| Summary of Contents THE STOCK IDEAS REPORT CARD FROM SHAREKHAN'S DESK
Nothing decisive yet The strong macro-economic head winds at home continue to blow, taking their toll on the stock market. Last month, the concerns over the continuing double-digit inflation, slowing economic growth and tightening monetary conditions kept the market bound in a range (in line with our stated view in the August 2008 issue) and the benchmark index, the Sensex, ended the month with a loss of about 100 points. But the good thing is that it is holding on and not letting go of any opportunity to regain the lost ground. Volatility was the order of the day for the stock markets in September 2008, after a sharp run-up in the previous month. The Nifty and the Sensex declined by 3.9% and 4.5% respectively during the month as on September 5, 2008. Sharekhan’s recommended stocks outperformed the broader markets as the portfolio of Top Picks declined by only 1.2% during the month. The two stocks added last time, Glenmark Pharma and Punj Lloyd, rendered a strong performance, rising by 5.1% and 2.3% respectively. STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs3,569
Current market price: Rs2,131 Price target revised to Rs3,569 Key points - We have realigned our estimates for Aban Offshore (Aban) post the release of its FY2008 annual report and also taking cue from its latest corporate presentation.
- On a consolidated basis, the company’s debt further increased to Rs13,043.4 crore (a debt:equity of 16:1) against Rs10,852.5 crore in the previous year on account of a higher capital expenditure (capex). However, on account of an excellent cash flow growth going forward, we expect the debt-equity ratio to come down to 5.8x in FY2009 and to 2.3x in FY2010.
- Aban has also informed in its annual report that the Russian Federal State Property Agency (SPA) has filed a proceeding seeking invalidation of the bareboat charter agreement between Arktik and Beta Drilling (for rig Murmunskaya) and between Arktik and Venture Drilling AS (for Deep Venture). Although the company assures that they are likely to win the case, any negative surprise from the above would have a negative impact on the future earnings of the company, as the two rigs combined are expected to contribute almost $169 million (about Rs677 crore) to the consolidated top line in FY2009.
- The risk pertaining to variation in foreign exchange (forex) movement still persists, so the company has entered into various derivative contracts to hedge currency and interest-related risks. As on March 31, 2008, the outstanding value of hedged forward covers/derivatives stood at Rs1,872.04 crore (Rs1,523 crore currency forward contracts and Rs349 crore interest swaps).
- The company maintains its optimistic outlook on the industry and expects the demand-supply mismatch of rigs to continue. However, the capex in shallow water is expected to remain stable while the bulk of the incremental E&P capex is now focused on deep and ultra-deep waters.
- On account of delay in the deployment of some of the rigs, higher borrowing cost, slight modifications in our day rate and exchange rate assumptions, we are revising our estimates downwards by 10.1% for FY2009 and by 6.6% for FY2010.
- At the current market price, the stock is quoting at 4.8x FY2010 estimates and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.1x. As of now, the global majors in the offshore service segment are quoting at one-year forward price earnings ratio (PER) of 7.8x and at an EV/EBIDTA of 6.6x. We value Aban at 8x FY2010 earnings, which is slightly higher than the global average on account of its higher return on equity (RoE) despite its high debt currently. Consequently, we maintain our Buy recommendation on the stock with a revised price target of Rs3,569.
Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,035
Current market price: Rs1,301 Acquires Apollo Sindhoori
Aditya Birla Nuvo (ABN) has acquired a 56% stake in Chennai-based retail broking company Apollo Sindhoori Capital investments Ltd (ASCIL) for Rs198.8 crore. The deal values ASCIL at Rs335 crore ie Rs64.1 per share. ABN would make an open offer to the shareholders of ASCIL as per Securities and Exchange Board of India’s guidelines to acquire additional stake in the company. Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs90
Current market price: Rs59 Price target revised to Rs90 Result highlights - Andhra Bank reported a profit after tax (PAT) of Rs77.6 crore indicating a decline of 45.0% year on year (yoy). The same was well below our estimate.
- The net interest income (NII) for Q1FY2009 came in at Rs346.3 crore, largely flat despite a healthy growth in the advances (23% yoy), as the reported margins contracted by 71 basis points yoy to 2.76%.
- The non-interest income declined by 9.7% yoy to Rs118.7 crore on the back of a treasury loss of Rs1 crore during the quarter.
- The operating expenses were largely stable at Rs259.7 crore during the quarter. The expenses were contained primarily due to a 2.9% decline in staff expenses, while other operating expenses grew by 11.9% yoy.
- Notably the provisions witnessed a significant (over ten-fold) jump and stood at Rs122.7 crore. The spike was primarily due to a significant (Rs86 crore) marked-to-market (MTM) loss on the bank’s investment book.
- The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) in percentage terms came in at 1.15%, down 37 basis points yoy, while the net non-performing asset (NNPA) in percentage terms was down 10 basis points to 0.10%.
- The growth in the advances though lower as compared to the industry growth, was at healthy 23% yoy, while the deposits registered a growth of 20.6% yoy.
- We are lowering our earnings estimate for FY2009 by 16.4% to account for higher than expected MTM losses on the investment portfolio. Further we are raising our cost of equity assumptions to factor in the higher 10-year G-sec yields. At the current market price of Rs59 the stock trades at 5.0x 2009E earnings per share (EPS), 2.6x 2009E pre-provisioning profit (PPP) and 0.8x 2009E book value (BV). We maintain our Buy recommendation with a revised price target of Rs90.
BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs330
Current market price: Rs282 Revenues driven by agro products Result highlights - BASF India (BASF) delivered a strong performance in Q1FY2009 well above our expectations. During the quarter the net sales increased by 61.4% year on year (yoy) to Rs380.8 crore as compared to Rs236.0 crore in the corresponding quarter last year. The sales growth was mainly driven by a strong 134.2% year-on-year (y-o-y) growth in the sales of agricultural products and nutrition segment followed by the performance-products segment (up 28.0% yoy).
- The operating profit margin (OPM) during the quarter improved by 90 basis points to 15.1% on a y-o-y basis. Consequently the operating profit grew by a healthy 71.8% to Rs57.4 crore. Segmental margins for the chemical segment improved significantly to 35.8% as compared to 29.4% in Q1FY2008 while the margins declined in the rest of the segments.
- The net profit for the quarter stood at Rs36.6 crore indicating a strong growth of 84.4% yoy.
- 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 on the company’s growth prospects. At the current market price of Rs281 the stock is trading at 9.2x FY2009E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs330.
Balaji Telefilms
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs268
Current market price: Rs169 Balaji and Star part ways Key points - Balaji Telefilms Ltd (BTL) and the Star group have ended the four-year-long exclusivity contract under which the Star group had the right of first refusal on content produced by BTL and BTL could not air any other content on the rival channels during the time when its shows were being aired on Star Plus.
- We believe the exclusivity agreement with the Star group had of late hampered the growth of BTL’s volumes, especially in the prime time slots. With the end of the exclusivity contract, BTL now has the leeway of offering new shows during the prime time on the other Hindi general entertainment channels (GECs). Therefore, the development is a positive for BTL.
- With the termination of the agreement, the promoters of BTL have gained the right to buy the Star group’s 25.99% stake in BTL at Rs190 per share within the next 240 days. To acquire this stake the promoters would require to mobilise Rs322 crore. We believe that due to the size of the amount involved the promoters may not be able to buy the entire stake. In case the promoters fail to exercise the option within the stipulated 240 days, the Star group could sell the stake to a third party.
- We understand from the BTL management that the acquisition of the additional stake by the promoters shall not trigger an open offer, as the promoters would be picking up the stake from a foreign collaborator (Star group) and hence would be exempt from an open offer.
- Meanwhile, the two parties have decided to close one of the two top earning shows for BTL—Kyunki Saas Bhi Kabhi Bahu Thi and Kahaani Ghar Ghar Kii—by November 2008. They have decided to replace one of these shows with a new show. This has increased the downside risk to the future earnings of BTL, as the new show may not do equally well, thereby affecting the company’s performance at the operating level.
- Our outlook on the television content business of BTL remains positive as the company is a scaleable player in a non-scaleable business. At the current market price of Rs169.3, the BTL stock trades at 8.5x FY2010E earnings per share (EPS) of Rs19.9. We maintain our Buy recommendation on the stock with a price target of Rs268.
Bharat Bijlee
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,747
Current market price: Rs1,238 Price target revised to Rs1,747 Result highlights - During Q1FY2009 the net sales of Bharat Bijlee Ltd (BBL) declined by 8.6% to Rs105.6 crore. The sales declined mainly due to disruption in production and non-shipment of one of the orders.
- The operating profit of the company declined by 33.5% year on year (yoy) to Rs13.2 crore resulting in a 467-basis-point decline in the operating profit margin (OPM) to 12.5%. The margins declined on the back of lower absorption of fixed costs due to lower sales volume.
- The interest cost declined by 47.7% to Rs0.5 crore and the depreciation charge rose by 50% to Rs1.2 crore.
- Consequently the net profits of the company declined by 39.2% yoy to Rs7.7 crore, well below our expectations. Lower than expected operating performance led to a lower-than-estimated net profits.
- The current order book of the company stands around Rs350 crore.
- The new capacity of 3,000MVA is expected to come on stream by the end of Q2FY2009 and would start contributing to the top line from Q3FY2009. After this capacity expansion, BBL’s total capacity would go up to 11,000MVA from 8,000MVA at present.
- We have revised our earnings for BBL mainly to account for the lower than expected revenue growth and lower operating margins going forward. We now expect BBL to report compounded annual growth rate (CAGR) of 17.2% and 14.2% in its revenues and profits respectively. Subsequently our FY2009 and FY2010 earnings per share (EPS) now stand at Rs142.3 and Rs167.5 per share respectively.
- We maintain Hold on the stock with a revised price target of Rs1,747. At the current market price the stock is trading at price-earnings of 7.4x and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.4x on our FY2010 estimates.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,230
Current market price: Rs1,783 Where is the slowdown?
During Q2FY2009 till date Bharat Heavy Electricals Ltd (BHEL) has bagged close to Rs9,135 crore worth of orders including orders from international utilities and its first 1,600MW (2x800MW) order from the Tamil Nadu Electricity Board based on super critical technology. While the company has acknowledged Rs5,435 crore worth of orders, media reports suggest the company is also close to winning a Rs1,700 crore order from GVK Power (2x270MW). This takes the company’s order backlog to a staggering 4.9x its FY2008 revenues. This provides strong visibility to BHEL’s revenues, going forward. BL Kashyap & Sons
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,356
Current market price: Rs1,040 Results in line with expectation Result highlights - BL Kashyap & Sons’ (BLK) top line grew by 36.9% year on year (yoy) to Rs414.1 crore in Q1FY2009. The Q1FY2009 revenues include revenues worth Rs29 crore from construction work for Soul Space Projects, BLK’s real estate subsidiary.
