JK Cement

JK Cement

JK Cement, Madras Cement, Mercator Lines, Mundra Port and SEZ, Punj LLoyd, PVR Cinemas, SCI, Subros, Tata Chemicals, Unity Infraprojects

JK Cement, Madras Cement, Mercator Lines, Mundra Port and SEZ, Punj LLoyd, PVR Cinemas, SCI, Subros, Tata Chemicals, Unity Infraprojects

JK Cement

JK Cement

JK Cements, Bajaj Holdings & Investment, Power Sector

JK Cements, Bajaj Holdings & Investment, Power Sector

Bharat Bijlee, Indian Overseas Bank, Indotech Transformers, JK Cement

Bharat Bijlee, Indian Overseas Bank, Indotech Transformers, JK Cement

JK Cement, Pharmaceuticals

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs330
Current market price: Rs218

Capacity expansion to drive growth

Key Points

• The capital expenditure (capex) plans of JK Cement are on track. The company completed its expansion at Nimbahera plant by raising the capacity from 3.5MTPA to 4MTPA. It is in the process of setting up a 3.5MTPA plant in Karnataka by December 2008 along with a 50MW captive power plant (CPP).
• It has acquired Nihon Nirman with a capacity of 0.4MTPA at an acquisition and refurbishing cost of Rs100 crore, taking JK Cement's total capacity to 4.4MTPA.
• Acquisition of Nihon Nirman will lead to savings of Rs200 per tonne in freight cost, as claimed by the management.
• The company has also lined up a capex plan to set up CPPs. It plans to set up a 43MW CPP which will include a 20MW pet coke fired generation unit, a 13MW waste heat recovery power plant and 10MW turbines.
• The company is investing in capacity addition along with investments in power generation. Going forward, the production cost per tonne will reduce because of initiatives taken by the company to invest in CPPs. At the current market price of Rs218 the stock is trading at a price-to-earnings multiple of 6.2x discounting our FY2008 earnings estimate and at 7.8x times discounting our FY2009 earnings estimate. On increased capacities JK Cement trades at an enterprise value (EV)/tonne of USD80.

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SECTOR UPDATE

Pharmaceuticals

Teva launches generic Protonix
Teva, the world's largest generic company, has launched the generic version of Wyeth/Altana's Protonix tablets in the USA on December 24, 2007 triggering off 180 days of exclusivity period for the product. Protonix is Altana's blockbuster drug for acidity and oesophageal reflux and is marketed in the USA by Wyeth. The product generated sales of close to $2.5 billion in 2006.

JK Cement, Saregama India

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs330
Current market price: Rs246

Price target revised to Rs330

Key points

• JK Cement is expanding its capacity by 3.5 million metric tonne (MMT) through a greenfield plant at Karnataka, which will be accompanied by a 50-megawatt (MW) power plant at the site. The capital expenditure (capex) programme is in progress and the plant is expected to be commissioned by FY2009 end. This will augment the capacity of the company by 70% in FY2010 and will drive the volumes of the company going ahead.
• Refurbishment of Nihon facility is expected to be complete by the end of Q4FY2008 and would increase cement volumes by 350,000 tonne in FY2009.
• JK Cement's capex on captive power plants (CPPs) is progressing well. The company has already commissioned a 20MW pet coke based power plant and has replaced its 10MW turbine. It has partially implemented the 13MW waste heat recovery plant and expects the plant to get fully operational by FY2008 end.
• With all CPPs in place, the company will be able to save Rs150-200 per tonne on power consumption from FY2009.
• JK Cement's Q2 results were much above our expectations. The topline grew by a healthy 33% year on year (yoy) to Rs356 crore on the back of a blended volume growth of 12% yoy and a realisation growth of 17% yoy to Rs3,597 per tonne.
• Strict control on variable costs led the operating profit grow by 58% yoy and the operating profit margin (OPM) expand by 450 basis points to 28.2%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne jumped by 40% yoy to Rs1,030 per tonne.
• Lower tax provision of 13% during the quarter made the profit after tax (PAT) grow by a whopping 142% yoy to Rs72.7 crore. The PAT growth was much ahead of our expectations.
• We have been bullish on the business prospects of JK Cement on account of its cost-cutting measures and capex programme. Savings in power costs from the CPPs coupled with higher volumes from its greenfield facility will be the major business drivers for the stock. The stock is trading at 10x its earnings and 6.6x its enterprise value (EV)/EBITDA on FY2009 earnings estimate. Even after a significant run-up in the last couple of months, it commands an EV per tonne of USD 84, which is lower than the benchmark asset valuation of USD 100-115 per tonne. Considering the cheap asset valuations, we maintain our Buy recommendation on the stock with an upgraded price target of Rs330, leaving an upside of 30%.

