Omax Auto

Investors with a short-term trading perspective can buy the stock of Omax Auto. The stock formed a medium-term peak at Rs 71 on January 11 and is in a medium term downtrend since then. This downtrend halted above the long-term 200-day moving average at Rs 44 after it had retraced about 46 per cent of its prior up-move. That makes it likely that the nascent uptrend from the February 8 low can sustain for a few more sessions. It is apparent from the daily chart that after a two-session halt, the short-term uptrend resumed on Wednesday. The stock has the potential to rally higher towards its 50-day moving average positioned at Rs 57 in the near-term. Movement of the oscillators in daily chart support the continuation of the current up-move. Daily moving average convergence divergence oscillator has just generated a buy signal while the rate of change oscillator is on the verge of moving above the zero line. This stock can be bought with the stop at Rs 48.5 and the targets of Rs 55 and Rs 57.

via BL

Omax Auto

Omax Auto

Omax Auto

Omax Auto

Omax Auto

Omax Auto

BUY - Omax Auto, Indus Fila, Punjab National Bank; HOLD - Bank of India

BUY - Omax Auto, Indus Fila, Punjab National Bank; HOLD - Bank of India

Omax Auto, IVRCL, VSNL, HPCL, India Strategy,Crompton Greaves

Man Financial on IVRCL

IVRCL's Q4FY07 numbers are much above our expectations with sales growth at 67.5% against expectations of 40.2% growth and margins increased to 10.6% as against expectations of 9.5%. With a healthy outlook for the core business and value creation from its real estate ventures, four special purpose vehicles (SPVs), and a strong performing subsidiary, Hindustan Dorr Oliver (HDO), we increase our target price to Rs 448 and maintain BUY.

Man Financial - Crompton Greaves

We expect consolidated eps of Rs 10.2 and Rs 12.5 (excluding upsides from Ganz and newly acquired Microsol) in FY08E and FY09E respectively. CG trades at a PER of of 23x FY08E and EV/EBITDA of 13x FY08E. We currently have a Outperformer rating on the stock. The rating is under review.


Man Financial on HPCL

* HPCL's quarterly results were above estimates as there was marketing over-recovery for Q4FY07 due to higher-than-expected subsidy-sharing by upstream companies.
* Although the refining margins recovered in this quarter, they were slightly disappointing as they lagged industry trends.
* We maintain our Neutral rating with a price target of Rs 315

JP Morgan on VSNL

Valuations and stock view. We maintain neutral rating on VSNL stock with Jun-08 SOP price target of Rs500 (Rs475 previously). Our SOP includes Rs235 from the India business, which we have valued using DCF (implied FY08E EV/EBITDA is 6.0x). Stock is likely to remain in a trading range and we would consider buying around Rs400/share level.

Risks to our view. Downside risks are competition, adverse regulatory changes (regulation of access to cable landing stations) and delay in cash breakeven of TGN. Upside may come from unlocking of surplus land value. Furthermore, listing of RCOM's cable assets (FLAG) could also boost investor outlook on the value of TGN submarine cable system.

JP Morgan on India Strategy

Earnings expectations lowered. Over May, consensus earnings estimates for FY08E & FY09E were revised down by 1.2% and 1.6% respectively. The trend in terms of breadth also remained weak - 29 out of 67 stocks in the MSCI India saw upward revisions, while earnings for 36 stocks were revised down for FY08.
· Consumer, healthcare and financials lead downward revisions. Earnings estimates for the metals, industrials and energy sectors were revised up, while for consumers, healthcare and financial sectors were reduced.
· Earnings expectations and index performance. An analysis of changes in historic and forward EPS expectations vs stock prices indicates significantly higher correlation in the case of materials, financials and consumer discretionary and relatively weaker relationship in the case of IT services, healthcare, telecoms and industrials.
· Key consensus earnings and recommendation changes. Among the stocks mentioned, we have Overweight rating on Jet Airways and Underweight on Bajaj Hindusthan and Arvind Mills

