Fw: Investor's Eye: Update - Larsen & Toubro, Mahindra & Mahindra, IL&FS Transportation Networks

 

 

Investor's Eye [August 08, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Larsen & Toubro        Cluster: Evergreen Recommendation: Buy Price target: Rs2,011 Current market price: Rs1,630 Q1FY2012 results: First-cut analysis Result highlights Results in line: Larsen and Toubro (L&T)'s Q1FY2012 results were a mixed bag-the overall profit after tax (PAT) was in line with our expectation led by a boost in the unallocable corporate income even as the segmental margins remained under pressure. Revenue-wise, its engineering and construction (E&C) division outperformed all expectations by registering a year-on-year (Y-o-Y) growth of 22.8%. The order inflow was modest for the quarter (up 3.6% year on year [YoY]) while the order backlog grew by 26.3% YoY to Rs136,172 crore (the same was, however, flattish on sequential basis). The company has maintained its guidance of Y-o-Y growth of 25% in revenues and 15% in order inflows for FY2012. The company has also indicated that in the current fiscal the margin could experience pressure of 50-75 basis points (in FY2011 the OPM stood at 11.7%) on account of an increase in the input cost.  Stand-alone sales up by 21.1%: L&T reported a strong rise in its revenues (stand-alone) for the quarter. The revenue growth was in line with our expectation of a 21.9% Y-o-Y increase in the revenue. This was mainly on account of a pick-up in the revenue of the E&C segment. The E&C division reported a 22.8% growth in its revenue which was marginally below our expectation of a 25% Y-o-Y revenue growth. The electrical and electronics (E&E) division reported flattish revenue for the same period. The machinery and industrial products (MIP) division reported a robust growth of 26.3% YoY for the quarter.  Overall margin stable, but segmental margins under pressure: The company has significantly regrouped its numbers under many heads. The overall operating profit margin (OPM) was robust at 11.9%, higher than our expectation of 11% but lower than 12.8% in Q1FY2011. Margin pressure was visible on account of higher input and employee costs. If we look at the segmental margins, the margin of almost every segment was under severe pressure. The biggest booster to the overall margin was the unallocable corporate income (which primarily includes interest income, dividends and the profit on sale of investments), which was higher by 179.7% YoY at Rs209.1 crore. The company has indicated that the rise in this income was primarily due to higher income from treasury operations and forex gain. Net profit up by 9.1%: Led by higher depreciation and interest, the adjusted PAT reported a 12% Y-o-Y growth, which was in line with our expectation.  Modest order inflow during the quarter: The order inflow for L&T was modest during the quarter, coming in at Rs16,190 crore (up 3.6% YoY) due to order booking in the E&C division (Rs14,416 crore). The order inflow for the quarter was largely driven by the orders in infrastructure and power sector. Currently, L&T's order backlog stands at Rs136,172 crore (up 26.3% YoY but flattish on a sequential basis). The company's management has indicated that the ordering environment still witness the deferral of award decisions and stiff competition. Outlook and view: While the company reported robust results for the quarter, the achievement of the order inflow guidance would be highly subjective to uptick in infrastructure development activities in the country and the Middle East region. We are also concerned on the margin pressure in view of rising input costs, particularly metal prices. Also, depreciation would also jump sharply in view of the recent capex undertaken by the company. Nonetheless, maintenance of the robust growth guidance for the year reiterates the company's confidence in its execution capabilities and bidding pipeline in the infrastructure sector. We would now be revisiting our estimates, our target price and recommendation on the stock and would soon come out with a detailed note on the same.   Mahindra & Mahindra        Cluster: Apple Green Recommendation: Buy Price target: Rs735 Current market price: Rs666 Q1FY2012 results: First-cut analysis Result highlights Mahindra & Mahindra (M&M)'s total income growth at 30.5% year on year (YoY) for Q1FY2012 came in marginally lower than our estimates. However operating profits surpassed our estimates due to the cost rationalisation efforts of the company.  Q1FY2012's profit after tax (PAT) also came marginally higher than our estimates at Rs604.9 crore. The capital employed figure for the tractors division jumped sharply by 40% YoY. This is on account of a sharp increase in working capital requirement to meet the forthcoming festive demand. The company is likely to see only a moderate volume growth in FY2012 as macro headwinds such as financing rates and fuel price hikes could impact buying sentiments. However raw material prices are likely to remain stable for the rest of the year. Given the in-line performance during the quarter, our estimates are unlikely to change significantly from hereon. We will release a detailed note post management interaction.    IL&FS Transportation Networks        Cluster: Emerging Star Recommendation: Buy Price target: Rs330 Current market price: Rs198 Price target revised to Rs330 Result highlights Earnings ahead of estimate: In Q1FY2012 the consolidated adjusted net profit of IL&FS Transportation Networks Ltd (ITNL) increased by a 11% year on year (YoY) to Rs116 crore, which was higher than our estimate of Rs107 crore; this was mainly due to lower than expected depreciation and interest charges. In fact, on a quarterly basis the depreciation and interest charges registered a decline of 12% and 20% respectively. The revenue grew by 41% on account of strong execution and robust income from the build-own-transfer (BOT) segment. The construction division's income grew by a robust 74.6% YoY supported by the timely execution of the projects under construction (except for the Jorabat-Shilong project). The BOT income grew by 47.6% driven by increased daily collection across operational projects and the commissioning of projects like the Beawer Gomti project and the Hyderabad Ring road. Elsamex has witnessed a poor performance but the revenue drop has been limited to 35.4% on account of rupee depreciation against the Euro. Higher proportion of E&C revenue results in margin contraction: The operating profit margin (OPM) contracted by 340 basis points to 30.3% in Q1FY2012 as compared to 33.7% in Q1FY2011 but the same was higher compared to our estimate of 28.3%. The margin contracted on account of a higher proportion of revenue from the engineering and construction (E&C) division (the projects are in construction phase), which generates a much lower margin compared to the BOT segment (where the project starts generating toll/annuity). The share of the E&C revenue in the overall revenue increased to 69% in Q1FY2012 from 55.6% in the corresponding quarter of the previous year. However, the margin in Elsamex India improved to 9% from 6.1% in the corresponding quarter of the previous year. The operating profit stood at Rs331 crore, up 27% YoY.  Positive surprise, interest cost and depreciation down on sequential basis: The interest charge during the quarter increased by 35% YoY whereas on a sequential comparison the cost actually decreased by 20% to Rs143 crore, which was way below our estimate of Rs180 crore. The sequential fall in the interest cost was mainly on account of a one-time fee charged on achieving the financial closure for the Chennai Nashri project. The depreciation charge increased by 23% YoY but declined by 12% sequentially to Rs16 crore.  Earnings estimates for FY2012, FY2013 fine-tuned: We are downgrading our revenue estimates for FY2012 and FY2013 mainly to factor in the lower than expected order inflow. However, we are factoring in the better than expected OPM which will partially offset the negative impact of the lower than expected revenue. The revised earnings per share (EPS) estimates now stand at Rs23.5 and Rs27 for FY2012 and FY2013 respectively. Maintain Buy with revised price target of Rs330: The National Highways Authority of India (NHAI) plans to award approximately 7,300km of roads this fiscal; of this 20% cost more than Rs2,000 crore and thus would attract lesser competition. Given ITNL's leadership position in the road vertical, we believe the company would be one of the major beneficiaries of the NHAI's proposed road project awarding activity. Further, the strong parentage of IL&FS and its strong relationship with state governments along with a relatively diversified and de-risked business portfolio boost our confidence in the company. However, we have downgraded our PE multiple for E&C division to factor in the macro headwinds and hence we have revised our price target to Rs330 and maintained our Buy rating on the stock. Currently, the stock is trading at 8.4x and 7.3x its FY2012E and FY2013E earnings.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