- The operating profit margin (OPM) improved by 25 basis points to 11.9% during the quarter. Consequently, the company’s operating profit grew by 39.8% yoy to Rs49.2 crore.
- During the quarter the company liquidated fixed maturity plans worth Rs85 crore and generated a profit of Rs7.3 crore, which led to higher other income of Rs10.3 crore during the quarter. Consequently the net income grew by 30.4% yoy to Rs36.2 crore in line with our expectation of Rs35.3 crore.
- For BPTP order aggregating to Rs1,040 crore, construction work has been delayed as approvals from the local authority is pending and BLK now expects the construction to start in December 2008. For FY2009, the company now expects the revenues to be in the range of Rs2,100-2,300 crore (this factors in Rs100 crore from construction of Soul Space Projects and only Rs40-50 crore from BPTP order).
- The order inflow remained healthy during the quarter. The company witnessed order inflow of Rs415 crore in Q1FY2009 and its current order book now stands at Rs3,070 crore. The company expects the order book to reach Rs3,500 crore by the end of August 2008.
- We have revised our FY2009 earnings estimate downward by 4.5% due to delay in BPTP project execution. We now expect the company’s top line and bottom line to grow at a compounded annual growth rate (CAGR) of 40.3% and 35.4% respectively during the period FY2008-2010 on the back of a healthy order book.
- At the current market price the stock is trading at 12.6x FY2009 earning estimates and 8.9x FY2010 earning estimates after adjusting for the valuation of Soul Space Projects. We maintain our Buy recommendation on the stock with price target of Rs1,356.
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs367
Current market price: Rs253 Annual report review Key points - During FY2008, the overseas power system business of Crompton Greaves Ltd (CGL) reported a 28% year-on-year (y-o-y) growth in its revenues to Rs2,959.7 crore, aided by strong performance of its key subsidiaries Pauwels and Ganz. The profit before interest and tax (PBIT) margin of the division was down 10 basis points to 6.1%, as Ganz reported loss in the last year, however the same is expected to breakeven in FY2009.
- The company has concluded a capital expenditure (capex) of Rs283.4 crore during the financial year. The majority of capex (Rs209 crore) has been incurred in the overseas power system business, as the company concluded acquisition of Microsol. The return on capital employed (ROCE) of the power system division improved from 26.6% to 31.3%. However further analysis shows a significant improvement in the RoCE (62.9% in FY2008 as against 43% in FY2007) of the domestic power business, which led to an improvement in the entire business unit.
- Highlighting the key balance sheet items, the debt of the consolidated entity reduced by Rs62.5 crore mainly on account of repayment of loans of the stand-alone company. CGL continued its efficient working capital management. The working capital (net of cash) was at 27.5 days of sales vis-Ã -vis 30.2 days in FY2007.
- The management indicated that with higher capital efficiency, inventory turns and cost minimisation, the company will focus on achieving higher growth rate both organically as well as though strategic acquisition. However, the management remained cautious on the global economy outlook and the subsequent slowdown in the demand from the USA, UK and the Euro zone.
- We reiterate CGL as our top preferred pick and continue to remain upbeat about the company’s business prospects. We recommend a Buy on the stock with a price target of Rs367. At the current market price, the stock trades at price to earnings (P/E) of 15.9x and 12.6x our FY2009E and FY2010E earnings respectively.
Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs112 Q1 net profit doubles Result highlights - The Q1FY2009 net profit of Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) stood at Rs44.9 crore, almost double compared with Rs22.6 crore for the corresponding quarter of the last year. The net profit was above our expectations and was largely driven by availability of gas from GAIL in Q1FY2009, significant ramp-up in sales volumes and surge in realisations.
- The net sales increased by 49.1% year on year (yoy) to Rs327.6 crore in Q1FY2009 on the back of a robust growth in both the chemical and the fertiliser segments due to the availability of additional gas during the quarter.
- Chemical segment: The revenues from the chemical segment increased by 52.1% yoy to Rs231.3 crore as compared with Rs152.0 crore in the corresponding quarter of the last year. The robust growth in the revenues during the quarter was achieved on the back of improved capacity utilisation.
- Fertiliser segment: The revenues from the fertiliser segment were up by 44.1% yoy to Rs98.9 crore from Rs68.6 crore in Q1FY2008 due to an increase in the manufacturing activity.
- Realty segment: The company’s specialty mall for interiors and exteriors, Ishanya Mall, registered revenues of Rs3.1 crore during the quarter.
- DFPCL’s operating profit during the quarter grew by 64.5% yoy to Rs63.6 crore with the operating profit margin (OPM) increasing by 180 basis points to 19.4%. A higher other income buttressed the earnings before interest, depreciation, tax and amortisation (EBIDTA), which grew by 78.6% to Rs89.7 crore.
- Chemical segment: The segmental profit before interest and tax (PBIT) for the chemical segment increased by 96.4% to Rs80.2 crore with the PBIT margin increasing from 26.9% in Q1FY2008 to 34.7% in Q1FY2009.
- Fertiliser segment: The fertiliser segment registered a segmental profit of Rs4.0 crore during the quarter as against a loss of Rs2.8 crore in Q1FY2008.
- The company’s interest expenses were higher by 79% yoy to Rs9.0 crore while the depreciation charge also increased by 17.7% yoy to Rs12.5 crore during the quarter.
- We have fine-tuned our earnings estimates for FY2009 to factor in the higher than expected growth in Q1FY2009. At the current market price of Rs112, the stock is trading at 8.1x its FY2009E earnings and 6.3x its FY2010E earnings. In view of the visibility of its future earnings, Ishanya, the company’s specialty mall for interiors and exteriors, is valued at Rs28.7 per share. We maintain our Buy recommendation on the stock with a price target of Rs169.
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs326 Results in line with estimates Result highlights - Elder Pharmaceuticals (Elder) has reported a revenue growth of 17.1% for Q1FY2009 to Rs146.1 crore. The revenue growth was driven by continued momentum in the company's star brands (Eldervit, Shelcal, Amrifru and Fairone), strong contribution from exports through its joint venture in Ghana, the mega success of its three products (Shelcal CP, Phyto Omega and Hibor) and strong performance of the active pharmaceutical ingredients (API) business.
- Elder has reported a 90-basis-point expansion in its operating profit margin (OPM) to 19.3% for the quarter. Consequently the operating profit of the company rose by 22.6% to Rs28.3 crore in Q1FY2009.
- Elder’s net profit rose by 16.1% to Rs17.5 crore in Q1FY2009. The net profit growth was in line with our estimates despite substantial increase in the interest cost (on account of the new external commercial borrowing made by the company and an increase in the interest rates) and depreciation charge during the quarter (due to commissioning of new capacities).
- The management has provided a rosy outlook for the next two to three years and expects to maintain its revenue momentum at around 20-25% with operating margins of around 21-22%.
- At the current market price of Rs326 the stock is trading at 6.9x FY2009E earnings and at 5.5x FY2010E earnings. We maintain our Buy recommendation on Elder’s stock with a price target of Rs508.
HCL Technologies
Cluster: Apple Green
Recommendation: Hold
Price target: Rs266
Current market price: Rs240 Price target revised to Rs266 Result highlights - HCL Technologies (HCL) has reported a revenue growth of 11.5% quarter on quarter (qoq) and 34.5% year on year (yoy) to Rs2,168.9 crore for Q4FY2008. In dollar terms the revenues grew by 3.9% qoq to US$503.9 million driven by volume growth (4.1%), realisation growth (0.6%), one-time revenues (0.7%) and change in service mix (0.3%). However this was partially offset by the loss in material revenues (-0.8%) and cash flow hedge accounting (-1.1%).
- The earnings before interest and tax (EBIT) margin improved by 123 basis points to 19.5% due to favourable currency impact (191 basis points), higher utilisation (85 basis points), higher realisation (14 basis points) and grants offered in northern Ireland (43 basis points). However this was partially offset by higher SG&A expenses (108 basis points), cash flow hedge accounting (82 basis points), depreciation (10 basis points), change in service mix (10 basis points). Consequently the company’s EBIT grew by 19% qoq to Rs423.5 crore during the quarter.
- The company reported foreign exchange (forex) losses of Rs299.9 crore during the quarter on its hedge position. Consequently the company’s net income went down by 58.8% qoq to Rs141.1 crore.
- The company announced a 150% dividend (Rs3 per share) during the quarter compared to 100% dividend in the previous quarters. If the dividend payout is maintained at the current quarter level, the stock offers healthy dividend yield of 5% at the current level.
- Aggressive hedging policy and directional view on currency backfired on HCL in FY2008. The company reported forex losses of US$71.3 million during the year. Furthermore the company reported unrecognised loss of US$140 million in the balance sheet under the other comprehensive income. Such aggressive and inconsistent forex practice raises the concern for the company’s future earning growth.
- The management has highlighted that the condition of one of its two top clients has worsened and the company now expects the revenues from the BFSI vertical to remain flat or negative in short term. This is likely to be compensated by the traction seen in the telecom vertical, moving ahead.
- We have revised our exchange rate assumption of Rs42 for FY2009 and Rs41 for FY2010. However we have adjusted US$100 million forex losses out of US$140 million reported in the balance sheet (under the head “other comprehensive income”). We have considered forex losses of US$50 million for FY2009 and FY2010 each. We have also revised our tax rate upward to 13% for FY2009 and 15% for FY2010 in line with the management’s guidance. Consequently we have revised our FY2009 and FY2010 earnings estimate downward by 2.8% and 5.2% respectively.
- At the current market price the stock is trading at the attractive valuation of 11.5x FY2009 earnings estimate and 10.2x FY2010 earnings estimate. Moreover at the current market price the stock offers good dividend yield to the investors. These factors could provide upside in the near term. However we remain concerned about the company’s aggressive and inconsistent forex hedging policy. The company has unrecognised forex loss of US$140 million at the end of Q1FY2009. If the rupee stabilises at this level it could drag the company’s profitability significantly. Hence we maintain our Hold recommendation on the stock with revised price target of Rs266.
Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,130
Current market price: Rs1,703 Axon to strengthen presence in Europe & SAP practice Key points - Infosys Technologies (Infosys) has announced that it has agreed on the terms for the recommended cash offer for a leading UK-based SAP consulting company Axon Group plc (Axon). The deal is valued at GBP407.1 million (Rs3,310 crore or GBP6 per share of Axon) for a 100% stake.