SSKI on Omax Auto

Omax's Q4FY07 revenue and profits have been in line with our expectations, though operating margins were below our expectations. Q4FY07 net sales growth was strong at 27.6%yoy (Rs1.81bn), though operating margins were lower by 130bps qoq (higher 90bps yoy) at 9.1%. Operating profit grew by 42.6%yoy to Rs163m and net profit grew by 10.3%yoy to Rs54.6m, impacted by higher depreciation and interest charges.
The company has trimmed its export target for FY08 to ~Rs400-Rs500m against its earlier target of Rs500-Rs600m. The company's margins which had improved in the first nine months of FY07 due to the company's cost saving initiatives have surprised us negatively in Q4FY07 with an increase in overheads and conversion costs. Further, Omax Auto is not likely to derive any significant cost benefit in its steel procurement from Omax steel as the company's steel production and rolling mill project has not scaled up as planned and the company is now also considering an option of divesting part of its stake in Omax Steel (76% at present). In view of these factors we have lowered our revenue estimates by 4.7% in FY08 and 3.1% in FY09 and also lowered our margin estimates by ~70bps for FY08 and ~30bps for FY09. This has led to a sharp downgrade of 15.8% in earnings for FY08 and 5.3% for FY09. Notwithstanding the sharp earnings downgrade in FY08, valuations at PER of 6.0x and EV/EBIDTA of 4.2x FY09 estimates appear attractive. Maintain Outperformer with revised price target of Rs122 based on PER of 8.0x FY09.

SAIL, Omax Auto, Jyothi Structures, BHEL, Motherson Sumi, India Technicals

Angel on SAIL

Better-than-expected Q4FY2007 performance: Public sector steel major, SAIL, reported a better-than-expected performance for the quarter ended March 2007 (Q4FY2007). It reported a yoy Topline growth of 15.7% to Rs10,385cr (Rs8,980cr). This was primarily led by higher realisations even as volume sales declined during the quarter. It must be noted that the company is already operating at around 119% capacity utilisation, which leaves little room for volume-led growth until new capacities come onstream.

At the CMP, SAIL trades at 11.8x FY2009E EPS, 6.8x EV/EBITDA and P/BV of 2.3x. Considering current valuation of the stock and the outlook in the medium-term, we maintain our Neutral view on the stock.

Angel on Omax Auto

In line Q4FY2007 results: In Q4FY2007 the company’s Net Sales grew by 27.6% yoy Rs181.2cr. The company sustained its margin improvement achieved in 9MFY2007 on the back of a lowered cost base. Operating Profit grew 59.3% yoy to Rs16.3cr. Net Profit grew 116% yoy to Rs8.1cr mainly on account of an 88.2% jump in Other Income. Omax has lowered its operating cost base over the last two quarters and will further benefit from partial captive sourcing of steel and higher capacity utilisation at its Bangalore and Binola plants.

Valuation: At the CMP, the stock trades at 7.3x FY2008E and 6.5x FY2009E Earnings. It appears very attractive at EV/EBIDTA of 4.7x FY2008E and 3.7x FY2009E. We maintain a Buy on the stock with a Target Price of Rs105.


Angel on Motherson Sumi

Consolidated Performance: Motherson Sumi Systems (MSSL) reported Net Sales of Rs462.7cr for Q4FY2007 as against Rs305.4cr in 4QFY2006. The results are not exactly comparable with the corresponding quarter of last year, as Q4FY2007 results include Motherson Advanced Polymer (MAPL) numbers, a 100% subsidiary amalgamated with MSSL with effect from February 1, 2006. OPM, for the quarter, was flat at 16%. Net Profit was Rs45.7cr (Rs42.2cr).

MSSL is a leader in wire harnessing and controls over 65% of the domestic passenger car market. The company is now focusing on the supply of higher level assemblies and modules where the Margins are comparatively higher. The company is also increasing content per car to diversify its product portfolio. MSSL is laying emphasis on its global product plan (GPP) wherein it would enter into JVs with leading tier-I suppliers to upgrade its technology base and increase clientele. MSSL targets to achieve 60% of consolidated turnover from overseas clients. The company expects to continue exploring opportunities in the non-automotive segments, which contributed 15.8% to FY2007 consolidated Revenue compared to 13.8% in FY2006. Increased
share of non-automotive segment is expected to help the company de-risk its business.

