| Summary of Contents STOCK UPDATE Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs458
Current market price: Rs364 Price target revised to Rs458 Result highlights - Bank of India (BoI) reported a profit after tax (PAT) of Rs511.9 crore for Q3FY2008, which was up by a whopping 101.0% year on year (yoy) and 20.4% quarter on quarter (qoq). The PAT beat our and consensus estimates by a significant margin. The strong PAT growth was on the back of robust interest income growth, spike in the non-interest income led by treasury gains and contained operating expenses.
- The net interest income (NII) during the quarter grew by 25.7% yoy to Rs1,079.5 crore. The NII growth was mainly due to a continued strong growth in the advances and an improvement in the net interest margin (NIM).
- The reported NIM of 3.14% during the quarter reflects an improvement of 10 basis points yoy from 3.04% for the year-ago period. The NIM improvement was mainly due to improvement in the yields on advances (115 basis points) and the investments (105 basis points), which outweighed the 83 basis points year-on-year (y-o-y) increase in the cost of funds.
- During the quarter, the advances grew by a strong 30% yoy to Rs 103,657 crore indicating an uptick in the credit off take compared with that of H1FY2008. The growth in the advances was led by a strong growth in the foreign advances (up 32.7%). Meanwhile the deposits grew by 27.4% yoy to Rs135,835 crore on the back of a 36% y-o-y growth in the term deposits and a 32.5% y-o-y growth in the current account deposits. However, due to a higher growth in term deposits, the current account and saving account (CASA) ratio declined to 37% from 40.7% a year ago.
- The non-interest income witnessed a huge growth of 72% yoy to Rs554.1 crore. The growth in the non-interest income was primarily due to the spike in the treasury gains, which were up 109% yoy. Meanwhile the fee income grew by a strong 46% yoy and 40.7% qoq.
- Notably, the operating expenses were up by only 5.5% yoy, whereas it declined by ~2% qoq to Rs662.2 crore, partly because of a higher base for the year ago period. The lower operating expenses growth can be traced to the decline in the other operating expenses (down 13% yoy), while the staff expenses were up 17% yoy. As a result of the lower operating expenses and the strong income growth, the cost-income ratio improved significantly to 40.5% compared with 50.6% for the year-ago period.
- Asset quality during the quarter continued to improve yoy, with a 10% y-o-y decline in the gross non-performing assets (GNPA) to Rs1,969.3 crore and a 29.5% decline in the net non-performing assets (NNPA) to Rs633.5 crore.
- Capital adequacy remains healthy with capital adequacy ratio (CAR) at 12.5% at the end of December 2007, compared with 11.7% at the end of December 2006.
- At the current market price of Rs364, the stock trades at 8.8x its 2009E earnings per share (EPS), 4.4x its 2009E pre-provisioning profit (PPP) and 1.9x its 2009E book value (BV). We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs458.
Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs792
Current market price: Rs755 Results above expectations Result highlights - Tata Motors' performance for Q3FY2008 was above our expectations. The net sales for the quarter grew by 5% to Rs7,252 crore on the back of a 2% growth in volumes and a 3.1% growth in realisations.
- Increase in costs adversely affected the operating profit margin (OPM) on a year-on-year (y-o-y) basis, which was down 150 basis points to 11.3%. However, the OPM improved on a quarter-on-quarter (q-o-q) basis by 163 basis points due to cost control and increase in prices. On a y-o-y basis, the operating profit declined by 7.1% to Rs819.7 crore.
- A higher interest and depreciation charge led to a 8% drop in the adjusted net profits for the quarter to Rs406.5 crore. After accounting for the foreign exchange (forex) gain of Rs27.51 crore and the profit on the sale of shares in HV Axles of Rs65 crore, the reported net profits for the quarter declined by 3% to Rs499 crore.
- The consolidated sales grew by 12.9% to Rs9,238.5 crore and the adjusted net profit prior to the forex gain and non-recurring income rose by 17% to Rs644 crore. Profit after tax (PAT) after extra-ordinaries and forex adjustments grew by 8.9% to Rs671.62 crore.
- The commercial vehicle (CV) industry should return to the normal y-o-y growth from FY2009 onwards, as the base of FY2008 has become low. Tata Motors has planned quite a few launches in the CV as well as the passenger vehicle segments in FY2009, which should help in driving the volume growth in FY2009.
