BSEIndia: All Stock Market News: [sharetrading] Investor's Eye [1 Attachment]

Wednesday, March 03, 2010

[sharetrading] Investor's Eye [1 Attachment]

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Investor's Eye: Update - Esab India (Price target revised to Rs672); Cement (Price hike higher than cost inflation)

Investor's Eye
[March 03, 2010]

Sharekhan
www.sharekhan.com

Summary of Contents

STOCK UPDATE

Esab India
Cluster: Vulture?s Pick
Recommendation: Buy
Price target: Rs672
Current market price: Rs588

Price target revised to Rs672

Results highlights

For Q4CY2009 Esab India has posted a net profit of Rs14.7 crore (up 59.5% year on year [yoy]) as against our estimate of Rs11.4 crore. The performance was achieved mainly on the back of higher than estimated revenues and margin during the quarter.
The company?s net sales improved by 15.1% to Rs105.7 crore. Both the divisions, consumables and equipment, performed well during the quarter. The sales from the equipment division increased by 17.9% whereas the sales from the consumables division grew by 13.9% yoy.
The operating profit margin (OPM) expanded by 652 basis points to 22.3% mainly due to a decline in the raw material cost as a percentage of sales to 67.8% from 74.8% in the a year-ago quarter. Further, the reduction in the employee cost by 33.1% to Rs6.3 crore also supported the margin expansion. However, the other expenditure increased sharply by 29.1% yoy to Rs12.9 crore.
On a segmental basis the profit before interest and tax (PBIT) margin of the consumables division improved by 568 basis points yoy to 22.7%. The equipment division?s PBIT margin expanded by 766 basis points to 21.1%.
The interest cost declined by 16.7% yoy whereas the depreciation charge rose by 26.4% to Rs2.2 crore. Due to a healthy growth in the top line coupled with the margin expansion the net profit of the company increased by 59.5% yoy to Rs14.7 crore. For CY2009 the company has registered a bottom line growth of 8.2% to Rs66.2 crore.
In line with the company?s performance for CY2009 we are revising our earnings estimate for CY2010 upwards to Rs50 per share. In this note we are also introducing our earnings estimate for CY2011 at Rs56.
The demand for Esab India?s products depends on the infrastructure activity in the country. We expect the business environment to improve considerably in line with the strong focus of the government on infrastructure development in the country. We believe Esab India is the leader in the industry and has the capability to deliver the best products in the industry. Furthermore, its international parentage provides the company a significant technological edge in the market and we feel Esab India will be able to post a 14% compounded annual growth rate (CAGR) in its profit over CY2009-11.
In view of the company?s strong balance sheet, high return on equity (RoE) and high dividend yield, we maintain our Buy recommendation on its stock with a revised price target of Rs672 (valued at 12x CY2011 earnings). At the current market price the stock trades at a price/earnings (PE) of 11.7x and 10.5x discounting its CY2010 and CY2011 earnings estimates respectively.

SECTOR UPDATE

Cement

Price hike higher than cost inflation

In the Union Budget 2010-11 there were a couple of announcements that have increased the input cost for the domestic cement industry. The key changes are as follows: (a) excise duty increased from 8% to 10% for packaged cement having a maximum retail price above Rs190 per bag and excise duty per tonne of clinker increased from Rs300 to Rs375; (b) cess of Rs50 per tonne imposed on domestic as well as imported coal; (c) diesel price increased by Rs2.55 per liter; and (d) exemption on the service tax on rail freight withdrawn.

In response to these announcements that increased the overall cost of cement makers and pressurised their margins, the cement players have increased the price of cement in most regions by Rs10 per bag with effect from March 1, 2010.

The cement prices have increased by Rs10 per bag as against the average increase of Rs7.6 in the cost of per bag. This has benefited the domestic cement companies by Rs2.4 per bag. The fact that the increase in the price is higher than even the cost effect (Rs7.6) points to the strength in the industry due the strong volume offtake.

The top four domestic cement players (ACC, Ambuja Cement, Grasim Industries and UltraTech Cement) have posted a mixed performance for February 2010. The cumulative volume growth of these four leading domestic cement players for the month came in at 4.3% yoy to 6.6 million metric tonne (MMT).