- Axon reported revenues of GBP204.5 million (Rs1,660 crore) and a profit after tax (PAT) of GBP20.2 million (Rs160 crore) in CY2007. At transaction value, Infosys has acquired Axon at enterprise value (EV)/sales of 2x (1.9x including the free cash of GBP25 million on Axon’s books as on December 2007) and price earning (PE) multiple of 20.2x. The acquisition seems to be reasonably priced given the recent acquisitions by some of the other frontline companies at EV/sales of 2.5-3x. Moreover, Axon is profitable and has presence in high-end consulting business in SAP practice. By leveraging on Axon’s SAP consulting services, Infosys with its strong presence and market reach can win large SAP-related business transformation deals. Axon’s strong presence in Europe and manufacturing vertical is an added advantage.
- On the earnings front, the acquisition is likely to be earnings per share (EPS) neutral in FY2010. The loss of interest income on the free cash flow would be offset by incremental earnings from this acquisition. This essentially means that Infosys would convert its non-core interest income to core operating income through the acquisition. Moreover, the utilisation of free cash on its books would have a positive impact on its return ratios.
- Axon’s shareholding pattern is fairly fragmented, with the institutions holding more than 45% stake. However, Infosys has approached and has received consent from the founding promoters and some key employees, who hold 18.1% stake. Hence, institutional consent is now important for Infosys to acquire the required majority stake in Axon. The management seems confident on the same and in fact is looking at acquiring 100% equity in Axon.
- We have not factored in this acquisition in our estimates and will do so after the likely completion of the acquisition by November 2008. We expect the company’s top line and bottom line to grow at compounded annual growth rate (CAGR) of 22.3% and 18.7% during the period FY2008-2010. At the current market price, the stock is trading at 16.5x FY2009 earnings estimate and 15x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with price target of Rs2,130.
International Combustion (India)
Cluster: Cannonball
Recommendation: Buy
Price target: Rs519
Current market price: Rs346 Q1 results in line with estimate Result highlights - For Q1FY2009 International Combustion India Ltd (ICIL) has reported a growth of 13.1% in its revenues to Rs22.9 crore. The growth is in line with our expectations.
- Looking at the performance of the various segments, the material handling equipment (MHE) division has reported a revenue growth of a modest 4% to Rs17.1 crore. The geared motors and gear box division (GMGBD) has reported a strong revenue growth of 59.6% to Rs6.1 crore. The GMGBD has also reported a 440-basis-point improvement in its margins to 6.7%.
- The operating profit of ICIL grew by 1% to Rs4.9 crore. The operating profit margin (OPM) fell by 255 basis points to 21.5%. The decline was mainly due to an increase in the raw material cost. The raw material cost as a percentage of sales increased by 225 basis points to 49.1%.
- The interest cost stood at Rs0.1 crore. The depreciation charge rose by 13% year on year (yoy) to Rs0.8 crore.
- The other income increased by 187% yoy to Rs0.7 crore on account a high interest income on its investments. Consequently, the net profit grew by 8.9% to Rs3.1 crore as against our estimate of Rs3 crore.
- The order book of the company stood at Rs60 crore at the end of the first quarter as against Rs56 crore at the end of Q4FY2008.
- We maintain our estimates for ICIL. We also maintain our Buy call and price target of Rs519 on its stock. At the current market price the stock trades at 5.6x FY2009E earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.5x on FY2009 estimate.
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs247
Current market price: Rs184 Tobacco curbs may hurt in long term In order to curb the production of tobacco and the consumption of tobacco products in the country the government is implementing several measures. - It has set up a fund of Rs5,000 crore to encourage tobacco farmers to diversify into other crops such as oil seeds, soy bean and chillies. The plan also includes financial support to the tobacco farmers to rehabilitate them from the major tobacco producing states like Karnataka and Andhra Pradesh.
- The health ministry in India is planning to make the listing of ingredients, such as tar, nicotine and monoxide, on cigarette, bidi and the other tobacco product packs mandatory from next year. Towards this end the government is planning to set up an apex laboratory and five regional laboratories for testing tobacco products.
Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs910
Current market price: Rs550 Q2 report card beats expectations Result highlights - Jindal Saw’s Q2CY2008 numbers are ahead of our expectations on account of a higher top line and a better than expected margin. After the hive-off of the company’s US division, the Q2CY2008 results are not strictly comparable with the Q2CY2007 results.
- The revenues from the Indian operations grew by a strong 34.8% year on year (yoy) to Rs1,017.5 crore on the back of a strong growth in the submerged arc welded (SAW) pipe sales. The sales of ductile iron (DI) pipes declined a bit sequentially due to an eight-day shutdown at the company’s blast furnace during the quarter.
- On the back of a favourable product mix, greater efficiencies and the hive-off of the US division, the operating profit margin (OPM) continued to improve and reached 16.6% during the quarter (after adjusting for Rs7.2 crore export duty). Consequently, the operating profit grew by 5% to Rs168.5 crore.
- The interest cost was higher on account of a Rs12-crore foreign exchange (forex) loan translation loss and a net settlement of Rs17 crore made towards forward contracts and options. We have treated both the items as “extraordinaries” and adjusting for the same, the profit stood at Rs106.4 crore.
- The company’s order book stood at $1.09 billion at the end of the quarter, to be executable by April/May 2009. Of the total orders, $760 million worth of orders are for SAW pipes while the remaining orders are for DI and seamless pipes.
- Though the Q2CY2008 results are ahead of expectations, the borrowing costs has risen lately. To factor in the same, we have marginally downgraded our earnings estimate for CY2008 by 4.3% to Rs58.9 and that for CY2009 by 1.3% to Rs89.3. At the current levels, the stock is trading at 6.1x its CY2009E earnings and is available at an enterprise value (EV)/ earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.2x. We maintain our Buy recommendation on the stock with a price target of Rs910.
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs451
Current market price: Rs331 Strong quarter Result highlights - KSB Pumps’ Q2CY2008 results are better than our expectations owing to a stronger than expected top line and higher margin. For pump makers, the second quarter is traditionally the best quarter, both in terms of sales and margin, because of higher pump sales for agricultural purposes during the period.
- In Q2CY2008, the company’s top line improved smartly by 32.6% to Rs149 crore while its margin increased by 630 basis points year on year (yoy) and by 220 basis points sequentially to 18.3%. KSB Pumps’ performance in the corresponding quarter of the last year, both in terms of top line and margin, was significantly suppressed on account of a lower contribution of the project business and certain operational difficulties faced by the company back then.
- Looking at the Q2CY2008 results of the segments separately, the pump division has reported a strong performance for the quarter. Its revenues grew by 37.2% to Rs118.8 crore. The valve division’s revenues grew by 20% to Rs30.3 crore. The profit before interest and tax (PBIT) margin of all the divisions too improved both yoy and sequentially.
- Consequently, the overall operating profit of the company grew by 102.5% to Rs27.3 crore. A higher other income helped the net profit to grow by a good 113.9% to Rs17.1 crore.
- Though the Q2CY2008 numbers are better than our expectations, looking at the seasonal nature of the business, we do not expect similar results in the coming quarters. As highlighted in our previous notes, we do not expect the margins to reach the previous levels. We expect the operating profit margin (OPM) to sustain in the region of 16%. We upgrade our CY2008 earnings estimate by 8.5% to Rs32.4 in view of the excellent performance in the second quarter. We also upgrade our CY2009 earnings estimate by 2.3% to Rs34.9.
- Pump makers would benefit directly from the expansion plans of their user industries, particularly the refinery and power sectors. Hence, we maintain our positive outlook on KSB Pumps. At the current market price, the stock is trading at 9.5x its CY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.6x. We maintain our Buy recommendation on the stock with a price target of Rs451.
Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs4,044
Current market price: Rs2,628 Annual report review Key points - Larsen & Tourbro (L&T) had a brilliant FY2008, as the stand-alone revenues rose by 43.1% led by excellent performance of the stand-alone company as well as its key subsidiaries. The margins of the company improved despite rising costs due to itsexcellent execution capabilities and judicious choice of orders.
- L&T (stand-alone) incurred a capital expenditure (capex) of about Rs1,647 crore in FY2008, which is extremely significant considering its last year net block of Rs1,756 crore. Despite huge investments, the company has maintained its return ratios, as its return on capital employed (RoCE) stood at 29.1%, while the return on net worth (RoNW) was at 26.6%.
- To our positive surprise, the company further improved its working capital management. The net working capital cycle was reduced to 24.4 days in FY2008 as against 30.1 days in FY2007. The company also continued to generate strong cash flows during the year, with the cash flows from operations standing at Rs2,049 crore in FY2008.
- The company has a strong cash and cash equivalent position of Rs6,131 crore on a consolidated level, which shall be used to fund its future projects. Furthermore, the debt-equity ratio remains comfortable at 1.14:1 on a consolidated basis.
- The order book of Rs53,000 crore (as on March 31, 2008) provides excellent visibility. L&T also highlighted the tremendous opportunities from the Gulf region, which it is looking to capitalise considering its already-established presence in the region.
- Diversified business model (both across products as well as geographies), opportunities from international operations, strong order book, and huge possibilities from its new initiatives are likely to fuel L&T’s growth going forward. At the current market price, the stock is trading at 17.6x its FY2010E consolidated earnings. We recommend a Buy on the stock with our sum-of-the-parts based price target of Rs4,044.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs840
Current market price: Rs736 Expanding branded franchise Key points - Lupin has entered into a multi-year promotion and marketing agreement for the AeroChamber Plus® line of products with Forest Laboratories, Inc. Under the terms of the agreement, Lupin Pharmaceuticals, Inc, USA, will use its 50-person sales force to promote the product to paediatricians.
- Lupin already employs around 50 people in the USA for the promotion of its branded product, Suprax, to paediatricians. Through this deal Lupin will be able to leverage the field force to increase its revenues without any incremental spend on front-end marketing. Further, the deal would also provide Lupin an opportunity to extend its branded franchise with the paediatricians in the USA.
- The above-mentioned deal would present an upside to our current estimates, as it would provide Lupin with incremental revenues without any increase in its costs. We believe Lupin would make a distribution margin of 10-15% on the marketing of the AeroChamber Plus® range of products which would flow directly to the bottom line in the absence of any additional cost. Due to the lack of clarity on the size of the opportunity, we have not factored in the upside from this deal into our estimates.
