| Summary of Contents THE STOCK IDEAS REPORT CARD FROM SHAREKHAN'S DESK
It all boils down to oil The market has tanked by over 35% from its January 2008 peak, wiping out most of the gains made during its steep rally in 2007. After touching its all-time high of 21,207 in January this year, the market has sunk to 13,000 levels in a matter of just six months. In June alone it shed almost 2,000 points. Investors have taken a massive hit on their portfolios in probably the worst stock market downturn in recent times. There is a general sense of pessimism and the dawn of each day brings fears of new lows. Sharekhan top picks
The market continued its slide last month, hit hard by the spiralling inflation at home and soaring crude oil prices globally. The Nifty and the Sensex were down by 13.2% and 13.6% respectively as on July 4, 2008. Sharekhan’s recommended portfolio of top picks performed in line with the market and declined by 13.4% during the month. Ranbaxy Laboratories, Shiv Vani Oil and Sun Pharma were the top performers in our portfolio for the month. Maruti Suzuki, Aban Offshore and Grasim Industries were the underperformers.
STOCK UPDATE 3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs180
Current market price: Rs118 Acquisition spree continues Key points - 3i Infotech has announced three acquisitions since April 2008, namely Regulus Group LLC (Regulus), M/S Locuz Enterprise Solution (Locuz) and M/S FinEng Solutions Pvt Ltd (FSL).
- Post these acquisitions, we expect 3i Infotech's top line to grow significantly in FY2009. However, the operating profit margin (OPM) and the net profit margin are expected to decline primarily due to revenue contribution from Regulus, which had a lower OPM of 13% in CY2007 and due to higher interest expenses associated with Regulus debt financing.
- We have revised upwards our FY2009 earnings estimate by 7.2% and FY2010 earnings estimate by 12.7%. At the current market price, the stock is trading at an attractive valuation of 8.2x FY2009 earnings estimate and 6.7x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with price target of Rs180 (10x FY2010 earnings estimate).
Axis Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,150
Current market price: Rs716 Annual report review The financial year 2008 was a roller-coaster year for the banking industry, with the outlook very positive at the beginning of the fiscal but clouded by multiple macro-concerns in the second half of the fiscal. Amidst all this, Axis Bank churned out an impressive earnings growth on the back of an aggressive business growth and capital infusion. We went through the recently released annual report of Axis Bank and present the highlights of the same below. Key points - The retail banking operations of Axis Bank contribute about 20% to the bank's total income and only 8% to its bottom line, making it the least profitable segment. Wholesale banking is most lucrative business for the bank owing to its strong position in the loan syndication business. However, significant focus on strengthening the current account and savings account (CASA) should drive Axis Bank's profitability going forward.
- The restructuring of the corporate banking business has helped the segment achieve a strong growth (a 68.3% growth in corporate advances). A leadership position in the loan syndication business provides further impetus to the corporate banking business.
- The concentration of the bank's exposure to certain industries is a cause for concern with gems and jewellery forming 39.5% of the non-fund exposure, and non-banking finance companies (NBFCs) and trading companies forming 13.6% of the fund based exposure. Also, a higher off-balance sheet exposure may require increased provisioning considering the Reserve Bank of India's (RBI) tough stance and revised guidelines on the subject.
- The bank's management believes that the operating environment for banks would get tougher owing to further possible monetary tightening, marginal deterioration in credit quality and valuation losses due to the widening of spreads.
- At the current market price of Rs716, the stock trades at 18.1x 2009E earnings per share, 8.6x 2009E pre-provisioning profit per share and 2.7x 2009E adjusted book value per share. At the current valuations, the stock looks attractive considering the bank's strengths. We maintain our Buy recommendation on the stock with a price target of Rs1,150.
Bharat Bijlee
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,080
Current market price: Rs1,572 Price target revised to Rs2,080 We attended the annual general meeting of Bharat Bijlee Ltd (BBL). We bring you the key takeaways from the meet. - BBL's revenues grew at a compounded annual growth rate (CAGR) of 36.7% and net profit increased at a CAGR of 45.8% over FY2006-08.
- The transformer division of the company has reported first full year of operations for its enhanced capacity of 8,000MVA. The company is further increasing its transformer capacity to 11,000MVA. The new capacity is expected to be operational by July-September 2008.
- The motor business' revenue grew by 24.5% in FY2007. The outlook for the current year also looks promising. However, the demand from certain sectors, particularly sugar and textile machineries, is slackening.
- During FY2008 the company obtained orders worth Rs629 crore compared with Rs579 crore in the previous year. In the first two months of FY2009, the company received orders worth Rs97 crore (vs Rs67 crore in the same period of FY2008), taking the total outstanding orders to Rs362 crore.
- The company's return ratios remained healthy in FY2008, with the return on equity (ROE) at 43% against 48.8% in FY2007. The slight moderation was caused by the higher transfer to reserves by the company. The return on capital employed was at 61.3% vs 63.4% in FY2007.
- The management has indicated that the revenue growth may decline in Q1FY2009 mainly due to the disruption of production at the current plant on account of the ongoing work at the site to develop a new capacity. The new capacity is likely to be commissioned by August 2008.
- Consequently, the Q1FY2009 results would remain subdued and we would see a decline in the top line and profits. The management seems confident of covering some lost sales in the subsequent quarters. The company's performance in Q2FY2009 would also depend on the timely commissioning of the new capacity. On a full year basis, we believe there could be a downside risk of about 4-5% to our current estimate under the current scenario.
- The commissioning of the new capacity and the subsequent expansion in the capacity would remain the key to growth of BBL for the next couple of years. In our view, the near-term performance of the company would remain subdued which would be a drag on the stock. In light of the near-term uncertainty, we change our rating on the stock to Hold. We are cutting our target multiple on the stock to 9x FY2010E earnings per share (EPS) and revising our price target for it to Rs2,080.
- At the current market price the stock is trading at 8.7x its FY2009E earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 3.3x.
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,610
Current market price: Rs1,015 Audited FY2008 results better Result highlights - Bharat Electronics Ltd (BEL) has announced its audited results for FY2008. The profitability for the fiscal is significantly higher than that indicated by the previously released un-audited results.
- As per the audited results, the sales figure is nominally lower at Rs4,060.3 crore as compared with the unaudited sales number of Rs4,069.3 crore. As a result of lower raw material cost and other expenditure the audited operating profit stands at Rs1,004.1 crore as compared with Rs973.6 crore in FY2007.
- Thanks to a higher other income, and lower depreciation charge and tax rate, the audited adjusted net profit has come in at Rs805.5 crore as compared with the unaudited net profit of Rs743.8 crore.
- As per the July issue of India Strategic Defence magazine, BEL has bagged orders estimated at $460 million for 28 weapon locating radars from the Indian Army. The radars to be integrated by BEL would have components to be bought from the private sector as well as the international markets. The time period for the execution of this order has not been determined.
- For the current fiscal, the growth outlook is robust and the company is expected to meet the revenue target of Rs4,800 crore in line with the memorandum of understanding (MoU) signed with the defence ministry. BEL has been able to generally meet its stated annual revenue targets so far. Moreover, the healthy order book of Rs9,450 crore as on March 2008 (over 2x FY2008 revenues) also provides good growth visibility.
- At the current market price of Rs1,015, the stock is trading at 8.1x our FY2010 EPS estimate of Rs126.2 and a very cheap EV/EBITDA of 2.2x. We maintain our Buy recommendation on BEL with price target of Rs1,610.
BL Kashyap & Sons
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,356
Current market price: Rs1,099 Price target revised to Rs1,356 Result highlights - The revenues of BL Kashyap & Sons (BLK) grew by 94.7% year on year (yoy) to Rs462.1 crore in Q4FY2008.
- The operating profit margin (OPM) of the company declined by 77 basis points to 12.5% during the quarter. Consequently, the company's operating profit grew by 83.5% yoy to Rs57.7 crore during the same period.
- BLK's interest expense and depreciation charge grew by 138.7% and 89.1% yoy to Rs4.5 crore and Rs5 crore respectively during the quarter. However, this increase was partially offset by a decline in the income tax expenses during the quarter. The company's effective tax rate declined from 36.4% in Q4FY2007 to 32.2% in Q4FY2008. Consequently, the company's net income grew by 83.6% yoy to Rs35.3 crore, above our expectation of Rs30.3 crore, during the quarter.
