Indiainfoline - From Research Desk

KPIT Cummins Infosystems Ltd.
Visit Note

We met Mr. Sanjay Sinha, Head – Business Development & Investor Relations and Karthik Krishnan, Manager – Investor Relations to get an update of the recent business developments and to check management’s preparedness and confidence for achieving revenue and earnings target under its Mission 2010.

Under the Mission 2010, the company has set a target of achieving US$250mn in revenues and US$40mn in earnings by FY10. This calls for a CAGR of ~35.5% in revenues from FY07E US$100mn and ~50.5% in earnings from FY07E US$11.6mn over FY07-10. Management has clarified that it should not be construed as a formal guidance as it actually defines the general direction of growth of the company.

RBI continues monetary tightening- Hikes CRR and LAF Repo rate

Major highlights

• CRR hiked by 50 bps in 2 stages effective from 14th and 28th April 2007
• Cut in interest paid on excess CRR above 3% to 0.5% from 1% earlier
• Repo rate hiked by 25bps to 7.75% widening interest rate corridor to 175bps

India’s Central Bank once again hiked policy rates to contain inflationary pressures in the economy. This is sighting high credit growth of 29.4% and inflation, which has sustained over 6% for 11 weeks in a row (currently at 6.46%). While the hike in CRR (by 50bps in 2 stages) and Repo rate (by 25bps with immediate effect) is not unwarranted, the timing of the move certainly is; as the Monetary Policy Review is scheduled on April 24, 2007. RBI has also reduced the rate of interest paid on excess CRR (above 3%) maintained with itself from 1% to 0.5%. While inflation is expected to come down from May 2007 due to the high base effect and impact of monetary measures, sustainable drop is likely with structural changes through capacity additions and better food grain supplies.

All the monetary measures are expected to make money dearer and we expect Banks to once again increase lending and deposit rates. The drop in interest rate on CRR is likely to impact margins marginally by around 2bps, which we expect this to be recovered through lending rates. Sharp rise in interest rates over the past 12 months has seen affordability reduce and could impact asset quality in the future. We maintain our neutral stance on the sector. PNB, BOI and BOB are our top picks, while Canara Bank is our top SELL in our coverage. We are in the process of updating our ratings and will realease it soon.

Sugar Incentives - positive move in short term

Government support for the sector positive in the short term Government has reportedly announced a series of measures to provide short term support to the sugar industry. These measures include:

1. A subsidy of Rs1.35/kg for coastal states like Maharashtra, Tamil Nadu, Karnataka and Gujarat while a subsidy of Rs1.45/kg for north based mills.
2. Creation of a buffer stock of about 2mn tons.
3. With an estimated sugar inventory of about 8mn tons by September 2007, the buffer stock would lower the cost of holding for the companies which would be borne by the government.

Beneficiary Companies

Companies with sizable re-export obligations are expected to take advantage subsidy schemes to partially liquidate their inventories accumulated as a result of bumper cane crop in the current seasons.

For instance, Sakthi Sugars, one of the largest exporters, has an obligation under the Advance License Scheme (ALS) of about 200,000MT to be exported by December 2007. The average import price of raw sugar was about US$200/ton while the company expects export realizations of about US$310/ton which would translate into domestic price of Rs13.2/kg which, coupled with the export subsidy of about Rs1.35/kg, would lead to net export realization of about Rs14.5/kg.

No Impact On Larger Players

Larger sugar companies like Bajaj Hindustan, Balrampur Chini Mills and Triveni Engineering and Industries do not have any obligation under ALS hence would remain unaffected by any such scheme. These companies may, however, look at fresh exports if domestic prices tumble further since this would help them liquidate mounting stocks albeit at lower international realizations.

IIL RESEARCH - Infotech Enterprises

Infotech Enterprises Ltd. Visit Note

We met Mr.Surya Kiran Sripati – Asst GM, Mr.Nataraja – VP Finance & Accounts, and Mr.Nanda Kishore Bajaj - Head Investor Relations, in Infotech Enterprises, to update ourselves on the growth prospects of the company.

Though the company fell short of the US$100mn target, it did not cause undue worries as it had garnered sizeable scale (~US$82mn) by that time.

Confidence level very high for achieving the new target/vision of US$250mn revenues by March 2009. Confidence mainly stemming from current quality (maturity, size & future potential) of engagements with existing large clients and pace of new client additions.

Visibility level for achieving 45% growth in FY08 is at ~75%, similar to what it had for FY07 one year back. Company is confident of earning the balance 25% of growth over the next 12 months

From the Research Desk - EMCO

EMCO Ltd.

EMCO Ltd.’s topline is expected to witness a 46.3% CAGR over FY06-09E backed by a robust order book of Rs10bn, 2.5x FY06 revenues. Transformers constitute 70% of the order book followed by projects at 27% and meters at 3%. This order book is executable over the next 12 months providing visibility for FY07 and FY08. Its order book of Rs2.7bn is executable partly during the quarter and the remaining during FY08. The division is expected to register 29.6% CAGR over FY06-09E.

Majority of the revenues accruing to the company will be contributed by the transformers division where margins are expected to improve due to better realizations. It practices normal hedging techniques and enters into price variation clause for majority of its contracts, which helps it to insulate its margins.

EMCO plans to enter into switchgear manufacturing coupled with power
generation in order to derisk its existing business model. It intends to set up a 135MW coal based thermal power plant at Chandarpur, Maharashtra. Power generation will come under a separate entity EMCO Energy Ltd whereas switchgear will be under EMCO Ltd. Its admission into this field will make it an integrated power player.

With faster execution of orders, strong order intake and improving margins from 12.8% in FY06 to 13.5% in FY07E, provides significant upside to the company’s bottomline. We expect the company’s topline and bottomline to grow at 46.3% and 68.4% CAGR respectively over FY06-09E. We maintain a BUY on the stock.