Fw: Sharekhan Top Picks

 

Top Picks [August 03, 2011]  Sharekhan www.sharekhan.com

Summary of Contents   SHAREKHAN TOP PICKS Sharekhan Top Picks Despite the promising beginning of the month, the benchmark indices failed to break out of the multi-month range on account of an aggressive policy rate hike by the Reserve Bank of India and negative global cues. Consequently, the benchmark indices, the Sensex and the Nifty, declined by 4.4% and 4% respectively since July 1, 2011 when we had last revised the contents of our Top Picks basket. The CNX Mid-Cap Index was more resilient and reported a relatively lower loss of 1.8% for the same period. Compared to benchmark indices, the performance of our Top Picks basket was better as it declined by 2.4% in the same period.  Over the past six months, the Top Picks basket has outperformed the benchmark indices five out of six times and generated cumulative returns of 5.5% as against flat and marginally negative returns of the Sensex and the Nifty respectively. The CNX Mid-Cap Index has appreciated by 4.0% in the same period. The two changes that we have initiated in this month are as follows. We have replaced Lupin with Glenmark Pharmaceuticals (Glenmark) as part of the routine churn within the sector and in view of the better upside potential in Glenmark after the recent revision in its price target. Second, CESC has come in place of Federal Bank, which disappointed with higher than expected slippages in Q1FY2012. On the other hand, CESC is our value pick in the utilities segment where we anticipate some positive policy actions.  Click here to read report: Sharekhan Top Picks       Regards, The Sharekhan Research Team myaccount@sharekhan.com  www.sharekhan.com to manage your newsletter subscriptions

Fw: Investor's Eye: Update - Lupin, Phillips Carbon Black, PTC India, Cement

 

 