- At the current market price of Rs736, Lupin is discounting its FY2009E earnings by 16.2x and its FY2010E earnings by 13.5x. Keeping in mind the strong business fundamentals and the growth potential of the company, we maintain our Buy recommendation on Lupin with a price target of Rs840.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs2,614 Results above expectations Result highlights - Madras Cement's Q1FY2009 revenues grew by 31% year on year (yoy) to Rs615 crore. The cement volumes of the company during the quarter increased by 11.1% yoy to 1.6 million tonne. The cement realisation per tonne increased by 14.9% yoy to Rs3,643 per tonne.
- The operating profit margin (OPM) declined by 270 basis points yoy to 36.2%. The drop in the OPM was mainly on account of an overall increase in the cost. Consequently the operating profit reported a growth of 22% to Rs222.9 crore.
- On per tonne basis, the power & fuel cost increased by 32.9% yoy due to higher coal price. The freight cost rose by 16.9% due to increase in diesel prices. The raw material cost increased by 38.9%. The employee cost increased by 4.1% while the other expenses swelled by 9.4%.
- The interest expenses surged by 143.9% to Rs19.7 crore while the depreciation rose by 31.5% to Rs31.5 crore. The increase in the interest and depreciation costs was on account of capacity additions carried out by the company.
- The net profit thus reported a growth of 13.3% to Rs114 crore.
- Going ahead we expect volume growth and cost saving from wind power to shield the company’s earnings. Thus we expect the company to post an earnings per share (EPS) of Rs360.3 and Rs418.2 in FY2009 and FY2010 respectively. At the current market price of Rs2,614, the share trades at 7.3X and 6.3X its FY2009 and FY2010 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.3X and 4.2X for FY2009 and FY2010 respectively. We maintain our Buy recommendation on the stock with a price target of Rs4,000.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs708
Current market price: Rs562 Price target revised to Rs708 Result highlights - The Q1FY2009 results of Mahindra & Mahindra (M&M) are marginally lower than our estimates. The stand-alone net sales of the company grew by 26.1% to Rs3,293.4 crore during the quarter.
- On a segmental basis, the automotive segment’s revenues rose by 24.5% to Rs1,873.2 crore. The farm equipment (FE) division has reported a higher revenue growth of 27.5%. The profit before interest and tax (PBIT) margin in the automotive segment declined by 80 basis points to 8%. The PBIT margin of the FE division dropped by 160 basis points to 11.8%. The operating profit margins (OPMs) are below our estimates with the overall OPM at 9.9%, down 90 basis points compared with 10.8% in Q1FY2008. As a result of the drop in the OPM, the operating profit grew by 15.3%.
- An increase in the interest expenditure and a higher depreciation charge led the adjusted net profit to grow by 11.1% to Rs217.5 crore. After taking into account a foreign exchange (forex) loss of Rs77.9 crore, the reported profit after tax (PAT) declined by 16.7% to Rs159.3 crore.
- On a consolidated basis, the gross revenues grew by 29% to Rs7,557.3 crore while the profit after minority interest grew by 36.7% to Rs409.5 crore in Q1FY2009.
- M&M has announced the merger of Punjab Tractors Ltd (PTL) with itself in the ratio of three shares of PTL for one share of itself. M&M will be acquiring the assets of Kinetic Motor Company (Kinetic) through a new company to be formed. The consideration for the acquisition is a sum of Rs110 crore in addition to a 20% stake to Kinetic in the new company. M&M will hold the balance 80% of the new company’s equity.
- The volume growth achieved in Q1FY2009 is expected to slow down over the rest of the year and improve after the launch of Ingenio.
- However, in view of the lowering of the margins and difficult market condition we downgrade the earnings multiple on standalone earnings from 10x to 9x and similarly downgrade the value of the subsidiaries also. We continue to value M&M on a sum-of-the-parts basis valuing the core business at Rs365 and subsidiaries at Rs343. We maintain Buy on M&M with a revised price target of Rs708.
Mold-Tek Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs72 Results in line with expectations Result highlights - Mold-Tek’s Q1FY2009 revenues grew by 23.1% year on year (yoy) to Rs33.9 crore. While the plastic division’s revenues grew by 24% yoy to Rs29.1 crore, the KPO division’s revenues grew by 18.2% yoy to Rs5 crore during the quarter.
- The operating profit margin (OPM) improved by 312 basis points to 16.1% during the quarter on account of better profitability of the plastic division. The earnings before interest and tax (EBIT) margin of the plastic division improved by 10 basis points to 7.7% during the quarter. Consequently, the company’s operating profit grew by 52.6% yoy to Rs5.5 crore during the quarter.
- The interest and depreciation grew by 63.2% and 20.6% respectively during the quarter. In terms of taxes, the company did not provide for tax provision due to scheme of de-merger. Consequently, the company’s net income grew by 54.9%. yoy to Rs4.2 crore, which is in line with our expectations.
- The company also announced that the high court of Andhra Pradesh (AP) has approved the de-merger of its structural engineering KPO operations and the plastic packaging product manufacturing division.
- Mold-Tek is witnessing traction in its high-rise building (HRB) business. The company has added two new clients in Canada and one client in Amsterdam. To cater to these clients and the potential new clients, the company plans to expand its HRB team from 50 members to 170 members. The company also plans to open a new branch in Nasik and the revenues from this branch are expected to flow from Q3FY2009.
- We maintain our earnings estimates for FY2009 and FY2010. At the current market price, the stock is trading at attractive valuation of 4.9x FY2009 earnings estimate and 3.7x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with price target of Rs169.
Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs80
Current market price: Rs70 Higher tax outgo affects bottom line Result highlights - Navneet Publications Ltd (NPL) posted a robust revenue growth of 22.1% to Rs242.5 crore in Q1FY2009 on the back of its stationery business, which grew by 58.8% year on year (yoy). The top line was ahead of our expectation of Rs229.6 crore for the quarter.
- The core publication business registered a growth of only 7.1% yoy to Rs153.1crore, which is below our expectation of 12.0% for the quarter. The profit before interest and tax (PBIT) margin of the business improved by 103 basis points to 37.4% in Q1FY2009.
- The operating profit margin (OPM) declined by 233 basis points yoy to 27.2% on account of higher raw material cost and advertising & sales promotion activities in Q1FY2009. NPL is continuously spending on brand building and promotional activities for its stationery business, which has resulted in a steep increase in the other expenses. Thus the operating profit grew by only 12.4% to Rs65.9 crore during the quarter.
- Higher interest charges coupled with higher incidence of tax led to a 4.7% decline in the adjusted net profit to Rs40.2 crore in Q1FY2009. The company had invested in windmills in FY2008 because of which the company got tax benefits leading to lower incidence of tax in FY2008.
- Though NPL’s core publishing business registered a subdued growth during Q1FY2009, we expect the company to achieve our FY2009 revenue and earnings estimates. The stationery business of the company is gaining good momentum in the domestic as well as the international market and going forward it could be major revenue driver for the company.
- At the current market price of Rs70 the stock trades at 11.1X its FY2009 earnings per share (EPS) of Rs6.3 and 9.2X EPS of Rs7.6. We maintain our Buy recommendation on the stock with a price target of Rs80.
Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs272
Current market price: Rs171 Annual report review Key points - NSEL continued its revenue growth momentum in FY2008 and grew by 30.5% year on year (yoy) to Rs228.7 crore during the year. The quality of its revenues continues to improve with the revenues from the high-margin product business contributing 68.38% to the sales in FY2008 compared with 54% in FY2007. However, the operating profit margin (OPM) decreased by 315 basis points to 25.4%, largely on account of a high employee cost.
- The company incurred net capital expenditure (capex) of Rs15.5 crore during the year for facility development. NSEL is investing around Rs35 crore in a notified special economic zone (SEZ) at Jaipur. This facility will help the company to reduce the effective tax rate after FY2010.
- In terms of return ratios, the return on capital employed (RoCE) and the return on net worth (RoNW) declined to 31.7% and 28.6% respectively in FY2008 on account of a lower net profit margin (because of a high employee cost) and an increase in the other current assets as well as in the loans and advances.
- The company continues to have a strong balance sheet with cash and cash equivalent of Rs94.1 crore in FY2008 compared with Rs81.9 crore in the previous year. The operating cash flow decreased by 58.6% yoy to Rs24.4 crore due to an increase in the loans and advances, and the other current assets. On the positive side, the days sales outstanding (DSO) came down to 86 days in FY2008 from 91 days in FY2007.
- During the year the company bagged 24 new orders for implementing 64 product modules of the Finnone product suite. However, fresh order intake during the year dropped to Rs276.7 crore compared with Rs420.2 crore in FY2007.
- The company declared a dividend of 30% (Rs3 per share) in comparison with 35% (Rs3.5 per share) in the previous year.
- We expect the company’s earnings to grow at compounded annual growth rate (CAGR) of 14.7 % during the period FY2008-10 on account of a decline in the OPM and a slower growth in the product business. At the current market price, the stock is trading at a multiple higher than that of 3i Infotech even though NSEL has a slower earnings growth rate. Therefore, we maintain our Hold recommendation on the stock with a price target of Rs272. At the current market price the stock trades at 9.6x FY2009E earnings and 6.9x FY2010E earnings.
Opto Circuits India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs460
Current market price: Rs338 Strong margin expansion Result highlights - Opto Circuits (Opto) has reported a top line growth of 83.8% to Rs177.4 crore for Q1FY2009. The revenues are marginally lower than our estimate, mainly due to a lower than expected contribution from the recently acquired Criticare Systems (Criticare). The invasive segment grew by 72% whereas the non-invasive business grew by 48%, driven by new product launches. Criticare contributed revenues of ~Rs30 crore (for two months). On excluding the contribution from Criticare, the organic growth was ~52%.
- Opto’s operating profit margin (OPM) expanded by 80 basis points year on year (yoy) and by 230 basis points on a sequential basis to 31.5% in Q1FY2009. The margin expansion was driven by a lower raw material cost. The dip in the raw material cost was primarily due to a reduction in the promotional spend and distribution of free samples. However, the management expects the margin to moderate in the coming quarters as the promotional costs are expected to bounce back. The operating profit grew by 88.7% to Rs55.8 crore in Q1FY2009.
- Despite a strong operating performance, Opto’s net profit growth was restricted to 61.4% to Rs44.9 crore, largely due to a higher than anticipated interest cost. The interest cost grew four-fold yoy and three-fold on a sequential basis to Rs10.9 crore during the quarter, largely due to the $56-million debt raised to fund the Criticare acquisition.
- In order to account for the lower than expected revenues, the stronger margins and the higher interest cost, we are revising our estimates for Opto. We are revising our revenue estimate for FY2009 and FY2010 downwards by 2.6% and 0.9% respectively. Our profit estimates for FY2009 and FY2010 have been downgraded by 5.4% and 2.8% respectively. Our revised earnings per share (EPS) estimates stand at Rs19.9 for FY2009 and Rs29.7 for FY2010.