- In view of the better-than-expected profit margins and improved performance of subsidiaries, we upgrade our consolidated earnings estimates for FY2008 by 18% to Rs58.2. At the current levels, the stock trades at 11.9x its FY2009E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 5.9x. We maintain our Hold recommendation on the stock with a price target of Rs792.
Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs250
Current market price: Rs181 Results in line with expectations Result highlights - Ceat's Q3FY2008 performance was in line with our expectations.
- The net sales grew by 5.1% to Rs564.1 crore due to lower production owing to festive holidays during the quarter and a slowdown in original equipment manufacturer (OEM) sales, which declined by 26.6% year on year (yoy). Replacement sales continue to be strong and rose by 21.9% during the quarter.
- The operating profit margin (OPM) remained stable at 7.4% against 7.3% in the same quarter of the last year but declined significantly on a sequential basis from 9.4% in Q2FY2008 due to lower production and rising raw material prices, particularly rubber prices. Consequently, the operating profit grew by 7.1% to Rs41.8 crore.
- A higher other income for the quarter at Rs8.3 crore, lower interest cost and stable depreciation charge led to a 63.2% rise in the net profit to Rs19.2 crore.
- The land sale at its Bhandup plant is expected to be complete by Q4FY2008 and the company would gradually sell the whole plant and shift the operations to Patalganga.
- Considering the continued buoyancy in the replacement market and strong opportunities in the specialty tyre segment, we maintain our positive outlook on Ceat. On back of very strong performance in the first nine months, strong margins and higher other income, we upgrade our FY2008 earnings estimate by 16.9% to Rs24.3 and expect the company to record a 10.4% top line growth in FY2009.
- At the current market price of Rs181, the stock is trading at 6.9x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.1x. We maintain our Buy recommendation on Ceat with a price target of Rs250.
Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs535
Current market price: Rs291 Disappointing overseas performance Result highlights - Q3FY2008 results of Tata Chemicals Ltd (TCL) have been quite disappointing. The consolidated revenues during the quarter registered a de-growth of 4.5% year on year (yoy) to Rs1,700.1 crore on account of a lower contribution from the fertiliser segment. The revenues from the fertiliser segment decreased by 13.1% to Rs860 crore, while the same for the chemical division increased by 6.2% to Rs840 crore.
- The consolidated operating profit during the quarter decreased by 14.5% from Rs292.2 crore to Rs249.8 crore, with the operating profit margin (OPM) declining by 170 basis points to 14.7%. The inability to pass on the increased input costs in overseas operations (due to long-term yearly contracts) led to an overall margin reduction. The segmental profit before interest and tax (PBIT) for the chemical division fell by 27.5% to Rs103 crore with the margins declining from 18% to 12.3%. While the PBIT for the fertiliser division increased by 29% to Rs99 crore with the margins improving by 380 basis points to 11.6%.
- The consolidated profit after tax (PAT) decreased by 31.9% to Rs106.1 crore with the margins reducing by 260 basis points to 6.2%. A pre-payment penalty of Rs15 crore imposed on the early payment of high-cost debt and higher depreciation costs affected the subsidiaries' as well as the overall performance of the company.
- On a stand alone basis, the net sales decreased by 6.4% due to lower volume of fertilisers traded, while PAT increased by 7.4% to Rs125 crore. The stand alone performance was little subdued also due to lower foreign exchange gains.
- After the initial teething troubles, the new plant at Magadi facility is functioning smoothly and is expected to reach around 75% capacity utilisation by the next quarter. As soda ash prices in spot market remain firm at $280-300 per tonne, new long-term contract prices are expected to be much above the last year price of $200 per tonne. This would help the company regain its lost margin in the next two quarters.
- De-bottlenecking of urea capacity to expand its Babrala capacity to 1.3 million metric tonne per annum (mmtpa) is progressing well and would be operational by September 2008. The company's new business initiatives like Fresh Produce and Biofuel are also shaping well.
