DG - Sharekhan ValueLine for May 2008

 

Sharekhan ValueLine [For May 2008] Sharekhan www.sharekhan.com

Summary of Contents   THE STOCK IDEAS REPORT CARD FROM SHAREKHAN'S DESK Market shows resilience, but obstacles ahead The market has closed in the positive for four weeks in a row, gaining 1,349 points in the past 17 trading sessions. Financial institutional investors appear to be coming back. After selling equities worth Rs130.6 crore in March and Rs11,432 crore in Q1CY2008 at net level, they turned net buyers of Indian equities in April by making net purchases worth Rs647.9 crore in the month. In April the domestic mutual funds made net sales to the tune of only Rs20.6 crore vs net sales of Rs1,971 crore in the previous month. After subdued activity in March, the market saw decent buying on steadily improving volumes in April. Not only did the large-cap benchmark index, the Sensex, gain 10.5% in the month but the BSE Mid-Cap Index and the BSE Small-Cap Index also rose by about 11.1% and 11.9% respectively in the same period. Though the market has recovered smartly, it might not be out of the woods yet.  Sharekhan top picks Finally, the markets had something to cheer about in April after three months of declining trend. The Nifty and the Sensex appreciated by 12.5% and 14.7% respectively during the month. The resurgence of tech stocks and a strong bounce-back in private banks aided the overall buoyancy in the markets. The unexpected but pleasant move to extend tax exemptions under section 10A/10B by one year to March 2010 boosted tech stocks that have a significant weightage in the benchmark indices.    STOCK UPDATE Aban Offshore  Cluster: Emerging Star Recommendation: Buy Price target: Rs4,829  Current market price: Rs3,407 Price target revised to Rs4,829  Result highlights Aban Offshore's Q4FY2007 standalone results were a little below our expectations, on the back of lower-than-expected margins, higher interest cost and an exceptional item of Rs7 crore relating to losses on foreign exchange derivatives. However, it needs to be noted that the stand-alone results do not provide the complete picture and our valuations are based on the consolidated earnings estimate of FY2010. The net sales marked a growth of 65.4% to Rs196.4 crore during the quarter on account of repricing of Aban IV and Aban VI. However, there has been a delay in the deployment of Aban V, as it would commence its new contract with Oil and Natural Gas Corporation (ONGC) only after the completion of certain statutory class surveys and minor repairs. The deployment of Aban III has also got delayed and is likely to commence from Q1FY2009. The operating profit margin grew by 1,010 basis points to 50.3% on a year-on-year basis, but declined by about 370 basis points on a sequential basis on the back of higher stores and repair expenses. Higher interest cost led to a 40.5% growth in its net profits to Rs41.5 crore. The company has made a provision of Rs6.96 crore for foreign currency derivatives to hedge its currency exposure. This led the reported profits to grow by just 16.8% to Rs34.5 crore.  During the quarter, the company received a letter of intent from ONGC for the deployment of a drillship, Aban Ice, on a three-year contract worth Rs657crore, at day rates of around $154,000 (as against the earlier day rates of $43,000). The company has already deployed its rig Aban VI at new day rates of $156,600. Two other rigs Aban III and Aban V have also completed their old contracts and are expected to be deployed at new day rates ($156,600 per day) from the next quarter.  We have reduced our consolidated earnings estimates for FY2009 by 9.8% and that of FY2010E by 6% to factor in the delays in the commencement of some of the contracts. We now understand that Aban Abraham is likely to commence operations by Q1FY2009, while Aban Pearl would start operations by Q2FY2009. Firm oil prices should continue to drive the growth for jack-up rigs going forward. The increased supply of jack-up rigs set to come in the next two years may affect the day rates a little. However, the demand visibility for jack-up rigs remains strong, with the industry operating at extremely high utilisation levels currently. Looking at the current demand supply scenario and the high crude prices, it is likely that the utilisation levels would remain strong despite the entry of new builds into the market. At the current market price, the stock trades at 9.5x FY2009 and 7.1x FY2010 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs4,829 (10x FY2010E consolidated earnings).   ACC  Cluster: Apple Green Recommendation: Book Profit Current market price: Rs798 Book profit With cement prices across the country peaking out on the back of new capacities coming on stream, we believe top line growth will be a function of increase in volumes. As ACC has no major capacity additions lined up in the current year, we are of the view that its top line growth is capped. Also, ACC's major sales come from north India, which is witnessing hefty capacity additions by its peers. Further, the sustained increase in the costs would continue to dent the profitability of the company. At the current market price of Rs798, ACC trades at 11.5x its CY2008E EPS and at an EV/tonne of $149. We believe that the valuations are expensive considering the low growth trajectory over the next two years. Thus, we recommend investors to book profit. We had put a hold on the stock in our update on February 22, 2008. The stock has given a return of 206.9% since our initiation of coverage on August 10, 2004.     Andhra Bank    Cluster: Cannonball Recommendation: Buy Price target: Under review Current market price: Rs81 Q4FY2008 results: First-cut analysis  Result highlights Andhra Bank reported a disappointing set of numbers for Q4FY2008. The profit after tax (PAT) declined by 10.5% year on year (yoy) to Rs124.3 crore. The PAT was well below our estimate of Rs157 crore. The net interest income (NII) was down 11.6% yoy to Rs342.9 crore. The interest expenses growth of 42% yoy outpaced the 20.5% growth in the interest income, pointing towards pressure on the net interest margin. The non-interest income continued to be a major contributor to the bottom line with a 32.5% growth at Rs183.3 crore.  The operating expenses were down 7.6% yoy to Rs213.1 crore, primarily driven by a substantially lower staff expenses (down 21.1% yoy). Meanwhile, the other operating expenses were up 8.1% yoy. Strong non-interest income coupled with a decline in the operating expenses helped the bank post a positive albeit a muted growth of 5.9% in the operating profit. Reported provisions registered a 12.8% year-on-year (y-o-y) increase to Rs91.4 crore. The effective tax rate for the quarter came in high at 44%. The asset quality of the bank improved further as reflected by a 34 basis points y-o-y decline in % gross non-performing assets (GNPA) to 1.07%. On absolute terms as well, the GNPA declined by 6.2%. Meanwhile, the % net non-performing assets (NNPA) came in at 0.15%, down 2 basis points yoy. The capital adequacy ratio at end of the quarter stood at a comfortable 11.61%, largely in line with the year ago level of 11.33%. Advances registered a growth of 22.4% yoy to Rs34,556 crore. Of the total advances, retail advances growth stood at 19.5% yoy, while small and medium enterprise (SME) advances were up by 22.7% yoy. The FY2008 PAT reached at Rs575.6 crore indicating a growth of 7% yoy. At the current market price of Rs80.6, Andhra Bank trades at 5.5x FY2009E earnings per share, 2.9x FY2009E pre-provisioning profit and 1x FY2009E book value. We are reviewing our earnings model to factor in the additional information.   Axis Bank  Cluster: Emerging Star Recommendation: Buy Price target: Rs1,150 Current market price: Rs881 Results above expectations  Result highlights Axis Bank reported a blockbuster set of numbers for Q4FY2008, beating our and consensus estimates by a significant margin. The PAT (profit after tax) for the quarter came in at Rs361.4 crore indicating a growth of 70.6% yoy (year on year) and 17.8% qoq (quarter on quarter). Reported NII (net interest income) was up 88.7% yoy to Rs828.4 crore on the back of a 50.2% y-o-y (year-on-year) increase in the interest earned, while the growth in the interest expense was contained at 31.5% yoy.  Non-interest income continued to be a major contributor to the bottom line with a 84.8% growth at Rs556.5 crore. The robust growth was supported by a jump in treasury gains and continued strong traction in fee income growth. Operating expenses were up 93% yoy to Rs662.1 crore, primarily driven by higher staff expenses (up 107% yoy), while other operating expenses were up 88% yoy. Reported provisions registered a 102% y-o-y (year-on-year) increase at Rs164.2 crore, driven by prudent provisions related to potential losses from forex (foreign exchange) derivative transactions.  PAT was up 70.6% yoy and 17.8% qoq to Rs 361.4 crore, beating our expectation of a Rs304 crore PAT and a consensus estimate of a Rs307.2 crore PAT. Asset quality improved further as %GNPA (gross non-performing assets as % of advances) and %NNPA (net non-performing assets as % of advances) improved during the quarter. Capital adequacy remained healthy at 13.73% compared to 11.57% a year ago. Axis Bank clarified on the forex derivative issue stating that except for the two customers that have filed lawsuit, the bank is not experiencing troubles in recovering the dues. The bank has provided Rs72 crore for potential default losses from the two aggrieved customers. At the current market price of Rs881, Axis Bank trades at 22.2x 2009E EPS (earnings per share), 10.5x 2009E PPP (pre-provisioning profit) and 3.1x 2009E price-adjusted book value. We maintain our Buy recommendation with price target of Rs1,150.   Balaji Telefilms       Cluster: Emerging Star Recommendation: Buy Price target: Rs355 Current market price: Rs198 Price target revised to Rs355 Balaji Telefilms Ltd (BTL) and Star entered a 49:51 joint venture (JV) in April 2007 (with BTL having a 49% stake) to launch regional entertainment channels in Telugu, Kannada, Malayalam, Bengali, Marathi and Gujarati. Star transferred its Tamil channel Star Vijay to the JV. Forward integration in regional broadcasting arena (especially south Indian language channels) with a world-class broadcaster like Star (with BTL's expertise in content) promised immense value creation potential for BTL and acted as a trigger for the stock. However the broadcast venture has been considerably delayed, as the first of these channels in Telugu that was to go on air by September 2007 and to be followed by the launch of at least four other regional language channels over a period of time are still to operationalise. The management has cited procedural issues to get the required approvals as the reason for the delay. In the absence of clarity on the timeline for the launch of these channels, the worst-case scenario would be that the JV might be called off. Considering this, we have conservatively revised our estimates and price target for the stock.   Bank of India  Cluster: Apple Green Recommendation: Buy Price target: Under review Current market price: Rs343 Q4FY2008 results: First-cut analysis  Result highlights Bank of India’s Q4FY2008 results were above our expectations. The bank reported a profit after tax (PAT) of Rs757 crore, indicating an impressive growth of 69.2% year on year (yoy).  The net interest income for the quarter came in at Rs1,216.8 crore, up 25.7% yoy. The net interest income growth was on the back of a continued robust growth in advances and an expansion in the net interest margin (NIM).  