- At the current market price of Rs338, Opto is trading at attractive valuations of 17.0x FY2009E fully diluted earnings and of 11.4x FY2010E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs460.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs300
Current market price: Rs260 Disappointing performance Result highlights - Orchid Chemicals and Pharmaceuticals’ (Orchid) Q1FY2009 results have been disappointing due to lower top line growth, margin pressures, higher than anticipated interest burden and foreign exchange (forex) translation losses.
- The Q1FY2009 revenues grew by 21.9% year on year (yoy) to Rs287.7 crore, way lower than our estimates of Rs350 crore. The revenue growth was restricted due to absence of new launches during the quarter. On a sequential basis the revenues were down by 24.1% due to the onset of the summer season in the USA (which is a lean period for the sale of antibiotics) and the entry of competition in Cefepime. On the positive side Orchid continued to perform well in older products like Cefoxitin and Cefdinir.
- The operating profit margin (OPM) shrank by 370 basis points to 24.2% in Q1FY2009 largely due to an increase in staff costs and rising power and fuel costs (due to a rise in the crude oil prices). The declining margin restricted the operating profit growth to 5.7% at Rs69.7 crore in Q1FY2009.
- Orchid reported a loss of Rs31.6 crore at the net level. This was due to poor operating performance, higher interest costs and mark-to-market translation losses on foreign currency liabilities of Rs58.8 crore (pre-tax). On excluding the net impact of the forex translation, the adjusted net profit of the company grew by 27.5% to Rs33.8crore in Q1FY2009 mainly powered by a 61x jump in the other income. The net profit reported by the company was below our estimates.
- Despite repeated assurances from the management Orchid’s debt level remains high at ~$300 million (excluding the foreign currency convertible bonds [FCCBs]) as reflected in the increase in the interest cost in Q1FY2009 [up by 50% on a year-on-year basis and by 24.6% sequentially]).
- Orchid has strong growth drivers over the next two years. We expect the competitive scenario in the Cephalosporin segment to intensify whereas the launch of Tazo-Pip and other non-antibiotic products will fuel growth in FY2009. The opening up of the Carbapenem generic market from FY2010 onwards will maintain the growth.
- Orchid has already launched Tazo-Pip in Canada and Australia (which represents a $50-60 million market collectively) and has also received the much awaited approval to launch the product in Europe through its marketing partner Hospira. The company is expecting the approvals for launching the product in the USA within the next one month. The approval and launch of Tazo-Pip in the USA would act as a major trigger for the stock.
- The management has scaled down its growth guidance for FY2009 from 30% earlier to 15-20% now mainly due to the delay in the launch of Tazo-Pip in the USA and Europe. Our estimates already factor in the delayed launch. Hence we maintain our revenues and profit estimates at the current levels.
- At the current market price of Rs260 Orchid is discounting its FY2009E earnings by 15.9x and its FY2010E earnings by 12.1x. We maintain our Buy recommendation on the stock with a price target of Rs300.
Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs57
Current market price: Rs35 Integrating vertically Key points - The board of directors of Orient Paper and Industries Ltd (OPIL) has approved the purchase of the chemical division of GMMCO, a group company. GMMCO’s chemical division at Amlai, Madhya Pradesh currently sells its entire produce of calcium hypochlorite, 23% of its liquid chlorine output and 18% of its caustic soda lye yield to OPIL’s Amlai paper mills. Thus, the acquisition will lead to vertical integration for OPIL’s paper business, resulting in suitable benefits. The transfer of the business will be effective from October 1, 2008.
- The acquisition involves the transfer of Rs10.18 crore worth of net assets by GMMCO to OPIL. As transfer of fixed assets worth only Rs15.8 crore (small as compared with the size of OPIL’s paper business) is going to take place, we do not expect the move to have any significant impact on the profitability of OPIL’s paper division. By way of consideration OPIL will issue 6% redeemable non-cumulative preference shares of Rs1 crore while the balance Rs9.18 crore will be paid to GMMCO within one year of the effective date of the transfer.
- The OPIL board has also approved a proposal to increase the steam and power generation capacities at the Amlai paper mills from the current 22 megawatt (MW) to 43MW at a cost of Rs140-150 crore. This expansion will be sufficient to meet the entire requirement of the paper mills, including the ongoing expansion of the tissue paper manufacturing capacity by 15,000 tonne. We believe OPIL would need to fund a substantial part of this project by raising debt as the company is already carrying out additional expansions worth ~Rs750 crore across its businesses. Despite this we expect the company’s debt: equity ratio to remain at a healthy 0.76x.
- OPIL is in the process of expanding its cement capacity from the current 3.4 million tonne to 5 million tonne which along with a 50MW captive power plant at Devapur is expected to come on stream by the end of FY2009. Also, the expansion of the tissue paper capacity is on schedule for completion by Q4FY2009.
- In FY2008, OPIL’s adjusted net profit had increased by 46.9% on the back of a 17.6% increase in its sales and a 340-basis-point improvement in its operating profit margin. The company continues to have one of the highest return on capital employed (RoCE) ratio in the sector—the ratio increased to 57.2% in FY2008 from 48.1% in FY2007. In the same fiscal, the debtors days reduced from 40.9 to 38.3 and the creditors days dropped from 66.7 to 58.8.
- Going forward, the company’s growth will be driven by capacity expansions across businesses. However, the current financial year will remain challenging especially due to the expected overcapacity in the cement business. OPIL is currently trading at extremely low valuations of 2.5x its FY2010E earnings per share and an enterprise value /earnings before interest, depreciation, tax and amortisation of 1.8x. We believe it is a value buy at these levels. Hence, we maintain our Buy recommendation on the stock with a price target of Rs57.
Patels Airtemp India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs135
Current market price: Rs62 Good performance Result highlights - Patels Airtemp’s Q1FY2009 results are ahead of our expectations on the back of a stronger than expected top line growth. The net sales for the quarter rose by 58.3% to Rs13.2 crore.
- The operating profit margin (OPM) continued to remain strong at 18.8% improving by 200 basis points year on year (yoy). Consequently the operating profit grew by 76.9% to Rs2.49 crore during the quarter. Stable interest and depreciation costs led to a staggering profit growth of 105.4% to Rs1.34 crore.
- Currently the company has an order book of Rs54 crore as compared to Rs50 crore at the end of the previous quarter. The management also hopes to maintain its margins going forward.
- We expect a strong second quarter for the company as the export orders from Iran and Germany are likely to be booked. The order inflows also remain steady for the company so far and the management is pretty confident that the same is likely to be sustained going forward too.
- At the current market price the stock is available at 4.1x FY2009E earnings and 3.5x FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs135 valuing the company at 9x FY2009E earnings.
Punj Lloyd
Cluster: Apple Green
Recommendation: Buy
Price target: Rs532
Current market price: Rs295 Annual report review Key points - During FY2008, Punj Lloyd Ltd (PLL) reported a robust 51.2% year-on-year (y-o-y) growth in its revenues to Rs7,752.9 crore, led by a strong 100.5% increase in the standalone business to Rs4,488.6 crore.
- The operating profit margin (OPM) of the consolidated entity came in at 8.3% led by a good operating performance in the PLL standalone. The reported net profit grew by 82.2% to Rs358.4 crore.
- In FY2008, the company incurred a total capital expenditure (capex) of Rs440 crore, however there was a significant increase in the capital works in progress from Rs70.9 crore in FY2007 to Rs206.1 crore in FY2008.
- The company’s secured loans went up to Rs1,350.7 crore in FY2008 as against Rs1,123.2 crore in the previous year. The secured borrowing rose during the year mainly due to increasing working capital requirement of the company.
- The working capital (net of cash) for PLL consolidated stood at 75.6 days of the net sales in FY2008, sharply up from 36.6 days in FY2007. In the standalone entity, the net working capital was high at 151 days of the net sales, but was down from 191 days of the net sales in FY2007. The working capital requirement increased due to strong execution of the projects undertaken by the company.
- We have refined our earnings estimates to reflect the higher borrowing cost of the company. Subsequently our FY2009E and FY2010E fully diluted earnings per share (EPS) stand at Rs17.3 and Rs22.9 per share respectively. At the current market price, the stock trades at 17x and 12.9x our FY2009E and FY2010E earnings respectively.
- We remain positive on PLL given the visibility to the revenues on the back of the strong order book position (2.6x FY2008 revenues) and strong execution capability displayed in the recent past. We reiterate out Buy recommendation on the stock with price target of Rs532.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs575
Current market price: Rs510 Strong operating performance Result highlights - Ranbaxy Laboratories (Ranbaxy) has delivered a mixed performance for Q2CY2008. While the revenues and net profit have been below our estimates, the operating performance has been ahead of our expectations.
- The revenues grew by 13% in rupee terms to Rs1,821.2 crore in Q2CY2008 and were marginally below our estimates largely due to the poor performance across the key Western European countries, Africa and India.
- The operating performance was ahead of our expectations in Q2CY2008. Including the other operating income, the operating profit margin (OPM) expanded by 350 basis points to 16.9% causing the operating profit to grow by 44% year on year (yoy) to Rs326.1 crore. The margin improvement was led by an improved gross margin due to a better product and market mix.
- The reported net profit stood at Rs22.9 crore, down by 91.4% yoy and below our estimates. The net profit was dragged down by a higher than expected foreign exchange (forex) translation losses of Rs193.1 crore (against our estimate of Rs148 crore). On adjusting for the forex losses, the net profit of the company stood at Rs160.8 crore.
- The company has however reduced its earnings before interest, tax, depreciation, and amortisation (EBITDA) margin guidance for CY2008 from 17.5-18% earlier to 17% currently due to the cancellation of the new drug discovery research (NDDR) de-merger.
- The launch of the open offer by Daiichi Sankyo pursuant to the receipt of SEBI approval and clarity on the US food and drug administration (US FDA) and the US Department of Justice investigations would drive the stock in the near term, whereas the launch of generic Imitrex in Q4CY2008 and further news flow on monetisation of first to file (FTF) opportunities would act as triggers for the stock in medium to long term.
- At the current market price of Rs510 Ranbaxy is discounting its CY2008E base earnings (excluding the FTF opportunities) by 36.5x and its CY2009E base earnings by 21.7x. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs575 (Rs470 per share for the base business and Rs105 per share for the FTF opportunities: Imitrex, Valtrex, Nexium, Caduet, Flomax and Lipitor).