- The company also announced a dividend of Rs4 per share for FY2008.
- The company's current order book stands at Rs3,100 crore. The commercial segment accounts for 80-85% of the order book. Beside this, BLK is also negotiating orders of Rs2,000 crore; the majority of these orders are also in the commercial segment.
- Construction activity in one project of Rs1,040 crore bagged from BPTP in February 2008 has got slightly delayed. Instead of June 2008, the management expects construction activity at this project to start in July 2008 as the approval from local authority is still pending.
- We have revised the value of BLK's real estate business downward to Rs121 per share on account of the debt raised by the company and the lower than expected realisation for the Bikaner project.
- The BLK stock is trading at 12.6x FY2009 earnings estimate and 9.3x FY2010 earnings estimate after adjusting the value of real estate subsidiary. We maintain our Buy recommendation on the stock with a revised price target of Rs1,356.
Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs100 Benefits delayed Result highlights - The net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) increased by 56.8% year on year (yoy) to Rs330 crore. The chemical division and the fertiliser division contributed 72% and 27% respectively to the net sales. The revenues from the chemical division increased by 48.2% yoy to Rs241.5 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division increased by 72.3% yoy to Rs90.6 crore due to an increase in the trading volume.
- The operating profit during the quarter grew by 38.7% yoy to Rs56.8 crore with the operating profit margin (OPM) declining by 230 basis points to 17.2%. The segmental profit before interest and tax (PBIT) for the chemical division increased by 41.8% to Rs62.4 crore with the margin declining from 27% to 25.8%. The loss in the fertiliser division reduced to Rs0.3 crore from Rs1.4 crore.
- The interest expenses were higher by 11.6% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 5.7% yoy during the quarter.
- The adjusted profit after tax (PAT) increased by 13.1% yoy to Rs31.3 crore with the margin reducing by 370 basis points to 9.5%. The effective tax rate increased during the quarter as the company had carry forward losses last year.
- Commencement of additional ammonia storage tank (15,000MT) at Jawaharlal Nehru Port Trust and new nitric acid capacity (45,000TPA) at Taloja has got delayed by over nine months till March 2009.
- The company is still in the process of negotiating long-term gas supply contract. An improved supply of natural gas to Taloja plant would help in replacing naphtha by natural gas for steam generation. Spot liquid natural gas at around $12-14 per million British thermal units (MMBTU) would cost almost half the price of naphtha ($22 per MMBTU).
- Setting up of the ammonium nitrate plant at Paradeep (Orissa) has got delayed due to impending approvals. Civil and construction work is complete and the orders for various equipment have been placed.
- The company's JV with the global major Yara International is still under due diligence and is expected to get over in the next two months.
- The company's specialty mall Ishanya, for interiors and exteriors, commenced operations during the quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
- At the current market price of Rs100, the stock is trading at 7.6x its FY2009E earnings and 5.7x its FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs169.
Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,002
Current market price: Rs2,192 Sponge iron unit to be spun off Key points - Grasim Industries (Grasim) has struck a deal with Welspun Power and Steel (Welspun) to sell its sponge iron business (Vikram Ispat) for a consideration of Rs1,030 crore by way of a slump sale. The proceeds from the sale will be invested in the core businesses of cement and viscose staple fibre (VSF).
- The sponge iron division will be sold at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x FY2008 EBIDTA. Considering the poor performance of the sponge iron division in the past (low capacity utilisation and EBIDTA margin), we believe the sale would be value accretive for the shareholders of Grasim.
- At the current market price of Rs2,192, the stock is trading at 8.8x its estimated FY2009E earnings per share (EPS). Based on our sum-of-the-parts valuation, we maintain our Buy recommendation on the stock with a price target of Rs3,002.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs622
Current market price: Rs534 Annual report review Key points - ICI India's FY2008 results are not comparable with FY2007 results, as the company sold off its Advanced 2K refinished paint business in March 2007. The net sales stood at Rs992.6 crore during FY2008, as against Rs1,015.2crore in FY2007. On a comparable basis, the net sales increased by 13.7% to Rs951.2 crore on the back of a strong performance by the chemical business.
- The return on equity (RoE) and the return on capital employed (RoCE) stood at 8.8% and 13.2% respectively in FY2008, which are lower compared to the RoE of 12.4% and the RoCE of 15.6% in FY2007. The decline in the return ratios was primarily due to a lower other income, as there were lower returns on the average investments.
- ICI India's cash from operating activities stood at Rs82.90 crore in FY2008 on account of a better working management.
- In keeping with its ongoing buy-back scheme, till FY2008, the company had bought back 24.91 lakh shares (constituting 6.1% of the paid-up capital) at an average price of Rs528 per share. This has led to a reduction in the equity capital to Rs38.4 crore in FY2008 from Rs40.9 crore in FY2007.
- In terms of outlook, the management is positive. However, it cites that its paint business would be impacted by a clear slowdown in the user industries like auto and real estate. The margins are likely to be under pressure due to the surging crude oil prices coupled with the hike in the key input prices. However, the company has a huge pile of cash of Rs700 crore, which it can use to generate organic or inorganic growth going forward.
- At the current market price of Rs534, the stock is trading at 18.1x (net of cash on books) its FY2010E core earnings per share (EPS) of Rs17.4. We maintain our Buy recommendation with a price target of Rs622.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs146
Current market price: Rs88 Price target revised to Rs146 Result highlights - Indian Hotels Company Ltd's (IHCL) Q4FY2008 numbers were below our expectations. The company posted a revenue growth of only 10.1% year on year (yoy) for the quarter to Rs556 crore, against our expectation of Rs599.4 crore.
- The operating profit margin (OPM) for Q4FY2008 improved by 270 basis points to 44.7%, mainly due to other expenses as percentage of sales being lower by 400 basis points yoy. Thus the operating profit grew by 17.1% yoy to Rs248.4 crore.
- The other income for the quarter stood at only Rs9.0 crore as compared to Rs28.9 crore for the corresponding quarter last year. Q4FY2007 had a one-time profit on sale of investments of Rs16.8 crore.
- The lower other income coupled with higher incidence of tax resulted in a flat y-o-y net profit at Rs134.9 crore for Q4FY2008.
- On a consolidated basis, the company's revenues for FY2008 grew by 16.5% to Rs2,920 crore and the operating profit grew by 23.8% to Rs892 crore with an improvement in the OPM by 180 basis points to 30.5%. However the net profit grew by a meagre 10.5% primarily on account of a 65.6% increase in the interest on account of the utilisation of foreign currency convertible bond (FCCB) funds and the funding of the 11.57% stake in Orient Express Hotels for $246.9 million (~Rs1,060 crore).
- We like IHCL, as it is the largest hotelier in the country with aggressive expansion plans domestically and overseas. However, we see increased risks going forward in terms of increasing the average room rates (ARRs) and maintaining the occupancy against the backdrop of an economic slowdown and an increase in the supply of hotel inventory. Thus we are reducing our price target to Rs146 based on a 18x price equity (PE) multiple to its FY2010E earnings per share (EPS) of Rs8.2.
Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,013
Current market price: Rs1,923 Annual report review Key points - Infosys delivered a decent performance in FY2008. The performance would have been robust had the rupee not appreciated by ~11.2% during the year. As a result the revenues grew by just 20.1% to Rs16,692 crore. The rupee appreciation cost the company ~Rs2,000 crore in the revenues and Rs1,000 crore in the net profit.
- Among the frontline stocks, Infosys was the one of stocks that was able to defend its margins compared to its frontline peers with a minimum hit of 23 basis points.
- Infosys used all possible levers in its arsenal and was able to defend its operating profit margin (OPM) to 31.38% compared to 31.6% in FY2007.
- Although the company is using various levers to defend its margins, we believe some levers are close to exhaustion and may not contribute to improve the performance going ahead.
- The outlook for FY2009 as of now remains muted due to faltering demand environment in the USA. As a result the company has given a guidance of 19%-21% growth in the revenues and a 16.7%-18.7% growth in the net profit (in dollar terms).
- Infosys has given a dividend of Rs33.25 per share for the full year including a special dividend of Rs20, as it crossed $1 billion mark in profits. It also intends to increase the dividend payout upto 30% of the net profit from the current policy of paying up to 20%.
- At the current market price, the stock trades at 20.2x FY2009E earnings and 18.1x FY2010E earnings. We maintain our Buy recommendation on the stock with price target of Rs2,013.