The reported NIM for the quarter stood at 3.24%, indicating an expansion of 10 basis points yoy. The improvement in the NIM was largely driven by margin expansion in the international business, while the margin for domestic business was flat at 3.71%. The non-interest income was up by 13.3% yoy to Rs653.3 crore from Rs576.7 crore a year ago. Importantly, the year-ago non-interest income included a one-time gain of Rs52 crore from Nigerian oil bonds and Rs14 crore gain from the sale of fixed assets. Excluding these one-time gains from the year-ago period, the non-interest income for Q4FY2008 indicates a robust 27.9% year-on-year (y-o-y) growth. The operating expenses during the quarter were marginally up by 1.3% yoy to Rs657.9 crore. The operating expenses growth was contained due to a 7.6% y-o-y decline in staff expenses, which helped to partly offset the 20.9% y-o-y increase in the other operating expenses. Consequently, the cost-income ratio improved significantly to 41.7% from 52.1% a year ago. Provisions and contingencies were down by 6.5% yoy, thereby boosting the bottomline. The asset quality of the bank improved during the quarter as evidenced by an 8.1% y-o-y decline in the gross non-performing assets (GNPA) and a 27.1% y-o-y decline in the net non-performing assets (NNPA). In line, the provisioning coverage ratio has improved to 69.3% from 61.3% a year ago. The capital adequacy ratio moved up to 12.95% from 11.58% a year ago, helped by qualified institutional placements. The advances witnessed a strong growth of 32.3% yoy and stood at Rs114,793 crore at the end of Q4FY2008. Meanwhile, deposits grew by 25.1% yoy to Rs150,012 crore. We are currently reviewing our earnings estimates. At the current market price of Rs343, the stock quotes at 8.2x 2009E earnings per share, 4.2x 2009E pre-provisioning profit/share and 1.8x 2009E book value/share. We maintain our Buy recommendation on the stock.   BASF India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs330 Current market price: Rs210 Agro products boost revenues Result highlights The stand-alone Q4FY2008 results of BASF India (BASF) are in line with our expectations. The net sales of the company grew by 20.3% year on year (yoy) to Rs193.4 crore, mainly driven by a strong 29.6% growth in the sales of agricultural products and a 20.2% growth in the sales of performance products. The plastic division’s sales also grew by a healthy 18.1%.  The operating profit margin (OPM) during the quarter remained flat at 5.1% yoy. The margin for the performance product and chemical divisions improved while the same for the agricultural product and nutrition division, and the plastic division declined during the quarter. Consequently, the operating profit grew by 18.5% to Rs9.8 crore in Q4FY2008. Despite increased interest and depreciation charges, the company’s net profit increased by 20.2% to Rs4.4 crore during the quarter. For FY2008, the consolidated net sales grew by 24.5% to Rs1,053.6 crore and the profit after tax (PAT) grew by 14.8% to Rs57.5 crore on the back of the solid performance by the agricultural product and nutrition division during the year. We expect the consumption boom in the company’s user industries (white goods, home furnishings, paper, construction and automobiles) to continue and hence we remain optimistic about the company’s growth prospects.  We believe the stock is trading at attractive valuations of 6.9x FY2009E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.9x. We maintain our Buy recommendation on the stock with a price target of Rs330.   Bharat Electronics        Cluster: Apple Green Recommendation: Buy Price target: Rs1,610 Current market price: Rs1,179 Price target revised to Rs1,610 Key highlights Bharat Electronics Ltd (BEL) announced its provisional results for FY2008. The company reported gross sales of Rs4,114 crore and profit before tax (PBT) of Rs1,109 crore during FY2008. The company's gross sales increased marginally by 4.1% and the PBT grew by 5.2% over FY2007. As a result in line with our expectations, BEL has missed its sales target of Rs4,725 crore as per the performance Memorandum of Understanding (MoU) signed with the Ministry of Defence. The implied Q4 results appear to be quite robust with growth of around 32% and 39.3% in the net sales and the PBT respectively. The implied Q4 sales and PBT are at Rs2,296.8 crore and Rs720.2 crore respectively. The company reported 18.6% decline in the net sales during the first nine months ended December 2007, which acted as a dampener to the company's overall financial performance. The company's pending order book stood at Rs9,450 crore as on April 1, 2008, up from Rs9,130 crore at the beginning of FY2008. The low growth in the order book was due to lower order inflows of Rs4,434 crore in FY2008 versus Rs6,460 crore in FY2007. The turnover per employee for 2007-08 was Rs33.26 lakh as against the last year's figure of Rs31.99 lakh, while the value added per employee for 2007-08 was Rs15.5 lakh as against last year's figure of Rs14.5 lakh. The company's healthy performance during the last quarter represents a strong operating profit margin (OPM) of 30.2% (derived backwards from the PBT numbers keeping our forecasts for other income, interest, and depreciation unchanged), which helped enhance the yearly OPM to 23.8% as against our estimates of 20.9% for 2008. At the current market price of Rs1,179 the stock trades at 12.5x FY2008E and 10.6x FY2009E earnings estimates. On an adjusted earnings (adjusted for cash) basis, the company trades at 8.2x FY2008E and 5.8x FY2009E, which offers strong downside support to the stock. Consequently, we are revising our recommendation on the stock to Buy with a revised price target of Rs1,610 (8x 2009E adjusted PER).   Bharat Heavy Electricals        Cluster: Apple Green Recommendation: Buy Price target: Rs2,845 Current market price: Rs1,753 FY2008 performance below expectations Key highlights Bharat Heavy Electricals Ltd (BHEL) has announced provisional numbers for FY2008, reporting a growth of 15.3% year on year (yoy) in its turnover to Rs21,608 crore. The net profit has been up 16.6% yoy to Rs2,815 crore as against Rs2,415 crore in FY2007. The growth has been below our and street expectations. Deriving Q4FY2008 from the provisional numbers, the revenue (gross) has reported a growth of 6.5% yoy to Rs8,070.2 crore, while the net profit has declined by 7.3% to Rs1,066.4 crore.  In our view, slower than expected execution rate and project specific delays could be the possible reasons for the lower-than-expected growth in the top line. Order inflows continue to be strong during FY2008 with a 41% increase to Rs50,265 crore. The order backlog at Rs85,500 crore is at a record high and the company has the largest order book among the Indian companies.  During the quarter the company has made provision for a 40% increase in employee wage to take into account the Sixth Pay Commission's proposals. The company has also made provisions for contractual obligation, consequently impacting the margins in Q4FY2008. On the super critical power plant front, the company has won order for the National Thermal Power Corporation's Barh-II project (2x660MW), while the equipment for the Tamil Nadu Electricity Board (TNEB) project (2x800MW) would also be supplied by BHEL as it would be holding a 26% stake in the joint venture company between TNEB and BHEL. The company has also bid for the Andhra Pradesh Power Generation Corporation project. The company has brought on stream additional 4,000MW of capacity during January 2008 taking the total production capacity to 10,000MW. Further, 5,000MW of additional capacity would be bought on stream by the end of CY2009. Additional capacity coupled with strong order book of Rs85,500 crore (3.9x FY2008 revenues) should aid strong revenue and profit growth for BHEL going forward. Currently, we are maintaining our estimates for FY2009 and FY2010 awaiting further clarity. We reiterate our Buy recommendation and at the current market price the stock is discounting it FY2009E and FY2010E earnings by 20.9x and 15.4x respectively.   Bharti Airtel   Cluster: Apple Green Recommendation: Buy Price target: Rs1,100 Current market price: Rs915 Results ahead of expectations  Result highlights The net revenues of Bharti Airtel grew by 12.3% quarter on quarter (qoq) and by 45% year on year (yoy) to Rs7,819.1 crore during Q4FY2008. The revenue growth was much ahead of the consensus estimate and driven by robust sequential growth of 14.4% and 9.3% in the mobile service business and the non-mobile service business respectively.  The operating profit margin (OPM) declined by 100 basis points qoq to 41.6% during the quarter, largely due to an increase in the operating expenses resulting from the transfer of passive infrastructure (network towers) to its subsidiary, Bharti Infratel. Moreover, the downward revision in the tariffs to Rs1 a minute for all pre-paid schemes in January and higher sales & marketing expenses also dented the overall profitability. The operating profit grew by 9.7% qoq and by 45.1% yoy to Rs3,251.8 crore. The interest expenses (net of interest income) jumped sharply to Rs215.7 crore (up from Rs81 crore in Q3) largely due to Rs147.2 crore of losses related to foreign exchange (forex) fluctuations and mark-to-market losses on the company's derivative exposure. On the other hand, the depreciation charge declined by 6.5% qoq to Rs970.2 crore (again due to the transfer of passive infrastructure to Bharti Infratel). Consequently, the earnings jumped by 7.6% qoq and by 36.9% yoy to Rs1,852.9 crore.  In terms of operational highlights of the mobile business, the average realisation per unit (ARPU) declined by just 0.3% (despite the tariff cuts) and the minutes of usage (MOU) jumped by 20.6% qoq during the quarter. The traffic growth is far ahead of street expectations and allays a major concern related to elasticity in the volume growth in response to the decline in the tariffs.  In terms of new developments, the company inducted $1.35 billion from private equity investors in Bharti Infratel, valuing the subsidiary at $10-12.5 billion. It has received additional spectrum in seven circles and is eligible in six more circles as per the new norms. In terms of regulations, the Telecommunication Regulatory Authority of India (TRAI) announced the phasing out of access deficit charges and introduced guidelines for sharing of active network infrastructure during the quarter.  To factor in the management's confidence in maintaining the growth momentum in monthly subscriber additions, we are revising upwards our FY2009 earnings estimate by 3.2% and introducing our earnings estimate for FY2010 in this note. At the current market price the stock trades at 20.3x FY2009 and 16.7x FY2010 estimated earnings. We maintain our Buy call on the stock with a price target of Rs1,100.   Cadila Healthcare  Cluster: Emerging Star Recommendation: Buy Price target: Rs381 Current market price: Rs289 Price target revised to Rs381 Result highlights Cadila Healthcare's (Cadila) performance in Q4FY2008 and in FY2008 exceeded our expectations. While the total operating income grew by 29.9% to Rs546.9 crore in Q4FY2008 and by 27.1% to Rs2,324.5 crore in FY2008, the pre-exceptional profits rose by 40.2% to Rs52.0 crore (against our estimate of Rs39 crore) in Q4FY2008 and by 27.5% to Rs264.5 crore in FY2008. The topline growth was above our estimates and was broad based. It was driven by strong traction in the US generics and the French business, improved performance in the domestic formulation segment and consolidation of the recent acquisitions (Liva Healthcare, Nikkho, Nippon Universal and an additional 50% stake in the Zydus Sarabhai joint venture [JV]). Due to the genericisation of Pantoprazole in the USA, Cadila's revenues from its JV with Nycomed (formerly Altana) declined by 20.2% to Rs66.8 crore, while the profits plunged by 27.6% to Rs48 crore. On the positive side, Cadila has expanded the scope of its JV with Nycomed, as per which Nycomed would shift the production of 17 active pharmaceuticals ingredients (APIs; including Pantoprazole) from its UK sites to the Indian JV. This is expected to start contributing to the revenues from FY2010 onwards.  