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,110
Current market price: Rs786 Results in line with expectations Result highlights - The Q1FY2009 results of Ratnamani Metals and Tubes Ltd (RMTL) are in line with our expectations. The company’s revenues grew by 31.4% to Rs249.7 crore on account of a strong volume growth in both the stainless steel (SS) and carbon steel (CS) pipe segments.
- The operating profit of the company grew by 24.1% to Rs56.4 crore in the quarter. The operating profit margin (OPM) declined by 133 basis points to 22.6% due to an increase in the other expenses. The company’s other expenses as a percentage of sales increased by 353 basis points to 11.2% in Q1FY2009.
- RMTL’s interest cost declined by 29.8% to Rs3.6 crore while its depreciation charge rose by 20.9% to Rs6.4 crore in Q1FY2009.
- During the quarter, the company made a provision to the tune of Rs7.86 crore for a mark-to-market (MTM) loss on its exposure to foreign exchange (forex) contracts. We have considered this as a one-off item. Consequently, the net profit of the company grew by 35.6% to Rs30.6 core. The reported net profit increased by 12.6% to Rs25.5 crore in the quarter.
- The combined order book of the company stood at Rs700 crore at the end Q1FY2009 as against Rs650 crore at the end of Q4FY2008.
- We have revised our earnings estimates for FY2009 and FY2010 mainly to factor in the lower OPM in the future and the MTM forex loss. Our fully diluted earnings per share (EPS) estimates for FY2009 and FY2010 now stand at Rs126.2 and Rs152.3 respectively. We reiterate our Buy call on the stock with a price target of Rs1,110 per share. At the current market price the stock trades at price-to-earnings of 6.2x and 5.2x its FY2009 and FY2010 estimates.
Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs298
Current market price: Rs224 Another quarter of excellent performance Result highlights - Sanghvi Movers Ltd (SML) has reported an excellent performance for Q1FY2009 and its results are ahead of our expectations on both revenue growth and profitability fronts.
- The revenues of the company grew by 48.5% to Rs78.7 crore in Q1FY2009. The power sector was the largest contributor to the top line, accounting for 33.8% of the net revenues.
- The operating profit of the company grew by 45.1% to Rs58.9 crore. On a high base of last year the operating profit margin (OPM) declined by 340 basis points to 73.2%. The increase in the operating expenses as a percentage of sales also contributed to the decline in the OPM.
- The other income stood at Rs1.3 crore, as the company sold two cranes for a total sum of Rs1.2 crore during the quarter.
- The interest cost and the depreciation charge rose by 37.4% and 32.4% year on year (yoy) to Rs10.1 crore and Rs14.7 crore respectively. Consequently, the net profit grew by 56.7% to Rs22.7 crore as against our estimate of Rs15.7 crore.
- The company added 19 new cranes during the quarter for a total capital expenditure (capex) of Rs66 crore. SML’s total fleet size now stands at 295 cranes.
- We have fine-tuned our FY2009 and FY2010 earnings estimates to Rs19.8 and Rs24.7 per share respectively. This change is mainly to factor in the company’s performance in Q1FY2009, the increase in its borrowing cost and taking the key inputs from its latest annual report. At the current market price the stock discounts our FY2009E and FY2010E earnings by 11.3x and 9.1x respectively.
- We reiterate our Buy call on SML with price target of Rs298 on the stock.
Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs345
Current market price: Rs295 Price target revised to Rs345 Result highlights - Selan Exploration Technology has reported a blow-out performance for Q1FY2009. The company’s net revenue leapfrogged by 364% year on year (yoy) to Rs35.8 crore during the quarter. On an annual comparison basis, the growth was driven by a close to 98% jump in its average realisation. However, the positive surprise was the surge of 133% in the sale volume to around 71,500 barrels in Q1FY2009.
- The volume surge was driven by the commercialisation of some new wells developed in the last fiscal. Moreover, we also suspect that part of the volume surge was driven by the gains from the unsold inventory held as on March 2008.
- Due to the sharp jump in the realisation and the benefits from the smart ramp-up in the volumes, the operating profit margin stood at 84.9%, the highest ever in any quarter. This resulted in a close to five-fold jump in the reported earnings to Rs17.8 crore. This is ahead of the net earnings for the entire fiscal 2008.
- The company has earmarked an enhanced capital expenditure (capex) of Rs50 crore for FY2009. This will include drilling of eight to ten new wells and seismic surveys. The development programme would be funded through the recent preference issue to promoters and internal accruals.
- In terms of guidance, the company expects to ramp up its production volumes to 5,00,000-7,00,000 lakh barrels over next three years. This would essentially mean a close to four-fold jump in the volumes over FY2008.
- To factor in the recent success in the commercialisation of the new wells, the aggressive capex planned for further development and the higher average realisation, we have revised our estimates significantly for FY2009 and FY2010. To arrive at the price target of Rs345, we have discounted the cash flow over the life of the fields by 15% with production anticipated to peak out at 6,50,000 barrels by FY2013.
- At the current market price the stock trades at 8.9x FY2009 and 7.6x FY2010 estimated earnings. We recommend a Buy call on the stock.
Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs50
Current market price: Rs34 Price target revised to Rs50 Result highlights - The Q1FY2009 results of Subros are ahead of our expectations on account of a higher sales growth during the quarter.
- The top line of the company grew by 11.1% year on year (yoy) to Rs175.2 crore in Q1FY2009. The growth was led by an increase of 27% in the volume. The realisation declined by 12.4% during the quarter. The realisation dropped because Subros supplied only components for newer models of passenger cars during the quarter instead of full kits comprising compressors and components.
- The operating profit margin (OPM) declined by 50 basis points leading to an operating profit growth of 7.3% to Rs20.6 crore. A higher other income and a lower depreciation charge led the profit after tax (PAT) to grow by 20.2% to Rs7.87 crore in Q1FY2009.
- The company has received a letter of intent from Tata Motors for supplying air-conditioning systems to Nano in India. For exports, Subros plans to set up assembly operations in Thailand to meet the needs of Nano in that country.
- In view of the lower than expected profit margin, we are downgrading our earnings per share (EPS) estimates for FY2009 and FY2010 by 9.6% to Rs5.6 and by 12% to Rs7.8 respectively.
- At the current market price of Rs34 the stock is trading at compelling valuations of 4.4x FY2010E EPS and 1.8x FY2010E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). The stock’s valuations are at a huge discount to that commanded by its peers. We maintain our Buy recommendation on the stock with a revised price target of Rs50.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,640
Current market price: Rs1,482 Israeli court rules in Sun’s favour Key points - Israeli court, Tel-Aviv has announced a verdict in favour of Sun Pharmaceutical Industries (Sun) against the motion of Taro Pharmaceutical Industries (Taro) to conduct a special tender offer.
- Sun will now be in a position to complete the previously announced tender offer at $7.75 per share through its subsidiary, Alkaloida Chemical Company Exclusive Group (Alkaloida).
- The employees of Taro have demanded that Sun raise the job security offered from two years to five years. Sun reiterated that it plans to use all of the existing Taro facilities and has no plans to lay off people.
- The US Federal Trade Commission (FTC) has approved Torrent Pharma to buy out Sun's rights and assets relating to the manufacture and sale of the three versions of Carbamazepine to avoid Sun’s monopoly after the proposed acquisition takes place.
- This decision from the Israeli court and the FTC in Sun’s favour is positive for the company and has reinforced our view that Sun will be able to successfully close the deal.
- At the current market price of Rs1,482, Sun is valued at 18.3x FY2009E and FY2010E fully diluted earnings. We reiterate our Buy recommendation on the stock with a price target of Rs1,640 (20x FY2010E earnings).
Surya Pharmaceutical
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs205
Current market price: Rs114 Results beat expectations Result highlights - Surya Pharmaceutical (Surya Pharma) reported an impressive 52.6% increase in the revenues to Rs158.1 crore in Q1FY2009. The revenue performance was in line with our estimate of Rs153 crore and was driven by an increase in the active pharmaceutical ingredient (API) business (due to de-bottlenecking and capacity expansion) and growing contributions from the recently commenced menthol business.
- The operating profit margin (OPM) shrank by 70 basis points to 17.0% during Q1FY2009 primarily due to an escalation in the material cost and a doubling of the staff cost. This caused the operating profit to grow by 46.9% to Rs26.9 crore. The margins reported by the company were ahead of our expectations.
- Driven by a strong operating performance, the net profit grew by an impressive 38.3% to Rs14.1 crore in Q1FY2009. This was despite a substantial jump in the interest and depreciation costs due to the commissioning of new capacities during the quarter. The profits reported by the company exceeded our expectations of Rs11 crore.
- The company is setting up a new manufacturing plant in Jammu. With the commissioning of this facility, Surya Pharma will enter the high-margin injectable business. As per the management the Jammu facility has the potential to generate almost Rs350-400 crore in revenues when utilised at 100% level. We expect the Jammu facility to contribute an incremental Rs75 crore to the company’s revenues in FY2009.
- At the current market price of Rs114, Surya Pharma is trading at 3.8x its FY2009E diluted earnings of Rs29.7 and 2.8x its FY2009E diluted earnings of Rs39.9. At the current prices, the stock offers a remarkable combination of strong growth at cheap valuations. We maintain our Buy recommendation on the stock with a price target of Rs205.
Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs515
Current market price: Rs330 Performance boosted by new fertiliser policy Result highlights - The Q1FY2009 results of Tata Chemicals Ltd (TCL) have been above our expectations. The consolidated revenues during the quarter registered a growth of 94.1% year on year (yoy) to Rs2,192.4 crore on account of spectacular performance of the fertiliser segment. However the results are not strictly comparable with the same quarter last year due to acquisition of GCIP in Q4FY2008.
- The consolidated operating profit increased by 96% yoy from Rs257.9 crore to Rs505.3 crore with the operating margins expanding by 20 basis points to 23% in Q1FY2009. The consolidated profit after tax (PAT) increased by 116.8% to Rs235.9 crore with the margins expanding by 250 basis points to 12.1%. The depreciation and interest costs increased significantly to Rs99 crore and Rs84.4 crore respectively due to GCIP acquisition.
- Fertilisers: The revenues from the fertiliser segment increased by 166.3% yoy to Rs932 crore while the segmental profit improved more than four fold to Rs187.2 crore. The profit before interest and tax (PBIT) margin for the segment jumped up to 20.1% yoy from 13.2% in Q1FY2008, as import parity pricing for phosphate fertilisers resulted in higher realisations.
- Chemicals: The revenues from the chemical segment increased by 62.5% yoy to Rs1,271.0 crore, the segmental profits improved by 54.4% yoy to Rs213.9 crore, while the PBIT margin declined from 17.7% to 16.8%. The growth in the chemical segment is attributed to GCIP acquisition.