From the Research Desk - Nagarjuna Constructions

Nagarjuna Construction Company Ltd (NCC)

Nagarjuna Construction Company Ltd (NCC) to benefit from the high investment in road and water verticals, expected to together account for 35.6% of revenues in FY07 and 19.5% in FY08. The current order book is healthy, given NCC’s average execution period of 27 months. With order intake during FY06 at 2x turnover, NCC is set for high growth in the next two years, with an expected topline increase of 54.5% and 43.5% during FY07 and FY08 respectively.

NCC was one of the early entrants into the BOT space and enjoys a good mix with two annuity road projects, two toll based ones and two projects in the power vertical. The company plans to bid for new BOTs on its own having raised
the finances. At the book value of NCC’s equity, these six projects translate into Rs15.8 per share of NCC, which is 9% of the CMP.

NCC will sell 88% of the 50 acres land, in lieu of 12% of the developed area to be given to the government, post the National Games 2007. NCC also has 89% equity stake in the AP Housing project for development of 85 acres. We value these two projects at Rs9.1 per share of NCC at 2x book value of equity infused, comprising 5.2% of the CMP.

We also assign a value of Rs10.9 per share to the 130 acres land bank, over and above the two projects above, with a current market value of Rs3bn, post a 25% haircut. We foresee enormous value unlocking on the development and sale of these properties in future.

From the Research Desk

Indoco Remedies Ltd. Investment Update

Indoco Remedies Limited’s (Indoco) Q2 FY07 results were in line with expectations. Sales recorded a growth of 27.9% to Rs794mn driven by a 14% growth in the domestic market to Rs623mn and 136% growth in the export regulated market to Rs125mn. Operating profit margin (OPM) declined by 90bps to 17.5% as new R&D facility at Rabale, Baddi and La Nova are yet to operate at full capacity leading to higher overheads. Higher depreciation and interest outgo resulted in lower earnings growth of 23.1% to Rs96mn, translating into an annualized EPS of Rs32.5. For H1 FY07, Indoco has witnessed a PAT growth of 26.1% to Rs179mn, translating into an EPS of Rs30.3. With Q4 being the strongest quarter for the company (contribution of 40% to profitability), we are confident that Indoco would achieve our EPS estimate of Rs36.9 for FY07.

We estimate Indoco to witness earnings CAGR of 41.6% to Rs633mn over FY06-08. At Rs280, the stock is trading at 8-9x FY07E EPS of Rs36.9 and 5-6x FY08E EPS of Rs51.5 after factoring in the dilution emerging from the merger of SPA Pharma with Indoco. We believe the stock is undervalued and deserves higher multiple considering contribution from high margin US market, increased traction in contract manufacturing as well as clarity on strong domestic market growth. We maintain BUY with a target price of Rs391 from a 12-month perspective.

From the Research Desk

Dishman Pharmaceuticals & Chemicals Ltd.

Recommendation Maintain BUY
CMP Rs215
Target Price Rs270

Dishman Pharma’s (Dishman) non Solvay contracts are gaining increasing traction. The company has been working with big pharma like Astra Zeneca, GSK, Krka and Merck and has been able to secure contracts in the range of US$10-
15mn.

Dishman’s relationship with Solvay, which begun over 2002-03 through the supply of intermediate/ API for Eposartan Mesylate (EM) has gained critical mass. Dishman is confident of generating revenue of Rs1bn from EM for FY07.

Carbogen Amcis (CA) business is witnessing increasing traction and is on track to record sales of Rs5.3bn for FY08. Growth would be driven by increasing capacity utilization at Cabogen and volume growth at Amcis.

Dishman, through Dishman India and Synprotec has identified contract research as an area for development which would result in contract manufacturing opportunities.

Dishman’s MM segment is likely to deliver 20% annual growth over the next two years. Dishman is increasingly changing its product mix from low end QUATs to high end QUATs.

We expect Dishman to witness revenue CAGR of 77.4% to Rs8.73bn over FY06-08. We believe Carbogen Amcis would be the growth engine for the company over the next few years and is expected to account for 48% of sales by FY08.

While Solvay contracts are on track, contracts with other large pharma companies are gaining increasing
traction and Dishman is emerging as a preferred Asian partner for those companies. MM segment is witnessing strong volume growth driven by a shift in product mix for the company.

We believe Dishman is well placed amongst its peers to capitalize on the lucrative CRAMS opportunity. At Rs215, the stock is trading at 19.5x FY07E EPS of Rs11 and 13.5x FY08E EPS of Rs15.9. We maintain BUY with a target price of Rs270, an
upside of 25.5%.

From the Research Desk

Ahmedabad Visit Note

Cadila Healthcare Limited.

Recommendation Maintain BUY
CMP Rs316
Target Price Rs417

We expect CHL to record revenue CAGR of 20% to Rs24.9bn over FY06-09 driven by strong growth in the export formulations market. Domestic formulations growth is likely to rebound in FY08 and would be above industry average growth. We estimate operating margins to expand by 450bps to 21.7% over FY06-09 driven by US contribution, turnaround of Zydus France and strong foothold in the domestic formulations space. Although there are concerns over the patent loss of Pantoprazole, the management is confident of no launch at risk by generic companies considering the complexity of the product. We estimate net profit to witness revenue CAGR of 32% to Rs3.5bn during the same period. At Rs316, the stock is trading at 17.7x FY07E EPS of Rs17.8, 14.3x FY08E EPS of Rs22.1 and 11.4x FY09E
EPS of Rs27.8. We believe CHL should trade at 19x FY08E and 15x FY09E considering increasing visibility in export formulations, strong foothold in the domestic market and return ratios in excess of 22%. We introduce FY09 estimates and maintain BUY with a target price of Rs417, an upside of 32%.

From the Research Desk

Budget FY08...The Day After

IT/Software:

Policy Initiatives
Non-extension of STP benefits beyond 2009 - Negative especially for all smaller & medium sized IT companies which will be forced to find relief under the SEZ scheme now.