Led by sharp improvements in the gross margin, the operating margin expanded by 380 basis points to 20.1% in Q4FY2008 and by 50 basis points to 19.8% in FY2008. This led the operating profit to grow by 59.5% to Rs113.4 crore in Q4FY2008 and by 30.6% to Rs459.8 crore in FY2008.  We have revised our FY2009E estimates for Cadila to reflect the better-than-expected performance in FY2008 and the outlook provided by the management. We are revising our FY2009E revenues upwards by 4.4% to 2,779.4 crore and the profits by 11.4% to Rs322.2 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 12.4% in FY2010E to Rs3,188.8 crore. The profits are expected to grow by 19.7% to Rs386.1 crore, resulting into earnings of Rs30.7 per share in FY2010E. We have used the sum-of-the-parts methodology to value Cadila. While we value Cadila's non-Nycomed business at 14x the FY2010 base earnings at Rs371 per share, we have used the DCF approach to value the Nycomed JV. Assuming a 95% decline in the cash flows post patent expiry in June 2010, a terminal growth rate of 5% and a discount rate of ~11%, we arrive at a value of Rs10.0 per share. Thus, we value Cadila's total business at Rs381 per share.    Canara Bank    Cluster: Apple Green Recommendation: Buy Price target: Rs315 Current market price: Rs232 Q4FY2008 results: First-cut analysis  Result highlights Canara Bank reported a profit after tax (PAT) of Rs464.1 for Q4FY2008, reflecting a decline of 8.1% year on year (yoy). The reported PAT was marginally above our expectation of Rs451.1 crore. Top line performance was disappointing - as expected - with the net interest income (NII) declining by 12.9% yoy to Rs922.5 crore owing to pressure on margins and muted advances growth. Non-interest income provided some relief with a 14.1% year-on-year (y-o-y) growth. Operating expenses grew by 10.1% to Rs697.6 crore during the quarter. The growth in operating expenses can be traced to a 30.9% jump in other operating expenses. Meanwhile the staff expenses declined by 4.3% yoy. Notably, the provisions continued its declining trend. Provisions and contingencies stood at Rs375.1, down 24.5% yoy. Lower provisions coupled with a positive growth in the non-interest income helped the bank check the decline in its profitability. Asset quality remained healthy with an improvement on absolute and relative basis. The % gross non-performing assets (GNPA) came in at 1.31%, down 20 basis points yoy, while the % net non-performing assets (NNPA) was down 10 basis points to 0.84%.  Capital adequacy ratio was healthy at 13.25% at the end of March 2008, largely in line with the year-ago level of 13.50%. Growth in advances and deposits was muted at 8.9% and 8.2% yoy respectively. At the current market price of Rs232, Canara Bank trades at 6.1x 2009E earnings per share, 3.2x 2009E pre-provisioning profit and 0.8x 2009E book value. The stock is trading below its 2009E book value making it an attractive buy. We maintain our Buy recommendation and price target on the stock.   Corporation Bank  Cluster: Apple Green Recommendation: Buy Price target: Rs440 Current market price: Rs339 Price target revised to Rs440  Result highlights Corporation Bank reported a profit after tax (PAT) of Rs205.6 crore for Q4FY2008, reflecting a growth of 73.5% year on year (yoy) and 7.7% quarter on quarter (qoq). The reported PAT was well above our expectation of Rs140 crore. The top line performance was disappointing with the net interest income (NII) growing by a muted 3.4% yoy to Rs402.6 crore.  The non-interest income provided some relief with a 20.2% year-on-year (y-o-y) growth on the back of a spike in treasury gains (up 123% yoy). The operating expenses declined by 5.2% to Rs210.3 crore during the quarter. The decline in the operating expenses can be traced to a 25% drop in the staff expenses. Meanwhile, the other operating expenses grew by 12.3% yoy. Notably, the provisions continued its declining trend. The provisions and contingencies stood at Rs101.9 crore, down 32.6% yoy. Lower provisions coupled with positive growth in the non-interest income helped improve the bottom line. The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The % gross non-performing asset (GNPAs) came in at 1.47%, down 28 basis points yoy, while the % net non-performing assets (NNPAs) was down 32 basis points to 0.32%. The capital adequacy ratio was healthy at 12.09% at the end of March 2008 compared with the year-ago level of 12.76%. The advances registered a strong growth of 30.8% yoy and reached Rs39,186 crore, while the deposits grew by 30.9% yoy to Rs 55,424 crore. Owing to weaker core operating performance, we are factoring in a slower earnings growth and are lowering our price target to Rs440. At the current market price of Rs339, the stock trades at 6x 2009E earnings per share (EPS), 3.2x 2009E pre-provisioning profit(PPP)/share and 1x 2009E book value (BV). We believe that at current valuations, the stock looks attractive. Esab India  Cluster: Vulture’s Pick Recommendation: Buy Price target: Rs575 Current market price: Rs435 On a strong footing Result highlights For Q1CY2008, ESAB India (ESAB) reported a 24% growth in its sales. The growth in sales was led by a 34% growth in the revenues of the equipment division, while the revenues of the consumables division rose by 20.3% yoy (year on year) to Rs71.5 crore.  The operating profit grew by 22.7% yoy to Rs24 crore. The operating profit margin (OPM) declined marginally (-20 basis points) to 23.9% mainly on account of a change in the product mix and higher inventory build up during the quarter. On segmental basis, the consumables division reported an increase of 20.8% in the profit before interest and tax (PBIT) to Rs19.9 crore, while the equipment division's PBIT increased by 28.7%, reporting a decline of 70 basis points. The interest costs increased by 15% to Rs0.23 crore, while the depreciation charge increased by 18.8% to Rs1.6 crore. Consequently, the net profit increased by 25.1% to Rs15.4 crore. ESAB is likely to be one of the major beneficiaries of the continued buoyancy in the user industries such as pipes, shipbuilding and steel. Furthermore, greater level of component indigenisation is likely to protect its margins against any adverse impact due to rising steel prices.  We have revised our CY2008 earning estimates downward by 5.1% to Rs42.2 per share mainly to take into account the lower than expected OPM in Q1CY2008. We are also introducing our CY2009 earnings in this report and expect ESAB to report compounded annual growth rate (CAGR) of 18.7% and 20.1% in its revenues and earnings respectively over CY2007-09E. At the current market price of Rs435, the stock discounts its CY2008 and CY2009 earnings by 11.3x and 8.7x respectively. In terms of enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) the stock is quoting at 7x and 5x its earnings estimates. We maintain Buy recommendation on the stock with a price target of Rs575.   HCL Technologies    Cluster: Apple Green Recommendation: Buy Price target: Rs318 Current market price: Rs261 Price target revised to Rs318 Result highlights HCL Technologies (HCL) has reported a revenue growth of 7.1% quarter on quarter (qoq) and 23.3% year on year (yoy) to Rs1,944.8 crore for the third quarter ended March 2008. In dollar terms, it has reported a sequential growth of 5.2% in its consolidated revenues to US$484.9 million. The sequential growth in the revenues was driven by a volume growth of 6.6% (a 5.3% growth in software service business, an 8.5% growth in Infrastructure Management Services [IMS] and a 4.5% growth in the business process outsourcing [BPO] business). The volume growth was partially mitigated by the adverse impact of an offshore shift (0.3%) and lower material billing in the IMS business (1.1%) during the quarter.  The operating profit margin (OPM) improved by 88 basis points to 22.3% on a sequential basis. The margin improvement was aided by higher realisations (7 basis points), hedging gains (22 basis points), improved revenue mix (26 basis points) and efficiency gains (48 basis points). This positive affect was however partially offset by higher infrastructure expenses of around ten basis points.  In terms of segments, the earnings before interest, tax, depreciation, and amortisation (EBITDA) margin of all the three business lines improved on a sequential basis. The IMS and software service businesses reported a sequential margin improvement of 113 basis points and 93 basis points respectively. The BPO service business reported a 16 basis-point sequential improvement in its margin. However, the foreign exchange (forex) loss of Rs27.1 crore as compared with a forex gain of Rs5.8 crore in Q2FY2008 resulted in a relatively lower earnings growth of 2.9% qoq to Rs342.5 crore. This is largely in line with our estimate. In terms of operational highlights, the company signed deals worth $500 million during the quarter. However, it has maintained its full year revenue growth guidance of around 35%, implying a relatively muted sequential growth in Q4FY2008. This is largely due to a slowdown in the business from two of its top ten clients as a fallout of the scenario in the USA. Moreover, the company added just 1,848 employees in Q3FY2008 and has scaled down the recruitment target to 9,000 employees in FY2008 from 12,000 employees targeted earlier. We have lowered our earnings estimate for FY2008 and FY2009 by 1.4% and 8.9% respectively. We have also introduced the FY2010 estimate and factored in a higher tax rate and exchange rate assumption of Rs38.5 per dollar. At the current market price, the stock is trading at 12.2x FY2009 earnings estimate and 10.9x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with revised price target of Rs318.   Housing Development Finance Corporation Cluster: Evergreen Recommendation: Buy Price target: Rs3,362 Current market price: Rs2,805 Extraordinary gains boost bottomline Result highlights Housing Development and Finance Corporation (HDFC) has reported an impressive set of numbers for Q4FY2008. The profit after tax (PAT) stood at Rs768.1 crore (including extraordinary items), indicating a strong growth of 39.6% year on year (yoy). The adjusted net profit came in at Rs611.8 crore, which is up by a moderate 11.2% yoy. The topline (net interest income) for the quarter came in at Rs880.5 crore, up 68.5% yoy buoyed by a continued robust growth in loan disbursals and a healthy improvement in the margins. The impressive topline growth could not trickle down fully to the net total income, as the quarter saw a decline in the capital gains and other operating income. The net total income stood at Rs960.4 crore, up 31.8% yoy. The operating expenses were up by ~40% yoy to Rs66.4 crore primarily driven by a significant increase in the staff expenses (up 45.3% yoy) and the other operating expenses (up 35.5% yoy). Despite the jump in the operating expenses, the operating profit growth was strong at 31.2% yoy. The bottomline received a major boost from an extraordinary gain of Rs202.1 crore. The extraordinary gain was on account of sale of stake in the general insurance business (HDFC ERGO General Insurance) to ERGO International. For FY2008, the topline stood at Rs2,641.1 crore, up 60.3% yoy, while the reported bottom line came in at Rs2,436.3 crore, up 55.1% yoy. The extraordinary gains for FY2008 were to the tune of Rs636.3 crore. After adjusting for extraordinary gains, the PAT comes in at Rs1,944.2 crore indicating a 26.5% y-o-y growth. At the current market price of Rs2,805, the stock trades at 20.3x FY2009E earnings per share and 3.9x 2009E book value/share. We maintain our Buy recommendation and target price on the stock.    