| Summary of Contents | STOCK IDEA JB Chemicals & Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs138
Current market price: Rs99
Steady growth, attractive valuations
Key points -
Steady growth in core business: JB Chemicals & Pharmaceuticals Ltd (JBCPL), a well-known name in the formulation and OTC markets of India, is set to show a steady growth in its domestic and international businesses on the back a deeper penetration of the existing markets (prescription sales in India and aggressive sales promotion in Russia/CIS), entry into newer markets (emerging countries like South Africa, Venezuela, Romania, Australia) and launch of new products. Consequently, we expect its core business to grow at a compounded annual growth rate (CAGR) of 14.5% over FY2010-12, driven by a CAGR of 17.5% in its domestic formulation business and a 12.8% CAGR in its international operations. -
CRAMS?untapped opportunity: The company is actively pursuing opportunities in the contract research and manufacturing services (CRAMS) segment as all of its manufacturing facilities are approved by the authorities of leading regulated markets, eg USFDA, UK MHRA and TGA (Australia). However, it would take three to four years before the CRAMS business begins to make any significant contribution to its overall revenues. -
Strong free cash flow and de-leveraged balance sheet: Given the strong free cash flow of close to Rs100 crore annually, a low debt-equity ratio of 0.2x and a limited capital expenditure (capex), the company is well placed to pursue inorganic opportunities. Though the receivable days in its Russian operations seem to be relatively higher (about 160 days), the company is quite confident about the quality of the receivables and we do not expect any significant negative surprise in terms of write-offs. -
Earnings growth at CAGR of 13.5%: After a tepid performance over FY2007-09, FY2010 set a base for a turn-around in its business. We expect JBCPL's net sales to rise at a 15.8% CAGR driven by a 14.5% CAGR in the core business and the incremental opportunities in the CRAMS space. A robust growth in the top line would lead to a 13.5% CAGR in the consolidated profit. -
Discounted valuations, Buy: Considering the double-digit growth in its revenues and the earnings from its core business, its strong free cash flows and healthy return ratios (18-20%), the company is trading at an attractive valuation of 6x FY2012 earnings (which is at a 20-25% discount to both the comparable companies? valuations and its long-term mean valuation of 8.5x one-year forward earnings). We initiate coverage on the stock with a ''Buy'' recommendation and price target of Rs138 (8.5x FY2012 earnings).
STOCK UPDATE Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,527
Current market price: Rs2,490
Q1FY2011 results: First-cut analysis
Result highlights -
Bajaj Auto Ltd (BAL)?s Q1FY2011 results were in line with our expectations. -
In the quarter, the total operating income of the company grew by 66.4% year on year (yoy) to Rs3,890.1 crore (against our expectation of Rs3,920.9 crore). The growth was driven by a strong 69.5% surge in the volumes. -
The operating profit margin (OPM) expanded by 50 basis points yoy to 20% during the quarter. The higher scale of operations coupled with a strict control in the employee cost and the other expenses offset the 500-basis-point increase in the raw material cost as a percentage of the total income. Consequently, the operating profit grew by a hefty 70.6% yoy to Rs776.9 crore (against our expectation of Rs815.5 crore). -
The strong performance at the operating level coupled with a higher other income led the adjusted net profit to grow by 85.9% yoy to Rs590.2 crore (in line with our expectation of Rs582.9 crore). -
The company has also announced a bonus issue in the ratio 1:1. -
At the current market price of Rs2,490, the stock is trading at 15.6x its FY2011E and 13.8x its FY2012E earnings per share (EPS) of Rs159.8 and Rs180.5 respectively. We maintain our Buy recommendation on the stock and shall come out with a detailed note on the company after a conference call with its management. ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs303
Current market price: Rs298
Q1FY2011 results: First-cut analysis
Result highlights -
ITC?s Q1FY2011 results are in line with our expectation. The company?s net sales grew by 17.3% year on year (yoy) to Rs4,847.3crore, which was in line with our expectation of Rs4,804.7 crore for the quarter. With the operating profit margin (OPM) remaining almost flat, the bottom line grew by 21.8% yoy to Rs1,070.3 crore (which was in line with our expectation of Rs1,050.0 crore for the quarter) on the back of a strong top line growth. -