Saregama India
Cluster: Ugly Duckling
Recommendation: Book Profit
Current market price: Rs296

Book profit

Key points

Saregama India Ltd (SIL) reported disappointing results for Q2FY2008. While the operating revenues fell by 2.7% year on year (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to Rs2.7 crore. Consequently the net profit before extraordinary items decreased by 44.7% yoy to Rs2.6 crore.

Operating profit margin (OPM) fell sharply to 7.9% in Q2FY2008 against 18.4% in Q2FY2007. The OPM declined primarily due to a sharp jump in royalty expenses that as a percent of sales increased by 860 basis points yoy to 28.6%. Royalty payments went up as royalty model has shifted from revenue sharing model to a fixed minimum guarantee model.

SIL's audio sales declined sharply by 34% yoy in the last four quarters. Sale of cassettes and CDs is continually falling as consumers shift to non-physical formats of music such as radio and TV.

SIL's share in acquiring new music rights declined to 9-10% from about 30% in the past. With competition setting in, the cost of acquiring these rights has gone up substantially. We believe that the current scenario wherein music rights are awarded on minimum guarantee as against revenue sharing in the past has increased the risk for music companies.

Increasing competition, lack of aggression on the part of the management and sharper decline in physical sales raise concerns. We believe, the current market price of Rs295.5 fully factors the risks and rewards associated with SIL's business and thereby advice investors to book profit.

JK Cement

JK Cements

Sharekhan Investor's Eye dated May 17, 2007

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs200
Current market price: Rs162

Price target revised to Rs200

Result highlights

• The overall revenues of JK Cement grew by 49% year on year (yoy) to Rs366 crore, as the overall volumes grew by 11% yoy and the realisations improved by 34.9% yoy.
• The expenditure for the quarter increased by 27% yoy to Rs255 crore mainly on account of a 13% year-on-year (y-o-y) increase in the raw material cost and a 31% y-o-y rise in the freight cost.
• The company's high leverage to cement prices resulted in a 145% y-o-y surge in its operating profits to Rs111.7 crore which helped the operating profit margin (OPM) to expand by 1,200 basis points yoy to 30.5%.
• As the interest cost and depreciation provision remained flat, the profit after tax (PAT) ballooned by 274% yoy to Rs61.4 crore.
• We had mentioned in our previous reports, the company is incurring a capital expenditure (capex) of Rs290 crore for setting up three captive power plants (CPPs). But as there has been a delay in the commissioning of all the projects, we don't expect the company to avail of the complete savings in the power cost in FY2008 as expected earlier.
• Consequently, we are revising our earnings estimate downwards by 5.2% to Rs211 crore from Rs222 crore. We are also introducing our FY2009 earnings estimate at Rs180 crore.
• At the current market price of Rs162 per share, JK Cement is trading at 5.3x its FY2008 earnings and 6.2x its FY2009 earnings. We maintain our Buy recommendation on the stock with a reduced price target of Rs200 per share.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs310
Current market price: Rs285