International Combustion (India)
Cluster: Cannonball
Recommendation: Buy
Price target: Rs519
Current market price: Rs378 Q4 results ahead of estimate Result highlights - In Q4FY2008, the revenues of International Combustion Ltd (ICL) grew by 20.3% to Rs29 crore. The revenue growth was ahead of our expectations.
- On a segmental basis, the revenues of the material handling equipment (MHE) division grew by 9.1% to Rs20.1 crore whereas that of the geared motor and gear box division (GMGBD) increased by a strong 53.6% to Rs9.1 crore. Even though the growth in GMGBD was good, the division’s margin fell sharply by 350 basis points to 11.2%.
- The operating profit of ICL grew by 21% to Rs5.9 crore during the quarter. The operating profit margin (OPM) was flat at 20.4% (up ten basis points).
- The company’s interest cost declined by 25% to Rs0.1 crore and its depreciation charge rose by 11.4% during the quarter.
- Consequently, the net profit grew by 40.2% to Rs3.5 crore, which was ahead of our expectations mainly due to a higher than expected revenue growth during the period.
- The current order book of the company stands at Rs56 crore of which Rs49 crore worth of orders are for the MHE division and the balance Rs7 crore are for GMGBD.
- We are introducing our FY2010 estimates in this report. We expect ICL’s revenues to grow at a compounded annual growth rate (CAGR) of 18.2% and net profit to rise at a CAGR of 20% over FY2008-10.
- We continue to recommend a Buy on the stock with a price target of Rs519. At the current market price the stock trades at 6.3x FY2009E earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.9x on FY2009E.
Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs875
Current market price: Rs540 Fire at formulation plant hampers performance Result highlights - The Q4FY2008 and FY2008 performance of Ipca Laboratories (Ipca) was below our expectations, primarily on account of a fire in the company's formulation unit at Athal during the quarter that led to a loss in exports of formulations manufactured at that unit. The company lost Rs15 crore of revenues in its formulation export business on account of the fire.
- Its revenues grew by 13.9% to Rs253.8 crore in Q4FY2008 and by 16.1% to Rs1,091.4 crore in FY2008. The revenue growth was achieved on the back of a 22% growth in the domestic formulations and a 25% rise in the formulation exports.
- The appreciation in the rupee along with the lower export revenues and an increase in the staff cost affected the company's operating profit margin (OPM), which shrank by 380 basis points to 14.4% in Q4FY2008 and by 110 basis points to 20.6% in FY2008. Consequently, Ipca's operating profit declined by 9.7% to Rs36.6 crore in Q4FY2008 and grew by 10.6% to Rs225.4 crore in FY2008.
- Despite a reduction in the interest cost, Ipca's reported net profit declined by 14.5% to Rs22.6 crore in Q4FY2008 and grew by 8.5% to Rs135.9 crore in FY2008. The net profit was dragged down by a fall in the other income. The company's earnings per share stood at of Rs9.0 in Q4FY2008 and Rs54.4 in FY2008.
- Ipca's formulation plant at Silvassa has already been inspected by the US Food and Drug Administration (USFDA) and the approval is expected over the next few weeks. The approval should enable Ipca to start supplying formulations to Ranbaxy Laboratories (Ranbaxy) in Q3FY2009. We have conservatively modeled revenues of $5 million in FY2009 and of $8 million in FY2010.
- We have revised our FY2009 estimates for Ipca to reflect the lower than expected performance in FY2008 and the guidance provided by the management. We are downgrading our FY2009 revenue estimate by 3.3% to Rs1,283.2 crore and the profit estimate by 6.1% to Rs171.3 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 16.0% in FY2010 to Rs1,487.3 crore. The profits are expected to grow by 21.7% to Rs208.4 crore, resulting into earnings of Rs83.3 per share in FY2010.
- With an expected earnings growth of 24%+, return ratios in excess of 25%, no fears of equity dilution and attractive valuations of 7.9x FY2009E earnings and 6.5x FY2010E earnings, Ipca presents an excellent investment opportunity. We retain our positive stance on the stock and maintain our Buy call with a price target of Rs875.
Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs910
Current market price: Rs574 Export duty scrapped
The Government of India has scrapped the export levy on pipes and tubes, which was imposed last month. The move, taken last month in an endeavour to cool down inflation, took the industry by storm. As the bulk of the order book of pipe makers comprises of export orders, the move would have led to a significant margin erosion for the industry and would have also reduced the competitiveness of domestic players vis-à-vis other international players. The market too reflected this concern, as the stocks of the pipe making companies corrected by almost 10-15% over the last one month, as the entire sector witnessed a considerable de-rating. We believe the withdrawal of the export levy would act as a significant booster for the sector and the sector should go back tracking the fundamentals as the concerns relating to government intervention are done away with. KEI Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs84
Current market price: Rs47 Price target revised to Rs84 Result highlights - KEI Industries (KEI) has reported an increase of 24.6% in its revenues to Rs258.5 crore for Q4FY2008. The growth in its sales is in line with our expectations.
- During the quarter the company made provisioning for mark-to-market losses of Rs3.67 crore on its exposure to foreign currency derivatives made for the purpose of hedging currency and interest rate-related risks.
- Adjusting for the provisioning, the operating profit grew by 7.9% to Rs27 crore, translating into an operating profit margin (OPM) of 10.5%. Thus, in Q4FY29008 the OPM declined by 160 basis points year on year (yoy).
- The operating performance of the company is disappointing due to the steep increase in its employee cost. The employee cost as a percentage of its sales increased by 140 basis points to 3.3%, as the company amortised deferred expenses for employee stock options (Rs2.05 crore) and employee benefits (Rs0.43 crore).
- During the quarter, the depreciation charge rose by 107.1% to Rs2.4 crore as the company commissioned its Chopanki plant during January 2008.
- Consequently, the adjusted net profit declined by 21.2% to Rs8.9 crore, which is below our expectations. The reported net profit is down 42.9% at Rs6.5 crore.
- The company has an order book of Rs400 crore out of which orders worth Rs125 crore are for high-tension (HT) cables.
- We have revised our FY2009 earnings estimate as we expect the company's margins to remain under pressure this year. Our FY2009 fully diluted earning per share (FDEPS) estimate now stands at Rs8.4. We are also introducing our FY2010 earnings estimate in this note. Our FDEPS estimate for FY2010 stands at Rs12.
- Though KEI enjoys a strong business outlook, the company has faced problems in managing its working capital. This has resulted in deteriorating cash flows. We have therefore revised our target multiple to 10x for the stock and downgraded our price target for KEI to Rs84 per share.
- At the current market price, the stock trades at 5.5x its FY2009E and 3.8x FY2010E FDEPS. We believe the valuations are attractive and reiterate our Buy call on the stock.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs800
Current market price: Rs537 Stake sale in First Choice
According to media reports, Mahindra and Mahindra (M&M) will be selling a 10% stake in its used car business, Mahindra First Choice (MFC), to PHI Advisors for about Rs80 crore. The company's management, in a media interview, has said that it plans to infuse Rs20 crore via rights issue and Rs60 crore via a stake sale into MFC. Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs77
Current market price: Rs65 Who says beauty is only skin-deep? Key points - Consumer spending patterns in India are gradually changing due to factors like rising aspiration levels, increasing income levels, growing brand consciousness and easy availability of credit. Not only that, an average urban household is also becoming increasingly conscious of beauty and health, and aware of the benefits of personal care. Despite this, according to a survey carried out by AC Nielsen, 30% of Indians are willing to spend more on beauty products and treatments to enhance their appearances.
- To tap this enormous opportunity several retail and fast moving consumer goods (FMCG) companies have entered or are planning to enter the Rs25,000-crore health & beauty retail segment in India. The operating profit margin (OPM) in this segment lies in the 20-25% range.
- Marico is leveraging its strength in the beauty and wellness segment through Kaya, which is recognised as a pioneer in skin care and beauty services. Kaya, which currently has 56 skincare clinics in India and nine such clinics in the Middle-East, contributed around Rs98.5 crore to Marico's total revenues during FY2008.
- The growing urbanisation of Indian cities and acceptance of specialised products and services provides a good opportunity for Marico to strengthen its roots in the low penetrated health and beauty segment in India. We believe that going forward Kaya would be one of the growth drivers for the company. However, the profitability of the company as a whole would be under pressure in the near term on account of a steep increase in the prices of its key raw materials.