MAT @ 11.2% on adjusted book profits extended to income u/s 10A & 10B – Negative for all the players as effective tax rate would increase (with MAT applicable on STP units) but impact could be severe for medium & smaller players having all or majority units under STP scheme.
Effective Tax Rate (ETR) to go up for almost all companies as STP units u/s 10A & 10B would be taxed at 11.2% now for FY08 & FY09 (till the sunset clause gets over in 2009). Beyond FY09 these units will come out of the tax holiday and would pay normal tax (full tax) on profits. MAT paid over the next two years would be allowed to be set-off post FY09 thereby lowering ETRs of those years to that extent.

Inclusion of ESOPs under the FBT net (rate & method of calculation not disclosed) - Negative for all players.

Higher education allocation by 34.2% to Rs32,352cr - Positive for IT education companies like Educomp Solutions (Not Rated), NIIT (Not Rated), Aptech (Not Rated), etc.

Almost doubling of e-Governance outlays both at the Centre and State level – Positive for companies like Vakrangee Software (Not Rated).

Impact – Negative
“Double Whammy!!!” – EPS estimates of FY08 and FY09 to be worst hit by combination of taxability on STP units
and FBT on ESOPs.

Outlook
We believe the post Budget battering of 5-10% for most of the sector stocks has opened up attractive buying opportunities into the large cap IT space. Though revising our 12-month target price downwards in line with reduction
in EPS forecast, we remain buyers for the Top 5 companies considering reasonable to significant upside potential from current prices. Amongst other stocks, we downgrade Infotech to SELL in the light of limited medium term price
appreciation potential while we maintain HOLD on Allsec.

From the Research Desk -Budget FY08...The Day After

FMCG Industry

Key Announcements

Packed biscuits of maximum retail sale price (MRP) not exceeding Rs50 per kg fully exempted from excise duty.

Excise duty on food mixes (including instant food mixes) fully exempt from excise duty.

Customs duty on food processing machinery has been reduced from 7.5% to 5%.

Crude as well as refined edible oils exempt from the additional CV duty of 4%.

Customs duty on crude sunflower oil has been reduced from 65% to 50% and on refined sunflower oil from 75% to 60%.

A Special Purpose Tea Fund launched for re-plantation and rejuvenation of tea. Similar financial mechanisms to be announced for coffee.

Excise duty on parts of footwear reduced from 16% to 8%.

Impact

Positive for Marico, Bata, organized biscuit manufacturers like Britannia, ITC and food-processing companies like ITC, Nestle, HLL, Dabur, MTR Foods.

From the Research Desk - Budget Impact

Budget Impact

General

Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies.

Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividend distribution tax at 25%.

Levy of additional 1% cess for funding of secondary and higher education.

Cement - Negative

Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continuous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.

Increase in allocation for Bharat Nirman, Rural housing and roads is positive for the industry from demand side.

IT – Negative

Higher education allocation by 34.2% to Rs32,352cr to be positive for IT education companies like NIIT, Aptech, Educomp Solutions, etc.

Almost doubling of e-Governance outlay both at centre and state level to benefit companies like Vakrangee to major extent and TCS and other Government focused companies to some extent

MAT to be applied to IT companies to 11.2% on book profits

Inclusion of ESOPs under the FBT net negative for the sector

Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies.

Research Calls

Emkay (Private Client Research) recommends a Buy Taj GVK Hotels and Resorts at Rs 196 with a price target of Rs 250. At Rs 196, the stock trades at 19 times and 14 times its estimated FY07 and FY08 earnings.

With Taj GVK’s predominant presence in Hyderabad and expansion of operations in Chandigarh, Chennai and Bangalore where the ARR's and occupancies are expected to remain strong, Emkay expects the company to register good growth over the next few years.

The company however registered a lacklustre growth year on year in the third quarter of FY07 primarily due to decline in occupancy rates in Hyderabad from 84 per cent to 78 per cent during the quarter though average room rate (ARR) improved by around 23 per cent.

Operating margins came under pressure due to lower occupancies and a significant increase in staff cost. The company has proposed a capital expenditure of Rs 400 crore over the next three years to add new properties and expand in some of its current properties.

It plans to add atleast one property in each financial year till 2009-10 which will result in an increase in the room capacity from the current 684 rooms to 1834 rooms by 2009-10.

Taj GVK Hotels and Resorts is a joint venture between Indian hotels and the GVK group with the former holding 25.5 per cent in the company, which is a market leader in Hyderabad and Chandigarh with consolidated room strength of 534 and 150 respectively.

Infrastructure Development Finance Corporation (IDFC)

BRICS Private Client Group recommends a Sell Infrastructure Development Finance Corporation (IDFC) at Rs 110 as it feels that there is a limited upside of 5 per cent from Rs 110 as it has risen by 50 per cent in he past five weeks.

In a sum of parts valuation, the standalone entity trades at 2.5 times estimated FY09 book value. With strong domain expertise and an established brand, IDFC is well positioned to capitalise on the burgeoning oppurtunities in infrastructure asset management.

However a key concern remains declining net interest margins though net interest income growth is strong, its inability to scale up fee income ( which declined by 13 per cent year-on-year in 9M FY07) any further to substitute the current high contribution of treasury and proprietary investments.

However the positive aspect about the company is its asset management business as well as its investment in the National Stock exchange.

Madhucon Projects

Angel Broking recommends a Buy on Madhucon projects at Rs 277 with a 12 month price target at Rs 351. At Rs 277, the stock trades (net of BOT and real estate projects) at 12.3 times and 7.3 times its estimated FY2008 and FY2009 earnings respectively.

Madhucon derives 99 per cent of its revenues from roads and irrigation sector which are expected to see huge investments. While investments in road sector are expected to increase at a CAGR of 24 per cent, another key positive is Andhra Pradesh's proposed investment in 5 years.

This macro-environment will boost the the company’s current order book of Rs 4400 crore and also expand the top line. Moreover its order book to sales ratio of 12.9 times its FY2006 revenue looks extremely comfortable and is executable over a period of the next 3 years.

Angel expects the company to post revenue CAGR of 68.3 per cent and a net profit CAGR of 58.8 per cent over a period of FY2007-FY2009.

