| Summary of Contents | | PULSE TRACK -
GDP grows at 8.6% in Q4FY2010
STOCK UPDATE Gayatri Projects
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs549
Current market price: Rs418
Results in line with the expectation Result highlights -
Net sales up 13%: Gayatri Projects Ltd (GPL)?s stand-alone revenue for Q4FY2010 grew by 13% year on year (yoy) to Rs377 crore, which was marginally below our expectation on account of the slower execution of the irrigation projects in Andhra Pradesh. Though the situation has improved in the state with the state government releasing funds, some projects still face financial constraints and their execution is slow. It would take another six to nine months for the pace to catch up. -
Better operating margin leads to 35% growth in net profit: The net profit for Q4FY2010 grew by 35.3% yoy to Rs15 crore, mainly on account of a better than expected operating profit margin (OPM). The OPM expanded by 373 basis points on a year-on-year (y-o-y) basis to 12.8% on the back of a lower construction cost as a percentage of sales. Thus, despite a tepid sales growth, the operating profit increased by 59.6% yoy to Rs48 crore. -
Robust order book: The company?s order book stands at around Rs7,000 crore currently as against Rs5,600 crore at the end of Q3FY2010?implying a strong order intake. The present order book is 5.6x its FY2010 revenues, which provides a strong revenue visibility. The 40% of the order book relates to irrigation projects, 50% to road projects and remaining 10% to other projects. The company is also the lowest bidder in one road project worth Rs300 crore. -
Building on BOT project: The company recently won a road build-own-transfer (BOT; toll) project worth Rs2,200 crore in consortium with DLF from the Andhra Pradesh Road Development Corporation. The winning of such a large project will help the company to qualify for big-ticket projects of the National Highway Authority of India. With this newly awarded BOT project the company has total seven BOT projects out of which five are expected to start generating revenue from Q2FY2011 and Q3FY2011. The balance two BOT projects are expected to achieve financial closure in five to six months? time. -
Ropes in strategic partner for its power project: Gayatri Energy Ventures Ltd (GEVL), a wholly owned subsidiary of GPL, has brought in a strategic partner for its 1,320MW thermal power project in Andhra Pradesh by entering into a 51:49 joint venture with M/s Sembcorp Utilities Pte Ltd Singapore (Sembcorp Utilities), a wholly owned subsidiary of Sembcorp Industries. Sembcorp Utilities will invest about Rs1,100 crore for its 49% stake in the project which is at a 31% premium to the book value (BV). Further 90% of the debt has been tied up and thus the financial closure is expected by June 2010. -
Full year?s performance: For FY2010 the revenue and net profit of the company grew by 24.7% yoy and 29.1% yoy respectively. The OPM expanded by 90 basis points to 12.2% on the back of a lower construction cost as a percentage of sales. -
Dividend: The board has recommended a dividend of Rs2.5 per share taking the full year dividend to Rs5 per share. -
Attractive valuations: The present order book of the company provides a strong revenue visibility for the coming two years. Further, in order to de-risk its business model the company is entering into new segments. It is moving up the value chain by focusing more on road BOT projects and foraying into power space. In BOT road project space, in addition to the progress in the existing five projects (that are expected to be complete as per schedule), the company has received two more projects the financial closure of which is expected in five to six months? time. Further, the company is also expected to achieve financial closure for its power project by June 2010. -
At the current market price the stock is trading at 8.6x and 6.8x its FY2011E and FY2012E earnings respectively and the valuations are attractive given the company?s growth plans. We maintain our Buy recommendation on stock with a price target of Rs549. Sunil Hitech Engineers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs295
Current market price: Rs217
Profitability in line Result highlights -
Q4 results in line: Sunil Hitech Engineers Ltd (SHEL)?s Q4Y2010 stand-alone results were in line with our expectation on the profitability front. The execution was marginally lower than expected in the stand-alone results, leading to a less than expected growth in the top line. -