- At the current market price of Rs64.6, the stock trades at 20.9x and 16.7x its FY2009E and FY2010E earnings per share (EPS) of Rs3.1 and Rs3.9 respectively. We maintain our Buy recommendation on the stock with a price target of Rs77.
Mold-Tek Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs71 Price target revised to Rs169 Result highlights - Mold-Tek Technologies Ltd's (MTTL) Q4FY2008 results were in line with our expectations. The net sales increased by 15.3% year on year (yoy) to Rs26.0 crore. The KPO division contributed 15.5% to the overall revenue during the quarter. The gross revenue from the plastics division increased by 16.9% yoy to Rs23.2 crore, while the sales from the KPO division increased by 16.8% yoy to Rs4.3 crore.
- The operating profit margin (OPM) rose to 14.2% in the quarter from 13.5% during the same quarter last year on account of improved profitability of the plastics division. Consequently, the operating profit grew by 21.6% to Rs3.7 crore. The segmental profit before interest and tax (PBIT) for the plastics division increased by 60.9% to Rs1.0 crore with the margin expanding by 120 basis points to 4.4%. The PBIT for the KPO division increased by 15.1% to Rs1.9 crore.
- The interest costs increased by 37% to Rs63 lakh, while the depreciation increased by 55.8% to Rs81 lakh. Higher other income resulted in a 22.9% increase in the profit before tax (PBT) to Rs2.6 crore. There was no provision for tax during the quarter.
- During the quarter, the company suffered notional loss of Rs5.3 crore as on March 31, 2008 from the forex derivatives positions. Though the losses are measured on a marked-to-market basis, these losses overhung on the stock resulting in the steep correction.
- Major rework of earlier assignments during the quarter would shift the company's focus more on improving the quality of work resulting into lower growth than our earlier estimates. We are downgrading our earnings estimates from Rs18.7 to Rs14.7 for FY2009 and from Rs25.4 to Rs19.2 for FY2010. Currently the stock is trading at 4.8x FY2009E earnings. We maintain our Buy recommendation with revised price target of Rs169.
Opto Circuits India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs460
Current market price: Rs316 Results in line with estimates Result highlights - Opto Circuits (Opto) has reported a top line growth of 43.1% to Rs120.5 crore for Q4FY2008 and of 86.1% to Rs468.1 crore for FY2008. The revenues are ahead of our estimates and were driven by a doubling of the invasive business and an increasing demand for the non-invasive products (sensors and patient monitors) from the regulated markets.
- Opto's operating profit margin (OPM) shrank by 670 basis points to 29.2% in Q4FY2008 and by 350 basis points to 29.3% in FY2008, largely due to an increase in the promotional spend on the distribution of free samples. Consequently, the operating profit grew by 16.2% to Rs35.1 crore in Q4FY2008 and by 66.2% to Rs137.2 crore in FY2008.
- Buoyed by a significant jump in the other income (on account of higher foreign exchange [forex] gains), Opto's net profit jumped by 43.5% to Rs34.8 crore in Q4FY2008 and by 80.7% to Rs132.4 crore in FY2008. The net profit reported by the company was in line with our estimate.
- Opto has successfully closed the acquisition of US-based Criticare Systems (Criticare) for $70 million. We estimate the Criticare acquisition would generate incremental earnings of Rs1.0 per share in FY2009 and of Rs2.7 per share in FY2010.
- In keeping with its trend of rewarding its shareholders, Opto's management has announced a 50% dividend and also decided to award seven bonus shares for every ten shares held by the existing shareholders.
- In order to incorporate the acquisition of Criticare, we are revising our revenue estimate upwards by 30.7% for FY2009 and by 19.7% for FY2010. Our profit estimate has also been upgraded by 5.3% for FY2009 and by 1.8% for FY2010. We believe Opto's revenues will grow at a compounded annual growth rate (CAGR) of 57% to Rs1,158.9 crore in FY2010 on the back of a 30% compounded annual growth in the non-invasive business and a 67% compounded annual growth in the base invasive business of stents. We expect Criticare to grow at a 20% CAGR to $62 million in FY2010. The net profit will grow at a CAGR of 48% to Rs290.6 crore in FY2010.
- At the current market price of Rs316, Opto is trading at attractive valuations of 15.0x FY2009E fully diluted earnings and 10.4x FY2010E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs460.
Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs852
Current market price: Rs400 Strong Q4 and FY2008 results We attended the analyst meet of Orbit Corporation. The following are its results highlights and key takeaways. - Orbit Corporation's (Orbit) revenues grew by 43.4% sequentially to Rs320.8 crore during the quarter. The company booked revenues worth Rs131 crore from Orbit WTC, Santacruz compared to Rs151 crore in Q3FY2008. On an annual basis, the company's revenues increased to Rs705.5 crore.
- The operating profit margin (OPM) improved by 627 basis points to 52.5% on account of better realisation during the quarter. Consequently, the company's operating profit grew by 62.9% quarter on quarter (qoq) to Rs103.4 crore during the quarter. On an annual basis, the company's operating margin improved significantly to 49.9% in FY2008 from 39.6% in FY2007.
- The net income grew 122.2% qoq to Rs122.5 crore during the quarter. In Q4FY2008, the bottom line growth was more than the operating profit growth primarily due to lower interest expenses (Rs20.5 crore in Q4FY2008 v/s Rs27.7 crore in Q3FY2008) and lower effective tax rate (16.8% in Q4FY2008 v/s 28.0% in Q3FY2008). On an annual basis, the company's net income grew 3.1x year on year to Rs235.8 crore in FY2008, which was above our expectation of Rs224.2 crore.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs300
Current market price: Rs251 Price target revised to Rs300 Result highlights - Orchid Chemicals' (Orchid) Q4FY2008 and FY2008 results are a mixed bag: While the revenue growth was above our estimate, strong margin pressure along with higher than anticipated interest burden and foreign exchange (forex) translation losses dragged down the profitability of the company during Q4FY2008.
- The US generic market continued to power Orchid's growth, with revenues growing by 55.9% to Rs379.2 crore in Q4FY2008 and by 35.7% to Rs1,238.9 crore in FY2008. The growth was driven by the consolidation of the market share in niche product opportunities like Cefepime injections, Cefdinir tablets, and Cefoxitin and Cefazolin injections.
- Orchid's operating profit margin (OPM) shrank by 730 basis points to 20.3% in Q4FY2008 and by 290 basis points to 27.8% in FY2008. The margin shrank largely due to one-time product development expenses incurred by the company and a huge inventory build up due to the impending launch of Tazobactum-Piperacillin (Tazo-Pip) in the USA. The declining margin restricted the operating profit growth to 14.6% at Rs77.1 crore in Q4FY2008 and to 23.2% at Rs344.8 crore in FY2008. Going forward, we expect the material cost to moderate as the inventory position corrects itself once the product is launched in the market.
- Orchid's reported net profit fell by 34.7% to Rs15.8 crore in Q4FY2008, due to the poor operating performance and a Rs7.8-crore (pre-tax) translation loss. For FY2008, the reported net profit grew by an appreciable 91% to Rs184.5 crore. On excluding the net impact of the forex translation, the adjusted net profit of the company grew by 79.4% to Rs27.6 crore in Q4FY2008 and by 65.3% to Rs143.3 crore in FY2008. The adjusted profits reported by the company during Q4FY2008 and FY2008 are below our expectations.
- Despite repeated assurances from the management, Orchid's debt level remains high at $220 million (excluding the foreign currency convertible bonds [FCCBs]) as reflected in the increase in the interest cost in Q4FY2008. Further, the capital expenditure (capex) cycle does not seem to be over yet, with the company planning capex of ~Rs150 crore in FY2009 and of Rs150-175 crore in FY2010. We expect the company's debt level to remain high over the next one to two years.
- Orchid has strong growth drivers over the next two years. We expect the competitive scenario in the Cephalosporin segment to intensify whereas the launch of Tazo-Pip and other non-antibiotic products will fuel growth in FY2009. The opening up of the Carbapenem generic market from FY2010 onwards will maintain the growth.
