2007 results are in line with our expectations with the sales reporting a growth of 12.1% to Rs168.6 crore. However, due to the delay in the export orders from Arvin Meritor and Tenneco, the company witnessed a slower-than-expected ramp-up in its exports.
• The operating profit margin (OPM) improved by 220 basis points to 9.9% on the back of lower power costs and other expenses. Consequently, the operating profit grew by 44.7% to Rs16.7 crore.
• However, higher interest and depreciation charges as a result of the capital expenditure incurred by the company led the profit before prior period expenses to grow by 22.2% to Rs5.8 crore. The net profit after the prior period expenses grew by 18.7% to Rs5.7 crore.
• Due to the delay in the export revenues and a muted performance in the domestic business (Hero Honda contributes 60% of the company's sales), higher interest and depreciation charges, we are downgrading our FY2007 and FY2008E earnings by 23% and 32% respectively.
• At the current market price of Rs100, the stock quotes at 6.8x its FY2008E earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 3.9x. Considering the cheap valuations we maintain our BUY recommendation on the stock with a revised price target of Rs134.
  

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs220
Current market price: Rs188

All-round performance

Result highlight

• ITC's Q2FY2007 net profit grew by 18.7% year on year (yoy) to Rs680.0 crore, in line with our expectations.
• The net revenues for the quarter grew by 32.3% yoy as most of its businesses grew strongly: cigarettes (14%), fast moving consumer goods (FMCG; 66%), hotels (30.5%), paperboards (11.3%) and agri-business (86.6%).
• The profit before interest and tax (PBIT) grew by 19.4% yoy as the PBIT margin contracted by 100 basis points, as per our expectations.
• The contraction in the margin was on account of a higher contribution from the low-margin agri-business. Except the agri-business all the other businesses witnessed a healthy expansion in their PBIT margin.
• The non-cigarette FMCG business is the only business in ITC's portfolio that is making losses. However, with a strong growth in the revenues, the magnitude of losses, ie the loss margin, have come down considerably.
• We have always liked the way ITC has channelised the strong cash flows generated from the cigarette business into the other businesses without affecting its return on capital employed (RoCE). At the current market price of Rs188, the stock is attractively quoting at 21.3x its FY2008E earnings per share (EPS) and 13.6x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on ITC with a price target of Rs220.
  

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs205
Current market price: Rs182

First-cut analysis

Result highlight

• The stand-alone revenues of Godrej Consumer Products Ltd (GCPL) grew by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007. The revenue growth was below our expectations. The soap 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, also below our expectations. The operating profit margin contracted by 220 basis points to 18.5%. The mediocre growth in the OP was a result of a sharp increase in the material cost, which jumped by 27.8% to Rs92.2 crore during the quarter. This increase was a result of the hardening prices of vegetable oil, which is a key raw material for the fast moving consumer goods companies.
• The profit before interest and tax (PBIT) margin of the soap division reduced by 400 basis points yoy to 10.8% whereas that of the personal care division increased by 60 basis points yoy to 42.7% during the quarter.
• 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. 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. The same was below our expectations.
• GCPL's consolidated revenues for Q2FY2007 stood at Rs231.8 crore. Its consolidated OP and net profit stood at Rs39.7 crore and Rs31.0 crore respectively. The company's consolidated numbers reflect the stand-alone numbers of Keyline, UK and Rapidol, South Africa (the latter is the subsidiary company GCPL acquired this quarter).
• The stock trades at a price/earnings ratio of 22.4x FY2008E consolidated earnings. In view of the lower-than-expected results in the second quarter we are revising our earnings estimates for the company. We shall update our estimates after attending the company's earnings conference call for the Q2FY2007 results.
  

Universal Cables
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs118

Performance in line with expectations

Result highlight

• Universal Cables' Q2FY2007 net profit at Rs5.64 crore is in line with our expectations.
• The net revenues have grown by 20.4% year on year (yoy) to Rs91 crore driven by a 19.6% growth in the cable sales. The sales of capacitators grew by 45.3% yoy.
• The operating profit margin (OPM) contracted by 49 basis points yoy, resulting in a slower operating profit growth of 15.5% yoy.
• The margin at the profit before interest and tax (PBIT) level in the cable business contracted by 48 basis points yoy. This resulted in a slower growth of 14.8% yoy in the PBIT to Rs9.85 crore. The PBIT margin in the capacitator business contracted by 77 basis points, leading to a slower PBIT growth of 40.3% yoy to Rs0.87 crore.
• The net profit growth too was lower at 14.4% due to higher depreciation during the quarter.
• At the current market price of Rs118, the stock is quoting at 5.5x its FY2008E earnings per share (EPS) and 3.2x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA).
• We reiterate our Buy recommendation on the stock with price target of Rs179.
  

Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs106
Current market price: Rs93

Core performance remains weak

Result highlight

• Allahabad Bank's net profit grew by 24.8% year on year (yoy) to Rs210.2 crore in Q2FY2007. The net profit grew at a rate higher than our expectations of 13.2% mainly due to a write-back in provisions, as at the operating level the profit growth was below our expectations at just 0.8% yoy.
• During the quarter, the bank's net interest income (NII) grew by 6.1% yoy to Rs389.9 crore, much below our expectations of a 16.9% year-on-year (y-o-y) growth.
• The NII growth was lower since the net interest margin (NIM) slipped by 47 basis points yoy and by 41 basis points quarter on quarter (qoq) to 2.6%. The yield on advances improved by 25 basis points yoy and by 11 basis points quarter on quarter (qoq) to 8.88%. However, the same and a 47.4% growth in the advances couldn't restrict the fall in the NIM. That is because the deposit cost increased by 56 basis points yoy and by 31 basis points qoq, and the deposits grew by 23.6% yoy during the quarter.
• The other income decreased by 24.6% yoy to Rs122.2 crore mainly due to a fall in the trading and other non-fee incomes. The other income excluding the treasury income also reported a fall of 15.5%. The core fee income, however, grew by 8% yoy.
• The operating expenses reported a fall of 6.8% yoy on account of a 12% fall in the staff expenses. As a result, the operating profit grew marginally by 0.8% yoy to Rs243.3 crore. The operating profit excluding the treasury income grew by 12.4% yoy, much below our expectations of a 21.5% growth.
• However, despite a marginal rise at the operating level, the bank reported a 41.8% rise in its profit before tax (PBT). This was mainly on account of a Rs19.7-crore write-back in the total provisions arising due to a Rs38.4-crore write-back in depreciation on investments.
• Even though the operating performance was below expectations and the write-back in the provisions higher than expected, the net profit at Rs210.2 crore was much above our expectations.
• We have revised our earnings per share (EPS) estimates for FY2007 from Rs14.6 to Rs15.7 mainly on account of the lower provisioning requirements and operating expenses of the bank. Our FY2008 EPS estimates however remain unchanged at Rs21.8.
• At the current market price of Rs93, the stock is quoting at 4.3x its FY2008E EPS, 3x pre-provision profit (PPP) and 0.8x book value. The bank is available at attractive valuations, considering its strong average return on equity (RoE) of 20.2% over FY2006-08E. We maintain our Buy call on the stock with a price target of Rs106.
  

Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs109
Current market price: Rs92

In line with expectations

Result highlight

• In Q2FY2007 Andhra Bank's net profit grew by 10.2% year on year (yoy) to Rs146.4 crore, in line with our expectations.
• During the quarter the bank's net interest income (NII) grew by 14.7% yoy to Rs330.9 crore, below our expectations of a 23.8% year-on-year (y-o-y) growth.
• The growth in the NII was lower because of an 8.7-basis-point fall in the net interest margin (NIM) due to a lower yield on investments and a higher cost of deposits.
• The other income increased by 9.1% yoy to Rs128.7 crore. The growth was in single digits mainly due to a fall of 39.7% in the trading income. However, the other income excluding the treasury income reported a strong growth of 25% with the core fee income growing by 22.3% yoy to Rs47.7 crore.
• The operating expenses reported a rise of 14.8% yoy and the operating profit grew by 11.3% yoy to Rs223.1 crore. The operating profit excluding the treasury income grew by 19.9% yoy, below our expectations.
• With the provisioning lower than expected, the net profit grew by 10.2% yoy to Rs146.4 crore, in line with our estimates.
• We have revised our earnings per share (EPS) estimates for FY2007 from Rs10.7 to Rs11.3 mainly on account of the improving core banking performance and the stable other income growth. Our FY2008 EPS estimates however remain at Rs13.3.
• At the current market price of Rs92, the stock is quoting at 6.9x its FY2008E EPS, 4.1x pre-provision profits (PPP) and 1.2x book value. The bank is available at attractive valuations given its improving operating performance, the adequate capital available in its books to meet the Basel II requirements and asset quality that is one of the best in the industry. We maintain our Buy call on the stock with a price target of Rs109.
  