Investor's Eye [August 02, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Lupin Cluster: Apple Green Recommendation: Buy  Price target: Rs520 Current market price: Rs458 Strong product pipeline provides earnings visibility Result highlights Earnings marginally below Street estimates: Lupin's net profit for Q1FY2012 grew by 7% year on year (YoY) to Rs210.1 crore which is marginally lower than Street estimates. The net sales grew by 17.6% YoY to Rs1,543.2 crore which were well supported by both domestic as well as export markets. However, on account of margin contraction the earnings growth was limited to 7%.  Performance by geography: The formulation business in the domestic market contributed 32% to the company's overall revenue and registered a 17% growth to Rs496.9 crore. The key export markets like the US and Europe which account for 35% of the consolidated sales have booked revenue of Rs534.7 crore which is a growth of 7% YoY. Further other export markets like South Africa and Japan have witnessed a robust revenue growth of 47% and 28% respectively.  Operating margin contracts: The operating profit margin declined by 250bps YoY to 17.5% due to an increase in material cost as a percentage of sales and increase in employee expense by 23.1% YoY. Consequently the operating profit grew by just 2.9% compared to a 17.6% growth at the revenue level.  Received 4 ANDA approvals during the quarter: During the quarter the company filed for 4 abbreviated new drug applications (ANDAs) bringing the cumulative filings as of Q1FY2012 to 152, of which 51 stand approved (4 during the quarter) by the US Food and Drug Administration (USFDA). Further the company received approvals for its Metformin Hydrochloride extended-release tablets, Levofloxacin tablets, Pregabalin Capsules and Levetiracetam ER tablets from the USFDA. Among these the company launched Levofloxacin tablets during the quarter. Alliance with Natco Pharma: The company has entered into an alliance with Natco Pharma to jointly commercialise a generic equivalent of Glaxo's Tykerb tablets. Natco has filed an ANDA for manufacturing generic equivalent of Tykerb tablets. As per the company Tykerb had sales of $113.6 million as of March 2011.  Tweaking FY2012 & FY2013 numbers: We have marginally tweaked our FY2012 and FY2013 numbers to factor in a higher cost push in terms of material costs. However, we also incorporate lower than expected research and development (R&D) spending which would largely offset the impact of increase in material cost. Our revised earnings per share (EPS) for FY2012E and FY2013E stands at Rs21.8 and Rs26.5 respectively. Maintain Buy recommendation with price target of Rs520: The expected launch of oral contraceptives and a robust pipeline of new launches in the domestic and overseas markets provide strong growth visibility going forward. The pressure on margins should also ease out with an improvement in the utilisation of its Indore special economic zone (SEZ) manufacturing facility. At the current market price, the stock trades at 21.0x FY2012E fully diluted earnings and 17.3x FY2013E fully diluted earnings. We maintain out Buy recommendation on the stock with a price target of Rs520.    Phillips Carbon Black       Cluster: Cannonball Recommendation: Buy Price target: Rs205 Current market price: Rs143 Price target revised to Rs205 Result highlights Strong performance across all parameters: Phillips Carbon Black Ltd (PCBL) reported a very healthy set of numbers across all parameters. Sales grew by 41% year on year (YoY) and 28% quarter on quarter (QoQ) to Rs567 crore, led by strong export sales volume and higher blended realisation. The operating profit grew by 45% YoY and 21% QoQ to Rs77 crore in Q1FY2012. The same growth percolated to the net profit level and exhibited a growth of 45% YoY and 25% QoQ to Rs41.6 crore. Healthy sales growth driven by higher realisation: The net sales grew by 41% YoY, supported by a 45% growth in the carbon black business. The carbon black segment grew on account of a strong 24% improvement in realisation. Sequentially also the net realisation improved by 15% consequently leading to net sales of the carbon black segment growing by 28%. However, sales of the power segment remained subdued both on a YoY and QoQ basis.  OPM remained in broad range of 12-13%: The operating profit for Q1FY2012 stands at Rs77 crore, a growth of 45% YoY and 21% QoQ. The operating margin has been reported at 12.8% in Q1FY2012 while the same was 12.3% in Q1FY2011 and 13.6% in Q4FY2011. On a Y-o-Y basis, the margin of the carbon black business expanded 373bps to 9.6%, as volume (providing benefit of economy of scale) and realisation both improved significantly. Consequently, the profit before interest and tax (PBIT) of carbon black grew by 136% to Rs52.4 crore while sales grew by 45% during this period. The PBIT margin of the power segment declined by 1,856bps YoY to 69.2%, on account of a higher input cost. The PBIT grew by 47% YoY on a sales growth of 41%. On a sequential basis, the PBIT margin of carbon black remains in the same range at 9.6%, but the same of power segment declined from 72% to 69%. The PBIT grew by 20% QoQ on a sales growth of 27%.  Net income jumped by 45% YoY and 25% QoQ: The profit before tax (PBT) grew by 52% YoY while sequentially it grew at 18% to Rs55 crore. With an effective tax rate of 25%, the profit after tax (PAT) stands at Rs41.6 crore for Q1FY2012, which reflects a growth of 45% YoY and 25% QoQ. The earning per share (EPS) has percolated to Rs12.5 during Q1FY2012.  Capacity expansion on track: During April 2011, a 10MW power plant commenced operation in Cochin. The Mundra Carbon Black expansion by 50,000MT also commenced its production during the month. Further, the project work at Vietnam is progressing as per schedule and financial closure of the same is expected in Q2FY2012.  Revised FY2012 estimates: While the domestic sales volume has declined, the volume from export market has shown a strong growth in Q1FY2012. As per our interaction with the management, in some of the European markets, several carbon black capacities have closed down during the global crisis of 2008 and a marginal revival in demand from those parts of the globe are diving carbon black demand currently. However, we opine that such kind of growth is difficult to sustain. Hence, we have conservatively revised upward our FY2012 numbers. We have revised our net sales estimate by 5% to Rs1,975 crore, EBITDA by 4.4% and PAT by 7%. However, we have retained our FY2013 numbers broadly in line with previous estimates, considering the fact that the user industry of carbon black is likely to see a slow down for some time now.  Trading at 0.7x FY2012 BV, maintain Buy: We believe the stock is undervalued given its growth potential and dominance in the domestic as well as global carbon black markets. We believe it should at least trade at its current year book value of Rs205 (revised from the previous Rs202 led by revision in FY2012 numbers), indicating an upside potential of 45%. Therefore, we remain positive on the stock and retain our Buy rating with a target price of Rs205, based on 1x FY2012 book value (BV).    PTC India        Cluster: Apple Green Recommendation: Buy Price target: Rs114 Current market price: Rs74 PTC Financial Services' robust performance augurs well for parent  PTC Financial Services (PFS), a 60% subsidiary of PTC India (PTC), reported a strong set of numbers where income from operations increased by 80% and profit after tax (PAT) grew by 101% on a yearly basis. This jump in profit was largely led by strong core operating performance and stake sale in two of its investments-Ind Bharat Power Project (internal rate of return of 23.4%) and Indian Energy Exchange (IEX; ~9x return).  SECTOR UPDATE Cement Healthy growth in July 2011 on low base The volume growth of top three domestic cement players, ACC, Ambuja Cement (Ambuja) and UltraTech Cement (UltraTech) for July 2011 was healthy on a year-on-year (Y-o-Y) basis. Among the companies, ACC registered a better performance with a robust 28.2% growth in its dispatches whereas UltraTech and Ambuja posted a dispatch growth of 7.4% and 13.9% respectively. Hence, cumulatively the pan-India players have registered a 14.5% of volume growth which is the highest monthly volume growth recorded in the current fiscal. However, the volume growth was healthy largely on account of the low base affect and is thus not a sign of a real pick-up in the cement offtake.  In terms of demand, dealers have confirmed that the cement offtake in most parts of the country was affected primarily due to the monsoon and political hurdles in Andhra Pradesh. In terms of region, the southern region, Rajashtan and Kolkata witnessed sluggish cement offtake. However, the demand environment was relatively better in the western market as Gujarat saw some signs of a pick-up in the volume particularly from the government infrastructure projects.  Cement prices during the month decreased in most parts of the country by Rs10-12 per 50kg bag in July 2011. The price correction during the month was largely driven by a slowdown in the cement offtake and also an increase in inter-regional movement by the cement companies. The largest price correction was witnessed in Kolkata. Further, dealers are of the view that the present price is likely to decline further in the coming 15-20 days due to the monsoon season.  We believe the sector could underperform in the coming six months given the possibility that the cement manufacturers may fail to adhere to supply discipline. However, we believe any correction in the sector will provide an investment opportunity for certain companies. We prefer Grasim Industries (Grasim) among the large companies and Orient Paper and Industries (Orient) in the mid-sized space.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