- In order to factor in the higher revenue base of FY2008, the delayed launch of Tazo-Pip both in the USA and Europe, the pressure on the margins due to the rising crude oil prices (which would increase the company's power & fuel costs) and the higher than anticipated debt and capex, we are revising our FY2009 estimates for Orchid. We are upgrading our FY2009 revenue estimate by 2.4% to Rs1,492.7 crore to reflect the higher revenue base in FY2008 but we are downgrading our profit estimate by 30%, accounting for the lower OPM and higher interest burden in FY2009. We now expect Orchid to deliver a pre-exceptional profit of Rs157.7 crore, which would translate into fully diluted earnings of Rs16.3 per share in FY2009.
- We are also introducing our FY2010 numbers in this report. We expect Orchid's revenues to grow by 17.6% in FY2010 to Rs1,756.0 crore, on the back of a full-year impact of the Tazo-Pip launch as well as the incremental contributions from the Carbapenem opportunity. We expect profits of Rs207.6 crore in FY2010 which should yield fully diluted earnings of Rs21.5 per share.
- The management has stated its intention of reducing its debt level further in the coming years, though we are yet to see the effect of the same on the company's financials. Despite the strong growth drivers and a robust business model, we believe the above-mentioned concerns will remain as an overhang on the stock, until the company's financials clearly reflect the management's intentions of reducing the debt further. In view of these concerns, we are reducing our target price/earnings multiple for Orchid to 14x and rolling over our valuations to FY2010E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs300.
Patels Airtemp India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs135
Current market price: Rs61 In line with expectations Result highlights - Patels Airtemp's Q4FY2008 results are in line with our expectations. The net sales for the quarter rose by 65% to Rs18.23 crore.
- Currently, the company has an order book of Rs50 crore out of which Rs13 crore is for exports.
- The operating profit margin for the quarter stood at 18.8%, down 220 basis points year on year (yoy). Consequently, the operating profit grew by 47.4% to Rs3.43 crore during the quarter.
- The interest cost was a little higher due to higher working capital requirements, as the profit after tax grew by 62.9% to Rs1.55 crore.
- For the full year, the company has reported a top line growth of 31.9% and a net profit growth of 105.9% to Rs5.21 crore. The company has recommended a final dividend of 10% in addition to the interim dividend of 5%, making the total dividend for FY2008 a good 15%.
- We introduce our FY2010 estimates in this note. We expect a top line growth of 16.1% to Rs87.1 crore and earnings of Rs17.5 during the fiscal. At the current market price, the stock is available at 4.1x FY2009E earnings and 3.5x FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs135, valuing the company at 9x FY2009E earnings.
Punj Lloyd
Cluster: Apple Green
Recommendation: Buy
Price target: Rs532
Current market price: Rs287 Price target revised to Rs532 Result highlights - Punj Lloyd Ltd's (PLL) headline numbers were broadly in line with our expectations. The revenues grew by 37.8% to Rs2,346.7 crore. The process plant contributed 36.3% to the top line.
- Led by strong performance in the standalone entity, the consolidated operating profit margin (OPM) increased by 60 basis points to 10.6%. The operating profit grew from 45.7 crore to Rs248.6 crore. The net profit grew by 32.4% to Rs117.7 crore.
- The auditors have made qualification on a project being executed by the subsidiary Simon Carves, which may incur a potential loss of Rs305.3 crore due to change in the scope of the work. However, the management has now highlighted that the company has already reached an agreement on the recovery of £15 million (~Rs125 crore). The management has further maintained that it would be able to reach the breakeven in the project and is negotiating with the client for the same.
- The company plans to spend Rs350-400 crore as capital expenditure over FY2009.
- The company continued to focus on its strategy of increasing its order ticket size. The current order of Rs19,595.6 crore has an average execution period of 26 months. The company has a robust order backlog and provides high visibility to the future earnings of the company. Rs709 crore worth of orders are legacy orders.
- The performance of the company during the year was in line with our expectations and hence we are maintaining our estimates.
- We are revising our price target to Rs532 and maintain our Buy recommendation on the stock. At the current market price, the stock trades at 16.5x and 12.4x FY2009E and FY2010E fully diluted earnings per share (EPS) respectively.
Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs632
Current market price: Rs480 Price target revised to Rs632 Result highlights - Punjab National Bank (PNB) reported an impressive growth of 128.8% year on year (yoy) in its bottom line during Q4FY2008. The profit after tax (PAT) of Rs543.8 crore was well above our expectation.
- The net interest income (NII) for the quarter stood at Rs1,517.3 crore, up 12.7% yoy. After adjusting the year-ago NII for one-time gain (Cash Reserve Ratio income of Rs56 crore), the NII growth comes at 17.6% yoy.
- The non-interest income registered a 9.8% decline yoy and reached Rs537.2 crore. Notably, the operating expenses were down 21.8% yoy to Rs827.7 that helped boost the bottom line. The decline in the operating expenses stemmed from a 33.3% decline in the staff expenses.
- The provisions and contingencies were down significantly by 72.6% yoy to Rs167.7 crore. The decline was primarily due to improving asset quality.
- The advances registered a healthy growth of 23.7% yoy to Rs1,19,502 crore, while the deposits were up 19% yoy to Rs1,66,457 crore. The current account and saving account (CASA) ratio stood at an impressive 43%.
- The asset quality improved further during the quarter on both absolute and relative basis. The gross non-performing asset (GNPA) in percent terms stood at 2.74%, significantly down from 3.45% a year ago, while the net non-performing asset (NNPA) in percent terms declined to 0.64% from 0.76% a year ago. The significant improvement in the asset quality has allayed concerns to a great extent.
- Capital adequacy ratio (CAR) as at the end of Q4FY2008 stood at a comfortable 12.96% based on Basel requirements, while based on Basel II the CAR was 13.46%.
- At the current market price of Rs480, The stock trades at 6.4x 2009E earnings per share (EPS), 3.3x 2009E pre-provisioning profit (PPP) per share and 1.2x 2009E book value (BV) per share. While, we have tweaked our FY2009 earnings estimates upwards, we are lowering long-term growth estimates. We maintain our Buy recommendation on the stock with revised price target of Rs632.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs575
Current market price: Rs543 Price target revised to Rs575 Key points - To factor in the impact of the recent developments in Ranbaxy Laboratories (Ranbaxy), we are revising our estimates and the price target. We have taken into account the proposed equity dilution and the cash infusion from the Daiichi Sankyo deal, the reset of the foreign currency convertible bonds (FCCBs) at a lower price, the revalued fair value of first to file (FTF) opportunities after the Pfizer settlement and the revised exchange rate assumptions. Consequently, we have downgraded the earning estimates of the base business in CY2008 by 20.5% (largely to factor in the research expenses as new drug discovery research {NDDR de-merger} is called off now). On the other hand, we have upgraded our base business earnings by 16.7% for CY2009. On a fully diluted equity base of 48.6 crore shares, our revised estimates would yield earnings of Rs14 per share in CY2008 and Rs23.5 per share in CY2009 for the base business (excluding FTFs).
- We have revalued Ranbaxy's FTF opportunities to account for the recent out-of-court settlement with Pfizer on Lipitor and Caduet. We expect Ranbaxy to earn revenues and profits of $4.3 billion and $1.7 billion respectively from all the FTF opportunities and the out-of-court settlements announced so far. Using a discount rate of ~9%, these settlements and FTF opportunities yield an NPV of ~Rs106 per share.
- We continue to value Ranbaxy using the sum-of-the-parts (SOTP) valuation method. We assign a multiple of 20x to Ranbaxy's earnings from the base business in CY2009, which yields a value of Rs470 for the base business. To that, we add the NPV of Rs106 per share for all the FTFs announced so far. Thus, we get a SOTP-based fair value of Rs575 per share for Ranbaxy. We continue to maintain Buy recommendation on the stock despite the fact that the stock price is nearing our fair value price target. We believe that there are many intangible positives that could accrue to the company, post the integration with Daiichi Sankyo. Moreover, the adjusted acquisition cost would be much lower after adjusting for the acceptance of around 34% holding in the open offer at Rs737.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,110
Current market price: Rs770 Price target revised to Rs1,110 Result highlights - For Q4FY2008 Ratnamani Metals & Tubes Ltd (RMTL) has reported a growth of 51.8% year on year (yoy) in its net sales to Rs231.5 crore. The sales are in line with our expectations.
- The company has reported a mark-to-market loss of Rs27.5 crore on foreign exchange (forex) derivatives for the quarter under review. Adjusting for the same, the operating profit grew by 53.8% to Rs59.4 crore. Thus, the operating profit margin (OPM) increased by 40 basis points.