Improved performance

Result highlights

• Bank of Baroda's (BoB) results are marginally below expectations. The profit after tax (PAT) grew by 17.6% year on year (yoy) but declined 25.4% quarter on quarter (qoq) to Rs245.7 crore compared with our estimate of Rs256.7 crore.
• The adjusted net interest income (NII) was up by 21.5% yoy and 9.6% qoq to Rs1,052.6 crore, better than our estimate of Rs1,002 crore. The net interest margin (NIM) has shown a sequential improvement of nine basis points, driven mainly by an improvement in the asset yields.
• The non-interest income grew by only 6.9% yoy to Rs397.8 crore; the growth was restricted mainly due to a 61.7% decline in the treasury income. However the core fee income grew by 36.4% yoy and 13.9% qoq.
• The operating profit was up 21% yoy but the core operating profit (operating profit excluding treasury and recovery) grew by 37.4% yoy.
• Although provisions and contingencies remained stable on a year-on-year (y-o-y) basis, yet the bank's tax liability for the current quarter went up significantly. This restricted the overall profit growth to only 17.6% on a y-o-y basis.
• The asset quality of the bank continues to be healthy with the gross non-performing assets (NPA) at Rs2,092 crore, down Rs300 crore sequentially. The net NPA in percentage terms stood at 0.6%, down from 0.67% in the previous quarter. The capital adequacy ratio (CAR) remains at a comfortable 11.8% with the Tier-I CAR at 8.74%.
• The bank has shown strong business growth with comfortable asset quality levels. However the profitability has not improved in proportion to the growth in the business, thereby leading to a lower return on equity. We feel the bank has successfully made structural changes required to show consistent business growth and the management has now focused on improving the profitability, which should lead to better numbers going forward. At the current market price of Rs285, the stock is quoting at 8x its FY2008E earnings and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs310.

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,300
Current market price: Rs2,500

Q4FY2007 results: First-cut analysis

Result highlights

• Bajaj Auto's Q4FY2007 results are slightly ahead of our expectations due to a higher than expected other income. The net sales grew by 6.8% to Rs2,313.6 crore in the fourth quarter.
• The operating profit of the company declined by 23.2% to Rs326.3 crore as the operating profit margin declined by 550 basis points to 14.1% year on year. However, the margin was stable on a sequential basis.
• The net profit before extraordinary items for the quarter declined 3.9% to Rs320.75 crore.
• The consolidated income from operations rose to Rs2,589.5 crore from Rs2,297.5 crore in the same quarter last year. The consolidated profit grew to Rs377.4 crore for the quarter as compared with Rs357.3 crore in the same quarter last year.
• The company has also announced its demerger, whereby two new companies will be listed. The existing Bajaj Auto will be renamed as Bajaj Investment and Holdings Ltd (BIHL) and will be the holding company for two other companies, namely Bajaj Auto (new-consisting of two- and three-wheeler manufacturing business) and Bajaj Finserv Ltd (BFL). Bajaj Finserv would comprise wind power, insurance and financing businesses.
• All shareholders in the existing Bajaj Auto on the record date would become shareholders in each of the new companies and be issued shares of the two new companies in the ratio of 1:1. After such issuance, for every share held in the existing Bajaj Auto each shareholder would:
  - continue to hold one share of BHIL (existing BAL) of face value of Rs10 each fully paid up,
  - be allotted one share of the new Bajaj Auto (existing BHIL) of face value of Rs10 each, fully paid up,
  and
  - be allotted one share of BFL of face value of Rs5 each, fully paid up.
• We will come out with our detailed update on the company and revise our estimates after gaining more clarity on the de-merger. Watch this space.

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs141
Current market price: Rs120