Madhucon enjoys better operating margins than its peers due to large Build-Own-Operate (BOT) projects, sub-contracting low value added work and owned equipment for construction. The company has a land bank of 9 acres in Kukatpally, Andhra Pradesh and is expected to develop an area of 2.2 million sq feet over a period of the next 4 years.

Siemens

Networth Stock broking recommends accumulating Siemens at Rs 1162 with a price target of Rs 1250. At Rs1162 , the stock trades at 23.49 times estimated FY08 earnings.

During the December 2006 quarter, net sales rose 91.1 per cent year on year to Rs 1626.9 crore. Strong growth in revenues was mainly driven by power, industrial solution and services and building technologies while healthcare and other services showed a lacklustre performance.

The other business segments like information and communication, automation and drive, automotive and transport registered a marginal decline in their revenues. Operating profit grew 66.8 per cent to Rs 116.95 crore and net profit doubled to Rs 98.1 crore.

Operating margin continued to remain under pressure dipping by 105 basis points due to higher material cost. Order inflow rose 23 per cent due to a major repeat order from the power division of Qatar. Order book to sales at the end of Q1FY07 stood at 2.4 times its 12 months trailing revenue.

Networth expects the company's consolidated revenue and net profit to grow at a CAGR of 37 per cent and over 40 per cent respectively in the next two years.

From the Research Desk - Cadila Healthcare

Cadila Healthcare Ltd (Q3FY07): BUY - Investment Update

Cadila Healthcare Limited’s (CHL) Q3 FY07 results were better than expectations. Key positives are significant growth (188.3% yoy and 106.1% qoq) and declining losses of Zydus France as well as maintaining the growth momentum in the US market. Domestic formulations sales were muted for the third quarter in a row, growing a dismal 6.2% for 9M FY07. Implementation of VAT in Tamil Nadu in December, which accounts for nearly Rs70mn of sales per month affected domestic formulation sales. However growth is likely to return to normal in Q4 FY07. Despite this strong topline growth, OPM contracted by 200bps due to higher spending on R&D (6.3% of sales vs 4.3%) and advertising for the quarter. One time income of Rs196mn on account of sale of branded business in France propelled 66% bottomline growth to Rs659mn translating into an annualized EPS of Rs21.

Post result conference call with the management has further reaffirmed our view about increasing clarity on CHL’s international operations. The management has highlighted that Q3 FY07 figures for Zydus France were not one off in nature and 60-70% growth in this market was achievable for FY08. Further the company is on track to turn EBIDTA positive for this market in FY07. US sales are going strong and with a wide basket of products, we believe 40% growth is achievable in US. CRAMS business has not run out of steam with CHL signing additional 3 contracts for the quarter, taking total contracts to 20 with peak revenue potential of US$27.5mn. The JV with Mayne for oncology products continues despite the latter being acquired by Hospira and the management believes that numbers would be bigger than estimated earlier due to wider geographic reach of Hospira. The domestic formulations business is likely to clock above average growth after a muted 9M FY07. Post the strong performance in 9M FY07 and increased visibility on earnings, we have increased our FY07 & FY08 estimates by Rs1.3 and Rs2 respectively. We thereby raise our target price to Rs416. We maintain BUY on the stock.

From the Research Desk - HLL

Hindustan Lever Ltd. (HLL) F12/06 - Result Update

HLL recorded 9.4% yoy growth in net sales at Rs121bn in F12/06 driven by 13.7% yoy growth in HPC (double-digit growth in laundry and toothpaste) and 9% yoy growth in Foods segment. During Q4 F12/06, the company has taken a price hike in some of its most popular brands like Lux (by 7.7%), Lifebuoy (100gms pack - by 11%) and Surf Excel Blue (1.5kgs pack - by 3.5%).

Operating profit increased by 14.2% yoy to Rs16.5bn. Operating margins expanded marginally by 60bps to 13.6% mainly due to sharp 26.6% yoy rise in adspend at Rs12.7bn (10.5% of sales). The company is likely to maintain the high levels of adspend (between 10-15%) going forward.

Pre-tax profit grew by 16% yoy to Rs18.6bn partly aided by higher other income and lower interest cost. Effective tax rate was at 17.3% resulting in a tax outgo of Rs3.2bn. Net profit grew by 13.7% yoy to Rs15.4bn.

Adjusted net profit after extraordinary income (Rs3.2bn) rose by 31.8% yoy to Rs18.6bn translating in an EPS of Rs8.4 per share. The company has declared a final dividend (including interim dividend of Rs3) of Rs6 per share.

Going forward, HLL’s growth would primarily be driven by growth momentum in the topline. At the current market price of Rs19, the stock is trading at 23.3x F12/07E EPS of Rs8.4 per share. We maintain ‘Market Performer’ rating on the stock.

From the Research Desk - Opto Circuit

Opto Circuits (India) Limited (OCIL): Maintain BUY - Investment Update

Opto Circuits India Limited (OCIL) recorded another strong quarterly performance with standalone sales witnessing a growth of 71.4% to Rs552mn. Economies of scale, cost cutting measures and better product mix has led to 250bps jump in OPM to 35.3% for the quarter. Healthy topline growth and strong margin expansion has led to a 98% growth in profitability to Rs198mn for the quarter. Consolidated sales recorded a growth of 88% to Rs628mn driven by increasing volumes in the base business and growing acceptance and wider penetration of EuroCor’s stents. OPM declined by 210bps to 32.5% for consolidated results due to lower margins for AMDL (60% subsidiary, sales Rs106mn, OPM 6%), a domestic distribution company for OCIL’s products. PAT increased by 90% to Rs200mn, translating into an annualized EPS of Rs13.