Top line lower than expectation: The stand-alone top line posted a 17.2% year-on-year (y-o-y) decline at Rs172.6 crore in the quarter as against our expectation of a flattish growth on account of less than expected execution in its projects business. -
OPM improves: The operating profit margin (OPM) stood at 10% in the quarter versus 5.4% in the corresponding quarter of the last year and was broadly in line with our expectation of 10.8% on account of a lower raw material cost as percent of sales. However, the same on a quarter-on-quarter (q-o-q) basis declined from 13% in the previous quarter mainly on account of increase in other expenses as percent of sales. -
Other income boosts profit: The other income also boosted to Rs8.4 crore on account of interest income and share premium of Rs7 per share on sale of investment of SHEL Energy that was sold to SHEL Investment Consultancy. As a result, the profit before tax (PBT) was up by 340% to Rs13.2 crore and better than our expectation of Rs11.8 crore. The adjusted tax rate of 28.3% was higher than our expectation. Boosted by operating performance, the adjusted net profit increased to Rs9.5 crore for the quarter. -
Extraordinary provision for tax: However there was an extraordinary provision of Rs12 crore as self assessment to cover any unforeseen addition of taxes that may arise due to scrutiny by the Income Tax department. And this was a key negative surprise in Q4 results. -
Order book strong: The order book stands at Rs1,935 crore, up by 64% on a y-o-y basis, backed by Rs1,531 crore worth of orders booked during the quarter. However, the order inflow of Rs45.6 crore for the quarter has been less than the order inflow of Rs797 crore in the previous quarter. The current order book translates into a book to bill ratio of 2.5x FY2010 revenues. The bids in pipeline are also stand robust at Rs2,600 crore. The company expects robust order execution in FY2011 and maintains a strong growth outlook for the coming year. -
We remain positive on SHEL as it is fast emerging as a strong end-to-end solution provider in the balance of plant space. However, in line with the lower execution rate in FY2010 results, we have fine-tuned our earnings estimates to Rs31.1 for FY2011 and Rs42.1for FY2012. -
Maintain Buy: We expect SHEL to report a compounded annual growth rate (CAGR) of 27.1% and 24% in its top line and adjusted bottom line respectively over the period FY2009-12E. At the current market price, the stock trades at 5.2x on FY2012 estimated earnings per share (EPS) respectively, which is quite attractive. Driven by the buoyant demand in the power sector, its robust order book and its strong growth outlook, we maintain Buy recommendation on the stock with a price target of Rs295. Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Hold
Price target: Rs637
Current market price: Rs572
Price target revised to Rs637 Result highlights -
Mahindra and Mahindra (M&M)?s Q4FY2010 results were above expectations on account of a higher than expected margin. -
Volume growth drives top line: In Q4FY2010, the total income grew by 45.5% year on year (yoy) to Rs5,304.7 crore (against our expectation of Rs5,200 crore). The income grew mainly on account of a 49.4% year-on-year (y-o-y) growth in the overall volumes. Although the volume growth for the quarter was strong, yet the average net realisation declined by 2.4% yoy on account of a higher contribution from the three-wheeler and the light commercial vehicle (LCV) segment. -
Segmental highlights: On a segmental basis, the automotive segment reported a 42.2% y-o-y increase in revenues to Rs3,113.9 crore primarily on the back of a stupendous volume growth of 44.1% yoy. The farm equipment (FE) segment?s revenue also grew by a hefty 50.3% yoy to Rs2,176.3 crore on the back of a volume growth of 60% yoy; however, the net realisation in the FE division declined by 6.1% yoy. -
Margins expand on a sequential basis: The Q4FY2010 margin came in as a positive surprise, expanding by a healthy 140 basis points on a quarter-on-quarter (q-o-q) basis to 15.9% (against our expectation of a 66-basis-point decline quarter on quarter [qoq]). This was primarily because of a higher volume growth and a lower employee expense, which declined by 19.3% sequentially due to the lower provisioning requirement for gratuity following an increase in the ten-year bond yield rates. On a y-o-y comparison, the margin expanded by 65 basis points on account of a lower raw material cost (down 230 basis points yoy to 67.6%), lower employee expenses (down 250 basis points yoy to 5%) and higher other expenses (up 410 basis points yoy to 11.5%) as a percentage of the total income. Consequently, the operating profit grew by a healthy 51.6% yoy to Rs845.6 crore. -