- Improved prices of phosphoric acid combined with better availability of rock phosphate and sulphur considerably improved the performance of Indo Maroc Phosphore S.A. (IMACID) while sharp increase in energy costs continued to hurt the profitability of Brunner Mond (BMGL) in Europe.
- De-bottlenecking of the urea capacity to expand its Babrala capacity to 1.3 million metric tonne per annum (mmtpa) is progressing well and the same would be operational by October 2008. The company’s new business initiatives like Fresh Produce and Biofuel are also shaping well.
- In view of the firm soda ash prices in mid term, we continue to remain positive on the stock. We have fine-tuned our earnings estimates for the company after incorporating the impact of its recently acquired company GCIP. We have revised our earnings estimates from Rs23.9 to Rs26.7 for FY2009 and from Rs32.2 to Rs35.8 for FY2010. At the current market price of Rs330, the stock is trading at 9.2x its FY2010E diluted earnings per share (EPS) and enterprise value (EV)/ earnings before interest, depreciation, tax and amortisaion (EBIDTA) of 5.5x. We maintain our Buy recommendation on the stock with price target of Rs515.
Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs545
Current market price: Rs396 Price target revised to Rs545 Result highlights - Tata Motors’ results for Q1FY2009 are below our expectations due to lower than expected margins. However, the profit after tax (PAT) of the company is higher than our estimate mainly on account of a higher other income and a lower tax outgo during the quarter.
- The net sales for the quarter grew by 14.4% to Rs6,928.4 crore on the back of a 3.9% volume growth and a 10.1% realisation growth during the quarter.
- Domestic sales of commercial vehicles (CVs) increased by 15.9% to 71,049 units while that of passenger vehicles declined marginally to 52,450 units. The export sales volume declined by 34% to 9,220 units.
- An increase in the overall expenses, such as raw material cost, employee cost and other expenses, led the operating profit margin (OPM) to decline by 130 basis points to 7.7%. Hence, the operating profit dropped by 2.9% to Rs530.5 crore in Q1FY2009.
- A higher other income and a lower tax outgo helped the adjusted PAT to grow by 59.3% to Rs412.37 crore. After accounting for a foreign exchange (forex) loss of Rs199.9 crore and a profit of Rs113.7 crore on the sale of the stake in Tata Auto Components, the reported net profit declined by 30.1% to Rs326.2 crore.
- Tata Motors has not reported the consolidated results for Q1FY2009 since the financial statements of Jaguar and Land Rover (JLR) are under compilation and have not been finalised yet. However the performance of the subsidiaries was also affected by the rising commodity prices and interest rates during the quarter.
- Our outlook on the CV industry remains cautious considering the lower availability of finance, the rising interest rates and the slowdown in the economy.
- In view of the pressure on the company’s profit margin, we downgrade our consolidated estimate for FY2009 by 7.3% to Rs54.6 and that for FY2010 by 12% to Rs60.8. At the current levels, the stock trades at 6.5x its FY2010E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.1x. We maintain our Hold recommendation on the stock with a revised price target of Rs545.
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs737 Scaling global presence Result highlights - Auction tea price jumped by 46.7% from Rs59.4 per kg in March 2008 to Rs87.2 per kg in June 2008 on account of a demand-supply mismatch in the domestic tea market. This rise in the auction tea price impacted the margins of Tata Tea in Q1FY2009. The company implemented a price hike of Rs2-8 per kg across its branded tea portfolio to combat the input cost pressure. We believe on account of continuous increase in the auction tea prices, the company would have to undertake further price hikes to minimise the pressure on its margins going forward.
- The non-alcoholic offerings by the company, such as green tea, herbal tea and fruit tea, are gaining momentum in international markets, while black tea is growing moderately in the key markets. Tetley Canada's Earl Grey Green Tea and Mango Passionfruit Açai Green Tea are getting good response in the North American markets. This has helped Tata Tea to achieve a leadership position in the Canadian market with a market share of 41% in volume terms in FY2008.
- To expand its green tea portfolio and to focus on expanding into new geographies, the company is eyeing Chinese and Russian markets. Towards this end Tata Tea has set up a (70:30) joint venture with Zhejiang Tea of China.
- The huge pile of cash (Rs1,320 crore) would help the company to focus on its newer initiatives and achieve inorganic growth. At the current market price of Rs737, the stock trades at 12.0x FY2009 and 10.0x FY2010 earnings estimates. We maintain our Buy recommendation on the stock with price target of Rs970.
Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs260
Current market price: Rs185 Strong operating performance Result highlights - Torrent Pharmaceuticals (Torrent) has reported a revenue growth of 16.8% to Rs390.6 crore for Q1FY2009. The revenues are above our estimate.
- The company’s branded formulation business in India remained sluggish during the quarter, growing by only 0.8% (vis-Ã -vis a 12.3% growth in the market), mainly due to the higher than expected attrition of the sales force during Q2FY2008. The domestic business is expected to get back on track from H2FY2009 onwards. Hence we have lowered our growth assumptions for this business in FY2009 from 12% earlier to 8%.
- The business of Heumann Pharma GmbH & Co Generika KG, Germany (Heumann; acquired in July 2005) also continued to bleed with the sales declining by 12% year on year (yoy) due to the pricing pressures and the market-led restructuring of operations. However, with the shift of manufacturing and the rationalisation of the field force, the profitability of the business improved during the quarter. We expect a 5% decline in the revenues during FY2009 and flat revenues in FY2010 for the Heumann business.
- On the other hand, the contract manufacturing business performed well, growing by 24.3% during the quarter to Rs37.3 crore, on the back of expanded capacities. We expect the contract manufacturing business to grow by 10% in FY2009 and by 7% in FY2010. Also, the international business (excluding Heumann) grew by 80.3% to Rs125.7 crore, driven by a robust sales growth in Brazil, Europe and Russia. We expect the growth momentum in the various export markets to sustain.
- Torrent commenced its US business during the quarter, recording a modest Rs3 crore in revenues from one product. With a pipeline of 13 abbreviated new drug application (ANDA) filings, Torrent expects another four approvals to come through in H2FY2009. We expect Torrent to record $5 million in sales from the US generic business in FY2009 and $10 million in FY2010.
- Torrent’s operating profit margin (OPM) expanded by a robust 310 basis points to 17.4% during the quarter, causing the operating profit to grow by 52.8% to Rs68.0 crore. We expect further margin improvement in the coming quarters on the back of improved profitability of Heumann and other export businesses. We have modeled a margin expansion of 200 basis points over FY2008-10 to 17% in FY2010.
- The robust operating performance caused Torrent’s profit after tax (PAT) to grow by 84.1% to Rs49.3 crore. The net profit reported by the company is above our estimate. The earnings for the quarter stood at Rs5.8 per share.
- We have revised our FY2009 estimates for Torrent to reflect the lower revenue base of FY2008, the lower growth in the domestic formulation business, the higher growth on the export front and the higher than expected margin expansion. We are revising our FY2009 revenue estimate downwards by 9.4% to Rs1,550.9 crore and the profit estimate upwards by 5.6% to Rs166.3 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 12.0% in FY2010 to Rs1,737.2 crore. The profits are expected to grow by 11.5% to Rs185.4 crore, resulting in earnings of Rs21.9 per share in FY2010.
- At the current market price of Rs185, Torrent is discounting its FY2009E earnings by 9.4x and FY2009E earnings by 8.5x. We maintain our Buy recommendation on the stock with a price target of Rs260.
Unity Infraprojects
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs871
Current market price: Rs463 Annual report review Key points - On a standalone basis, Unity Infraprojects (Unity) reported a strong financial performance in FY2008. The company’s top line and bottom line grew by 56.5% and 41.7% respectively in FY2008. The lower growth in the bottom line was due to a decline in the operating profit margin (OPM).
- The company’s order book grew by 20.7% year on year (yoy) to Rs2,410.5 crore. At the end of Q1FY2009, the order book has further increased to over Rs3,000 crore. On the back of this strong order book, we expect the company’s top line and bottom line to grow at a compounded annual growth rate (CAGR) of 29.3% and 26.5% respectively during the period FY2008-2010.
- Unity’s working capital requirement increased significantly on account of increase in loans and advances. The increase in loans and advances was due to rise in the advances to contractors and suppliers. Furthermore, the company loaned Rs100 crore to its subsidiaries.
- The company’s debt to equity ratio remained comfortable at 0.8 in FY2008 inspite of the long-term debt of Rs189.2 crore raised by the company to fund its working capital requirement and capital expenditure (capex). Moving ahead, we believe the company can fund its working capital requirement from its internal accruals and cash balance.
- Unity’s return on capital employed (RoCE) declined to 21.7% in FY2008 from 26.3% in FY2007 on account of a decline in earnings before interest and tax (EBIT) margin and an increase in the working capital requirement.
- To factor in the higher interest cost due to increased debt, higher capex leading to higher depreciation and decline in the margins, we have revised our FY2009 earnings estimate down by 2.3% and FY2010 earnings estimate by 0.2%.
- At the current market price, the stock is trading at 8.4x FY2009 earnings estimate and 6.5x FY2010 earnings estimate. We continue to value the stock with sum-of-the-parts (S-O-T-P) methodology and maintain our Buy recommendation with price target of Rs871.
Wipro
Cluster: Apple Green
Recommendation: Hold
Price target: Rs463
Current market price: Rs418 Price target revised to Rs463 Key takeaways from annual report - Wipro’s hedge position had increased significantly at the end of FY2008. In Q1FY2009, the rupee depreciated by approximately 7%. This led to unrecognised foreign exchange (forex) losses of Rs900 crore on the balance sheet under the head “Other comprehensive income”. The hedging policy of the company could drag the company’s profitability significantly in the coming years if the rupee stabilises at the current level.
- Wipro had continued its acquisition spree in FY2008. The company had acquired Unza Holdings (Unza) and Infocrossing, Inc (Infocrossing) for USD246 million and USD436 million respectively during the fiscal. These acquisitions had contributed 5% to the top line and 2.2% to the bottom line in FY2008 (under the Indian GAAP).
- In terms of working capital requirement, Wipro’s days sales outstanding (DSO) and inventory days had increased on account of the acquisitions and the higher lead time for the procurement of raw materials in Wipro Infrastructure Engineering.
- The long-term debt of the company had also increased from Rs53.6 crore in FY2007 to Rs1,452.2 crore in FY2008 on account of the external commercial borrowings (ECBs) made to fund the acquisitions.