HDFC Bank   Cluster: Evergreen Recommendation: Buy Price target: Rs1,571 Current market price: Rs1,498 Results in line with expectations  Result highlights HDFC Bank's net interest income (NII) jumped by 55.7% year on year (yoy) to Rs1,642.1 crore. The NII growth was buoyed by continued growth in advances coupled with an improvement in the net interest margin (NIM) based on our calculations. The non-interest income was up by a strong 39.3% yoy to Rs549.3 crore, primarily driven by a robust growth in the fee income (up 37.6%) and a turnaround in the treasury gains on a year-on-year (y-o-y) basis.  The operating expenses were up significantly (61.2% yoy), driven by both the staff expenses and the other operating expenses. Consequently, the cost-income ratio went up by 312 basis points yoy to 50.3%. Despite the jump in the operating expenses, the operating profit growth was robust at 42.3% yoy. Meanwhile, the core operating performance was relatively lower with a year-on-year (y-o-y) growth of 29.7% to Rs1,077.3 crore. The bank increased its provisions and contingencies during the quarter significantly by 74.2% to Rs465.1 crore. The spike was mainly due to an additional provisioning of Rs172.7 crore in the form of 'legal and other contingencies'. Since the bank has not given any specific details related to provisions for foreign exchange (forex) related products, we suspect this will only give rise to speculation that a large part of the 'legal and other contingencies' provisions are for meeting the same. The profit after tax (PAT) for Q4FY2008 stood at Rs471.1 crore, which was largely in line with our estimate of Rs467.4 crore. The Q4FY2008 PAT indicated a growth of 37.1% yoy and 9.7% quarter on quarter (qoq).  Advances grew by a healthy 35.1%, which though an improvement on a y-o-y basis, indicates moderation on a sequential basis. On the deposit front, the overall deposits grew by 47.5% yoy to Rs100,769 due to an increased effort by the bank to acquire retail customers. The asset quality of the bank remained healthy as reflected by the largely stable % gross non performing assets (%GNPA; GNPA as % of advances) and % net non performing assets (%NNPA; NNPA as % of advances) ratios. At the current market price of Rs1,498, HDFC Bank trades at 26.8x FY2009E earnings per share (EPS), 10.8x FY2009E pre-provisioning profit (PPP) and 4.1x FY2009E book value (BV). Currently, our earnings model does not factor in the financials of Central Bank of Punjab (CBoP) and the dilution due to the merger and sale of shares to the parent. We continue to maintain our Buy recommendation and price target on HDFC Bank.   Hindustan Unilever Cluster: Apple Green Recommendation: Buy Price target: Rs280 Current market price: Rs251 Core to the fore Result highlights Hindustan Unilever Ltd's (HUL) top line growth was above our estimates, however the profitability was below our expectations. The net sales grew by 19.1% year on year (yoy) to Rs3,793.9 crore. The sales growth was driven by a stupendous performance of the home and personal care (HPC) segment, which grew by 21.2% yoy. The foods segment that contributed 16.1% to the revenues grew by 15.6% yoy, pulling down the overall sales growth. The soaps and detergent business put up a strong show with sales growth of 19.9% yoy to Rs1,738.2 crore and the profit before interest and tax (PBIT) margin of 13.4% (up by 144 basis points yoy). Personal care product business outperformed our expectations with a handsome growth of 23.5% yoy. We believe extended winter, contribution from new launches under the brands Dove and Ponds, and price hikes contributed to the strong growth in the revenues of the segment. The PBIT margin for the segment stood at 24.7% (up by 25 basis points yoy). Beverages, processed foods and ice creams segments posted sales growth of 15.8%, 15.5% and 14.1% respectively, however the performance was bad on margin front with the PBIT margin at 11.6% (down 324 bps yoy), 1.1% (down 439 bps yoy) and -7.8% (against 3.8% in Q1CY2007) respectively. The operating profit margin (OPM) as a whole declined by 70 basis points to 10.75% yoy, mainly due to the increase in the other expenses by 28.3% yoy to Rs663.5 crore. The raw material cost as a percentage to sales showed a decline of 78 basis points to 54.7%. Hence the operating profit increased by 11.9% yoy to Rs407.8 crore. The other income increased by 126.2% yoy to Rs77.3 crore leading the earnings before interest, depreciation, tax and amortisation (EBIDTA) to increase by 21.7% to Rs485.1 crore.  As the interest income (net of interest expenses) was lower by 44.1% at Rs20.1 crore, the increase in adjusted net profit was lesser and stood at 16.7% to Rs378.4 crore, which is below our estimate of Rs397.7 crore. We are enthused by the performance of HUL's HPC business and pleased by the fact that the company is exploring ways to maintain the growth in the segment by expanding its presence in premium personal care products. At the current market price of Rs251 the stock trades at 26.8x and 22.9x its CY2008E and CY2009E earnings per share (EPS) of Rs9.4 and Rs10.9 respectively. We maintain our Buy recommendation on the stock with target price of Rs280.   ICICI Bank    Cluster: Apple Green Recommendation: Buy Price target: Rs1,204 Current market price: Rs895 Results above expectations Result highlights ICICI Bank reported an impressive set of numbers for Q4FY2008. The profit after tax (PAT) was up by 39.4% year on year (yoy) to Rs1,149.8, which was well above our estimates.  The net interest income (NII) came in at Rs2,079.5 crore indicating a 29.2% year-on-year (y-o-y) growth, driven by an expansion in the net interest margin. Importantly, the NII growth moderated compared to a 32% y-o-y growth seen in the previous quarter, owing to moderation in advances. The net interest margin (NIM) of 2.14% (calculated) for Q4FY2008 reflects an expansion of 13 basis points yoy. The NIM improvement can be traced to higher yields on interest earning assets outpacing the increase in the cost of funds on a y-o-y basis. The overall deposit growth was muted at 6%, however the current and saving account (CASA) balance grew by 27% yoy, helping the bank improve its CASA ratio by about 400 basis points. On the non-interest income front, the fee income registered a robust growth of 35.1% yoy despite slowing advances, while the treasury income was down 63% yoy to Rs164 crore. The treasury income declined owing to mark-to-market (MTM) losses of Rs400 crore from the credit derivatives portfolio. The asset quality continued to deteriorate further with the % gross non-performing assets (GNPA) and the % net non-performing assets (NNPA) increasing to 3.3% and 1.6% respectively, driven by an increased proportion of non-collateralised advances in retail advances. ICICI Bank's subsidiaries continued to maintain their leadership positions in their respective fields. At the current market price of Rs895, the stock trades at 21.4x 2009E earnings per share (EPS), 10.8x 2009E pre-provisioning profit (PPP) and 2.0x 2009E book value (BV). We reiterate our Buy recommendation on ICICI Bank with price target of Rs1,204.    Infosys Technologies          Cluster: Evergreen Recommendation: Buy Price target: Rs1,940 Current market price: Rs1,510 Price target revised to Rs1,940 Result highlights Infosys Technologies (Infosys) reported a revenue growth of 6.3% quarter on quarter (qoq) and 20.4% year on year (yoy) to Rs4,542 crore during the fourth quarter. The sequential growth in the revenues was contributed by a volume growth of 4.9% in its consolidated information Technology (IT) service business, an increase of 0.2% in its blended realisation and a depreciation of 0.9% in the rupee. The operating profit margin (OPM) decreased by 10 basis points qoq to 32.5% in Q4FY2008. The operating profit grew by 6.2% qoq to Rs1,478 crore.  The other income component declined to Rs139 crore in Q4FY2008 from Rs158 crore during the corresponding period last year primarily due to a foreign exchange (forex) fluctuation loss of Rs45 crore during Q4FY2008 as compared to a relatively lower loss of Rs14 crore in Q3FY2008. The company also recorded a tax reversal of Rs20 crore during the quarter compared to Rs51 crore in Q3FY2008. This led to a 1.5% quarter-on-quarter (q-o-q) increase in the net income to Rs1,249 crore. After adjusting for these tax reversals, the company's earnings grew by 4.2% sequentially to Rs1,229 crore. The company announced a final dividend of Rs7.25 per share and a special dividend of Rs20 per share. The company also intends to increase its dividend payout ratio from 20% to 30% of the net profit.  In terms of guidance for FY2009, the revenues are guided to grow by 19% to 21% and the earnings are guided to grow 16.7% to 18.7% in dollar terms (Rs92.3-93.9 per share in rupee terms). This is in line with our expectation and higher than street expectations. However, the guidance for Q1FY2009 is quite muted. In rupee terms, the revenues are guided to remain flat sequentially (with a growth of less than 1%), whereas the earnings are expected to decline sequentially to Rs20.7 per share (down from 3.5% sequentially). In terms of demand environment, the management indicated that 76% of its clients expect their IT budget to decline or remain flat. Moreover, the company is also witnessing some deal cancellation in the retail vertical. On the positive side, there has not been any cancellation of projects in the Banking Financial Services & Insurance (BFSI) vertical.  We have revised our earning estimates for FY2009 downward by 2.6% on account of lower other income, as the company plans to increase its dividend payout ratio. We have also introduced FY2010 estimates and expect the company's earning to grow by 4.8% to Rs99.8 per share. The lower earning growth rate will be primarily due to an increase in the effective tax rate from 15% in FY2009 to 22% in FY2010 due to withdrawal of Software Technology Park of India (STPI) benefits. At the current market price, the stock is trading at 15.9x FY2009 earning estimates and 15.1x FY2010 earning estimates. We maintain Buy recommendation on the stock with revised price target of Rs1,940.   Jindal Saw  Cluster: Emerging Star Recommendation: Buy Price target: Rs910 Current market price: Rs653 Price target revised to Rs910 Result highlights Jindal SAW Ltd's (JSL) Q1CY2008 numbers were ahead of our expectations on the back of a higher top line and improved margins. However, we would like to underscore that the results are not strictly comparable since the US division has been hived off. The revenues from Indian operations improved during the quarter. The net revenues grew by 8% year on year (yoy) to Rs952.2 crore, primarily on the back of a high growth witnessed in the submerged arc welded (SAW) pipe and the ductile iron (DI) pipe segments. On the back of favourable product mix, hiving off of the US division, and greater efficiencies, the operating profit margin (OPM) expanded by 390 basis points yoy and 300 basis points sequentially to 15.4%. Consequently, the operating profit grew by 0.4% to Rs146.6 crore.  JSL's order book at the end of the quarter stood at $1.09 billion, executable by January/February 2009. Of this, $860 million orders were for SAW pipes, while the remaining orders were for DI and seamless pipes.  