Strong operating performance partially offset by a higher tax rate yoy: The strong operating performance was offset by a higher tax rate, which stood at 25.8% as compared to 17.8% in Q4FY2009. Consequently, the adjusted net profit grew by 36.4% yoy to Rs570.3 crore (higher than expectation of Rs485.9 crore). -
Consolidated highlights: On a consolidated basis, the gross revenue (including the other income) for FY2010 stood at Rs33,790.1 crore, indicating a growth of 16.6% yoy, while the reported net profit stood at Rs2,478.6 crore as against Rs1,405.4 crore in FY2009. -
Demand outlook positive: We believe that with the expectation of a good monsoon in the current year, the tractor division is likely to see a healthy demand. Furthermore, in the automotive division, the incremental volumes of the Gio and Maxximo coupled with the commencement of exports of pick-up trucks to the USA are also likely to aid the volume growth. Though the demand outlook is likely to be positive, the key concern remains the uptrend in the raw material prices. -
Estimates maintained, price target revised to Rs637: We broadly maintain our estimates for FY2011 and FY2012, and expect the company to report stand-alone earnings per share (EPS) of Rs40.2 and Rs44.3 respectively. At the current market price, the stock is quoting at 13.9x its FY2011E and 12.6x its FY2012E stand-alone earnings. We have also rolled forward our price target to our FY2012E earnings. Consequently, our sum-of-the-parts (SOTP) price target now stands at Rs637. We maintain our Hold recommendation on the stock. Punj Lloyd
Cluster: Apple Green
Recommendation: Hold
Price target: Rs138
Current market price: Rs120
Price target revised to Rs138 Result highlights -
Another quarter of disappointment: Punj Llyod Ltd (PLL)?s Q4FY2010 results were a huge disappointment as the company reported an operating loss for the stand-alone entity, and a very low execution rate and a huge operating loss for its subsidiary. -
Operating loss in stand-alone results: In Q4FY2010, PLL reported a 38.6% year-on-year (y-o-y) fall in the stand-alone top line to Rs1,214.3 crore. What surprised us the most in its Q4FY2010 report card was the operating loss of Rs220.6 crore. This was the result of the cost overrun of Rs243 crore on the ONGC Heera platform development project. For the quarter there was also a liquidated damage of Rs65.5 crore that has not been accounted for and could be reported in the coming quarters. -
Net loss of Rs171.8 crore: This operating loss led to adjusted losses of Rs171.8 crore for the quarter, in spite of limited depreciation and interest charges. The company made a profit of Rs311.09 crore mainly on account of its stake sale in Pipavav Shipyard. We believe that the company has sold its stake at a 20% discount to the market price to boost liquidity. -
Consolidated numbers also disappoint: The consolidated top line for Q4FY2010 fell by 47.2% to Rs1,700.1 crore on account of a sharp fall in the revenue of the subsidiary to Rs485.9 crore from Rs1,240.9 crore in Q4FY2009. A significant execution delay was noted in the Libyan orders during the quarter and the management has indicated that the execution pace may pick up only from Q4FY2011. -
Simon Carves? woes continue: Simon Carves has reported a loss of Rs237 crore at the operating level for the quarter with respect to the Ensus Bio ethanol project, UK. On account of the operating loss in both the subsidiary and the stand-alone entity, the company posted an operating loss of Rs428.2 crore for the quarter as compared to Rs145 crore of operating profit for Q4FY2009. On an adjusted basis (net of tax implication) the company has reported a loss of Rs461.8 crore. There was an extraordinary item of Rs162.9 crore on account of the liquidated damages in the Simon Carves Ensus project and an extraordinary profit of Rs311.09 crore mainly on account of its stake sale in Pipavav Shipyard. -
Robust order book?profitable execution is the key: In Q4FY2010 the company reported order inflow of Rs6,000 crore, which was much lower than the orders worth over Rs1,521 crore bagged in Q3FY2010. The strong order inflow was led by roads projects, EPC power projects and the gas project in Abu Dhabi. The current order book of the company stands at Rs27,769.5 crore with the African region forming 35% of the backlog. This is a cause for concern as the Libyan orders have not been executed and the possibility that the same may translate into revenues in the coming future also looks bleak. -