**[investwise]** The Great Economic Correction - 5 Years On (110731)

 

"The US currency used to be fixed to gold. No one had to manage it. We didn't need geniuses. But since it has been actively managed – by people Bernanke and Geithner, and their predecessors – it has lost 97% of its value. What are the odds that these managers will do better in the future? What are the odds that they will succeed where all the central bankers and central financial planners who came before them failed?...

http://www.stock-investing-software.com/commentary/articles.html?next=16893

Ian

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Fw: Invitation for Subscriber Awareness Program in Chennai on August 5, 2011

 

Dear Investor,

 

Government of India (GOI) introduced the New Pension System (NPS) for all new employees to Central Government service, except for Armed Forces, joining Government service on or after 1st January 2004. As of date 22 State Governments / Union Territories have adopted NPS for their employees. Subsequently, this was made available to "All Citizens of India" from May 1, 2009. National Securities Depository Limited (NSDL) has been appointed as the Central Recordkeeping Agency (CRA) for NPS.

 

You may be aware of our Investor Depository Meets (IDM) wherein we meet and impart awareness amongst investors regarding the depository functions and their rights and duties. In a similar manner, as part of our initiative to supplement the efforts by Pension Fund Regulatory and Development Authority in popularising the NPS among the prospective subscribers, we conduct the Subscriber Awareness Programs (SAPs). During these programmes, we educate the existing as well as prospective subscribers about the various modalities of the scheme. We also would like to take a feedback from you for improving the various features of the scheme.

 

The next SAP is being organized in Chennai on August 5, 2011.The address of the venue and the schedule of the programme are given below.

 

Date and Time

Friday, August 5, 2011

4.30 pm to 7.00 pm

 

Venue:

Hotel Priyadarshini Park

New # 139, Wallajah Road,

Mount Road,

Chennai - 600002

 

We would like to take this opportunity to cordially invite you for the above mentioned SAP. We hope that the SAPs would impart awareness to the participants about various features of the NPS.

 

Regards

NSDL Team

 

Fw: Investor's Eye: Update - HUL, ITC, Sun Pharma, PNB, Corp Bank, Orient Paper, Glenmark Pharma

 

 