Strong operating performance

Result highlights

• The Q4FY2007 results of Union Bank of India (UBI) are below our expectations with the profit after tax (PAT) reporting a growth of 57.4% year on year (yoy) to Rs228.1 crore compared with our estimate of Rs254.7 crore. The profit is lower mainly due to higher than expected provisions made by the bank during the quarter.
• The adjusted net interest income (NII) was up 29.4% yoy and 9.4% quarter on quarter (qoq) at Rs750.4 crore. The net interest margin (NIM) of the bank improved on a sequential basis by 38 basis points to 3.37% for Q4FY2007. Controlled increase in costs coupled with improvement in yields helped the bank to improve its margins both yoy and qoq.
• The improvement in the NIM was a fall-out of the strategy adopted by the bank's management in the previous quarters. The bank shed low yielding advances and focused on quality advances to improve the yields on the asset side. On the liability side, the bank reduced the high-cost term deposits and improved its low-cost deposits, which helped in containing the costs.
• The operating profit was up 49.4% yoy and 30.7% qoq, while the core operating profit (ie the operating profit excluding the treasury gains and others) reported a growth of 56.4% yoy and 31.4% qoq. The growth was driven by a good core income growth and controlled operating expenses.
• Provisions and contingencies rose by 48.1% yoy and 148.3% qoq mainly due to higher non-performing asset (NPA) and standard asset provisions made during the quarter to improve the asset quality levels.
• As a result of higher provisioning the bank's NPA level improved to 0.96% from 1.12% in the previous quarter. The gross NPA level also declined to 2.94% from 3.24% on a sequential basis.
• The management's renewed focus on profitable businesses and asset quality is a welcome move for the bank's future performance, which is aptly reflected in its improved NIMs and low NPA levels. The bank is currently available at attractive valuations compared to its peers. At the current market price of Rs120, the stock is quoting at 5.6x its FY2008E earnings and 1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs141.

Sharekhan Investor's Eye dated May 17, 2007

Emkay - 3i Infotech, JK Cement, Shree Cement

3i Infotech

JK Cement

Shree Cement

BRICS PCG Research

Bank of India

CMP: Rs 167 Target: Rs 186 (upgraded from Rs 170) BUY

Hitting the high notes

Bank of India (BOI) has churned out an excellent Q2FY07 performance, posting the best results among PSU banks. As guided by the bank after the FY06 results, net interest income (NII) continues to grow at a very robust pace, well ahead of expectations. An improved yield on funds and a relatively lower increase in cost of funds led a 47% growth in NII. This together with the healthy 18% growth in non-interest income (ex-treasury) to Rs 3bn led to a 61% spurt in net profit. Within loans, lending towards the retail, agriculture and SME segments recorded strong YoY growth of 56%, 22% and 27% respectively. BOI expects these segments to continue to drive asset growth and boost yields.

The management is targeting a growth of 20% in deposits (25% in low-cost deposits) and 25% in loans in FY07. Based on our dividend discount model (DDM) we value the bank at Rs 186, an upward revision from Rs 170 earlier to incorporate the robust financial results. BUY.

Tulip IT Services

CMP: Rs 362 Target: Rs 457 (upgraded from Rs 383) BUY

Power packed performance

Tulip IT Services reported a very strong Q2FY07 financial performance, much ahead of our expectations. Revenues in the quarter grew sequentially by 29.7% to Rs 1.9bn on the back of 59.4% growth in the corporate data services (CDS) segment. Operating margins expanded by 280 bps to 15.5% as the share of CDS revenues increased to 34% of total revenues. Net profit grew by 46.5% to Rs 202.5mn, a slower pace than the 58.6% QoQ increase in operating profit due to higher depreciation and tax costs during the quarter. In view of the exceptional performance, we are raising our estimates for FY07 and FY08 and accordingly upgrading our target price to Rs 457 (from Rs 383). BUY.

K S Oils

CMP: Rs 176 Target: Rs 218 BUY

Fuelled for success

KS Oils (KSO) has clocked an outstanding performance during Q2FY07 with 79% YoY growth in revenues to Rs 2.3bn and a 213% spike in net profit to Rs 111mn. Better volumes due to enhanced capacity utilisation and increased realisations from a heightened focus on the retail segment drove sales during the quarter. Operating profit has grown 140% YoY to Rs 161mn, accompanied by an improved margin at 7.1% from 5.3% a year ago. The margin growth was fuelled by increased realisations, lowered operating costs (particularly power) and better working capital cycles. Net profit margins also rose 75% from 2.8% to 4.9% this quarter. We retain our projections for FY07 and FY08, and thus recommend a BUY with our initial target price of Rs 218.