Cautious on the likelihood of more cost overruns/liquidated damages: Overall, FY2010 was a bad year with many of the company?s clients coming up with fresh charges of liquidated damages and cost overruns against the company. The execution of the order book also did not pick up leading to a liquidity crunch in the company. For the coming quarters also, we remain cautious about a possible delay in the execution of the Ador power plant project in Indonesia and the petrochemical plant for PTT Thailand, which could further lead to liquidated damages in FY2011. -
Downgrading estimates: We have downgraded our estimates for FY2011 and FY2012 by 32-40% each to reflect the expected low execution rate for the Libyan projects as well as the concern on the margins in the various projects. We have revised our earnings per share (EPS) estimate to Rs8.6 for FY2011 as we have lowered our revenue projection for FY2011 because of the slower execution and the lower operating profit margin (OPM). For FY2012, our revised EPS estimate stands at Rs12.5, which is subject to a pick-up in order execution and margin sustenance. -
Valuations and outlook: At the current market price, the stock is trading at 9.6x FY2012E EPS. PLL is present in some of the high-growth sectors (infrastructure, petrochemicals etc), which are expected to receive heavy investment in the coming years. However, the order execution for the company has been slow in the recent quarters which is a cause for concern. We have revised our price target for the stock to Rs138 per share (at 11x FY2012 estimates). In view of the recent fall in the stock, we maintain our Hold recommendation on the stock. The key risks to our call are further slowdown in order execution and cost overruns/liquidated damages in the company?s projects. Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs330
Current market price: Rs274
Strong performance Result highlights -
Net sales up by 15.8%: Ipca Laboratories (Ipca) has reported a strong performance for Q4FY2010 with a 15.8% year-on-year (y-o-y) increase in the net sales, driven largely by a robust growth in the in the domestic formulation business (up by 29.7%) and sustained traction in the active pharmaceutical ingredient (API) exports (up by 25.7%). The revenues from the export formulation business languished and remained flat due to lower contribution from the institutional tender business and continuing challenge in Russian/Commonwealth of Independent States (CIS) markets. -
OPM at 18.7%, up by 170 basis points: The reported operating profit margin (OPM) stood at 18.7%, up 170 basis points on a y-o-y basis. The Q4 OPM was however below our estimate, largely on account of a lower than expected sales from the high-margin Russia/CIS region. Also, the margin expansion was restricted by a spike in the cost of artimeter sales, which grew by more than ~135% year on year (yoy). -
Reported profit grew by 375.9%: Driven by a strong operating performance, Ipca?s reported net profit grew by 375.9% yoy to Rs37.6 crore aided by a lower interest cost and depreciation charges. The company incurred a foreign exchange (forex) gain of Rs1.8 crore in the quarter vis-?-vis a loss of Rs15.4 crore in the corresponding quarter of the last year. Adjusting for forex impact, the adjusted profit after tax (PAT) stood at Rs35.8 crore, which is below our estimate of Rs45.5 crore. -
Reiterates guidance: Ipca incurred a capex of Rs130 crore in FY2010 and plans to incur another Rs150 crore worth of capex in FY2011. Of this, Rs90 crore would be utilised towards Sikkim facility. For FY2011, the management has guided for a top line growth of ~18-20% and expects the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to improve hereon. However, we believe that the volatile currency movement will continue to be a key risk for margin improvement going forward. -
Maintain Buy: At the current market price of Rs264, Ipca is attractively valued at 13.5x FY2011E earnings and 11.2x FY2012E earnings. We believe this multiple is justified given the robust earnings growth with improving revenue visibility. With a healthy balance sheet and improving return ratios, we expect re-rating of the stock closer to its peers. Based on the strong earnings visibility from the export segment and the scale-up in the US business, we maintain our Buy recommendation on the stock with a price target of Rs330 (14x its FY2012E earnings).
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