- TCL has recently entered into definitive agreements to acquire US-based General Chemical Industrial Products Inc (GCIP) for US$1,005 million, subject to stockholder and other regulatory approvals. GCIP is among the top five global producers with 2.5mmtpa of natural soda ash capacity, and its estimated recoverable trona ore reserves is approximately 600 million tonne. Prima Facie, this is a positive development in view of the soda ash upcycle remaining firm for the next two years. As the details of the acquisition are not disclosed, we have not updated financials of the company for the development. The company plans to finance this acquisition with a mix of debt-equity funding, which would lead to equity dilution. However it is earnings per share (EPS) accretive.
- At the current market price of Rs291, the stock is trading at 9.8x its FY2009E diluted earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.0x. We maintain our Buy recommendation on the stock with a price target of Rs535.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs368
Current market price: Rs255 Price target revised to Rs368 Result highlights - Cadila Healthcare (Cadila)'s total operating income (consolidated) grew by a 22.7% year on year (yoy) to Rs579.4 crore in Q3FY2008. The sales were in line with our estimate and were driven by a 14.9% growth in the domestic business and a 40.4% growth in the exports.
- While the domestic formulation business continued to remain sluggish during the quarter, the improved performance of the French business (a growth of 14.9% yoy) and the US business (a growth of 47.4% yoy) contributed largely to the robust growth in the exports. The company has already garnered ~$45 million in revenues from the US generic business in M9FY2008 and is well placed to exceed its guidance of $50 million for FY2008. We have modeled $55 million in US generic sales in FY2008 and $70 million in FY2009.
- The prospects of Cadila's joint venture (JV) with Altana have been uncertain, with generic companies entering the market. This is already evident in Q3FY2008 as the revenues and profits of this JV dropped by 32% sequentially in Q2FY2008 and by 43% sequentially in Q3FY2008. The management has indicated that the expected loss of profits due to the generic entry in Pantoprazole would be to the tune of Rs17-18 crore in FY2009. On the other hand, Wyeth's (Altana's partner in the USA) appointment of an authorised generic player increases the JV's prospects, as the JV would be supplying the Pantoprazole active pharmaceutical ingredient (API) to the authorised generic player. We have conservatively modeled revenues of only $28 million in FY2008 and of $20 million in FY2009 for the JV. Any positive outcome from the ongoing talks between Cadila and Altana would be an upside to our estimates.
- Cadila's operating profit margin (OPM) expanded by 50 basis points to 17.9% in Q3FY2008. The expansion in the margin was largely due to a 170-basis-point improvement in the raw material cost. Consequently, the operating profit grew by 25.8% to Rs103.5 crore in Q3FY2008.
- The pre-exceptional net profit grew by 13.2% to Rs52.4 crore due to a 27.4% rise in the depreciation (on account of acquisitions) and a 780-basis-point increase in the tax incidence. The net profit was below our estimate of Rs62 crore. The earnings for the quarter stood at Rs4.2 per share.
- Cadila's JV with Hospira for oncology injectables seems to be on track to start contributing from FY2009 onwards. The management has indicated that the JV will generate Rs150 crore in revenues in FY2009. However, we have built in only Rs100 crore into our estimate (of which Cadila's share will be Rs50 crore).
- In view of the slower than expected ramp-up in the domestic formulation business and the reduced revenue and profit potential of the Altana JV (due to generic entry), we are downgrading our numbers for Cadila. Further, we are also incorporating the revised guidance provided by the management on the revenue potential of the Cadila-Hospira JV from FY2009 onwards. We have revised downwards our FY2008 and FY2009 earnings estimates by 12.0% and 12.5% respectively to Rs19.7 per share in FY2008 and Rs23.0 per share in FY2009.
- Cadila's stock price has seen a significant correction over the past two weeks. We believe the current price more than factors in the genericisation of Pantoprazole. At the current market price of Rs255, the stock is available at attractive valuations of 12.9x our FY2008 and at 11.1x our FY2009 estimated earnings. We reiterate our Buy recommendation on Cadila with a revised price target of Rs368 (16x FY2009E earnings).
SECTOR UPDATE Automobiles Low finance availability slows growth
Sales of automobile majors for January 2008 are below our expectations. The sales across segments have been impacted due to non-availability of finance. Financers have withdrawn lending in some of the northern markets due to cases of delinquencies and defaults. Till the financing situation eases out, growth will continue to be slow in the sector. In the case of passenger cars, the high base of last year is restricting the growth rates. |
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