We like OCIL’s business model and believe the model would be difficult to replicate. OCIL is witnessing very strong volumes on its base business (SpO2 sensors & pulse oxymeters) which are estimated to witness revenue CAGR of 31% over FY06-08. EuroCor’s stents are witnessing wider geographical penetration and increasing acceptance amongst cardiologists which should enable it to contribute at least 30% to the total revenue and profitability by FY08. By moving low end stents manufacturing to India, OCIL would keep its margins intact by leveraging on India’s low cost advantage as well as tax benefits under 100% EOU. Strong operational performance every quarter vindicates our belief that OCIL would achieve our EPS estimates of Rs11.3 for FY07 and Rs17.8 for FY08.

OCIL is undergoing a financial and legal due diligence on a European Medical Equipment Company that designs and manufactures a wide range of balloon catheter assemblies and related products for coronary, renal and other applications. The acquisition estimated at Rs720mn is likely to close out over the next few weeks. We believe this acquisition will be a huge strategic fit for the company as it would enable OCIL to achieve backward integration thereby improving operational performance and profitability. We maintain BUY on the stock.

From the Research Desk

Hexaware Technologies Ltd. Result Update for Q4 CY06

Hexaware delivered decent performance in the quarter with revenues growing 6.8% qoq and earnings de-growing 2.7% qoq marred by the impact of sharp rupee appreciation. The Dollar revenue growth of 10.7% qoq was impressive in the quarter. For the full year CY06, revenue and profit growth stood strong at 39.9% and 99% respectively excluding PeopleSoft ISC. Company has entered CY07 with a strong order book of ~US$170mn (for the year) and confidence of doubling its operations over the next 8-10 quarters. FocusFrame integration is running ahead of schedule and is expected to complete by end CY07. Management has issued a guidance of a robust topline growth and subdued bottomline growth in Q1 CY07.

Outlook

Based on the company’s broad guidance for CY07, it is likely to post an EPS of about Rs12.4, which discounts CMP Rs174 at 14x. Being a reasonably large and old mid-cap IT company with good management, the current valuations appear attractive to us. Valuing Hexaware at the higher-end (due to CY ending unlike peers) of the one-year forward peer P/E band of 15-19x, we arrive at a 10-12 month target price of Rs224 representing 29% upside

From Research Desk

Dishman Pharmaceuticals and Chemicals Limited

Dishman Pharmaceuticals and Chemicals Limited’s (Dishman) Q3 FY07 results were in line with expectations. Sales recorded a growth of 181% to Rs1.7bn driven by CRAMS which includes the full impact of Carbogen Amcis (CA-sales Rs820mn) for the first time. Sales for EM (Eposartan Mesylate) to Solvay are back on track after a sluggish H1 FY07 and on target to record Rs1bn for FY07. Operating profit margin (OPM) declined by 110bps to 28.2% as CA has lower margins as compared to other business segments of Dishman. Consolidation of CA which has led to higher depreciation and interest outgo restricted PAT growth to 25% to Rs244mn, translating into an annualized EPS of Rs12 on a fully diluted basis.

Post result conference call with the management has further reaffirmed our view that Dishman would be one of the best bets in the growing outsourcing space. Starting with Solvay as its only client in 2003, Dishman has made significant progress in this space, emerging as a preferred supplier for big pharma companies (GSK, Merck, Krka, AZN, Sanofi Aventis). CA business is gaining increasing momentum surpassing its own estimates for CY06. With capacity at Amcis nearing saturation, a few customers have expressed an in principle approval to shift operations to Dishman India. This we believe is a very positive sign for both Dishman and the industry at large as it shows confidence in Dishman’s IPR adherence.

Apart from CRAMS, Dishman has also made significant progress in the Electrolyte QUATs business and has signed a couple of long term contracts with global majors. One contract with Ferro Corporation worth US$6mn annually is progressing smoothly. In addition, Dishman has broadened its top management by appointing a COO and a CFO, which indicates robust growth in the years to come.

We are very positive on Dishman’s CRAMS strategy and believe Dishman will be able to leverage strongly on the relations developed with big pharma companies in CRAMS. At Rs236, the stock is trading at 22.7x FY07E EPS of Rs11 and 14.9x FY08E EPS of Rs16.8. We maintain BUY with a target price of Rs286 based on 17x FY08 earnings.

Kesoram Industries Ltd. (KIL) Q3FY07
Result Update

Kesoram Industries Ltd.'s (KIL) cement despatch for Q3FY07 increased by 10.6% to 0.84mn ton and tyre volumes increased by 19.9% to 20331 ton. Cement capacity utilization for Q3FY07 increased to 116% compared to 105% in Q3FY06 and Q2FY07. We estimate FY07 despatches to be at 3.35mn ton with new capacity expected to commence commercial production in March 2007. We expect cement volumes to be at 4.2mn ton for FY08 with staggered production for the new capacity.

KIL’s gross cement realization went up by 45.7% to Rs3285 yoy for Q3FY07 but was down sequentially by 2.7%. Cement prices are looking up in the recent months. We expect realisations for KIL to improve 3.6% in FY08 over FY07. The recent customs duty removal for cement is expected to have marginal impact on pricing front and prices are expected to rule firm till major capacities are coming in FY09.

Tyre margin for Q3FY07 has come down to 4.1% from 4.6% on yoy basis and on sequential basis the same has come down from 6.1%. Prices of key inputs like Carbon Black, NTCF and Synthetic Rubber has firmed up in the quarter and reduction in average natural rubber price to the tune of 6% has not had a major impact. Tyre producers reduced the prices of tyres also by nearly 4% in September 2006 which has reduced the EBIT margins for tyre segment. We expect natural rubber prices to continue at the present levels and possibility of increase in tyre prices by the producers if the prices exceed Rs10000 per quintal. Recent reduction in Carbon Black is a positive for the sector.

Rayon and Transparent Paper (TP) division has turned around and posted profits at EBIT level in Q3FY07. Definitive anti-dumping duty was imposed for VFY in Q2FY07 and provisional duty was imposed on TP in Q4FY06. This has improved the prospects of these segments and prices have started moving up. From negative EBIT margin in Q3FY06 and Q2FY07 the segment has recorded 4.3% EBIT margin in Q3FY07.