Investor's Eye [July 28, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Hindustan Unilever      Cluster: Apple Green Recommendation: Hold Price target: Under review Current market price: Rs323 Upgraded to Hold Result highlights Hindustan Unilever Ltd (HUL)'s Q1FY2012 results are ahead of our expectation largely on account of a lower than expected advertisement and promotional expenditure, which aided the operating profit margin (OPM) to sustain at 12.3% on a year-on-year (Y-o-Y) basis (ahead of our expectation of 11% for the quarter). Its net sales grew by 14.8% year on year (YoY) to Rs5,503.9 crore (in line with our expectation of Rs5,503.9 crore). The growth was driven by a mix of both sales volume growth and price increases undertaken to reduce the pressure on the margins. The sales volume growth in the domestic consumer business stood at 8.3% YoY (the growth moderated slightly from 13.0% Y-o-Y growth in Q4FY2011). The key input prices stood significantly higher on a Y-o-Y basis (palm oil-32% YoY; LABfs-47% YoY; caustic soda [flakes]-34.2% YoY). Hence the gross margin declined by 482 basis points YoY to 44.1% during the quarter. However, pruning the advertisement spend helped HUL to maintain the operating profit margin (OPM) during the quarter. The advertisement spend as a percentage of sales stood at 11.5% in Q1FY2012 as against 15.7% in Q1FY2011. Thus the operating profit grew by 13.4% YoY to Rs678.8 crore (ahead of our estimate of Rs603.2 crore) and the adjusted net profit grew by 12.4% YoY to Rs581.3 crore during the quarter (ahead of our estimate of Rs549.0 crore). All the segments of the company posted a better performance in Q1FY2012. The HPC business grew by 15.4% YoY with the soap and detergent and personal segments registering a strong double-digit growth of 12.8% YoY (in line with our expectation of a 12.0% Y-o-Y growth) and a 19.3% Y-o-Y growth during the quarter. While the profit before interest and tax (PBIT) margin of the soap and detergent segment improved sequentially by 172 basis points to 9.2%; the PBIT margin of the personal wash segment was maintained at about 25% during the quarter.  Also the food business registered a strong performance with the business revenues growing by a robust 14.9% YoY during the quarter. The revenues of the packaged food segment (including the processed foods and ice cream categories) and the beverage segment grew by 18.0% YoY and 13.1% YoY respectively during the quarter. It was the seventh consecutive quarter of a volume-led growth for HUL with all the segments performing well during the quarter. Though the input cost pressure is likely to sustain for the next one to two quarters, the company's ability to maintain the double-digit top line growth (with a decent sales volume) gives us hope of a decent bottom line growth in FY2012. Hence we upgrade our recommendation on the stock from Reduce to Hold. However, we will revise our price target after fine-tuning our estimates after tomorrow's conference call. At the current market price the stock trades at 30.1x and 26.2x its FY2012E and FY2013E earnings.   ITC      Cluster: Apple Green Recommendation: Buy Price target: Rs223 Current market price: Rs206 Q1FY2012 results: First-cut analysis Result highlights ITC's Q1FY2012 results are ahead of our estimates largely on account of a slightly higher than expected top line growth and a higher than expected other income during the quarter. The net sales (including the other operating income) grew by 20.6% year on year (YoY) to Rs5,860.2 crore (ahead of our estimate of Rs5,669.7 crore) on the back of a strong performance by all the business verticals during the quarter. The operating profit margin (OPM) sustained at around 34.0% in Q1FY2012. Hence the operating profit grew by 20.2% YoY to Rs1,976.1 crore. This along with a higher other income resulted in a 24.5% year-on-year (Y-o-Y) growth in the reported profit after tax (PAT) to Rs1,332.7 crore (ahead of our estimate of Rs1,260.7 crore) during the quarter. The core cigarette business' revenue grew by about 13.0% YoY in Q1FY2012. The cigarettes sales volume growth must have stood at higher single digits during the quarter. The profit before interest and tax (PBIT) margin of the business improved to about 30.0% during the quarter. It was yet another quarter of an excellent performance by the non-cigarette fast moving consumer goods (FMCG) business with its revenues growing by 19.4% YoY. The losses of business were down by 15% YoY. The performances of the agri business and paper, paperboard and packaging businesses were the highlights of the quarter. The revenues of the agri business grew by about 27% YoY to Rs1,707.1 crore on the back of the strong sales of soy, wheat and coffee during the quarter. The profit before interest and tax (PBIT) margin of the agri business was maintained at 9.2% during the quarter. The revenues of paper, paperboard & packaging business grew by strong 22% YoY with the PBIT margin sustaining at 22.0% on the back of an improved product mix and better realisations. Being a lean quarter the hotel business revenues grew by just 12.2% YoY to Rs252.5 crore. The PBIT margin of the business improved by 321bps YoY to 20.3% during the quarter We will review our estimates for FY2012 and FY2013 after our interaction with the management of the company and shall come out with a detailed note on the results. We maintain our Buy recommendation on the stock with a price target of Rs223. At the current market price the stock trades at 26.2x and 22.2x its FY2012E and FY2013E earnings respectively.    Sun Pharmaceutical Industries       Cluster: Ugly Duckling Recommendation: Buy Price target: Rs534 Current market price: Rs518 Q1FY2012 results: First-cut analysis Result highlights Earnings ahead of Street estimates: Sun Pharmaceutical Industries (Sun) in its Q1FY2012 results posted an 11.2% de-growth in the net profit to Rs501 crore but the same was ahead of Street estimates. The net sales of the company grew by 19.8% year on year (YoY) to Rs1,635.7 crore. Since Taro Pharmaceutical Industries (Taro) became a subsidiary of Sun from September 20, 2010 the latter's performance for the current quarter includes the results of Taro and its subsidiaries and therefore is not comparable with the corresponding figures of the previous quarter. Performance by geography: Indian branded generic sales grew by 18% YoY to Rs638 crore. The revenue growth of the company in the Indian generic market was supported by 7 new product launches. In the export market, US formulation which accounts for 37% of the total sales, posted revenue of $139 million whereas generic formulation in the rest of world (RoW) markets accounted for $56 million.  