- For the forex loss, the management maintains that the chances of incurring any loss on its positions are limited. In our view, this could be a risk to our profit estimates going forward.
- The interest expenses declined by 30.3% to Rs3.4 crore while the depreciation charge increased by 2.9% to Rs6.4 crore during the quarter.
- Consequently, the adjusted net profit grew by 81.1% to Rs31.6 crore. However, the reported net profit declined by 23.6% to Rs13.4 crore.
- The company has an order book of Rs650 crore of which Rs119 crore worth of orders are for exports.
- The board has declared a dividend of 70% and a sub-division of shares into five shares of face value of Rs2 each.
- We are introducing our FY2010 estimates for RMTL in this report and expect the company's revenues to grow at a compounded annual growth rate (CAGR) of 27.5% and profits to grow at a CAGR of 24.7% over FY2008-10. We have revised our FY2009E fully diluted earnings per share (FDEPS) mainly to factor in the impact of the 10% export duty levied by the government, which has lately been scrapped. Consequently, the impact would be felt only for one month and thereby we are revising our estimates to Rs138.7 per share.
- We believe that given the robust business outlook for RMTL, the latter's strong order book with increased capacity would drive its revenue growth going forward. The current valuations are compelling and we maintain our Buy recommendation on the stock with a revised price target of Rs1,110 (8x FY2009E EPS). At the current market price the stock trades at 5.6x and 4.5x its FY2009E and FY2010E earnings.
Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs298
Current market price: Rs226 Better days ahead Result highlights - Sanghvi Movers Ltd (SML) reported a robust 52.8% growth in the revenues to Rs79.7 crore. The windmill segment continues to be the key revenue driver for the company, though the contribution from the segment has significantly reduced to 48% of the total revenues this financial from 73% of the total revenues in FY2007.
- The operating profit margin (OPM) of the company declined by 550 basis points, mainly due to high employee cost during the quarter. Consequently, the operating profit reported an increase of 41.7% to Rs55.7 crore.
- The other income spiked up by 184.3% to Rs1.4 crore primarily on account of the profit booked on the disposal of old cranes (Rs1.05 crore). The interest cost increased by 31.5%, while the depreciation charge increased by 33.5% to Rs13.3 crore.
- The net profit consequently increased by 56.8% to Rs23.7 crore, which is ahead of our estimates. The profit growth was led by a better-than-expected revenue growth and a higher-than-expected other income.
- The company added Rs220 crore worth of cranes during the year and planned a capex of Rs250 crore for FY2009 and FY2010.
- The company had earlier guided for a Rs390-crore capex during FY2009, which has now been reduced to Rs250 crore mainly because of the delay in the supply of cranes. Taking into account the same, we have refined our numbers for both FY2009 and FY2010. However there has been no material impact on our estimates. The FY2009 and FY2010 earnings per share (EPS) now stand at Rs.19.2 and Rs24.6 respectively. We maintain our price target of Rs298 on the stock.
- At the current market price, the stock trades at 11.8x and 9.2x its FY2009E and FY2010E respectively.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,640
Current market price: Rs1,419 Price target revised to Rs1,640 Result highlights - Sun Pharmaceuticals' (Sun Pharma) Q4FY2008 and FY2008 revenues grew by an outstanding 129.2% and 57.1% respectively to Rs1,257.2 crore and Rs3,356.5 crore. The growth was significantly higher than our estimates and was boosted substantially by the 'at-risk' launch of generic Pantoprazole under exclusivity.
- After four successive quarters of supernormal growth, Sun Pharma's domestic formulation revenues grew at a relatively moderate rate of 15.8% in Q4FY2008 to Rs361.5 crore. For FY2008, the growth stood at a healthy 25%, far above the industry growth of 12-14%. We expect Sun Pharma's domestic formulation business will continue to outpace the industry and grow at a compounded annual growth rate (CAGR) of 18.0% over FY2008-10E.
- Caraco Pharma continued its impressive performance by registering a five-fold jump in the revenues to $192 million in Q4FY2008 and a doubling of the revenues to $350 million in FY2008. The exceptional performance surpassed our estimates and was largely due to the blockbuster sales of generic Pantoprazole under exclusivity. Caraco Pharma has guided for a 25% growth in FY2009 on the back of a strong pipeline of new launches, which we believe is fairly conservative, given the visibility of strong upsides from the Pantoprazole, Ethyol and Effexor XR exclusivities.
- Sun Pharma has been awarded a 180-day exclusivity for generic Effexor XR, a blockbuster anti-depressant, with $2.6 billion in annual revenues. We have not modeled the impact of the launch into our estimates, which could yield an incremental $35-40 million in the revenues and $20-25 million in the profits during the exclusivity period. The approval and subsequent launch of generic Effexor XR by Sun Pharma in the USA would be a trigger for an upgrade.
- Due to substantial high-margin revenues from exclusivities, Sun Pharma's margins expanded by 3,200 basis points to 58.9% in Q4FY2008 and by 1,470 basis points to 46.2% in FY2008. The margin expansion caused the operating profit (OP) to increase four-fold to Rs740.7 crore in Q4FY2008 and by 130.7% to Rs1,551.1 crore in FY2008. Going forward, we expect these kinds of margins to be sustainable for the next one quarter due to the ongoing Pantoprazole exclusivity. However, we expect the margins to start moderating post the expiration of the exclusivities; we have modeled a decline of 400 basis points over FY2008-10E.
- Sun Pharma's net profit grew by a stellar 225.2% to Rs722.8 crore during Q4FY2008 and by 89.6% to Rs1,486.9 crore in FY2008. The profit growth was restricted due to the sharp reduction in the other income and the increase in the tax provision.
- Taro Pharmaceuticals (Taro) has decided to unilaterally pull out of its merger agreement with Sun Pharma. Sun Pharma is currently evaluating its options relating to the acquisition. While the successful closure of the acquisition is strategically important for Sun Pharma, the failure to close the acquisition would not impact our estimates, as our estimates do not factor in the impact of Taro acquisition. The uncertainty around Taro acquisition could act as a sentimental overhang on the stock in the near-term, while positive news flow on the acquisition would catalyse the stock's upward movement.
- To account for the better than expected performance in FY2008 on account of the higher exclusivity revenues from generic Pantoprazole, we are upgrading our estimates for Sun Pharma. While the revenue estimates for FY2009E have been upgraded by 10.7%, the earnings have been revised upwards by 26.5% to Rs81.7 per share. We have also introduced our FY2010E numbers in this report. We expect Sun Pharma's revenues and profits to grow by 7% and 0.5% respectively, yielding earnings of Rs82.1 per share in FY2010E.
- At the current market price of Rs1,419, Sun Pharma is valued at 17.4x FY2009E and 17.3x FY2010E fully diluted earnings. We reiterate our Buy recommendation on the stock with a revised price target of Rs1,640 (20x FY2010E earnings).
Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs515
Current market price: Rs297 Price target revised to Rs515 Result highlights - The Q4FY2008 results of Tata Chemicals Ltd (TCL) have been below our expectations. The consolidated revenues during the quarter registered a growth of 19.9% year on year (yoy) to Rs1,460.4 crore. The revenues from the fertiliser segment increased by 20.1% to Rs506 crore, while the same for the chemical division grew by 19.8% to Rs953.6 crore.
- The consolidated operating profit dropped by 6.4% from Rs213.2 crore to Rs199.7 crore with the operating profit margin (OPM) declining by 380 basis points to 13.7%. The inability of the company to pass on the increased input costs in the overseas operations due to long term yearly contracts led to a reduction in the overall margin. The segmental profit before interest and tax (PBIT) for the chemical division reduced by 56.2% to Rs55.6 crore with the margin declining from 16% to 5.8%, while the same for the fertiliser division increased by 44.8% to Rs71.1 crore with the margin improving by 240 basis points to 14%.
- The consolidated PAT increased by 20.1% to Rs62.7 crore with the margin remaining flat at 4.3%. The depreciation and interest costs increased by 7.5% and 34.1% yoy to Rs79.3 crore and Rs31.5 crore respectively, while the tax provision declined by 50.9% to Rs36.4 crore.
- On a yearly basis, the net sales increased by a mere 3.8% to Rs6,023.2 crore due to lower production of soda ash and phosphate fertilisers during the year, while the adjusted PAT increased by 3.7% to Rs499.4 crore.