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs167

Exceptional results

Result highlight

• Bank of India's net profit grew by 60.5% year on year (yoy) to Rs212.1 crore, which is above our expectations of a 52.5% growth. The excellent numbers were driven by an improvement in all the key parameters of the bank's business.
• During the quarter the bank's adjusted net interest income (NII) grew by a robust 39.6% yoy to Rs908.5 crore compared to our expectations of a 27% year-on-year (y-o-y) growth. The improvement in the NII was due to the expansion in the net interest margins (NIMs) coupled with the growth in the advances.
• The domestic NIMs improved by 45 basis points yoy while the global NIMs improved by 43 basis points yoy. The expansion was also robust on a quarter-on-quarter (q-o-q) basis as the domestic NIMs improved by 21 basis points while the global NIMs improved by 15 basis points.
• The other income showed a good growth of 16.5%, with the fee-based income showing a strong 30.7% growth.
• The operating expenses were up 31.2% mainly due to the expenses incurred on the implementation of the core banking solution (CBS) that the bank charges to the profit and loss account unlike the other banks that prefer to capitalise and claim depreciation on the same. Some promotional expenses for the centenary year celebration also kept the operating expenses on the higher side.
• As a result, the operating profit grew by 33.9% yoy to Rs538.2 crore. The operating profit excluding the treasury income grew by 37.6% yoy.
• We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs15.5 and Rs18 to Rs18.8 and Rs22.2 respectively to take into account the improved expected operating performance of the bank going forward. The improved performance of the bank is based on the improving margins, which should stabilise going forward coupled with the stable other income and the operating expenses growth.
• The capital adequacy ratio (CAR) of the bank stood at 11.85% with the Tier-I ratio at 6.19%. This leaves very little room for the bank to grow its assets without diluting its equity in the medium term. However, the bank has shown no intent of raising its equity capital, unless absolutely necessary. Hence, we feel that the bank would initially use all the options available like innovative Tier-I capital. A plain equity issue may follow in H1FY2008, which would enhance the bank's book value and be value accretive going forward for the investors.
• At the current market price of Rs167, the stock is quoting at 7.5x its FY2008E EPS, 3.3x pre-provision profits (PPP) and 1.2x its book value. The bank is available at attractive valuations looking at the strong visibility in its earnings and is less prone to interest rate risk shocks unlike some leading PSU banks. We reiterate our Buy call on the stock with a revised price target of Rs185.
  

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,116
Current market price: Rs1,095

Strong growth in core operating profits

Result highlight

• State Bank of India's (SBI) Q2FY2007 stand-alone net profit at Rs1,184.5 crore was down 2.5% year on year (yoy), but above our expectations of a fall of 11.4% largely due to the lower-than-expected operating expenses reported by the bank and on account of lower provisions.
• The net interest income (NII) grew by 8.1% yoy to Rs3,898.7 crore, above our expectations of a 6.9% growth. The improved yield on the advances (up by 67 basis points) to 8.48% over a 21.2% advances growth coupled with the lower cost of deposits (down 15 basis points) to 4.64% mainly resulted in a better NII growth. The reported core net interest margin (NIM; adjusted for a one-time interest income) for H1FY2007 has improved by 40 basis points to 3.32%.
• Most other PSU banks have reported an increase in the cost of deposits, while SBI has reported a fall mainly due to the improvement in its CASA ratio to 42.6% from 39.5% and the lowering of the bulk deposit rates to discourage high-cost deposits in its books.
• The other income increased by 10.7% yoy to Rs1,433.8 crore, restricted mainly due to a drop of 96.9% in the trading income during Q2FY2007 to Rs7.7 crore from Rs246.7 crore in Q2FY2006. The other income excluding the treasury income reported a very strong growth of 36.1%.
• With the net income up by 8.8% yoy and a decrease of 2% in the operating expenses, the operating profit increased by a healthy 24.7% yoy. The operating profit excluding the treasury income was up 42% yoy.
• The provisions were down 16.7% yoy mainly on account of the absence of investment depreciation during the quarter. However the tax outflow at Rs606 crore with an effective tax rate of 33.9% was much above our expectations.
• At the current market price of Rs1,095, the stock is quoting at 9.6x its FY2008E earnings per share (EPS), 4.5x its pre-provision profits (PPP), 1.6x its stand-alone book value and 1.3x its consolidated book value. The bank is definitely a proxy investment for the Indian economy and the improved operating performance post the redemption of India Millennium Deposits (IMDs) could still provide some upside from the current levels. We maintain our Buy call on the stock with a price target of Rs1,116.
  

Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs590

Performance below expectations

Result highlight

• Orient Paper & Industries Ltd's (OPIL) Q2FY2007 net profit at Rs20.4 crore is below our expectations primarily because of a 33-day maintenance shutdown at the company's Amlai paper unit for a major overhaul. This plant shutdown resulted in a 21% decline in the paper division's revenues, leading to a loss of Rs8.5 crore. However the performance of the cement business (earnings before interest, depreciation, tax and amortisation [EBIDTA] per tonne of Rs929 as against Rs111 per tonne) is above our expectations.
• The revenues for the quarter grew by 34.6% to Rs229 crore entirely driven by its cement division, which almost doubled its revenues to Rs141 crore. The paper division registered a decline of 21% in its revenue due to a shutdown and the fans division showed a decent performance registering a 22.6% growth in its revenues.
• The operating profit for the quarter grew by a whopping 288% to Rs43.8 crore as the cement division's earnings before interest and tax (EBIT) reported a significant jump to Rs49 crore signifying the effect of the cement prices on the company's profitability. The paper division reported an overall loss of Rs8.5 crore out of which Rs5.6 crore is the loss because of a 33-day plant shutdown and the balance is on the already non-operational Brijrajnagar unit. The other two units together reported a loss of Rs1 crore. Hence the overall profitability was significantly affected.
• The operating profit margins (OPMs) for the quarter jumped three-fold to 19.1%, driven by the stellar performance of the cement division.
• The performance at the operating level was strengthened by a 26% decline in the interest cost and a 25% increase in the other income to Rs2.44 core and consequently the pre-exceptional net profit for the quarter stood at Rs20.4 crore as against a loss of Rs3.36 crore a year ago. Q2FY2006 included a profit of Rs6.6 crore on the sale of investments which we have treated as an extraordinary income. Hence OPIL's reported net profit jumped by 526%.

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VIEWPOINT

Moser Baer

Strong reversal in fortune
Incorporated in 1983, Moser Baer has emerged as one of the top three optical storage media manufacturers in the world. It has a wide range of products ranging from floppy disks, compact discs (CDs) to digital versatile discs (DVDs). It has relationship with all the top 12 global technology brands and has steadily gained market share over the past few years.

Recently, the company has diversified into manufacturing of photovoltaic cells to tap the growing demand for solar power generation globally. The company is likely to commission the first phase of its photovoltaic cell manufacturing facility in the fourth quarter of this fiscal.

Dr Reddy’s Laboratories

Results above expectations

Result highlight

• Dr Reddy’s Laboratories (DRL) reported revenues of Rs2,003.9 crore in Q2FY2007, as against Rs580.4 crore in Q2FY2006, representing an increase of 245% year on year (yoy).
• The revenues from the international markets increased by 391% yoy at Rs1,760 crore largely because of the contributions from the authorised generics and acquisitions.
• The revenues from its core businesses (excluding the contributions from the authorised generics and acquisitions) increased by an impressive 42% to Rs820 crore during the quarter.
• The overall gross margin declined to 41.3% from 51.6% in the corresponding quarter of the previous year, largely because of the pricing pressures in the USA and Europe and due to the integration of the Betapharma acquisition.
• However, with the impressive reduction in the selling, general and administrative (SG&A) cost to 18.3% of sales from 30% in Q2FY2006, the operating profit margin (OPM) expanded to 19.0% from 11.9% in Q2FY2006.
• The net profit increased by over two times (up by 214%) at Rs279.8 crore.
• At the current market price of Rs752, the stock trades at 18.2x and 22.0x of FY2007 and FY2008 consensus earnings. Currently, the management plans to focus strategically on enhancing the earnings by leveraging its Day-1 launches (as 55 ANDAs are in the pipeline) and authorised generic deals. On the cost front, DRL plans to curtail its litigation costs by out of court settlements and has already started tightening its SG&A expenses. On the R&D front, the company has already de-risked its model by partnering with financial partners. With all these developments we are positive about the stock.
  

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