Operating margins contracted by 11 percentage points YoY but improved QoQ: Sun reported a sharp contraction in its operating profit margin (OPM) by 11 percentage points to 33.5% on account of the high base effect and a sharp increase in the employee cost (up by 123% YoY). However on a sequential basis the OPM of the company improved by 315bps which is on account of a decrease in other expenditure by 13.3% and also due to a decrease of research and development (R&D) expenditure as a percentage of sales to 5.4% as against 6.2% in Q4FY2011.  Healthy other income through receipt of interest: During the quarter the company booked healthy other income of Rs96.9 crore of which Rs31.5 crore is on account of net interest income.  Performance of Taro: Taro reported a 14% YoY increase in its revenue to $112 million whereas net profit has come significantly higher at $36 million.  Caraco became wholly owned subsidiary: Caraco has convened a shareholder meeting on June 14, 2011 and become a wholly owned subsidiary of Sun. ANDA approvals for 7 new products have been received during Q1FY2012: During the quarter abbreviated new drug applications (ANDAs) for 6 products have been filed of which 4 products are by Sun and the remaining 2 by Taro. Cumulatively the company has filed ANDAs for 383 products. In terms of approvals the company has received ANDAs for 7 products in Q1FY2012 taking the total number of approvals to 232. Further the total number of patent applications submitted now stand at 551 with 250 patents granted so far.  We expect Sun's strong domestic business, its niche US market (controlled release substances, hormones etc) and the improving visibility of its patent pipeline to drive a steady growth in the long term. With a strong cash balance, Sun is well positioned to capitalise on the growth opportunities. We shall come out with a detailed note post attending the conference call. We maintain our Buy recommendation on the stock with a price target of Rs534. At the current market price, the stock trades at 24.2x FY2012E earnings and 21.1x FY2013E earnings.   Punjab National Bank      Cluster: Ugly Duckling Recommendation: Buy Price target: Rs1,410 Current market price: Rs1,103 Strong operating performance  Result highlights Punjab National Bank (PNB) reported a strong set of numbers for Q1FY2012 as net profits grew 3.4% year on year (YoY) to Rs1,105 crore despite making a one off provision of Rs389 crore (as per revised provisioning norms) and lower treasury profits. This was driven by a strong growth in net interest income (NII) which grew 19% YoY and 2.9% quarter on quarter (QoQ). The margins remained steady at 3.84% and showed a marginal decline of 7bps QoQ. The asset quality deteriorated as gross non performing assets (NPAs) increased to 2% compared to 1.79% in Q4FY2011. We estimate PNB's earnings to grow at a compounded annual growth rate (CAGR) of 19% over FY2011-13 led by a 22% CAGR growth in advances. We maintain our Buy rating with a price target of Rs1,410 (1.5x FY2013E book value [BV]). Strong growth in NII: The NII increased by 19% YoY and ~3% QoQ , in line with our estimates. The growth in NII was driven by steady margins and a healthy growth in advances. During Q1FY2012 the advances growth remained flat on a sequential basis while it increased by 23.4% YoY driven by small and medium enterprise (SME; +36% YoY), retail (+24% YoY) and overseas advances (+77% YoY). We have assumed an advances growth of 22% CAGR over FY2011-13. Margins remain firm, on higher yields: Unlike other public sector unit (PSU) banks, PNB's net interest margin reported a marginal decline of 7bps QoQ to 3.84%. This was driven by a 55bps QoQ increase in yields on advances to 11.4% which offset the 64bps increase in the cost of deposits. The reported yield on investment also went up by 55bps QoQ due to shifting of investments towards longer dated securities. Due to rising cost pressures and shifting to higher rated advances the bank expects to maintain its net interest margin (NIM) at ~3.5% levels. Strong growth in fee income: The overall non interest income increased by 24.3% YoY despite lower treasury profits (Rs48 crore vs Rs121 crore in Q1FY2011). This was on account of a strong growth in fee income and higher recovery from written off accounts (Rs109 crore vs Rs76 crore in Q1FY2011). The core fee income growth during the quarter was 25% YoY and 6% QoQ. Asset quality disappoints: The gross NPAs and net NPAs increased to 2% and 0.88% respectively compared to 1.79% and 0.85% in Q4FY2011. The bank reported slippages of Rs1,177 crore (~2% annualised) while recoveries were to the tune of Rs663 crore. The bank made Rs389 crore of one off provisions (Rs243 crore for NPAs and Rs146 crore for standard advances) based on revised Income Recognition Asset Classification (IRAC) norms. During the quarter Rs512 crore of advances were restructured while outstanding restructured loans were ~6.3% of advances. The bank maintained its guidance to hold NPAs at around 2% levels.  Opex increases QoQ due to pension provisions: The employee expenses surged sequentially (despite a high base) by 7% mainly contributed by the pension provisions of Rs260 crore (excluding Rs166 crore on second pension liability). Consequently, the cost to income ratio increased to 41.8% from 39.9% in Q4FY2011. Plans to acquire 30% stake in MetLife: The bank has finalised Metlife as its insurance partner and will acquire a 30% stake in the company. The bank is likely to acquire a stake via issue of fresh equity shares in the insurance company. According to the management the capital infusion in MetLife is largely over and it would help the bank in increasing its fee income. Valuations: PNB delivered a superior performance in Q1FY2012 led by healthy core performance. The margins remained steady despite pressures while fee income showed strong growth. In view of slower credit volumes, likely compression in margins and higher credit cost we have slightly trimmed our FY2012 and FY2013 estimates. We expect PNB's earnings to grow at a CAGR of 19% over FY2011-13, leading to a return on equity (RoE) of around 22%. We maintain our Buy rating with a price target of Rs1,410.   