KIL’s share is discounting its FY07 and FY08 estimated earnings by 10.1x and 8.4x. We expect cement and tyre business margins to improve going forward with price increases. With increased cement capacity and ongoing expansion on tyre capacity, we expect KIL to be well positioned to exploit the up-cycle in these sectors. KIL is expanding its cement capacity by 1.5mn ton which is expected to come online in Q4FY09 and planning to increase its tyre capacity by putting Greenfield tyre capacity at Jharkhand. It has purchased land for new tyre capacity at Rs600mn recently. With major capacity expansions, KIL is expected to become a mid-sized player in Cement and Tyres and command better valuations going forward. We revise our target from Rs641 to Rs668 based on estimated FY08 earnings upgrade. Our target discounts FY08 by 10x. We maintain our BUY rating on the stock.

Chennai Petroleum Corporation Ltd. (CPCL) Q3FY07
Result Update

Chennai Petroleum Corporation Ltd. (CPCL) announced Q3 FY07 results, which were below expectations primarily on account of a shutdown in the month of December 2006. Net sales rose by 7.9% yoy to Rs59bn on account of higher realizations and also on back of refund of Rs1.2bn offered to oil marketing companies as discount on LPG and SKO for the period of April 2006 to September 2006. The profit growth was stunted, as GRMs for the company remained flat at US$2.7/bbl, which was on backdrop of weakness in refining margins across the globe and also on account of Rs1bn inventory loss.

Going ahead the company is the process of expanding its capacities from the current levels of 10.5mn tons to around 12.3mn tons. The expansion is through de-bottlenecking of the existing facilities. We have a positive outlook for the trend in gross refining margins going ahead as demand is likely to remain strong for petroleum products especially from developing countries such as India and China. The emission standards are getting stringent in most of the developing and developed economies leading to increased demand for low sulphur fuels. Existing refineries are spending on upgrading their facilities to process heavier varieties of crude oil and hence there are no major capacity additions coming on stream during the next couple of years. Apart from these factors, a complex refinery can also leverage upon the increasing differential between prices of heavy and light crude. CPCL's Manali refinery, which has a nelson complexity index of over 9, should be able to clock higher GRMs in Q4 and also in the couple of years going ahead.

On the above premise that the GRMs will strengthen and also for the fact that CPCL is increasing its capacity by 1.8mn tons per annum, we believe that the company can witness a CAGR of 15.2% between FY06 and FY09 in earnings. The stock at CMP of Rs204, trades at 5.1x and 4.6x FY08 and FY09 estimated EPS of Rs43.9 and Rs49.4 respectively. With high complexity index of the refinery and rising demand for lower emission products, we feel that CPCL should trade at 4.5 times FY09 EBIDTA, which yields a target of Rs282 giving an upside of 25.3%. We recommend a BUY.

CRR Hike Impact

In a surprising move RBI last evening hiked the Cash Reserve Ratio (CRR) currently at 5.5% by 50bps effective in two stages from 17th February and 3rd March 2007. This is likely to suck out Rs140bn liquidity from the market. The move seems to emanate from RBI’s concern on rising inflation and sustained high credit growth.

We expect the banking and real estate sector to be the biggest losers of this move. Hike in CRR in all likelihood will prompt for another round of PLR hikes, which would pull down consumer loan growth and especially mortgage loans. The ripple effect of this would be felt by the real estate sector, where this could form the much awaited trigger for drop in real estate prices, which have held on despite rising interest rates (small correction in some parts).

From the Research Desk - Kesoram

Kesoram Industries Ltd. (KIL) Q3FY07 - Result Update

Kesoram Industries Ltd.'s (KIL) cement despatch for Q3FY07 increased by 10.6% to 0.84mn ton and tyre volumes increased by 19.9% to 20331 ton. Cement capacity utilization for Q3FY07 increased to 116% compared to 105% in Q3FY06 and Q2FY07. We estimate FY07 despatches to be at 3.35mn ton with new capacity expected to commence commercial production in March 2007. We expect cement volumes to be at 4.2mn ton for FY08 with staggered production for the new capacity.

KIL’s gross cement realization went up by 45.7% to Rs3285 yoy for Q3FY07 but was down sequentially by 2.7%. Cement prices are looking up in the recent months. We expect realisations for KIL to improve 3.6% in FY08 over FY07. The recent customs duty removal for cement is expected to have marginal impact on pricing front and prices are expected to rule firm till major capacities are coming in FY09.

Tyre margin for Q3FY07 has come down to 4.1% from 4.6% on yoy basis and on sequential basis the same has come down from 6.1%. Prices of key inputs like Carbon Black, NTCF and Synthetic Rubber has firmed up in the quarter and reduction in average natural rubber price to the tune of 6% has not had a major impact. Tyre producers reduced the prices of tyres also by nearly 4% in September 2006 which has reduced the EBIT margins for tyre segment. We expect natural rubber prices to continue at the present levels and possibility of increase in tyre prices by the producers if the prices exceed Rs10000 per quintal. Recent reduction in Carbon Black is a positive for the sector.

Rayon and Transparent Paper (TP) division has turned around and posted profits at EBIT level in Q3FY07. Definitive anti-dumping duty was imposed for VFY in Q2FY07 and provisional duty was imposed on TP in Q4FY06. This has improved the prospects of these segments and prices have started moving up. From negative EBIT margin in Q3FY06 and Q2FY07 the segment has recorded 4.3% EBIT margin in Q3FY07.

We expect cement and tyre business margins to improve going forward with price increases. With increased cement capacity and ongoing expansion on tyre capacity, we expect KIL to be well positioned to exploit the up-cycle in these sectors. KIL is expanding its cement capacity by 1.5mn ton which is expected to come online in Q4FY09 and planning to increase its tyre capacity by putting Greenfield tyre capacity at Jharkhand. It has purchased land for new tyre capacity at Rs600mn recently. With major capacity expansions, KIL is expected to become a mid-sized player in Cement and Tyres and command better valuations going forward. We revise our target from Rs641 to Rs668 based on estimated FY08 earnings upgrade. Our target discounts FY08 by 10x. We maintain our BUY rating on the stock.