The cigarette business? gross sales grew by 12.2% yoy to Rs4,669.7 crore, entirely on account of the price increases effected during the quarter (to combat the steep increase in the excise duty) as the sales volumes remained subdued after the steep pricing changes. The cigarette business? profit before interest and tax (PBIT) margin stood flat at 27.9% in Q1FY2011. -
It was yet another quarter of extraordinary performance by the non-cigarette fast moving consumer goods (FMCG) business with the business? revenues growing by 32.4% yoy, ahead of our expectation of a 23% y-o-y increase for the quarter. The PBIT losses of the non-cigarette FMCG business increased to Rs89.3 crore in Q1FY2011 from Rs78.7 crore in Q4FY2010. This, we believe, was mainly on account of higher advertisements towards the existing product portfolio and the launch of new products (skin care) in the personal care segment during the quarter. -
The hotel business? sales grew by 21.2% yoy to Rs225.1 crore, which was in line with our expectation of Rs233.0 crore. The growth is attributable to an improved business environment (with the occupancy levels in the key cities coming back on track) and the commencement of the Bangalore property. However, the PBIT margin of the business disappointed as it stood flat at 17.1% during the quarter. -
The agri-business continued its strong performance and registered a revenue growth of 43.5% yoy during the quarter. Also, the PBIT margin of this business improved on a sequential basis to 9.1% in Q1FY2011 from 5.9% in Q4FY2010. -
The paperboard, paper and packaging business delivered an improved performance with a revenue growth of 13.5% yoy as compared to that of 11.9% yoy in Q4FY2010. However, the highlight of the performance was the 524-basis-point y-o-y improvement in the PBIT margin, which, we believe, was on account of an improved revenue mix. -
We shall release a detailed note after interacting with the management of the company. At the current market price the stock trades at 23.6x its FY2011E earnings per share (EPS) of Rs12.6 and 20.6x its FY2012E EPS of Rs14.5. We maintain our Buy recommendation on the stock. Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,224
Current market price: Rs1,056
Q1FY2011 results: First-cut analysis
Result highlights -
Punjab National Bank (PNB)?s Q1FY2011 net profit grew by a strong 28.4% year on year (yoy) to Rs1,068.3 crore. The bottom line is in line with our estimate of Rs1,080 crore. -
The net interest income (NII) came in at Rs2,618.6 crore, up by 40.6% yoy and 4.8% quarter on quarter (qoq); the NII grew mainly on account of a healthy 24.6% year-on-year (y-o-y) growth in the advances. The reported net interest margin (NIM) contracted by 5 basis points sequentially to 3.94% as the cost of funds increased sequentially. -
The non-interest income declined by 10.2% yoy to Rs871.5 crore from Rs970.2 crore in the year-ago quarter, driven by weak treasury gains. -
The operating expenses grew by 10.2% yoy and by a steep 26.5% qoq to Rs1,391.9 crore. The sequential growth was steep primarily due to a 52.4% y-o-y increase in the staff expenses. The other operating expenses were down 11.2% yoy. As a result, the cost-to-income ratio expanded to 40% from about 33% in the previous quarter. -
The total provisions for the quarter jumped by 77% yoy to Rs534.1 crore, which suppressed the bottom line growth to an extent. -
The business growth was healthy as the business grew by 20% yoy. The advances continued to grow at a healthy pace?in this quarter the advances recorded a 24.6% y-o-y growth to Rs196,870 crore. The deposit growth was relatively lower at 16.6% yoy to Rs255,335 crore, leading to 225-basis-point sequential improvement in the credit-deposit ratio. -
The gross non-performing assets (GNPAs) on an absolute basis increased by 12.4% qoq to Rs3,613.8 crore and stood at 1.82% on a relative basis compared to 1.71% in the previous quarter. However, the net non-performing assets (NNPAs) increased significantly (up 30.7% qoq) despite a higher provisioning during the quarter. -
The capital adequacy ratio (as per Basel II norms) as at the end of Q1FY2011 stood at 13.77%, with the tier-I capital at 8.77%. -
At the current market price of Rs1,056, the stock trades at 6.2x FY2012E earnings per share and 1.4x FY2012E book value per share. We maintain our Buy recommendation on the stock and would return with a detailed analysis of the bank?s Q1FY2011 performance shortly. IDBI Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs169
Current market price: Rs122
Q1FY2011 results: First-cut analysis
Result highlights -
IDBI Bank has reported a strong set of numbers for Q1FY2010. The bottom line grew by a strong 46% year on year (yoy), driven by a robust growth in the net interest income (NII) and a healthy core fee income. The outperformance at the bottom line level can be traced to a lower than expected operating expenses in the quarter. -