- Wipro’s return on capital employed (RoCE) had declined to 16.1% in FY2008 from 22.5% in FY2007. The decline could be attributed to the recent acquisitions. Infocrossing was negative at the operating level at the time of the acquisition. Going forward, the management has indicated that Infocrossing’s margins are expected to improve significantly.
- In terms of the performance of the various business segments, the company has reported a healthy growth in the top line across segments. However, the margin decreased in all the segments. The company has changed the format of reporting the results of its segments. We have discussed the Q1FY2009 performance of the segments later in this report.
- We have revised our exchange rate assumption to Rs42 and Rs41 for FY2009 and FY2008 respectively. However, we continue to be worried about the company’s hedging position. We have factored in a forex loss of Rs300 crore each for FY2009 and FY2010. Consequently, we have revised our earnings estimate downward by 2.4% for FY2009 and by 0.5% for FY2010. We had also seen a significant decline in the RoCE and return on net worth (RoNW) of the company during FY2008. Hence, we believe Wipro should trade at a 20% discount to Infosys Technologies. We maintain our Hold recommendation on the stock with a revised price target of Rs463.
Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs318
Current market price: Rs200 Price target revised to Rs318 Result highlights - Wockhardt’s Q2CY2008 and H1CY2008 performance has been robust on the core business front—its revenues grew by 48.3% to Rs935.0 crore in Q2CY2008 and by 49.2% in H1CY2008. The Q2CY2008 growth was driven by a 13.8% increase in the domestic business and a 64.8% jump in the exports.
- Wockhardt’s operating profit margin (OPM) expanded by 60 basis points to 24.7% in Q2CY2008, which is in line with our estimate. As a result, the operating profit grew by 51.6% to Rs230.8 crore during the quarter. The margin performance is encouraging in light of the acquisition of the low-margin businesses and is clearly indicative of Wockhardt’s ability to increase the profitability of the acquired companies.
- Despite a strong top line growth and a robust operating performance, Wockhardt’s net profit grew by a mere 3.8% to Rs106.3 crore, largely due to a nine-fold jump in the interest cost. The interest cost was higher due to an increase in the debt level to fund acquisitions as well as due to a Rs44.7-crore foreign exchange (forex) loss on account of the translation of the $108.5 million worth foreign currency convertible bonds (FCCBs).
- Though Wockhardt’s inorganic growth strategy has paid off in terms of a strong operational performance, it has exposed the company to various financial challenges. Saddled with a substantially higher debt level (~$730 million, including the unconverted FCCBs), Wockhardt’s interest burden increased almost six fold in H1CY2008. Further, the higher debt levels have strained Wockhardt’s balance sheet, raising its gearing ratio from 1.1x in CY2005 to over 2.3x currently, thereby making further fund raising tough for the company.
- Wockhardt had issued $108.5 million worth of FCCBs in 2004, which are due for redemption in 2009. The conversion price of these bonds is at Rs486 per share, which is more than double the current market price. Hence, the risk of non-conversion of these FCCBs remains high. If the FCCBs fail to get converted, the company would have to redeem the outstanding bonds at a premium of 30% or at a total cost of $32 million, which it has not provided for in the past. The provision of $32 million in the CY2009 Profit & Loss account could potentially wipe out ~30% of Wockhardt’s CY2009 profits.
- In the wake of the depreciation in the Indian Rupee against all the other major currencies, we have revised our exchange rate assumptions for Wockhardt. This has led to an upward revision of our revenue estimates for Wockhardt. We have upgraded our revenue estimate for CY2008 by 1.6% to Rs3,516.7 crore and that for CY2009 by 1.2% to Rs3,924.1 crore. On the other hand, to factor in the higher than expected interest burden and the forex translation losses on the outstanding foreign currency liabilities, we are revising our profit estimates for Wockhardt. We are downgrading our CY2008 pre-exceptional profit estimate by 12.9% to Rs347.0 crore and our CY2009 profit estimate by 10.2% to Rs453.3 crore.
- Further, we have calculated our earnings per share on Wockhardt’s existing equity capital, not taking into account the potential dilution due to the FCCB conversion, as we do not believe that the FCCBs are likely to get converted on or before the conversion date. Hence, our revised earnings estimate for the company stands at Rs31.7 per share for CY2008 and at Rs41.4 per share for CY2009.
- Though we are confident about the core operational performance of the company in the future, the various financial challenges of high interest costs, high gearing ratio and the risk of non-conversion of the outstanding FCCBs along with the loss of investor confidence cause us to de-rate the stock. Consequently, we have lowered our price/earnings (P/E) multiple target from 12x earlier to 8x, thereby arriving at a fair value of Rs331 based on 8x CY2009E earnings of Rs41.4 per share. Further, even though we have not provided for the FCCB premium of $32 million, or Rs13 per share, in the company’s accounts, we prefer to conservatively deduct the same from the fair value of Rs331, thereby arriving at a price target of Rs318 per share.
- At the current market price of Rs200, the stock is available at attractive valuations of 6.3x its CY2008E earnings and at 4.8x its CY2009E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs318.
WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs86
Current market price: Rs49 Price target revised to Rs86 Result highlights - WS Industries’ (WSI) Q1FY2009 results were in line with our estimates on the revenue front, though the profit was lower than our estimates.
- The net revenues of the company grew by 8.9% year on year (yoy) to Rs51.9 crore as against our estimate of Rs52.4 crore.
- The operating profit of the company declined by 17.1% to Rs5.9 crore implying an operating profit margin (OPM) of 11.4%. The OPM contracted by 355 basis points on the back of the increase in commodity prices, mainly metals and crude oil.
- The other income doubled to Rs0.4 crore. The interest cost was up by 11% to Rs1.9 crore while the depreciation charge rose by 8.1% to Rs1 crore.
- The tax rate came in at 35.5%, sharply higher than 12.2% in the corresponding quarter of the last year. The tax was higher than estimated mainly due to higher deferred tax. Consequently the net profit of the company declined by 50.4% to Rs2 crore.
- The current order book of the company at the end of Q1FY2009 stood at Rs180 crore, at the same level it was at the end of Q4FY2008. The company also has order of Rs40 crore for its projects division.
- The expansion on upcoming capacity of the company in the Andhra Pradesh special economic zone (SEZ) is running on schedule and expected to come on stream by mid FY2009. In our view this capacity would be the growth driver for the company going forward.
- We have revised our FY2009E and FY2010E earnings per share (EPS) by 5.5% and 2.4% to Rs7.1 and Rs9.7 per share respectively. The change in the earnings is mainly to factor in the lower margin due to high power & fuel cost and higher cost of raw materials.
- We continue to value WSI on the sum-of-the-parts (SOTP) methodology, valuing its core business at Rs58.5 per share and the real estate subsidiary at Rs27.9 per share. Hence we arrive at a fair value to Rs86 for the stock. At the current market price the stock trades at 6.9x and 5x our fully diluted earnings per share (FDEPS) estimates for FY2009 and FY2010 respectively.
SHAREKHAN SPECIAL Monthly economy review The BSE Bankex has outperformed the BSE Sensitive Index (Sensex) by a wide margin since the recovery of the broader market after touching a low of 12,576 on July 16, 2008. For the period July 1–August 19, the BSE Bankex has appreciated by 22.3% compared with a 12.2% increase in the Sensex. The recovery in the banking stocks has primarily been driven by the widespread expectations of reforms in the banking sector as well as the easing of the inflationary pressures (global commodity prices have declined in the past few weeks). However, against the backdrop of tight liquidity conditions, moderating credit growth and a likely strain on the quality of banking assets, the fundamental outlook for the banking sector remains bleak over next few quarters. Hence, the upside to banking stocks may be largely capped in the short term. However, from the perspective of a medium to longer term, the banking stocks look attractive at the current valuations.
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 Fertiliser Subsidy dues to be paid in cash - The government has announced that it will make cash payments to fertiliser companies as settlement against the fertiliser subsidies due to them for FY2009. The highlights of the plan are:
- The government will immediately pay to the fertiliser companies a sum of Rs22,000 crore to be funded by loans to be raised from State Bank of India (SBI) and the other public sector banks (PSBs);
- The interest on the loans would be borne by the government;
- The government will release additional Rs31,000 crore (actual budgetary allocation) within the next three months for the same purpose, the details about this payment have not been disclosed;
- Collectively, this would result in a cash outflow of Rs53,000 crore from the government’s coffers in the next three months.
- As a result of the rising demand for urea and complex fertilisers, and the spiralling prices of imported urea the total fertiliser subsidy bill is estimated to have reached a whopping Rs119,000 crore in FY2009. This implies an additional subsidy burden of Rs84,000 crore on the fiscal deficit.
- The government has not disclosed the payment mode (ie cash/bond) for the amount in excess of Rs22,000 crore that is to be paid in cash now.
- The decision to pay subsidy dues in cash (instead of bonds) augurs well for the cash-strapped fertiliser companies, as it would help them to meet their working capital requirements and reduce their capital costs.
- We believe the decision to pay subsidy dues in cash is aimed at avoiding a shortage of urea by increasing the domestic production. Higher production of urea would help reduce the import of urea and the other complex fertilisers, thereby resulting in a lower fertiliser subsidy bill. Most of the fertiliser companies stand to benefit from this move. However, the payment method for the remaining subsidy portion would remain a key monitorable in the days to come. Tata Chemicals remains our top pick among the fertiliser companies.
Insurance FDI hike on cards
The hike in the FDI limit augurs well for all industry players—both domestic and foreign. As for the domestic players, it will open up a new avenue for capital raising for funding further business growth. Traditionally, the life insurance business is highly capital intensive by nature. Meanwhile, the foreign players will get a chance to increase their stake and participation in the high-growth insurance market, which they have always desired.
VIEWPOINT Apar Industries Beneficiary of power T&D spends
Apar Industries is a leading manufacturer of power conductors and transformer oils in India with a strong global footprint. The company has sold its non-core polymer business and has diversified into cables business by acquiring Uniflex Cables. Cipla Richly valued
The guidance provided by the management indicates that there would be a slowdown in the growth in the coming quarters, after reporting a strong performance in Q1FY2009. This would be primarily due to the waning off of the Alendronate exclusivity revenues from Q2FY2009 onwards (which had boosted the Q1FY2009 performance). Further, a lack of visibility of further exclusivity opportunities, a high export base upon which achieving a high growth would be a sizeable challenge indicates that the growth momentum in the coming quarters is likely to slow down. On the brighter side, the CFC-inhaler opportunity for Cipla is huge and a scale-up of volumes in this segment could lead to a significant ramp-up in revenues and profits. However, the revenues from this segment would be realised only after a few years, once all the requisite approvals for the various markets come through.
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