From Research Desk

GlaxoSmithkline Consumer Healthcare Ltd (F12/06)
Result Update

GlaxoSmithkline Consumer Ltd. recorded 15% yoy growth in net sales at Rs11.1bn during F12/06 driven by average volume growth of ~8% in Horlicks and Boost. Revenues for the quarter increased by 9.2% yoy (down 12.2% qoq) to Rs2.6bn, led by a average volume growth of ~4% in Horlicks and Boost. Biscuits category recorded a ~11% yoy growth during the year. The company has taken ~5% price increase in Horlicks and 2% price hike in Boost (in November) resulting in a average price increase of ~4.5%.

Operating profit for the year remained almost stable at Rs1.8bn. Operating margins dipped by 250bps to 16.6% mainly due to the sharp 190bps rise in raw material cost. Milk prices increased significantly by 16% this year and are expected to remain higher by ~20-25% in F12/07. Prices of other key raw materials like malted barley (expected to remain higher by 5% yoy in F12/07), wheat, sugar, coco powder etc are also expected to remain firm. During Q4 F12/06, margins dipped by 540bps to 10.4% due to higher input (370bps) and staff (250bps) cost. Lower adspend (12.7% of net sales in Q4 F12/06 from 14.9% of net sales in Q4 F12/05) restricted further margin erosion.

Other income (including cross charge of Rs70mn per quarter received on account of OTC products sold on behalf of GlaxoSmithkline Pharmaceuticals Ltd) for the quarter and year was higher at Rs169mn and Rs522mn respectively. PBT rose by 17.3% yoy to Rs1.9bn during F12/06 driven by higher other income and lower interest cost. Effective tax rate was at 33.4% resulting in a tax outgo of Rs636mn. Net profit for the year increased by 18.5% yoy to Rs1.3bn translating into an EPS of Rs30.1.

The management expects to record a double-digit topline growth in F12/07 driven by strong growth in Horlicks and Boost and expects to maintain the margins at ~20% (including other income). However, higher input cost could put pressure on margins. Exports account for 5% on the company’s total sales and are expected to continue at the same level. Acquisitions, if any could be a growth driver for the company. At the current market price of Rs582, the stock is trading at 19.3x FY07 EPS of Rs30.1 per share. We recommend a ‘Hold’ rating this stock.

Madras Cements Ltd. (MCL) - Q3 FY07
esult Update

MCL’s cement volumes increased by 27% y-o-y to 1.48mn ton and on sequential basis it went up by 1%. MCL has increased its despatches despite monsoon in the Southern States. We expect MCL’s despatches to be at 5.78mn ton for FY07, up from 5.66mn ton as per our previous estimation. We retain our FY08 and FY09 cement volume at 6.02mn ton and 7.49mn ton as new capacities comes in at FY08/FY09.

MCL’s OPM increased by 1560 bps to 32.7% on y-o-y basis but went down 620 bps on sequential basis due to increase in cost per ton of cement. Cost per ton increased by 4.8% sequentially to Rs1784 in Q3FY07. On y-o-y basis it increased by 3.0%. Higher coal prices in international market and increase in freight charges has led to increase in costs. Power & Fuel expenses per ton went up by 6.7% sequentially to Rs551 and freight charges increased by 9.8% to Rs374. Realization per ton fell by 4.7% sequentially to Rs2651. We have factored 2.3% fall in our estimations for the quarter. Cement price have rebound in Southern markets post monsoon and hovering at pre-monsoon levels at present.

Interest cost for the quarter has come down 24.6% y-o-y to Rs85mn. Sequentially it has more than doubled. Higher requirement for working capital due to fund requirement for ongoing expansion and interest rates firming up has increased the interest burden for Q3FY07 over Q2FY07.

We revise our FY07 earnings estimate from Rs291.2 to Rs280.7 and retain our FY08 and FY09 earnings estimates at Rs339.3 and Rs355.8 respectively. We consider MCL as better play in Southern region going forward. MCL is expanding cement capacity by 4mn ton to take the total capacity to 10mn ton by FY09. MCL is putting up 18MW CPP at Jayanthipuram facility by Q1FY08. MCL is trading at 10.1x and 9.6x of its estimated FY08 and FY09 earnings of Rs339.2 and Rs355.7 respectively. We maintain our BUY rating with target price of Rs4270. Our target price discounts FY09 earnings by 12.0x and EV/EBIDTA by 7.6x.

Arihant Foundation & Housing Ltd (Q1 F9/07 )
Result Update

Property demand in Chennai remained firm in the Oct-Dec quarter, helping AFHL book a 64% growth in revenues. The company currently has 5 on ongoing projects and has booked total sales of 0.19mn sqft during the quarter as against 0.16mn sq ft in the previous quarter. AFHL is currently carrying a Work-In-Progress inventory of Rs590mn, the sales for which should be converted over the next two quarters.

While the CBD, OMR and GST rd have seen stable to rising prices, other areas like Ambattur have not picked up as well as expected. As a result majority of the company’s projects are earning gross margin in the range of 35-40%. However, the commercial project at Ambatur (approximately 55% of revenues in Q1 F9/07) grossed around 22%, pulling down blended margin to 25.3%, a drop of 114bps over Q1 F9/07. However, we expect margin to look up from third quarter as high margin project contribution increases.

In line with the company’s guidance, it has started foraying outside Chennai. AFHL has added four new projects one each in Madurai (21 acres), Vijaywada (50 acres), Poonamali high rd (5 acres) and Mall + hotel (0.6mn sq ft) on the OMR rd. We have yet to factor in these new projects in our estimates, which are likely to contribute to revenues from F9/09.

We have delayed our project completion phase in some of AFHL’s projects (no guidance from the management). As a result we have revised our revenue growth downwards by 17% each for F9/07 and F9/08, while earnings have been revised downwards only 7% and 1% in the respective years. Lower revision in earnings is on account of lower tax rate.