The reported NII came in at Rs851.2 crore, a 169% increase over that of the corresponding quarter of the last year. The healthy NII growth primarily stemmed from a strong 38% year-on-year (y-o-y) growth in advances and a 7-basis-point sequential expansion in the reported net interest margin (NIM). -
The non-interest income dipped by 38.3% yoy to Rs466.2 crore driven by a significantly lower treasury gains during the quarter (Rs10 crore vs Rs465 crore a year ago). Importantly, the core fee income growth was impressive at 53% yoy. -
The operating expenses growth remained high at 54% yoy led by a 96% y-o-y increase in staff expenses as the bank continued with its aggressive hiring. On sequential basis, however, the operating expenses were down by 20.7%. Further, it was also lower than our projection. -
The provisions for the quarter dipped by 10.4% yoy to Rs501.8 crore, which in turn, supported the bottom line growth. A major part of the provisions was due to a rise in the non-performing assets (NPAs), whereas provisions on investment and standard assets were also higher. The provision coverage ratio for the quarter stood at 39.2% (vs 34% in Q4FY2010), however including technical write-offs the same came in at 73.6%. -
The asset quality deteriorated sequentially, as the gross non-performing asset (GNPA) increased by 24% quarter on quarter (qoq) to Rs2,640.2 crore. In relative terms too, the GNPA (%GNPA) as well as the net non-performing assets (%NNPA) increased sequentially by ~40 basis points and 17 basis points respectively. The surge in NPAs was due to two large restructured accounts slipping into the NPA category. Total slippages from restructured accounts during the quarter amounted to ~Rs280 crore. -
The bank restructured assets to the tune of around Rs65 crore during the quarter, taking the total restructured assets outstanding to ~Rs9,365 crore, about 4.8% of the total advances outstanding. Of these a total of ~Rs460 crore have slipped into the NPA category. -
The business growth of the bank in the quarter remained strong at 37% yoy, led by a 36% and a 38% y-o-y growth in the deposits and advances respectively. The current account and savings account (CASA) ratio deteriorated by 160 basis points sequentially. However the CASA ratio calculated on daily average balance basis witnessed some improvement sequentially. -
The capital adequacy ratio (CAR) of the bank as on June 30, 2010 stood at 11.86% with tier I CAR at 6.69%. While the CAR is marginally below the regulator?s comfort level of 12%, it would be restored to ~13% after the capital infusion to the tune of Rs3,119 crore by the government (likely next month). -
At the current market price of Rs122, the stock trades at 5.9x its FY2012E earnings per share and 0.8x its FY2012E book value. We maintain our Buy recommendation on the stock and will follow up with a detail analysis shortly. Mahindra Lifespace Developers
Cluster: Vulture?s Pick
Recommendation: Hold
Price target: Rs506
Current market price: Rs498
Q1 results below expectation
Result highlights -
Q1FY2011 results below expectation: In Q1FY2011 Mahindra Lifespace Developers (MLD) reported a stand-alone net profit of Rs14.5 crore (up 39% year on year [yoy]), which is below our expectation. The revenues grew by 43.7% to Rs67.9 crore. The lower than expected revenue growth was mainly on account of lower revenue recognition during the quarter compared to our estimate. On a sequential basis, the revenue dropped by 32.7%. The operating profit margin (OPM) improved to 23.9% from 22% in the year-ago quarter on the back of lower general and administrative costs. -
Rs92 crore of pre-sales during the quarter: The pre-sales during the quarter stood at Rs92 crore as compared to Rs21 crore in Q1FY2010 and Rs200 crore in Q4FY2010. In this quarter the pre-sales were lower sequentially due to the absence of new launches. However, the company aims to launch four to five projects in H2FY2011 and this provides visibility to its revenues. -
Addition of new projects: It has signed a memorandum of understanding (MoU) for acquiring 23 acres (1.8 million square feet [mn sq ft]) of land in Pune. It has also signed a development agreement for the joint development of 10 acres (1mn sq ft) in Hyderabad. This would further add to the land bank. We have not factored these into our projections as we await more clarity on these fronts. -
Addition of clients in MWC Chennai: MLD?s integrated townships, Mahindra World City (MWC) Chennai and MWC Jaipur, have been making a slow progress. The company has added four new customers at MWC Chennai. Two more customers have commenced their operations over there, taking the number of operational clients to 34 out of the total 50. At MWC Jaipur, EXL commenced operations at the IT/ITES SEZ during the quarter. -