We believe that the core business of JSL would continue to do well on the back of buoyant demand outlook. However, the margins in the current year might be impacted due to rising coking coal prices and a proposed 10% export duty on pipes. At the same time, capacity expansion and commencement of the captive power plant should help mitigate the adverse impact to a certain extent. At this point of time, we are not making any changes in our estimates for the company due to lack of clarity regarding the government's measure and its possible impact. However, it is important to note that in case the export duty on pipes goes through, this could have a significant impact on the earnings of the company as out of the current order book, about 60% (about $600 million) pertains to international orders. At the current levels, the stock is trading at 7.2x its CY2009E earnings and is available at an enterprise value (EV)/ earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.8x. However, we believe that rising steel prices, lack of clarity over new initiatives and recent export duty announcement by the government would lead to a de-rating in the valuation multiple enjoyed by the company. We now value the company at 10x CY2009E earnings and maintain our Buy recommendation with a price target of Rs910.   Madras Cement       Cluster: Cannonball Recommendation: Buy Price target: Rs4,800 Current market price: Rs3,202 Buys back 1.5% outstanding equity  Key points Madras Cements has completed the process of buy back. As a result of the buy back the earnings per share (EPS) of the company will increase by 1.5%. Firm cement prices in south India will be the key driver for the company's earnings in Q4FY2008. The company had a capacity of 6 million tonne at the end of FY2007, which increased to 7 million tonne at the end of FY2008 and is expected to further increase to 10 million tonne by the end of FY2009. Capacity additions will drive the volumes growth of the company. At the current market price of Rs3,202, the share trades at 8.7X and 6.7X its FY2008 and FY2009 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisaion (EBIDTA) of 5.5X and 5X for FY2008 and FY2009 respectively. We maintain our Buy recommendation on the stock with a price target of Rs4,800.   Mahindra Lifespace Developers  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs835 Current market price: Rs479 Results ahead of expectations  Result highlights Mahindra Lifespace Developers' (MLD) top line grew by 75.1% year on year (yoy) to Rs59.6 crore in Q4FY2008. During the quarter, revenues were booked from Mahindra Eminente in Goregaon, Mahindra Royale in Pune and Sylvan County in Chennai. In FY2008, MLD's revenue grew by 7.4% yoy to Rs172.12 crore. The operating profit margin (OPM) during the quarter improved to 36% vi-a-vis a -7.6% in Q4FY2007. The improvement in OPM can be attributed to a better revenue mix (higher proportion of revenue booked from the high-margin project, Mahindra Eminente, Goregaon). The other income increased to Rs47.8 crore in Q4FY2008 from Rs7.7 crore in the corresponding period last year. Consequently, the net income stood at Rs22.2 crore during the quarter compared to a loss of Rs1.5 crore in Q4FY2007. Since the company ended the fiscal year with this quarter, the company also reported its annual consolidated financials. MLD's consolidated revenue grew by 6.8% yoy to Rs264.4 crore and the consolidated net income grew 3.7x yoy to Rs66.4 crore in FY2008, the latter being significantly ahead of our and street expectations. The rise in the consolidated net income was primarily due to a 14.1 percentage point improvement in the OPM to 28.3% and 4.4x year-on-year (y-o-y) increase in the other income to Rs33.5 crore. The OPM improvement was on account of higher realisation and better revenue mix . At the current market price, MLD is trading at 17.3x FY2009 earning estimates and 6.9x FY2010 earning estimates. We continue to value the stock using the sum-of-the-parts (SOTP) valuation (NAV for planned development and discount to market price for unplanned development) and maintain Buy on the stock with price target of Rs835.   Marico     Cluster: Apple Green Recommendation: Buy Price target: Rs77 Current market price: Rs68 Price target revised to Rs77 Result highlights For Q4FY2008, Marico has posted a 17.8% growth in its net sales to Rs467.5 crore as against our expectation of Rs484 crore. The operating profit margin (OPM) declined by 35 basis points year on year (yoy) to 9.7% on account of a hefty increase of 115% in the staff cost and a higher advertisement & sales promotion expenditure. Hence the operating profit increased by 13.6% to Rs45.47 crore. Input costs continued to show an increasing trend as the cost of some of the key inputs such as copra, kardi oil and sun flower oil were up by 7.1%, 45.9% and 45.3% yoy respectively. Despite the rise in the input costs, the company was able to maintain the raw material cost as percentage to sales ratio at 50.8% during the quarter as compared to 52.0% in Q4FY2007, as the company hiked the prices of its edible oil brands Saffola and Sweekar by more than 20% during the quarter.  Decline in deprecation charges and lower tax incidence resulted in a 14.8% growth in the adjusted net profit to Rs32.3 crore. During the quarter Marico sold its non-focus brand Sil to Scandia Food India resulting in a pre-tax profit of Rs10.61 crore (Post-tax profit of Rs8.49 crore). Thus the reported net profit grew by hefty 45.0% to Rs40.8 crore in Q4FY2008.  For FY2008, the net sales increased by 22.5% yoy to Rs1,906.7 crore, comprising of 17% organic and 5% inorganic growth. The operating profit increased by 18.6% to Rs246.4 crore. Lower depreciation charges and lower tax incidence resulted in a hefty growth of 49.8% in the reported net profit to Rs169.1 crore. We like Marico's three pronged growth strategy of enhancing the existing products, introducing new products and achieving inorganic growth through acquisitions, which gives us comfort of a sustained growth going forward. At the current market price of Rs68, the stock trades at 21.8x and 17.5x its FY2009E and FY2010E earnings per share (EPS) of Rs3.1 and Rs3.9 respectively. We value Marico at 20x its FY2010E earnings and maintain our Buy recommendation on the stock, upgrading our price target to Rs77.    Maruti Suzuki    Cluster: Apple Green Recommendation: Buy Price target: Rs947 Current market price: Rs723 Price target revised to Rs947 Result highlights Maruti Suzuki's Q4FY2008 results are below our expectations on account of a drop in the company's margin and a change in its depreciation policy. The revenues (including the income from the service business) grew by 8% to Rs4,783.9 crore during the fourth quarter and were in line with our expectations. The revenue growth was driven largely by a 6.8% growth in the realisations during the quarter because of a change in the product mix due to higher sales of SX4 and Swift; while the volume growth during the quarter stood at just 1.1%. The sales included a compensation package of Rs54.5 crore for dealers for the excise duty cuts announced in Budget. The operating profit margin (OPM) for the quarter fell to 10% against 12.4% last year. The margin declined due to higher other expenditures on account of three reasons: (1) higher royalty charges due to a change in the product mix; (2) a higher power cost; and (3) an extraordinary item of provision for foreign currency derivatives of Rs50.54 crore. Adjusting for the extraordinary items (the dealer compensation package and the derivatives provision), the OPM stood at about 12%. The company also changed its depreciation policy, as it reviewed the useful life of its assets because of the shortening lifecycle of products. This resulted in an additional provisioning of Rs212.3 crore for depreciation for FY2008 during the quarter.  Consequently, the reported net profit declined by 33.6% to Rs297.7 crore. However, if we exclude all the one-time items and the effect of the higher depreciation, the profit would be in the region of Rs477.4 crore, which would be slightly ahead of our estimate of Rs469.9 crore.  Maruti Suzuki targets to sell 1 million cars in the domestic market by FY2011, which works out to a compounded annual growth rate (CAGR) of about 12% in the next three years. It also wants to add bigger cars to its product basket going forward.  We expect a challenging FY2009 for the company on account of increased competition, high interest rates and lower availability of finance. We also believe that with the intensified competition, the focus of the company would slowly shift towards retention of its market share, which would take its toll on the margin of the company. However, we believe that the margin decline would be mitigated to an extent by the capacity ramp-up at Manesar and a change in the product mix.  In view of the higher raw material cost and change in the company's depreciation policy, we are downgrading our FY2009 earnings estimate by 14.2% to Rs62.6. Our earnings estimate for FY2010 is Rs72.8. At the current market price of Rs723, the stock is quoting at 9.9x its FY2010E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs947.   Nicholas Piramal India   Cluster: Apple Green Recommendation: Buy Price target: Rs434 Current market price: Rs354  Price target revised to Rs434  Result highlights The Q4FY2008 and FY2008 results of Nicholas Piramal India Ltd (NPIL) are ahead of our expectations. The company's top line grew by 19.0% year on year (yoy) to Rs767.9 crore in Q4FY2008 and by 16.2% to Rs2,872.8 crore in FY2008. Its pre-exceptional profit increased by 181.9% to Rs158.1 crore in Q4FY2008 and by 58.1% to Rs232.6 crore in FY2008. The growth was driven by an impressive performance in the branded formulation business (up by 17.8% in FY2008, despite the temporary setback received in Q1FY2008 on account of lower phensydyl sales), strong traction in the Indian custom manufacturing (CMG) operations (up by 18.9% in FY2008) and the pathology laboratory (path lab) business (up by 71.8% in FY2008). The reported operating profit margin (OPM) expanded by 1,330 basis points to 26.5% in Q4FY2008 and by 340 basis points to 18.9% in FY2008. The margin improved on the back of rising operating leverage and savings arising out of the demerger of the new chemical entity (NCE) research and development (R&D) unit into an independent company. Even on a like-to-like basis (without considering the impact of the savings from the NCE R&D demerger), the margin expanded by a robust 310 basis points in Q4FY2008 and by 100 basis points in FY2008. Consequently, the reported operating profit grew by 139.9% to Rs203.6 crore in Q4FY2008 and by 41.3% to Rs541.8 crore in FY2008.  The company incurred a one-time restructuring charge in its international operations, on account of which the reported net profit (after extraordinary items) grew by 141.7% to Rs132.8 crore in Q4FY2008 and by 53.1% to Rs218.1 crore in FY2008. In FY2008 the company delivered earnings of Rs17.5 per share, which were in line with its guidance and ahead of our estimate of Rs17.2 per share. The management has guided towards a 16% like-to-like growth, with continued improvement in the OPM to 20.5%, resulting in earnings of Rs21 per share in FY2009. Given the strong margin expansion, we believe that the earnings guidance provided by the management is conservative. We have revised our FY2009 earnings estimate for NPIL to reflect the better than expected performance in FY2008 and the guidance provided by the management. For FY2009 we are revising our revenue estimate upwards by 0.7% to Rs3,326.1 crore and our profit estimate by 3.2% to Rs443.1 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 15.0% in FY2010E to Rs3,825.4 crore. The profits are expected to grow by 20.4% to Rs533.3 crore, resulting in earnings of Rs25.5 per share in FY2010E. At the current market price of Rs354, NPIL is discounting its FY2009E earnings by 16.7x and its FY2009E earnings by 13.9x. With the strong traction expected across its businesses, we maintain our positive outlook on NPIL. We are rolling forward our valuation for NPIL to FY2010E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs434. At our target price, the stock would discount its FY2010E earnings by 17x.   