- As soda ash prices in the spot market remain firm at $350-400 per tonne, new long-term contract prices are being revised $25-50 per tonne higher than the last year price of $200 per tonne. We expect this would help the company in regaining its lost margin on account of higher input costs, mainly coal and coke.
- The de-bottlenecking of the urea capacity to expand its Babrala capacity to 1.3 million metric tonne per annum (mmtpa) is progressing well and would be operational by October 2008. However, its benefits would accrue largely in FY2010, as it will lose one-two months urea production in the process. The company's new business initiatives like Fresh Produce and Biofuel are also shaping well.
- TCL completed the acquisition of the soda ash business of General Chemical Industrial Products Inc (GCIP), a US-based chemical company during the quarter. With this acquisition, the company now has access to an extremely low cost natural resource and several new markets. As the financial details of the acquired entity are not yet available, we have not updated the financials of the company for the development.
- At the current market price of Rs297, the stock is trading at 9.2x its FY2010E diluted earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x. In view of a subdued performance of Brunner Mond Group Ltd (BMGL), UK and a lower urea production during de-bottlenecking, we are downgrading our earnings estimates from Rs29 to Rs23.9 for FY2009 and from Rs34.4 to Rs32.2 for FY2010. We maintain our Buy recommendation on the stock with a revised price target of Rs515.
Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs680
Current market price: Rs532 Price target revised to Rs680 Result highlights - Tata Motors' sales for Q4FY2008 were in line with our expectations at Rs8,750 crore, which represents a 5.8% growth. The increase in costs adversely affected the margins on a year-on-year (y-o-y) basis, which are down by 300 basis points to 8.7%. The operating profit declined by 21% to Rs763 crore.
- A higher other income led to a 3% drop in the adjusted net profits to Rs560.3 crore.
- For FY2008, the net revenues grew by 4.6% to Rs28,730 crore led by a 3.6% realisation growth, while the reported profit after tax (PAT) grew by 6% to Rs2,028.9 crore. On a consolidated basis, the net sales grew by 10.2% to Rs35,651.5 crore and the adjusted net profit declined by 2% to Rs2,097.1 crore.
- In order to fund its Jaguar Land Rover (JLR) acquisition, the company is looking to raise Rs7,200 crore through three simultaneous but unlinked rights issues. In addition, it proposes to raise about $500/$600 million through an appropriate issue of securities in the foreign markets on terms to be decided at the time of issuance.
- The outlook for the commercial vehicle (CV) industry appears to be weak for FY2009 onwards in view of the tight financing situation and higher fuel prices. In the passenger vehicle (PV) segment, quite a few launches are slated, but most of them with be in the second half of FY2009, the full impact of which would get reflected in FY2010 only.
- We downgrade our PAT estimates for FY2009 by 2% and introduce estimates for FY2010. We have not factored in the equity dilution as well as the revenue impact of JLR acquisition in view of the incomplete details of JLR. At the current levels, the stock trades at 7.8x its FY2010E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 3.8x. In view of the much higher than expected equity dilution to fund the JLR acquisition, muted business outlook, we maintain Hold on the stock with a revised price target of Rs680.
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs779 Domestic volumes—sipping hot Result highlights - Tata Tea registered a growth of only 1.5% in the net sales in Q4FY2008 to Rs1,176.8 crore. Adverse forex translation and transfer of North India Plantation Operations (NIPO) impacted the overall growth.
- The operating profit margin (OPM) declined by 58 basis points due to higher raw material cost, as raw material cost as percentage to sales increased by 344 basis points to 32.7% in Q4FY2008. However a decrease in the employee cost coupled with lower advertisement expenses aided a marginal decline in the OPM. Thus, the operating profit declined by 2.6% to Rs161.5 crore.
- The lower interest cost and exceptional income led to a 154.7% increase in the adjusted net profit to Rs78.7 crore during Q4FY2008.
- On the domestic front, the company on a standalone basis registered a growth of 9.5% year on year (yoy) to Rs275 crore despite the transfer of NIPO and the strong rupee. Better performance in the domestic market was attributed to a more than 15% growth in the branded tea volume during Q4FY2008.
- The OPM improved by 350 basis points to 9.4% yoy, mainly due to the lower employee cost, which declined by 51.5% to Rs19.7 crore. Thus the adjusted net profit stood at Rs51.3 crore during Q4FY2008.
- While Tata Tea would continue to deliver stable performance across businesses, which in FY2009 should be aided by weakening of the rupee, the company's hefty cash reserves together with the management's intention to look for acquisitions in the domestic and global non-alcoholic beverage market will ensure inorganic growth for the company in the future.
- At the current market price of Rs777.3 the stock trades at 10.7x FY2010E earnings per share (EPS) of Rs72.9. We maintain Buy recommendation with the sum-of-the-parts price target of Rs970.
Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs19.5 Back on our buying list Result highlights - The net interest income of Tourism Finance Corporation of India (TFCI) declined by 27.0% year on year (yoy) to Rs11.2 crore in Q4FY2008. This was mainly due to a 15.6% drop in the interest income and an 11.0% increase in the interest expenses of the company.
- Notably, the operating expenses of TFCI declined sharply by 30.3% yoy during the quarter. The decline was primarily due to a higher base in the year-ago quarter on account of an extraordinary payment of Rs1.0 crore made towards the arrears of employee expenses.
- In addition to the decline in the operating expenses, there was a write-back of provisions (for bad and doubtful debt) of Rs10.0 crore, as the same was no longer required. The significant write-back was the primary reason why the bottom line improved.
- Lower operating expenses and write-back of provisions boosted the operating profit for the quarter. The operating profit increased by 45.4% to Rs19.9 crore. Hence, the net profit for Q4FY2008 also increased by a strong 60.2% to Rs15.3 crore.
- At the end of the fiscal, the sanctions made by the company stood at Rs333.8 crore, up 36.0%. The disbursals also registered an increase of 50.0% to Rs180.36 crore. However, the high growth in the disbursals could not translate into growth of the loan book due to higher repayment of loans.
- The loans increased by 6.0% to Rs372.7 crore, breaking the previous five years' trend of declining growth.
- The gross non-performing assets (NPAs) stood at Rs61.0 crore on an asset base of over Rs500 crore (advances and investments combined). However, the company has maintained the net NPA level at 0% by fully providing for the gross NPAs.
- During the quarter, TFCI raised Rs63.8 crore through the preferential allotment of 1.32 crore equity shares of Rs10 each for cash at a price of Rs48 per share (including a Rs38.0 premium). The capital raising was aimed at enabling the company to finance its future growth.
- At the current market price of Rs19.5, the stock trades at 8.2x its FY2009E adjusted earnings per share (EPS) of Rs2.4 and 0.6x its FY2009E book value of Rs34.9. At the existing valuations, the stock still has substantial upside potential and hence we are upgrading it to a Buy with a revised price target of Rs30.
Unity Infraprojects
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs877
Current market price: Rs390 Price target revised to Rs877 Result highlights - Unity Infraprojects (Unity) revenues in Q4FY2008 grew by 77.1% year on year (yoy) to Rs317.1 crore.
- The operating profit margin (OPM) during the quarter declined by 10 basis points to 11.4%. Consequently, the company's operating profit for the quarter grew by 75.6% yoy to Rs36.1 crore.
- Unity's net income grew 79.4% yoy to Rs20.2 crore during the quarter. The growth rate of the net income was higher than that of the operating profit primarily due to lower tax expenses. The company's effective tax rate stood at 41.7% in Q4FY2008 compared to 46.6% in Q4FY2007. However, this was partially offset by higher depreciation expenses. The company's depreciation expenses during the quarter grew by 124.4% yoy to Rs2.2 crore.
- The company also announced a dividend of Rs4 per share.
- With a strong order book of over Rs3,000 crore, we expect Unity's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 29.2% and 26.7% respectively during the period FY2008-FY2010.
- We have also revised downward the real estate subsidiary valuation. Earlier, the company was planning to fund the projects by selling stake in the real estate subsidiary. However, given the recent turmoil in the market, we believe the projects would be financed through debt. These projects (including the UMC project) now contribute Rs86 per share to our valuation.