Maintain Hold: We maintain our net asset value (NAV) for MLD at Rs506 per share despite the lower than expected results of the company as the recently launched projects of the company would start contributing to its revenues from the following quarters. At the current market price, the stock is trading at 0.98x its NAV and 2x FY2011 stand-alone price/book value (P/BV). Bajaj Finserv
Cluster: Apple Green
Recommendation: Buy
Price target: Rs581
Current market price: Rs433
Upgraded to Buy
Result highlights -
Bajaj Finserv has reported a strong set of numbers in Q1FY2011 with the quarterly consolidated net profit up at Rs66.1 crore vis-a-vis a net profit of Rs41.9 crore in Q1FY2010. The strong quarterly performance was driven primarily by robust show by the life insurance and auto finance business with their profit after tax (PAT) up by 1.5x and 2.1x on a year-on-year (y-o-y) basis respectively. -
The consolidated income from operations was up by 17% year on year (yoy) at Rs124.1 crore in the quarter. -
The operating profit was up by a strong 38% yoy to Rs101.9 crore on account of stringent cost-control measures and shift in focus towards high-yielding business segments. -
Life insurance: The gross written premium for the company?s life insurance business dropped by 8% yoy in Q1FY2011, partly on account of changes in regulatory norms by the Insurance Regulatory and Development Authority (IRDA) and partly due to some policyholders surrendering their policies on expiry of the mandatory three year lock-in period. The drop in the quarterly gross written premium along with a steep decline in the investment income led the total revenue of the life insurance business drop by 59% yoy in the quarter. In spite of a significant reduction in the revenue, the PAT expanded by a robust 1.5x to Rs169 crore (against Rs68 crore in Q1FY2010) as the company continued its focus of growth with profit. -
General insurance: The gross written premium for the general insurance business improved by 13% yoy to Rs718 crore, leading to a 5% y-o-y increase in revenue and a 15% y-o-y rise in profit to Rs29 crore. -
Bajaj Auto Finance Ltd: Bajaj Auto Finance Ltd (BAFL), the automobile and consumer financing arm of the group, witnessed a strong quarter in terms of business growth, with deployments growing by 96% yoy to Rs2,047 crore. The total operating income was up by 56% yoy to Rs297 crore and the PAT rose a strong 2.1x yoy to Rs47 crore. The company, in the quarter, also increased its stake in BAFL to 50.4% from 44.6%, making BAFL its subsidiary. -
Bajaj FinServ has reported a strong set of numbers for Q1FY2011 predicated mainly on a sturdy show by its life insurance and auto finance businesses. In spite of a slowdown in the new business premium sales in the near term on account of recent regulatory changes, we expect the life insurance business to continue to grow its profit going ahead. -
During the quarter IRDA has clarified that the recent circular by the Reserve Bank of India (RBI) pertaining to transfer of shares by Indian residents to non residents is not applicable to the financial sector. This has placed Bajaj Finserv out of its purview. However, as the non banking finance companies (NBFCs) are mandated to take the approval of both the RBI and the IRDA while transferring shares to non residents, there is a strong possibility that the RBI could direct such companies to adhere to the discounted cash flow method while pricing the share transfer. With the ambiguity on RBI circular continuing, we continue to value Bajaj Finserv on the average of the two price targets: one that is arrived at by factoring in the potential upside from the RBI circular and that arrived at by excluding the impact of the circular on the company?s valuations. -
Additionally, as Bajaj Finserv has raised its stake in BAFL to 50.4% from 44.6% during the quarter, we have revised our price target to factor in the potential upside arising from the increased stake. With the stock price of Bajaj Finserv correcting significantly from its peak lately, we are upgrading the stock to Buy from Hold with a revised price target of Rs581. Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Under review
Current market price: Rs809
Growth driven by pick up in execution
Result highlights -
Top line up 49%: Thermax? Q1FY2011 results topped our projections on almost all the fronts due to a strong growth in the top line. The net income from operations was up by 49% year on year (yoy) to Rs778.8 crore against our expectation of Rs634.2 crore due to favourable base effect and pick-up in execution in both the energy and the environment division. The environment division continued to post an excellent performance with the sales up by 77.4% yoy. The energy division also posted a strong 44.6% y-o-y growth in revenue to Rs606.6 crore. -
OPM below expectation: The increase in raw material cost as % of sales led the operating profit margin (OPM) shrink marginally to 12.8% in the quarter from 12.2% in the same quarter of the last year. The raw material cost as % of sales was up mainly due to higher contribution from the lower margin projects and rising raw material cost. -