Orchid Chemicals & Pharmaceuticals      Cluster: Emerging Star Recommendation: Buy Price target: Rs375 Current market price: Rs207 Rumours of Ranbaxy group taking over Orchid Key points According to a section of media, Solrex Pharmaceuticals has acquired an 8.06% stake in Orchid Chemicals (Orchid) from the open market. The stake has been acquired at an average price of Rs165-170 per share. As per media speculation, Solrex Pharmaceuticals belongs to the Ranbaxy group. If the media speculation is to be believed and the Ranbaxy group manages to take over Orchid at a cheap price of Rs165-170 per share, it would come as a huge benefit for the group. The company will gain from acquiring a fundamentally strong business with a complementary product portfolio and that too at extremely cheap valuations.  Pursuant to the ~40% plunge in the share price of Orchid on March 17, 2008 due to relentless selling by the troubled Bear Stearns and the subsequent margin call trigger for the promoters, the promoter holding in Orchid had reduced from 24% to 17%. The low promoter holding coupled with the sharp fall in the share price made Orchid an attractive takeover target.  As per our estimates, the fair value of Orchid works out to Rs375 per share, which means that the Ranbaxy group's purchase price would work out to a 120% discount to the fair value of the company and a 93% discount to the 52-week high price of Rs328. In fact, the acquisition price would be at par with Orchid's estimated FY2008 book value of Rs167.6 per share. We have always maintained that Orchid's business model is fundamentally strong with a strong presence in the USA and expansion plans underway in Europe. However, the stock has been plagued by several concerns including a relatively low promoter holding and an over-leveraged balance sheet. We feel that the potential takeover of Orchid by the Ranbaxy group or even the holding of a minority stake by the Ranbaxy group in Orchid will ensure long-term growth for Orchid, as the latter would be in stronger and more credible hands. At the current market price of Rs207, Orchid is discounting its FY2008E earnings by 11.9x and its FY2009E earnings by 8.8x. The valuations at these levels seem absolutely compelling when viewed in context of the strong growth potential that awaits the company. We retain our positive stance on the stock and maintain our Buy recommendation with a price target of Rs375.   Orient Paper and Industries   Cluster: Vulture’s Pick Recommendation: Buy Price target: Rs80 Current market price: Rs46 Paper division affects profitability  Result highlights Orient Paper and Industries (Orient Paper) has reported an 11.5% year-on-year (y-o-y) growth in its net sales to Rs379.3 crore for Q4FY2008. The revenue growth was driven by the cement and fan divisions, which have reported revenue growth of 15.9% and 26.7% respectively for the same quarter. On the other hand, the revenues of the paper division declined by 18.1% to Rs60.1 crore in Q4FY2008.  The reported operating profit margin (OPM) fell by 460 basis points year on year (yoy) to 21.7% mainly due to a decline in the profit before interest and tax (PBIT) margin of the paper division. The PBIT margin of the paper division dropped due to a shutdown at its Amlai paper unit in Q4FY2008. Consequently, the operating profit of the company declined by 8% yoy to Rs82.4 crore. The adjusted OPM for the quarter stood at 24.9%. The other income of the company declined by 71.8% to Rs2.5 crore due to the absence of income from the sale of certified emission reduction units (CERs). In the corresponding quarter in the previous year, the company had generated income from the sale of CER credit of Rs6.4 crore. The interest expense of the company declined by 65.7% to Rs3.13 crore due to debt repayment. The reported net profit of the company increased marginally by 0.3% to Rs48.1 crore during Q4FY2008. During the quarter under review, the company made a provision of Rs12 crore against receivables from its joint venture company in Kenya. In the corresponding quarter in the previous year the company had a prior-period item of Rs11.7 crore. Thus, the adjusted net profit of the company increased marginally by 1% to Rs55.8 crore in Q4FY2008.  Orient Paper's expansion schedules are progressing well. The third phase of the capacity expansion (from 3.4 million metric tonne [mmt] to 5mmt) in the cement division; the 50-megawatt (MW) captive power plant (CPP) at the Devapur cement plant; and the expansion of the tissue paper capacity of the company by 15,000 tonne are expected to be commissioned as per schedule by the end of FY2009. We have revised our FY2009 net profit estimate marginally upwards by 1.1% and forecast a net profit of Rs281.1 crore for FY2010. We expect the company to generate earnings per share (EPS) of Rs11.5 and Rs14.6 in FY2009 and FY2010 respectively. High volumes from the capacity additions in the cement and paper divisions will be the primary drivers of the earnings growth for the company in FY2010. At the current market price of Rs45.95, the stock trades at 4x and 3.2x its FY2009 and FY2010 earnings estimates and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.3x and 1.9x for FY2009 and FY2010 respectively. The EV per tonne for the cement business works out to US$67 per tonne and US$25 per tonne for FY2009 and FY2010 respectively. Taking into account the low valuations at which the stock trades at present, we maintain our Buy recommendation on Orient Paper with a price target of Rs80.   Ranbaxy Laboratories  Cluster: Apple Green Recommendation: Buy Price target: Rs625 Current market price: Rs477 A soft quarter  Result highlights Ranbaxy Laboratories (Ranbaxy) has delivered a mixed performance for Q1CY2008. While the revenues and net profit have been below our estimates, the operating performance has been ahead of our expectations.  The revenues grew by a modest 3.9% in rupee terms to Rs1,613.7 crore in Q1CY2008 and were below our estimate largely due to the poor performance across the key Western European countries, particularly Romania. The revenue growth was also affected by the ~10% year-on-year (y-o-y) appreciation in the rupee, as the revenue growth in dollar terms was more robust at 15%.  Ranbaxy's operating performance was ahead of our expectations in this quarter. The reported operating profit margin (OPM) expanded by 350 basis points to 15.8%, causing the reported operating profit of the company to grow by 33.8% year on year (yoy) to Rs255.20 crore. Further, on excluding the new drug discovery research (NDDR)-related research and development (R&D) expenses of Rs20.5 crore (which would get reversed upon completion of the demerger) during the quarter, the margin would have stood at 17.1%. The reported net profit of Rs136.5 crore was in line with our estimate but was boosted significantly by an extraordinary income of Rs89.5 crore (pre-tax) received from the sale of surplus land and buildings. Adjusting for the extraordinary income and the NDDR-related R&D cost (which would be excluded upon the approval of the demerger), the net profit of the company stood at ~Rs83 crore. The same was significantly below our estimate primarily due to a higher than expected foreign exchange (forex) translation loss of Rs79.8 crore incurred during the quarter.  The process for the demerger and the subsequent listing of the NDDR division are on track, with the expected date of the listing at the end of Q3CY2008. The effective date of the demerger, however, remains January 1, 2008. The management has disclosed that the company is working on a new R&D deal for its NDDR business (similar to the one it currently has with Glaxo SmithKline) and is likely to make an announcement on the same in the next few weeks. The management has re-affirmed its guidance of an 18-20% growth in the top line in US Dollar terms and stated it expects to ramp up growth in the coming quarters in order to achieve the said guidance. Pursuant to the acquisition of a 14.7% stake in Orchid Chemicals (Orchid), Ranbaxy has entered into a strategic business alliance with Orchid, involving multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients (APIs). We believe this alliance is a win-win arrangement for both the companies.  At the current market price of Rs477, Ranbaxy is discounting its CY2008E base earnings (excluding the first-to-file [FTF] opportunities) by 22.3x and its CY2009E base earnings by 19.5x. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs625 (Rs490 per share for the base business and Rs135 per share for the FTF opportunities: Imitrex, Valtrex, Nexium, Flomax and Lipitor).   Reliance Industries   Cluster: Evergreen Recommendation: Buy Price target: Rs3,025 Current market price: Rs2,577 Q4 results in line with expectations Result highlights ·         Reliance Industries Ltd (RIL) has reported a growth of 35.8% year on year (yoy) in its stand-alone revenues to Rs37,286 crore for Q4FY2008 which is on the higher side of market expectations. In terms of segments: The refining division grew by 36.4% yoy to Rs28,686 crore. The petrochemical division grew by 12.3% yoy to Rs14,119 crore, driven largely by the growth in volumes.  The exploration and production (E&P) division grew by 51.1% to Rs828 crore. ·         The operating profit margin (OPM) during the quarter declined by 270 basis points yoy and by 80 basis points quarter on quarter (qoq) to 16.1% in Q4FY2008. In terms of segments: The margin for the petrochemical division declined by 60 basis points to 10.4% due to higher crude oil prices. The gross refining margin (GRM) for the company increased marginally on a sequential basis from US$15.4 per barrel to US$15.5 per barrel in the quarter ended March 2008. The GRM was higher on account of sustained structural tightness in the global distillate market and sustained light-heavy differential. The margin for the E&P division declined by 110 basis points to 54%. The company's net profit increased by 24% yoy to Rs3,912 crore during Q4FY2008 from Rs3,156 crore during the same quarter last year. Its interest expenses were lower during the quarter due to the rupee's appreciation vis-à-vis the US Dollar whereas the depreciation charge was marginally higher. For FY2008, the consolidated net sales grew by 19.5% to Rs137,147 crore. The consolidated net profit (after excluding exceptional items) grew by 26.9% to Rs15,326 crore. The exceptional item of Rs 4,733 crore represents gains primarily arising out of transactions concerning Reliance Petroleum Ltd (RPL) shares. During the year, RIL made nine new discoveries in its offshore E&P blocks. It also achieved 90% overall progress in the implementation of RPL's complex refinery. Reliance Retail today operates over 590 stores in 57 cities, spanning over 3.5 million square feet of trading space across 13 states. With nine oil and gas discoveries during the year and a portfolio of exploration blocks, the company holds a great promise in the exploration business. The refinery business would exhibit good performance on the back of superior margins and volume growth in future as RPL's new refinery becomes operational during FY2009. This along with the growing contribution from the retail business provides a well diversified growth opportunity. Currently the stock is trading at 14.5x FY2010E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.1x. We maintain our Buy recommendation on the stock with a price target of Rs3,025.   