- We have revised our FY2009 and FY2010 earning estimates downward by 3.5% and 4.9% respectively to factor in the lower OPM on account of a sharp increase in the raw material cost. At the current market price, the company is trading at 5.3x FY2009 earning estimate and 4.32x FY2010 earning estimate after adjusting value for these projects. We maintain our Buy recommendation on the stock with a revised price target of Rs877 per share.
Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs535
Current market price: Rs497 Reorganising structure for better growth We attended the analyst meet of Wipro held in Mumbai. Some of the key high lights of analyst meet are presented below. - Reorganisation of structure to enhance focus: In addition to appointing two joint chief operating officers, Wipro has aligned its structure based on industry verticals to improve its operational efficiencies and provide better positioning for large transformational deals. Inorganic initiatives will also continue to be an important strategy in building the competitive edge over the peers for large transformational deals.
- India and Middle East to be major growth driver: The Indian and Middle East market has grown by a compounded annual growth rate (CAGR) of 35% in the last five years, and is regarded as an important market apart from the USA and Europe by Wipro. Last year Wipro won three mega deals—a $600 million deal from Aircel, a $100 million worth deal from Saudia Airlines and a deal from Future Group.
- Pricing environment remains stable: Wipro has indicated that the pricing environment has remained stable. It has been able to renegotiate higher billing rates in most contracts renewed in the past few months. The demand environment is expected to improve in the second half of the year and the management continues to indicate back-ended growth this fiscal.
- Margin drivers: The management expects meaningful moderation in offshore wage hikes this year, which is expected to be down to 10-12% as compared to 14-15% in the past couple of years. Moreover, Wipro has significant leverage in its employee utilisation rate and tightening up of performance on fixed rate contracts.
SHAREKHAN SPECIAL Q1FY2009 Auto earnings preview Profits to be affected
The automobile sector is expected to show weakness in profitability in Q1FY2009. Though the sales volume growth during the quarter is better than that of Q4FY2008, the rising raw material cost would exert pressure on the profitability. The profitability of the sector would be affected despite the price increase undertaken by the automobile companies to cushion the raw material cost rise. Rising inflation and interest rates are also expected to impact the volume growth of the sector going forward. The volume growth in the sector was better than that of Q4FY2008 due to low base effect, purchases made in advance to tide over the expected price rises and the marriage season in the first two months of the quarter. Among the heavyweights, Maruti Suzuki's sales volumes for the quarter grew by 13.5%, impacted by increasing competition and a slowdown in the sector. The sales volumes of Mahindra and Mahindra (M&M) were maintained with a 5.2% growth during the quarter. Tata Motors' sales volumes for the quarter rose by 3.4%. Ashok Leyland's volumes for the quarter grew by 1.4%, whereas exports helped Bajaj Auto Ltd (BAL) sales volumes to grow by 8%. Q1FY2009 IT earnings preview - The top lines of frontline tech stocks are expected to grow in the range of 6.5%-11.1% sequentially in the rupee terms in Q1FY2009. The growth in the top lines is primarily driven by a volume growth of 1%-2%, boosted by ~7% depreciation in the rupee against the US dollar during the quarter. In dollar terms, the sequential growth is expected to remain muted during the quarter.
- On the margin front, the margins of frontline IT companies during the first quarter of the fiscal are generally dented by visa cost. For Infosys and Tata Consultancy Services (TCS), the margins in the first quarter of the fiscal are impacted by wage hikes in addition to visa cost. Consequently, the operating profit margins (OPM) of Infosys and TCS in Q1FY2009 are expected to decline by around 185-205 basis points, in spite of the positive impact of the rupee depreciation.
- On the net income front, we expect HCL Technologies' net income to decline by 29.6% year on year (yoy), as the company had reported foreign exchange (forex) gains of Rs250 crore in Q1FY2008. Beside this, HCL Technologies and Wipro Technologies had increased their hedge positions in Q4FY2008. Hence, the two companies may report higher forex losses, given the recent depreciation of the rupee.
Q1FY2009 Media earnings preview Overall, we expect the companies in Sharekhan’s media and entertainment universe to register a 31.9% increase in their revenues, leading to a 38% growth in their operating profit and a 41% increase in their adjusted net profit. Zee News is our top pick in the sector.
MUTUAL GAINS Sharekhan's top equity fund picks We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity). The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation. FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE Banking Escalating inflation attracts more rate hikes
The Reserve Bank of India (RBI) has announced a 50-basis-point hike in the repo rate (a key short-term indicative rate) from 8% to 8.50% with immediate effect. In addition, the cash reserve ratio (CRR) has also been increased by 50 basis points to 8.75% in two stages: to 8.5% from July 5 and to 8.75% from July 19. It is estimated that the stringent measures would suck up liquidity to the tune of Rs20,000 crore from the banking system. Capital goods Power T&D—Opportunity galore
In the recent past, there has been growing concerns about the possible moderation in the investment upcycle in the backdrop of deterioration in the macro-economic scenario. The lower than expected performance by some large capital goods players due to execution delays and other company specific issues have only added to the growing pessimism. The sudden dip in the capital goods segment in the index of industrial production (IIP) figures for January also jolted investor sentiments. Fertiliser New policy for the long term
Being a market driven policy, the new fertiliser policy is quite encouraging for the fertiliser industry, especially for phosphatic fertilisers. The new policy also encourages investments in the international markets to source inputs. From improved realisations for DAP, the policy would improve earnings estimates for the domestic DAP manufacturers like Tata Chemicals (IMACID), which has assured source of phosphoric acid. The policy can benefit fertiliser companies like GSFC, Coromandel Fertilizers and GFCL in case of improved availability of phosphoric acid in the international market. There has been no announcement of brownfield and greenfield expansions, which holds the trigger for the fertiliser stocks. However, we expect some announcement regarding the same in the near future. Information Technology Global outsourcing industry survey
Recently, Brown & Wilson conducted a survey of global outsourcing industry for the year 2008. The results of the survey were brought out in the form of a report—2008 Black Book of Outsourcing—in which over 24,000 clients of outsourcing vendors participated. The survey was aimed at identifying the 50 best-managed global outsourcing companies by surveying client experience and assessing industry developments. Telecommunications Consolidation to improve sector's valuation
Idea Cellular is reportedly looking to acquire Spice Communications (Spice). Spice is a two-circle (Punjab and Karnataka) GSM operator with 4.4 million subscribers. For Q1FY2008 Spice reported revenues of Rs300 crore; earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs81 crore; and a net loss of Rs36 crore. Considering its subscriber base and profitability, Idea Cellular may not offer a premium to acquire Spice. However, Idea Cellular could seek a premium from Telekom Malyasia, which currently holds a 39.2% stake in Spice, for a stake in Idea Cellular.
VIEWPOINT Dish TV India Concerns galore
Dish TV stock has been a big underperformer over the last year and we believe it was so for right reasons. The direct to home (DTH) opportunity in India is big with the subscriber base expected to increase rapidly from 3.5 million in December 2007 to 25 million by 2012 registering a compounded annual growth rate (CAGR) of 48% over the period. However, we believe, only players with deep pockets are likely to gain and survive over longer term. Essar Shipping Ports & Logistics In expansion mode
Incorporated in 1975, Essar Shipping Ports and Logistics has transformed itself from a mere shipping company to an end-to-end logistic service provider with presence across ports and terminal services, sea and surface transportation services, and onshore and offshore drilling services. Gammon India Italian job
Gammon India Ltd (GIL) has recently acquired two companies in Italy. We attended the conference call held by the company post-acquisitions. We now bring you the key takeaways from the call. Idea Cellular Idea Spices up its business
Idea Cellular has bought a 40.8% stake in Spice Communications at a price of Rs77.30 per share. Idea Cellular will pay an additional Rs544 crore as a non-compete fee to the Spice group. Idea Cellular and Telekom Malaysia along with their affiliates and associates will make an open offer to acquire an additional 20% stake in Spice Communications. The open offer will be made at a price of Rs77.30 per share. Sujana Towers Towering growth
Sujana Towers is a tower manufacturing company catering to tower requirements of power, telecom and railways sectors. With an installed capacity of 128,125 tpa the company manufacturer towers up to 400 kilo volt (kv) rating lines. In order to further expand its product portfolio, the company has introduced 765kv towers and is awaiting approval from Power Grid Corporation of India for the same. The company currently derives 60% of the revenues from the sale of power towers, while the balance comes from telecom towers.
EARNINGS GUIDE
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