Corporation Bank      Cluster: Apple Green Recommendation: Buy Price target: Rs690 Current market price: Rs514 Price target revised to Rs690 Result highlights Corporation Bank in Q1FY2012 reported a net profit of Rs351.4 crore, a growth of 5.3% year on year (YoY), which is higher than our estimates. During the quarter there was a write back of tax provision amounting to Rs63.3 crore which aided profit growth. Excluding the one-time gain of tax reversal, the earnings of the bank declined by 13.7% YoY and 16.2% quarter on quarter (QoQ) to Rs288 crore. The net interest income (NII) of the bank was short of our estimates as it remained flat on a year-on-year (Y-o-Y) basis and declined sequentially by 7.1% led by a sequential decline in advances and margins (margins stood at 2.1% for the quarter compared to 2.48% in Q4FY2011). The asset quality of the bank also deteriorated as gross and net non performing assets (NPAs) increased to 1.07% and 0.52% respectively compared to 0.91% and 0.46% in Q4FY2011. We have reduced our estimates for FY2012 & FY2013 and revised the price target to Rs690 from Rs720 earlier . We maintain our BUY rating on the stock. NII growth remains flat on Y-o-Y basis: The NII of the bank remained flat on a Y-o-Y basis and declined by 7.1% QoQ to Rs707.5 crore. This was on account of a sequential dip in advances and a contraction in margins. The advances of the bank grew by 21.8% YoY while they declined by 9.1% sequentially. Deposits of the bank increased by 29.4% YoY and increased marginally by 1% QoQ. Consequently the credit to deposit ratio of the bank declined to 67% in Q1FY2012 from 74.4% in Q4FY2011. NIM contracts 38bps sequentially; CASA ratio slips to 21%: The margins of the bank came off sharply by 38bps QoQ to 2.1%. This was led by a sharp increase in the cost of deposits of the bank which grew by 87bps sequentially to 7.27%. The current account-savings account (CASA) of the bank also declined sharply to 21% from 26% in the earlier quarter leading to a sharp jump in the cost of deposits. Subdued growth in non-interest income: The non -interest income of the bank increased by 8.9% YoY mainly on account of a decline in treasury profits (Rs34.3 crore vs Rs53.8 crore in Q1FY2011) and lower recoveries from written off accounts (Rs39 crore vs Rs59.2 crore in Q1FY2011). The core fee income showed a growth of 12% YoY.  Lower NPA provisions and write back of tax supported bottom line: The provision expenses for the quarter were reduced to Rs167 crore as against Rs270 crore in Q4FY2011. This was mainly due to lower provisions for NPAs at Rs90 crore during the quarter as against Rs187 crore during the previous quarter. Of the provisions for NPAs of Rs90 crore, Rs35 crore are on account of one time provision as per new Income Recognition Asset Classification (IRAC) guidelines. Provisions on investments were at Rs70.6 crore during the quarter. Asset quality deteriorates: The asset quality of the bank deteriorated during the quarter as gross NPAs increased sequentially to 1.07% (from 0.91%) while net NPAs increased to 0.52%. The slippages during the quarter were Rs154.8 crore (~1% annualized). The provision coverage ratio of the bank stood at 74.90% in line with that of the preceding quarter.  Tax write back led to reduction in tax rate: The tax/ profit before tax (PBT) ratio of the bank during the quarter declined to 14.1% as against 27.7% in Q4FY2011. This was majorly due to the one time write back of tax provision of Rs63.3 crore during the quarter.  Outlook: Corporation Bank's Q1FY2012 numbers were qualitatively weak as tax write back and lower provisions aided growth in profits. The bank's margins and CASA ratio have slipped to much lower levels compared to its peer banks. We have reduced our estimates for FY2012 and FY2013 by 7% and 3% respectively. We have also revised our target price downwards to Rs690 (1.05x FY2012E book value [BV]). Currently the stock is trading at 0.8x FY2013E BV. We maintain our Buy recommendation on the stock.   Orient Paper and Industries      Cluster: Vulture's Pick Recommendation: Buy Price target: Rs70 Current market price: Rs60 Demerger of cement business to unlock value Result highlights Impressive performance, earnings in line with estimate: For Q1FY2012 Orient Paper & Industries Ltd (OPIL) has posted a net profit of Rs59.4 crore (improved by 73.4% year on year [YoY]), which is in line with our estimate. The impressive performance was driven mainly by a surge in the average blended realisation of 30.6% YoY and of 6.6% on a sequential basis. However, the paper division continued its disappointing performance during the quarter with a loss at the earnings before interest and tax (EBIT) level. Cement and electrical divisions drive overall revenue growth: The net sales of the company grew by 20.9% YoY to Rs533.9 crore. The top line growth was driven by the electrical division (which grew by 22.3% YoY) and the cement division (which grew by 11.4% YoY). Despite a 14.7% year-on-year (Y-o-Y) decline in the volume the cement division's revenue growth was supported by a sharp increase in the realisation (up 30.6% YoY). The demand environment in one of its key markets continues to be sluggish and hence the volume growth in the coming two quarters will remain under pressure.  Margin expanded in spite of overall cost inflation and loss in paper business: On the margin front the operating profit margin (OPM) expanded by 312 basis points YoY to 19.4%. The increased profitability of the cement division due to the increase in the realisation largely offset the cost pressure and the loss in the paper division. Further, the profitability of the electrical division also improved marginally which added to the overall OPM. Consequently, the operating profit increased by 44.1% YoY to Rs103.5 crore.  Other income boosted through sale of CER: The other income during the quarter increased by 65.5% YoY to Rs14.5 crore, which was supported by Rs8.5 crore received on account of CER sale.  