Usha Martin Ltd
Result Updat

Usha Martin posted strong results for Q3 FY07 with stand-alone earnings rising 19.8% qoq and 72.2% yoy. On consolidated basis, net profit growth was higher at 29.3% on sequential basis. This robust bottomline performance was led by significant operating margin expansion; 170 bps qoq on stand-alone basis and 390 bps qoq on consolidated basis. During the quarter company reaped the benefits of higher iron ore integration, better realizations and improved product mix. We maintain 'BUY' and raise our EPS estimates to Rs27.2 (earlier Rs26) for FY07 and Rs34.1 (earlier Rs32.6) for FY08. Our one-year target price is Rs251 based on 5.2x FY08 EV/EBITDA and implying a multiple of 7.4x on FY08 EPS.

Since our last recommendation at Rs170 in our Q2 FY07 Investment Update in November 2006, the stock has run-up by 24%. Despite this, we still maintain 'BUY' as Q3 FY07 performance was above our expectations and has forced us to raise earnings estimates. At CMP of Rs210, company trades at 7.7x FY07E EPS and 6.2x FY08E EPS. We believe these valuations does not reflect sufficient premium to commodity steel makers with company's character of an alloy/special steel manufacturer producing high value added products like Wires and Wire Ropes in majority. Also company's products are subjected to far less cyclical price fluctuations than that of commodity steel players. With operating margin on improvement path from backward integration (iron ore - started & coal - to start) and stress on value added products, we expect material upgrades to valuations.

From Research Desk - GlaxoSmithkline Consumer Healthcare

GlaxoSmithkline Consumer Healthcare Ltd (F12/06) - Results Update

GlaxoSmithkline Consumer Ltd. recorded 15% yoy growth in net sales at Rs11.1bn during F12/06 driven by average volume growth of ~8% in Horlicks and Boost. Revenues for the quarter increased by 9.2% yoy (down 12.2% qoq) to Rs2.6bn, led by a average volume growth of ~4% in Horlicks and Boost. Biscuits category recorded a ~11% yoy growth during the year. The company has taken ~5% price increase in Horlicks and 2% price hike in Boost (in November) resulting in a average price increase of ~4.5%.

Operating profit for the year remained almost stable at Rs1.8bn. Operating margins dipped by 250bps to 16.6% mainly due to the sharp 190bps rise in raw material cost. Milk prices increased significantly by 16% this year and are expected to remain higher by ~20-25% in F12/07. Prices of other key raw materials like malted barley (expected to remain higher by 5% yoy in F12/07), wheat, sugar, coco powder etc are also expected to remain firm. During Q4 F12/06, margins dipped by 540bps to 10.4% due to higher input (370bps) and staff (250bps) cost. Lower adspend (12.7% of net sales in Q4 F12/06 from 14.9% of net sales in Q4 F12/05) restricted further margin erosion.

Other income (including cross charge of Rs70mn per quarter received on account of OTC products sold on behalf of GlaxoSmithkline Pharmaceuticals Ltd) for the quarter and year was higher at Rs169mn and Rs522mn respectively. PBT rose by 17.3% yoy to Rs1.9bn during F12/06 driven by higher other income and lower interest cost. Effective tax rate was at 33.4% resulting in a tax outgo of Rs636mn. Net profit for the year increased by 18.5% yoy to Rs1.3bn translating into an EPS of Rs30.1.

The management expects to record a double-digit topline growth in F12/07 driven by strong growth in Horlicks and Boost and expects to maintain the margins at ~20% (including other income). However, higher input cost could put pressure on margins. Exports account for 5% on the company’s total sales and are expected to continue at the same level. Acquisitions, if any could be a growth driver for the company. At the current market price of Rs582, the stock is trading at 19.3x FY07 EPS of Rs30.1 per share. We recommend a ‘Hold’ rating this stock.

From Research Desk - Madras Cements Ltd. (MCL) – Result Update Q3 FY07.

CMP – Rs3,418
Rating – BUY
Target – Rs4,270

MCL’s cement volumes increased by 27% y-o-y to 1.48mn ton and on sequential basis it went up by 1%. MCL has increased its despatches despite monsoon in the Southern States. We expect MCL’s despatches to be at 5.78mn ton for FY07, up from 5.66mn ton as per our previous estimation. We retain our FY08 and FY09 cement volume at 6.02mn ton and 7.49mn ton as new capacities comes in at FY08/FY09.

MCL’s OPM increased by 1560 bps to 32.7% on y-o-y basis but went down 620 bps on sequential basis due to increase in cost per ton of cement. Cost per ton increased by 4.8% sequentially to Rs1784 in Q3FY07. On y-o-y basis it increased by 3.0%. Higher coal prices in international market and increase in freight charges has led to increase in costs. Power & Fuel expenses per ton went up by 6.7% sequentially to Rs551 and freight charges increased by 9.8% to Rs374. Realization per ton fell by 4.7% sequentially to Rs2651. We have factored 2.3% fall in our estimations for the quarter. Cement price have rebound in Southern markets post monsoon and hovering at pre-monsoon levels at present.

Interest cost for the quarter has come down 24.6% y-o-y to Rs85mn. Sequentially it has more than doubled. Higher requirement for working capital due to fund requirement for ongoing expansion and interest rates firming up has increased the interest burden for Q3FY07 over Q2FY07.

We revise our FY07 earnings estimate from Rs291.2 to Rs280.7 and retain our FY08 and FY09 earnings estimates at Rs339.3 and Rs355.8 respectively. We consider MCL as better play in Southern region going forward. MCL is expanding cement capacity by 4mn ton to take the total capacity to 10mn ton by FY09. MCL is putting up 18MW CPP at Jayanthipuram facility by Q1FY08. MCL is trading at 10.1x and 9.6x of its estimated FY08 and FY09 earnings of Rs339.2 and Rs355.7 respectively. We maintain our BUY rating with target price of Rs4270. Our target price discounts FY09 earnings by 12.0x and EV/EBIDTA by 7.6x.