Satyam Computer Services  Cluster: Apple Green Recommendation: Buy Price target: Rs505 Current market price: Rs459 Healthy guidance for FY2009 Result highlights The consolidate revenues of Satyam Computer Services (Satyam) grew by 10.0% quarter on quarter (qoq) and by 35.8% year on year (yoy) to Rs2,416 crore in Q4FY2008. In dollar terms, the revenues grew by 9.0% qoq to US$613.3 million during the quarter driven by an impressive volume growth of 8.8% sequentially.  The operating profit margin (OPM) improved by 133 basis points qoq to 22.8% during the quarter primarily due to a better utilisation rate (an improvement of 189 basis points in the offshore utilisation rate to 85.6% and that of 53 basis points in the onshore utilisation rate to 97.3%) and an increase in the billing rates (a 0.63% sequential growth in the onsite billing rate and a 0.51% sequential growth in the offshore billing rate). Consequently, Satyam's operating profit grew by 16.8% qoq to Rs550.6 crore. The net income grew by 7.6% qoq to Rs466.8 crore, below our expectation of Rs485.9 crore. The net income was lower primarily due to a lower than expected other income of Rs23 crore following foreign exchange (forex) losses of Rs46 crore in Q4FY2008. For the same quarter the company has reported earnings per share (EPS) of Rs7, which is below its guidance of Rs7.23 announced in the previous quarter. For FY2009 the company has guided to a revenue growth of 23.9% to 25.9% in rupee terms; the same is on the higher end of the street expectation. The earnings are expected to grow at 17-19% during the same period, in line with the market expectation. The earnings are expected to grow at a lower rate compared with the top line primarily due to a 50-basis-point decline in the OPM and a 2% equity dilution. In Q1FY2009, the revenues and EPS are guided to grow to Rs2,500-2,512.5 crore and Rs7.64-7.68 respectively, implying a sequential growth of 3.5-4.0% in the top line and of 9.7-10.2% in the EPS. The Q1FY2009 guidance given by Satyam is better than that provided by its peers in the last week. To fine-tune our earnings estimates and to factor in the revised exchange rate assumption of Rs39.5 for FY2009, we have revised downward our earnings estimate for FY2009 by 0.2%. We have also introduced our earnings estimate for FY2010 in this note and expect the earnings to grow by 7.7% in the next fiscal. At the current market price, the stock is trading at 15.3x FY2009 earnings estimate and 13.8x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with a price target of Rs505.    SEAMEC Cluster: Ugly Duckling Recommendation: Buy Price target: Rs253 Current market price: Rs172 Price target revised to Rs253  Result highlights Q1CY2008 results of SEAMEC were in line with our expectations. As expected, the revenues during the quarter declined by 37.9% year on year (yoy) to Rs34.9 crore from Rs56.1 crore due to lesser deployment of vessels. During the quarter, SEAMEC II was completely out of operations for repair work, while SEAMEC IV (Princess) began its operations from March 2008. SEAMEC I and SEAMEC III were fully deployed during the quarter. The company registered a 65.1% decline in the operating profit at Rs9.4 crore as against the operating profit of Rs27.1 crore during Q1CY2007. The operating profit margin (OPM) declined to 27.1% from 48.2% during Q1CY2007 primarily on account of lower deployment of vessels. The company incurred one-time expenses with provision for doubtful debts of Rs13.1 crore and a dry-docking expense of Rs6.6 crore for SEAMEC II during the quarter. The net profit during the quarter declined by 89% to Rs2.7 crore as against the net profit of Rs24.4 crore during Q1CY2007. SEAMEC III will be out of operations due to statutory dry-docking during Q2CY2008 and SEAMEC II will begin its post-repair operations by the end of May 2008. In such scenario, the company is expected to continue its poor run during Q2CY2008. However, we believe the worst is behind us, as all the four vessels are expected to be fully-deployed during H2CY2008 and CY2009. In addition, the management has hinted to acquire a new vessel in the begining of the next year. At the current market price, the stock trades at 6.7x CY2008 and 5.4x CY2009 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs253 (8x CY2009 earnings).   SKF India   Cluster: Apple Green Recommendation: Buy Price target: Rs424  Current market price: Rs306 Price target revised to Rs424 Result highlights SKF India's Q1CY2008 results are slightly below our expectations due to lower than expected margins. The company's net sales grew by 9% to Rs392.1 crore during the quarter, which we believe was primarily by strong industrial sales. The operating profit margin (OPM) declined by 170 basis points year on year (yoy) but improved by 60 basis points sequentially to 15.1%. The margin dropped yoy due to higher prices of raw materials, particularly steel. Consequently, the operating profit declined by 2.3% to Rs59.1 crore. As a result of a higher other income the net profit grew by 3% to Rs37.8 crore against our expectations of Rs41.9 crore. SKF India is expanding its capacity by setting up a greenfield plant at Haridwar, Uttarkhand at a cost of Rs150 crore. The project is expected to be completed by the end of this year.  Since a large portion of the company's sales comes from the automotive segment, the slowdown in the automobile sector is expected to be a temporary dampener for the company. At the same time, industrial demand remains strong and going forward, the recovery in the automobile sector, industrial buoyancy and company's expansion plans should put SKF India back on its high-growth path. On the back of slower growth expected in automobiles this year, and margin pressures due to a continued surge in the raw material prices, we are downgrading our CY2008E earnings estimates by 9% to Rs32 and CY2009E earnings by 10% to Rs35.4. At the current market price of Rs306, the stock discounts its CY2009E earnings by 8.7x and its CY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 4.1x. We maintain our Buy recommendation on the stock with a revised price target of Rs424.    Tata Chemicals       Cluster: Ugly Duckling Recommendation: Buy Price target: Rs535 Current market price: Rs288 GCIP acquisition to be earnings accretive We attended the conference call hosted by the management of Tata Chemicals Ltd (TCL) to discuss its acquisition of General Chemical Industrial Products Inc (GCIP), USA. The key highlights are presented.   Tata Consultancy Services Cluster: Evergreen Recommendation: Buy Price target: Rs1,079 Current market price: Rs887 Price target revised to Rs1,079 Result highlights Tata Consultancy Services (TCS) has reported a growth of 2.9% quarter on quarter (qoq) and of 18.4% year on year (yoy) in its consolidated revenues to Rs6,094.7 crore for Q4FY2008. The sequential revenue growth was contributed by a volume growth of 4.8% and rupee depreciation of 1.1%. However, the revenues during the quarter were adversely affected by a 1.6% decline in the blended realisation and a 1.4% decline due to a change in the revenue mix (following a higher offshore proportion). The operating profit margin (OPM) declined by 118 basis points to 25.5% sequentially. The OPM was dented by lower blended realisation (a 1.6% sequential decline) and an increase in the overhead cost as a percentage of sales (up 70 basis points to 21.1% of the sales). On the other hand, a favourable offshore-onsite mix and a 320-basis-point improvement in the utilisation rate (including trainees) to 75.8% partially cushioned the pressure on the OPM. Consequently, the operating profit declined by 1.7% qoq to Rs1,552.4 crore. The other income declined sharply by 25.4% qoq to Rs78.1 crore. Moreover, the company's effective tax rate increased to 13.5% in Q4FY2008 from 12.7% in Q3FY2008. Consequently, the net income fell by 5.6% qoq to Rs1,255.9 crore, which was below our expectation of Rs1,377.7 crore.  The performance was largely dented by a slowdown in the business from two of its top clients (from the banking and financial services domain) and project delays in the other verticals in the last quarter. The decline in the blended realisation was largely on account of pre-transition of a large deal (ie TCS put employees on a project but didn't charge it to the client). As a result, a 4.8% sequential volume growth didn't completely translate into higher revenues and improved margins. The stock is expected to under-perform in the near term. Given the sluggish demand in the banking, financial services and insurance (BFSI) vertical, the management is cautiously optimistic on the demand environment. The scenario is expected to improve, moving ahead. The company closed six large deals during the quarter. The deal pipeline is also healthy (25 deals with the run rate of over US$50 million) and the management expects the growth to improve in the coming quarters. TCS has set a target of 30,000-35,000 gross employee additions in FY2009. To fine-tune our earnings estimate and to factor in an exchange rate assumption of Rs39.5 per dollar for FY2009, we have revised our earnings estimate for FY2009 down by 5.0%. We have also introduced our FY2010 earnings estimate in this note and expect the company's earnings to grow at 6.4% during the fiscal. At the current market price, the stock is trading at 14.9x FY2009 earnings estimate and 14.0x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with a revised price target of Rs1,079.   Tata Motors        Cluster: Apple Green Recommendation: Hold Price target: Rs792 Current market price: Rs629 Conference call highlights In a post Jagaur-Land Rover acquisition conference call, the management of Tata Motors discussed some of the details of the deal along with the future product pipeline of both the brands. The key highlights of the conference call are presented.   UltraTech Cement   Cluster: Ugly Duckling Recommendation: Buy Price target: Rs975 Current market price: Rs793 Price target revised to Rs975 Result highlights The Q4FY2008 results of UltraTech Cement (UltraTech) are in line with our expectations. The company has reported a top line growth of 9.3% year on year (yoy) to Rs1,601.6 crore for the fourth quarter against our expectation of Rs1,588.4 crore. The top line growth was higher mainly on account of higher realisation during the quarter. The realisation stood at Rs3,323 per tonne against Rs2,908 per tonne a year ago, implying an increase of 14.3% yoy. Volumes for the quarter were lower by 4.4% yoy at 4.82 million metric tonne (MMT) against 5.04MMT a year ago. The operating profit margin (OPM) for the quarter improved by 260 basis points yoy to 30.5%. The OPM improved mainly on account of higher cement prices. The earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne for the quarter stood at Rs1,013, higher by 25% yoy. However, on a sequential basis, the EBIDTA per tonne was down by 6.7% as the increase in the cost was higher compared with the increase in the cement prices. For the quarter, the company has reported a profit after tax (PAT) of Rs282.8 crore, up 22.2% yoy. However, this is marginally lower than our expectation of Rs295 crore. The lower than expected PAT is attributable to a higher tax rate of 34.4% against our assumption of 32%. The cost of raw material per tonne of cement during the quarter shot up by 46.8% yoy to Rs330. Also, the cost of power and fuel per tonne of cement was higher by 22.6% yoy to Rs766. This was mainly on account of higher domestic and imported coal prices. Imported coal prices were up almost 100% yoy. For the quarter, the freight and handling expense per tonne of cement was lower by 5.1% yoy at Rs586. However, the same was marginally up on a sequential basis. The increase in the freight and handling cost quarter on quarter (qoq) can be attributed to the hike in the price of diesel in February 2008. For FY2008, the stand-alone net sales stood at Rs5,509.2 crore, up 12.2% yoy. The operating profit stood at Rs1,720.1 crore, up 21.3% yoy, and the PAT stood at Rs1,007.61 crore, up 28.8% yoy. For FY2008, the consolidated net sales stood at Rs5,623.8 crore, up 13.2% yoy, and the consolidated PAT was Rs1,010.1 crore, up 28.7% yoy. For FY2008, the realisation stood at Rs3,203 per tonne against Rs2,852 a year ago; that's an increase of 12.3% yoy. The EBIDTA per tonne for FY2008 stood at Rs1,000 against Rs824 during FY2007, implying an increase of 21.4% yoy. The company has announced a dividend of Rs5 per share. During the quarter the company commissioned a 3.3-million-tonne-per-annum (mtpa) clinker capacity at Tadipatri in Andhra Pradesh; the new capacity would help the company to increase its volumes in FY2009. At the current market price of Rs793 the stock is trading at 9.6x our FY2009 earnings per share (EPS) estimate and at 11.1x our FY2010 EPS estimate. On an enterprise value (EV) per tonne basis, UltraTech is trading at $122 based on the FY2009 capacities and at $101 based on the FY2010 expanded capacities. We maintain our Buy recommendation on the stock with a revised price target of Rs975.   