Approved demerger of cement business into separate entity, which will get listed: The board of directors of the company has decided to demerge the cement undertaking of the company by transferring the same to a newly formed wholly owned subsidiary, Orient Cement. The shareholder of OPIL will get one new equity share of Orient Cement for each share held in OPIL. Further, Orient Cement is proposed to be listed on the BSE and NSE, and the appointed date for the scheme is April 2012. We believe the development is a positive move for the company as it will unlock the value for the shareholder through direct exposure to a pure cement player.  Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax amounting to Rs181.7 crore has been made by the company since the company's application for waiver thereof is under consideration by the state government of Madhya Pradesh. Planning to introduce new range of products in electrical division: The board of directors of the company has decided to further diversify the range of its consumer electrical products by adding household appliances such as mixers, geysers, coolers and room heaters in addition to fans and lighting products. Initially the company will do trading of aforesaid new products and the activity is expected to start from Q3FY2012. Maintain Buy with price target of Rs70: Due to the supply discipline mechanism followed by the manufacturers in the southern region, the company is benefited in terms of a strong growth in the realisation but going ahead we believe cement prices would come under pressure with a likely increase in the supply. However, the company's efficient cost structure gives it an advantage over the other players. Further, the company is in the process of introducing a new range of products in the electrical division which could lead to a strong revenue growth in the electrical division. Further, in addition to a strong balance sheet and attractive valuation, the demerger of the cement division will act as a re-rating trigger for the stock. Hence, we maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price the stock trades at a PE of 5.8x and EV/ EBIDTA of 3.8x, discounting its FY2012 earnings estimates.   Glenmark Pharmaceuticals      Cluster: Apple Green Recommendation: Buy Price target: Rs426 Current market price: Rs331 Price target revised to Rs426 Result highlights Earnings growth ahead of Street's estimate: Glenmark Pharmaceuticals (Glenmark) reported a strong growth (of 23.1% year on year [YoY]) in its net profit on a consolidated basis and stood at Rs210 crore, which is ahead of the Street's estimate. The higher than expected earnings growth was largely driven by a better than expected revenue growth in some key geographies and margin expansion. Revenue grew by 27.8% supported by rebound in the US generic business and formulation business in the Indian market: The revenue of the company (excluding out-licencing fees) grew by 27.8% to Rs757 crore. The specialty business division, which accounts for 55% of the total revenue, reported a 29% growth. Geographically, the Indian market witnessed a 20% growth due to the launch of two new products, named Vorth TP and Doriglen. The Latin American market registered a 62% growth, which was supported by the launch of nine new products across the region. On the other hand, the generic business, which forms 45% of the total revenue, also supported the overall revenue growth. Geographically, the US market rebounded with a revenue growth of 37% whereas from the European market the company booked revenue of Rs17.5 crore (a growth of 118% YoY). In addition the company has also booked out-licencing fees to the tune of Rs111.2 crore as compared to Rs89.5 crore in the corresponding quarter of the previous year.  OPM expanded due to a decrease in material cost and increase in out-licencing fees: The operating profit margin (OPM) of the company increased by 53 basis points YoY to 34.2% on account of a decrease in the material cost as a percentage of sales and increase in the out-licencing fees by 24%. However, adjusting for the out-licencing fees, the OPM for the quarter stood at 24.5%, which is ahead of the management guidance of 22-23%. However, the management has maintained its earlier OPM guidance of 22-23%.  ANDA approval received for 4 new products: During the quarter the company received the final abbreviated new drug application (ANDA) approval for four products and filed three ANDAs with the US Food and Drug Administration (USFDA). In the forthcoming quarter the company plans to file four new products and anticipates the launch of seven new products. At the end of Q1FY2012, the company had a portfolio of 69 generic products authorised for distribution in the US market as well as 40 ANDAs in various stages of approval process with the USFDA. Glenmark has received $15 million from Salix Pharmaceuticals, Inc, USA (Salix). This is as per an agreement for advance against the commitment fee, which is to cover the risks associated with the upgradation of its manufacturing facilities to meet the anticipated increased requirements of Salix for Crofelemer, which is for multiple diarrhoeal conditions. Through an agreement between the two companies, Salix agreed to pay Glenmark a $21.6-million commitment fee in five equal annual installments, with the first annual installment in July 2012. The commitment fee is in addition to the compound purchase price payable by Salix to Glenmark. Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to incorporate the higher than expected revenue growth particularly from the geographies like the USA, India and Latin America. We believe new product launches and ability to maintain the market share of the existing products will help sustain the momentum in the revenue growth. The revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs24.1 and Rs22.6 respectively. Maintain Buy with revised price target of Rs426: Given the expectation of a healthy performance by the core business and a favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a revised price target of Rs426 (15x FY2012E core earnings for the base business and Rs64 for research and development [R&D]). At the current market price, the stock trades at 13.8x FY2012E earnings and 14.7x FY2013E earnings.      Click here to read report: Investor's Eye

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