Indoco Remedies

CMP: Rs 293 Target: Rs 410 BUY

Healthy growth, in line with estimates

Indoco Remedies' Q1FY07 results are largely in line with our estimates. Though the sales growth in the quarter exceeded our expectations, net profit was marginally below our estimates due to higher finance charges and depreciation. Net sales in Q1FY07 grew by 37% to Rs 726.5mn as against Rs 529mn in Q1FY06, driven by 26% growth in domestic sales and a 103% rise in exports to regulated markets. Domestic sales contributed about 81.3% to the topline whereas exports to regulated markets contributed about 12% in Q1FY07. These exports have grown more than anticipated (103% as against 60%) on account of a swelling customer base as well as an increase in the products supplied. Operating margins for the quarter have fallen by 90 bps YoY due to an increase in raw material cost as a percentage of sales. We believe the margins in the coming quarters will stabilise at about 20% as the exports gain further momentum.

At the current market price of Rs 293, the stock is trading at P/E multiples of 7.4x on FY07E and 5.9x on FY08E which we believe is very attractive. With an expected ROE of 23% in FY08 and earnings growth of about 30% we believe the stock should trade at a higher multiple. We therefore recommend a BUY with a target of Rs 410.

JK Cements

CMP: Rs 191 Target: Rs 315 BUY

Pillar of strength

JK Cements' (JKCL) Q2FY07 results are in line with our expectations. Sales have grown by 30% YoY from Rs 2.1bn to Rs 2.7bn. The company sold 8.13 lakh tonnes of grey cement and 60,900 tonnes of white cement in Q2FY07. Net profit has risen substantially from Rs 49mn to Rs 340mn in Q2FY07 mainly due to better realisations as compared to the last year. Operating margins have also jumped from 13.7% in Q2FY06 to 23.7% in Q2FY07. The EPS for the current quarter stands at Rs 4.9 versus Rs 1 in Q2FY06.

The company's expansion plans and power projects are on schedule and it has concluded the acquisition of JayKayCem, a wholly owned subsidiary. Further, the outlook on cement demand and prices remains upbeat, with a Rs 3-5 price hike per bag expected in the near term. We thus maintain a strong BUY on JKCL with our target of Rs 315.

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Sharekhan Investor's Eye - Oct 31

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs295
Current market price: Rs190

Whopper results

Result highlight

• JK Cement reported a pre-exceptional net profit of Rs30 crore for Q2FY2007, much higher than expected. The same was better than expected because of higher-than-expected cement volume and realisation. Also its white cement business delivered a good performance during the quarter.
• Impressed by JK Cement's Q2FY2007 results we are upgrading our earnings estimates for FY2007 and FY2008 by 59% and 49% respectively. Our earnings per share (EPS) estimates now stand at Rs21.3 for FY2007 and Rs31 for FY2008.
• The revenues for Q2FY2007 grew by a healthy 30% year on year (yoy) to Rs268 crore driven by a growth of 36.6% in the cement realisation. Overall cement volume declined by 4.6% because of excessive rains and floods in Rajasthan and Gujarat.
• The grey cement volume declined by 6.4% whereas its realisation grew by a massive 37%. On the other hand, the white cement volume and realisation grew by 29.6% and 9% respectively yoy.
• The company's leverage to cement prices led to a massive 125% jump in its operating profit to Rs63.5 crore whereas the operating profit margin (OPM) expanded by 10% points to 23.7%. The earnings before interest, tax, depreciation and amortisation (EBITDA)/tonne more than doubled to Rs726 from Rs308 in the same quarter last year.
• The net interest cost stood at Rs9.2 crore whereas the depreciation charge stood at Rs8.1 crore, in line with our expectations.
• The pre-exceptional net profit for the quarter stood at Rs30 crore, up a whopping 512% yoy. The quarter included a one-time extraordinary other income of Rs4 crore in the form of a refund given by the Rajasthan State Electricity Board (RSEB) towards a waiver on electricity duty pertaining to an earlier period. We have treated this as an extraordinary item and accounted for it below the line. The reported net profit grew by 594%.
  

Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,150
Current market price: Rs762

Strong operational performance

Result highlight

• The Q2FY2007 net profit of Sanghvi Movers Ltd (SML) grew by 90.1% year on year (yoy) to Rs13.1 crore, ahead of our expectations of Rs11.4 crore.
• The net revenues grew by 37.1% yoy to Rs47.3 crore driven by the addition of cranes worth Rs80 crore during H1FY2007 and a utilisation rate of 43%, which was higher than that of 40% achieved in Q1FY2007.
• The operating profit grew by 52.3% yoy driven by an 820-basis-point expansion in the operating profit margin (OPM). The OPM expanded by 170 basis points sequentially.
• Despite the addition of the new cranes, the depreciation charge was down 9.7% yoy to Rs8.5 crore, reflecting the effect of the change in the company's accounting policy for depreciation of new assets (bought after April 1, 2005), effected in Q3FY2006. The company has shifted from the written-down value (WDV) method to the straight-line method (SLM). Also it has changed the depreciation method for all assets (bought between April 1, 2002 and March 31, 2005) in the current quarter.
• Driven by the strong operational performance and aided by the lower depreciation the net profit grew by a robust 90.1% yoy to Rs13.1 crore.
• We have upgraded our estimates of earnings per share (EPS) for FY2007 and FY2008 by 4.1% and 5.2% to Rs63.7 and Rs82.9 respectively to take into account the better-than-expected OPM and the revenue growth that is in line with our estimates.
• At the current market price of Rs762, the stock is trading at 9.2x its FY2008E EPS, 6.2x FY2008E cash EPS (CEPS) and 5.0x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs1,150.
  

Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs234

Price target revised to Rs280

Result highlight

• The Q3CY2006 net profit of Hindustan Lever Ltd (HLL) grew by 17.5% year on year (yoy) to Rs383.0 crore, in line with our expectations.
• The net revenues grew by 12.2% yoy on the back of a 14% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses. Adjusted for Nihar (a brand sold by HLL to Marico Industries) the growth in the revenues stood at 12.8%.
• The profit before interest and tax (PBIT) grew by 15.3% yoy as the PBIT margin expanded by 44 basis points yoy to 16.2%.
• The expansion in the PBIT margin was partly a result of an improvement in the margins of the ice cream business and exports. Another reason was the turnaround in the process foods business, which had made losses in Q3CY2005.
• The PBIT margin in the soap and detergent, and personal product businesses contracted by 76 basis points and 136 basis points respectively despite price increases, as the sales and promotion expenses of these businesses went up substantially.
• We have lowered our earnings per share (EPS) estimates for CY2006 and CY2007 by 5% and 6.6% to Rs7.1 and Rs8.5 respectively to take into account the slower-than-expected expansion in the margin of the HPC segment.
• At the current market price of Rs234, the stock is quoting at 26.8x its CY2007E EPS and 24.6x CY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs280.
  

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs370
Current market price: Rs250

Cool gains

Result highlight

• Subros' Q2FY2007 net profit at Rs7.8 crore is sharply ahead of our expectation, primarily because of a higher-than-expected revenue growth and a better operating profit margin (OPM).
• We are upgrading our earnings estimates for Subros by 17% for FY2007 and 13% for FY2008. Our earnings per share (EPS) estimates now stand at Rs28.1 for FY2007 and Rs40.5 for FY2008.
• The revenues for the quarter at Rs166 crore grew by 27% year on year (yoy), driven by an impressive growth in the volumes of its key clients, Maruti Udyog Ltd (MUL) and Tata Motors (TAMO), which are currently reaping the benefits of an 8% reduction in the excise duty on small cars. The total automotive air-conditioning system (AAS) volumes grew by a handsome 41% to 125,756 units and, as expected, the realisation came down by 10%.
• The volume growth (41%) reported by Subros is higher than that reported by its key clients MUL (13%) and TAMO (21%). This means it has been able to increase its combined supply share for these two auto majors from 47% a year ago to 58% in Q2FY2007.
• Driven by a slight improvement in the raw material cost and a strict control on the other operating costs, the OPM for the quarter improved by 240 basis points yoy to 11.1%. Hence the operating profit for the quarter grew by 61.5% yoy to Rs18.3 crore.
• With the commissioning of some of the capacities set up as part of the first phase of the capacity expansion programme, depreciation for the quarter inched up by 10.3% and the interest charge doubled to Rs1.71 crore.
• The net profit for the quarter grew by a handsome 93% to Rs7.8 crore.
  