Net profit jumps 42.3%: Boosted by other income and almost nil interest charge, the adjusted net profit jumped by 42.3% yoy to Rs66.2 crore in quarter, which is above our projection of Rs56.8 crore. -
Order book at Rs6,984 crore: The company?s current order backlog at group level stands at Rs6,984 crore (up 104% yoy). At stand-alone level, the order book comes in at Rs6,330 crore (up 96% yoy). The energy division received orders to the tune of Rs1,437 crore and the environment division got orders worth Rs293 crore in the quarter. The company expects robust growth in order intake in the year on the back of improving industrial capital expenditure (capex) cycle and momentum in order inflow from utilities boiler segment. Thermax also expects to participate in super-critical boiler bids by the end of CY2010 after the completion of required formalities like land acquisition and equity contribution. -
Estimates revised; expect 32% CAGR in profit over the next two years: We have fine tuned our estimates to incorporate numbers from the annual report of FY2010 as well as Q1FY2011 results. We expect a rebound in the company?s profit with the stand-alone profit showing a compounded annual growth (CAGR) of 32% over FY2010-12 on the back of execution of the current order book and upcoming opportunities in power and other sectors. -
Maintain Hold: There has been a sharp run-up in Themax? stock lately and it has started enjoying valuation multiple comparable to engineering, procurement and construction (EPC) giants like Larsen & Toubro (L&T), Bharat Heavy Electricals Ltd (BHEL), mainly due to option value of its super critical boilers venture. However, we feel, there need to be more clarity on revenue booking front to value this venture appropriately. We believe the board meeting scheduled in August 2010 would impart more clarity on land acquisition and its equity contribution to the boilers venture. Hence we keep the price target under review with a Hold recommendation. At the current market price, the stock trades at 26.4x and 21.6x on FY2011 and FY2012 estimates respectively. Esab India
Cluster: Vulture's Pick
Recommendation: Book Profit
Current market price: Rs611
Book profit
Result highlights -
For Q2CY2010 Esab India has posted a net profit of Rs16.5 crore (up 1.9% year on year [yoy]), which is slightly higher than our estimate of Rs15.7 crore. The company?s net sales improved by 16.1% to Rs121.8 crore. The top line growth was driven by an impressive performance in both the business divisions, consumables and equipment. The sales from the equipment division increased by 24.3% whereas the sales from the consumable division increased by 13.1% yoy. -
On the margin front, the operating profit margin (OPM) contracted by 325 basis points yoy to 21.1% mainly due to an increase in the raw material cost as a percentage of sales to 60.1% from 57.1% in the corresponding quarter of the previous year. Further, the sharp increase of 35.8% yoy in the employee cost to Rs9.7 crore also contributed to the dent the OPM. Consequently, the operating profit increased by merely 0.8% yoy to Rs25.9 crore despite a 16.1% growth in the top line. -
On a segmental basis, the profit before interest and tax (PBIT) margin of the consumable division declined by 292 basis points yoy to 22.1% during the quarter. On the other hand, the equipment division showed a sharp contraction of 570 basis points in its PBIT margin to 16%. -
The depreciation charges rose by 37% to Rs2.5 crore. Due to the contraction in the margin and the higher depreciation charges the net profit of the company increased by 1.9% yoy to Rs16.5 crore. -
The board of directors of the company has approved the payment of royalty to the promoter group, Esab Holdings Ltd, UK, for the usage of the Esab logo on all the products sold in the market at the rate of 2% of the net sales. We believe this will directly affect the margin and result in a nearly 12% downgrade of its earnings estimate for FY2011. Though there is a lack of clarity regarding the date of the implementation of the same, we expect the stock to underperform due to the steep earnings downgrades and its demanding valuations. Taking the downgrade into account, the stock would trade at close to 14x CY2010 earnings which is not cheap given the less than 10% compounded annual growth rate in the earnings over CY2009-11. Hence we advise our investors to exit from the stock.
MUTUAL FUND: INDUSTRY UPDATE Equity funds' assets rise on gaining domestic markets The total average asset under management of equity MFs in June 2010 stood at Rs211,427 crore. After adjusting for net inflows/outflows in the month, the net rise in assets came in at 3%, as against a 4.5% rise in the Sensex.
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