We remain positive on the company. We believe MSSL will grow at a CAGR of around 30% over the next two years. We upgrade our consolidated EPS for FY2008E and FY2009E to Rs6.9 and Rs8.4, respectively. At the CMP, the stock trades at 20.4x FY2008E and 16.6x FY2009E consolidated earnings. We maintain a Hold on the stock with a Target Price of Rs130.


Angel on BHEL

Net Sales surge: For Q4FY2007, Bharat Heavy Electricals (Bhel) reported a strong yoy growth of 25.5% to Rs6,919.7cr (Rs5515.7cr). For FY2007, the company reported growth of 29.7% to Rs17,237.5cr (Rs13,289.28cr). This was expected FY2007 being the last year of the Tenth Plan.

Strong Order Book: Bhel clocked a sharp increase in order inflow of more than 88% (5%) to Rs36,300cr (Rs1,9318cr). In absolute terms, order inflow increased by around Rs17,000cr as against a relatively moderate increase of Rs2,650cr in turnover has resulted in an unexecuted order book of Rs55,000cr, an increase of 47% (18%). Of this, the power segment, which accounts for more than 70% of the company's revenues, contributed Rs27,700cr with orders for nearly 9,900MW of capacity being booked during the year. Apart from this, transmission sector orders doubled to Rs1,170cr. FY2007 has been a significantly better year than FY20, in terms of the order intake and order book position, which had grown at a modest rate of 5% and
18% only in FY2006.

Bhel has grown at a CAGR of more than 25% in terms of sales over the past three years. With significant growth in sales, and fixed cost getting spread over a larger base, profits have risen sharply by around 43%. The growth in sales came on the back of a strong order book and government initiatives in the power sector. Going ahead, we expect a slow down in order book to slowdown as there have been issues regarding delays in execution, capacity limitations of the company and the government requires faster execution of the projects to meet the targets set for the Eleventh Plan. The Central Electricity Authority (CEA) had undertaken assessment of preparedness of Bhel to meet the capacity requirement of the power sector during the Eleventh Five Year Plan. The report stated that while some of the delays in the Tenth Plan were on account of state power utilities, major delays have been attributed to Bhel -- “major delays are attributable to Bhel”. Hence, the Ministry of Power has held Bhel responsible for much of the delays in the Tenth Plan, which led to a shortfall of nearly 15,000MW in the period.
At the CMP, the stock trades at 22.2x and 18.2x FY2008E and FY2009E EPS. With valuation stretched and sustained earnings momentum also factored in, we remain Neutral on the stock.


ABN Amro Technicals

The broader indices namely BSE Midcap and C NX 500 are trading near their weekly resistance levels. However, the BSE Smallcap index seems to have some more steam left on the upside. All the major sectoral indices namely, Auto, Capital Goods, Consumer Durables, Healthcare, Oil & Gas, PSU and Bankex are trading near their medium term resistance levels. However, IT Index is trading near the lower end of its channel which suggests the fall in the sector is likely to get arrested in the short term.
The FMCG Index and the Metal Index are also showing some strength in the near term.
To sum it up, the broader indices and major sectoral indices are near their strong resistance levels, after the recent up move. Therefore caution and some profit booking is advised in the short term.

BSE Midcap Index is trading near its weekly trend line resistance of 6187 and 6314. Sustaining above 6314 on a weekly basis can take the index to 6600. On down side support is at 5752.

BSE Small Cap Index faces resistance at 7510; currently the index is in mid way suggesting that it can still witness some up move. Support comes at 6971 and 6815 thereafter.

CNX IT index is trading near its lower band of long term channel hence the chance of bounce back is not ruled out. It needs to sustain and make a good base around 5060, from where it can rally to levels of 5900. In case support is broken on monthly basis it could be headed towards 4500.


ABN Amro on Jyothi Structures

Strong sector growth outlook: The transmission business has high visibility over the next few years, with a continuous focus on improving the power infrastructure in the country. Projects such as Accelerated Power Development and Reforms Programme (APDRP), Rural electrification under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and measures to reduce Aggregate Technical & Commercial (AT&C) losses by upgrading the Transmission & Distribution (T&D) infrastructure would drive demand for the services rendered by the transmission companies. An investment of Rs4270bn is envisaged during the 11th 5 Year Plan on various schemes in the T&D sector.