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs53
Current market price: Rs44

Higher truck sales impact margins

Result highlight

• Ashok Leyland's (ALL) Q2FY2007 results are in line with our expectations, though the margins have been slightly lower than our expectations.
• The net sales for the quarter grew by 34% to Rs1,675.7 crore led by a volume growth of 33%.
• The operating margins have declined by 80 basis points to 8.2% as a result of higher raw material costs, particularly rubber and non-ferrous metals. Consequently, the operating profits (after adjusting for the foreign exchange [forex] gain/loss) for the quarter rose by 22% to Rs138 crore.
• With a price hike of 2.5% with effect from November and a higher contribution from the defence and bus segments in the second half, the margins should improve.
• Higher other income, lower interest costs and stable depreciation aided the company in posting a 27.1% growth in the reported net profits to Rs95.4 crore.
• At the current market price (CMP) of Rs44, the stock quotes at 11.6x its FY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs53.
  

Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs600
Current market price: Rs520

Core operating numbers look promising

Result highlight

• Punjab National Bank's results are slightly below our expectations with the profit after tax (PAT) reporting a growth of 19.7% to Rs505 crore compared to our estimates of a PAT of Rs532 crore.
• The net interest income (NII) was up by 14.4% compared to our estimates of 20.5%. The reported net interest margins (NIMs) for H1FY2007 at 4.16% have improved by 16 basis points year on year (yoy). The bank's CASA ratio at 49% is among the best in the industry.
• The other income decreased by 9.1% to Rs284 crore mainly due to the lower trading income as the fee income growth remained robust at 17.6%.
• The core operating profit was up 33.5% while the operating profit was up 30% with the provisions up from Rs9.4 crore to Rs101 crore mainly due to the higher non-performing assets (NPAs) and standard assets provisioning. We expect that the bank must have utilised the write-back in the excess depreciation due to a fall in the bond yields, booked during Q1FY2007 to make higher NPA related provisions during Q2FY2007.
• The advances growth has been at 28.9% yoy as on September 2006 compared to 37.4% yoy as on June 2006. The moderation in the advances growth is welcome with the high yielding advances like retail growing by 47.7% yoy as on September 2006.
• We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs51.8 and Rs 65.2 to Rs56.1 and Rs 70.7 respectively mainly on account of the improving core banking performance on the back of improving margins and selective credit growth along with a high 49% CASA which protects the cost of deposits during a rising interest scenario. However, the scrip remains exposed to some amount of interest rate risk if the bond yields move up significantly beyond 8% from the current levels.
• At the current market price of Rs520, the stock is quoting at 7.4x its FY2008E EPS, 4.2x pre-provision profits (PPP) and 1.3x book value. The bank is available at attractive valuations given its improving operating performance 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 Rs600.
  

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,004
Current market price: Rs828

Margins dip, just a blip

Result highlight

• Tata Motors� Q2 results are below our expectations due to a marginal drop in the operating margins and higher interest and product development costs.
• The net sales for the quarter are in line with our expectations, marking a growth of 37.4% to Rs6,571.8 crore.
• The operating margins (excluding forex gain/loss and some non-incurring employee expenses) for the quarter have declined by 60 basis points to 11.8%. The margins have been affected due to the higher consumption of steel and rubber in commerical vehicles. Consequently, the operating profits for the quarter have grown by 30.8% to Rs777.9 crore.
• Higher interest and product development costs led to a net profit growth of 30.4% to Rs441.9 crore.
• The company is in talks with Fiat to expand the terms of its joint venture agreement across product categories and markets.
• In view of the favourable domestic market, increasing international dimension (soaring exports, acquisitions & tie-ups) and an aggressive growth strategy, we believe Tata Motors is set to assert itself as a globally competitive auto major.
• Considering the decline in the operating profit margins we are marginally downgrading our estimates by 7% from Rs58.0 to Rs53.9 for FY2007 and by 5% for FY2008 from Rs70.6 to Rs67.4. At the current market price of Rs828, the stock quotes at 12.4x its consolidated FY2008E earnings and 7.9x its FY2008E earnings before interest, depreciation, tax and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs1,004

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