Unity Infraprojects        Cluster: Ugly Duckling Recommendation: Buy Price target: Rs970 Current market price: Rs581 Two new orders in kitty Unity Infraprojects (Unity) has bagged two new orders worth Rs222 crore. The first order totaling Rs133.6 crore is for the construction of a mall and a hotel, whereas the second order worth Rs88.3 crore is for the construction of five towers with basement and a podium. With these two orders, the company has bagged orders worth around Rs450 crore in Q4FY2008. This implies its current order book stands at Rs2,425 crore at the end of March 2008, which is a growth of 21.4% year on year (yoy).   Wipro  Cluster: Apple Green Recommendation: Buy Price target: Rs525 Current market price: Rs453 Price target revised to Rs525 Result highlights Wipro’s global information technology (IT) service business grew by 5.4% quarter on quarter (qoq) and by 24.8% year on year (yoy) to Rs3,789.9 crore (under US GAAP) for Q4FY2008. In dollar terms, the revenues grew by 5.4 % qoq to US$959.4 million during the quarter (ahead of the company’s guidance of US$955 million). The revenue growth was driven by a 5.5% sequential growth in the volume. The volume growth was marginally mitigated by a ten-basis-point decline in the blended realisation during the quarter. Revenues from the Infocrossing acquisition also grew by 2.8% qoq to US$61.7 million during the quarter. The global IT service division’s operating profit margin (OPM) declined by 20 basis points to 20.5% in Q4FY2008. This was despite the fact that the company had hiked the onsite wages during the quarter (by 3-4% with effect from January 2008), which had an adverse impact of 100 basis points. However, the impact was mitigated by the improvement in the utilisation rate (up 67.2% from 66.7% in Q4FY2007), improved profitability in the business process outsourcing (BPO) service division (driven by higher realisations) and a significant improvement in the margin of the recently acquired Infocrossing (up 450 basis points qoq to 9.0%). Wipro’s consolidated revenues grew by 6.9% qoq to Rs5,595.4 crore and net income grew by 6% qoq to Rs875.4 crore during the quarter. The growth rate in the net income was lower than the operating profit growth rate primarily due to other expenses of Rs2.2 crore in Q4FY2008 due to foreign exchange (forex) losses of Rs35 crore. The company’s other income had stood at Rs45.5 crore in Q3FY2008.  For Q1FY2009, the company has guided revenues of US$988 million for the global IT service division and of US$1060 million for the combined IT service business (global plus India and Asia-Pacific). This implies a sequential growth of 2.9% for the global IT service business and of 2.8% for the consolidated IT service business. The management expects to maintain the margin of the global IT service business in FY2009. It is also positive on the continued uptick in the pricing during the year.  We have revised our FY2009 earnings estimate upward by 2.7% and also introduced the FY2010 estimate in this note. At the current market price, the stock is trading at 16.6x FY2009 earnings estimate and 15.1x FY2010 earnings estimate. We maintain our Buy recommendation on Wipro with a revised price target of Rs525.   Zee News   Cluster: Emerging Star Recommendation: Buy Price target: Rs79 Current market price: Rs55.6 On a roll Result highlights Zee News Ltd (ZNL) has delivered a blow-out performance for Q4FY2008. Beating our and the consensus estimates, the revenues from its operations grew by a robust 59.1% year on year (yoy) to Rs113.1 crore in the quarter. The net profit after minority interest zoomed multifold to Rs15.3 crore during the same period. The advertising revenues soared by 84% yoy to Rs86 crore, while the subscription revenues that had grown by a meagre 7.6% in M9FY2008 grew by 49.7% yoy and 36.3% quarter on quarter (qoq) to Rs22 crore. A break-up of its channels into existing and new businesses shows that the revenues from the existing businesses grew by a handsome 53% yoy, whereas the new businesses recorded a 153% growth in their revenues. The operating profit margin (OPM) for the quarter stood at 23.7% against –1.3% for Q4FY2007. Hence the operating profit grew to Rs26.8 crore against an operating loss of Rs0.9 crore in Q4FY2007. The improvement in the margins of the existing businesses continued and stood at 37.2% for the quarter. The operating loss for the new businesses declined from Rs15.3 crore in Q4FY2007 to Rs10.1 crore. Zee Marathi and Zee Bangla, which are number one channels in their respective genres, increased their gross rating points (GRPs) by 35.7% and 18.5% respectively over Q4FY2007, whereas Zee Telugu and Zee Kannada, which form a part of the new businesses, increased their GRPs by 74.3% and 123.4% respectively and have thus increased their market share to ~10.5% against 6% and 4.5% earlier. We believe that with the continuous gain in viewership the new businesses (excluding Zee Tamil) would break even by the end of FY2009. The company will launch Zee Tamil by the end of July 2008 against which it has charged Rs1.39 crore as expenses in the quarter. The south Indian regional entertainment diaspora is highly competitive. However, considering the Zee group’s established track record in entertainment and the size of this market, we remain positive on Zee News’ prospects in these markets. We believe that its entertainment channels in the southern regional languages remain the key drivers of its growth in the longer term. At the current market price of Rs55.6, ZNL discounts its FY2009E and FY2010E earnings per share (EPS) by 23.7x and 18.1x respectively. We maintain a Buy recommendation on the stock with a price target of Rs79. SHAREKHAN SPECIAL Q4FY2008 earnings preview   Key points The earnings of the Sensex companies are likely to grow by 22.2% year on year (yoy) and 2.4% quarter on quarter (qoq) in Q4FY2008. Excluding ONGC and DLF, the earnings are expected to grow by 16.2% yoy and 3.6% qoq. The estimated earnings growth is expected to be relatively much slower than the growth witnessed in the previous few quarters and indicates moderation in the overall growth momentum.  The report card of banking and capital goods companies will undergo extensive scrutiny following the series of negative developments recently.  The expected 22.2% year-on-year growth would mainly be achieved on the back of the high growth in the oil & gas sector (76.2% yoy) and the telecom sector (34.9% yoy) while the automobile sector is expected to act as a drag on the Sensex' earnings.  The Q4FY2008 performance gains all the more important against the backdrop of a deterioration in the macro environment, ie soaring headline inflation, a dip in the industrial production during January 2008, lower automobile sales and losses from foreign exchange (forex) derivatives. These factors have been discussed in detail later.  Some of the sectors have been facing tough challenges: Cement (high fuel cost), fast moving consumer goods (FMCG; higher raw material cost) and capital goods (capacity constraints). In light of all this, we anticipate further moderation in the earnings growth. The Reserve Bank of India (RBI) and the finance minister have taken cognisance of the fears of a slowdown. However, the macro situation does not offer easy solution for stimulating growth because inflation (7.4% as on March 29th) is already well above the RBI's target rate of 5%. On the positive side, the Union Budget has spelled out multiple measures to stimulate consumption and investments. For instance, the loan waiver scheme and tax slab restructuring are likely to give a major boost to consumption, though in the medium to longer term.   Monetary policy review The Reserve Bank of India (RBI) has kept key interest rates like the reverse repo rate, the repo rate and the bank rate unchanged in the annual monetary policy review for the year 2008-09. The cash reserve ratio (CRR) has been hiked by 25 basis points to 8.25%. The policy focuses on maintaining price stability and controlling inflation, while sustaining the growth momentum. 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 CRR hike to hurt sentiments The Reserve Bank of India (RBI) has raised the cash reserve ratio (CRR) by 50 basis points to 8% to check inflationary expectations by sucking out excess liquidity from the system. The hike would be implemented in two stages: a 25-basis point hike on April 26, 2008 followed by a 25-basis point rise on May 10, 2008. The fact that the RBI has not waited for the policy review (due on April 29, 2008) for announcing the CRR hike is likely to weigh down heavily on sentiments towards the banking stocks.    Cement   Robust growth Historically, March has been the busiest month for cement industry. The present year was no different. Capitalising on high demand from construction and housing industry, the cement industry reported an 8.5% growth in dispatches to 16.4 million tonne in March 2008. The growth in dispatches was primarily driven by higher dispatches from northern region.     Information Technology Tax sops for STPIs extended by a year The information technology (IT) companies finally have something to cheer about. The finance minister has proposed to extend the tax concessions granted under sections 10A and 10B to the Software Technology Parks of India (STPIs) and the export-oriented units by a year. As per the new proposal, the sunset clauses, which were to expire in March 2009, would now expire in March 2010. VIEWPOINT  Chambal Fertilisers & Chemicals Expansion in shipping business to drive future growth Chambal Fertilisers and Chemicals Ltd (CFCL), promoted by the K K Birla group, is the largest private sector manufacturer of urea in India with a manufacturing capacity of 1.73 million tonne per annum. The company also trades in diammonium phosphates, other complex fertilisers, pesticides and seeds. The company has also diversified into the areas of software, shipping and now power. EARNINGS GUIDE Please click to read report: Sharekhan ValueLine Regards, The Sharekhan Research Team myaccount@sharekhan.com

 

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