Valuation: JSL’s revenues and PAT are estimated to grow at a CAGR of 33% and 51% between FY07- FY09. At the CMP of Rs185, JSL trades at 17.3x FY08F EPS of Rs10.7 and 11.8x FY09F EPS of Rs15.7. We reiterate our Buy call on JSL, given the high earnings visibility for the sector, and greater comfort over management

IDBI Capital - Omax Auto

Download here

Stocks you can pick up this week

Marico
Research: India Infoline
Ratings: Outperformer
CMP: Rs 552 (Face Value Rs 10)
12-Month Price Target: NA

Marico has acquired a hair cream and hair gel brand – HairCode from Egypt’s Pyramids Group for an undisclosed consideration. The Pyramids group has agreed for a non-compete agreement in hair creams and hair gels segments with Marico. The brand enjoys ~23% market share of the pre- and post-wash hair care market in Egypt. In September ‘06, Marico had acquired a hair care brand called Fiancee, owned by the Ready Group of Egypt.

With both these acquisitions, Marico has now achieved a dominant market share of ~50% in the Rs1.7-bn pre- and post-wash hair care market in Egypt. Both these acquisitions are expected to contribute ~Rs 95 crore plus to Marico’s consolidated turnover in FY08.

Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Deepak Fertilisers
Research: Anand Rathi
Ratings: Buy
CMP: Rs 87 (Face Value Rs 10)
12-Month Price Target: Rs 120

DFPL is the only domestic producer of isopropyl alcohol (IPA), which until recently was fully imported to cater to domestic demand. IPA will significantly add to the revenues and is likely to contribute around 20% of FY09 revenues. Real estate unlocking further de-risks the revenue model. DFPL has been fractionally unlocking large land bank it has at prime locations in Pune.

Ishanya, a specialty mall, is a unique venture by the company and will add some stability to its revenue base. Availability of gas is to ease raw-material pressures from FY08. Margins have been under pressure due to non availability of natural gas in required quantities, which is likely to ease post the completion of Dahej-Uran gas pipeline by H2FY08, leading to resurrection of margins enjoyed earlier. At the current market price, stock is trading at a P/E of 8.1x and 6.1x and EV/EBITDA of 3.8x and 2.8x FY07 and FY08 earnings respectively. Anand Rathi feels the fruits of the capex underway currently will be realised from FY08 onwards.

Raipur Alloys & Steel
Research: Networth Stock Broking
Ratings: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 200

Raipur Alloys and Steel manufactures 2,10,000 MT of sponge iron and 1,40,000 MT of steel ingots with captive iron ore and power. It is undergoing a structural change with a merger of group companies. Moreover, aggressive plans for backward and forward integration will enhance operating margins going forward. At the current market price, the stock is trading at a P/E of 9.3x FY07E and 5.6x FY08E and EV/ EBITDA of 7.4x FY07E and 5.1x FY08E on a consolidated basis. Networth Stock Broking recommends a ‘Buy’ with a one-year price target of Rs.200, considering P/E of 8x and EV/EBITDA of 6.5x.


Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

NRB Bearings
Research: Buy
Ratings: ULJK Securities
CMP: Rs 493 (Face Value Rs 10)
12-Month Price Target: Rs 551

NRB Bearings with an 80% market share, growing at a CAGR of 18.15% in the last five years, is expected to grow further more on account of surging demand from OEMs and increase in exports. It is undertaking an expansion programme of Rs 100 crore, which is to be completed by end-‘07. It’s expanding its roller bearing segment from 2.045 crore to 2.615 crore, and needle roller from 272.9 crore to 350 crore.

NRB is also setting up a subsidiary company at Thailand for manufacturing activities, and to cater to the growing south-east Asian markets, which will all together help NRB to strenghthen its overseas presence. NRB also enjoys highest margins in the industry despite huge competition and price pressure, from peer companies and OEMs. The stock has a strong potential and to be an outperformer.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

BRICS PCG - Omax Auto

Download here

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%.

---

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.
  

Download here