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Summary
of Contents
SHAREKHAN
SPECIAL
Banking Q2FY2007 earnings
review
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After two relatively dull quarters, the latest
quarterly results truly justified the run-up in the banking stock
prices. The exuberance in the banking sector is based on the core
fundamentals and improved visibility in the earnings of the
sector, a glimpse of which we have seen during Q2FY2007.
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The net interest income (NII) witnessed a
handsome growth, backed by a strong advances growth and the
relatively stable net interest margins (NIMs). Higher growth in
the fee income helped a commendable growth in the core operating
profits.
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With the benchmark yields down almost 50 basis
points from the quarter ended June 30, 2006, instead of a
mark-to-market provisions charge that was seen in the previous
couple of quarters, we saw most banks writing back excess
provisions. This kept the overall provisions down and helped the
robust growth in profits.
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Based on the improved visibility in the
earnings for the banking sector, we have revised the earnings for
certain banks. We feel that with the busy season ahead the banking
sector is poised to see better times. Our top picks among the
public sector banks remain Bank of India, Canara Bank and Punjab
National Bank while in the private banking space UTI Bank is our
preferred choice.
STOCK
UPDATE
Solectron Centum
Electronics
Cluster:
Emerging Star
Recommendation: Buy
Price target:
Rs315
Current market price: Rs227
Unlocking value
Result highlights
-
Solectron Centum Electronics (SCEL) has
reported a robust growth of 146.3% in its net revenues to Rs41.3
crore during the second quarter ended September 2006. The growth
was largely driven by a 264.5% jump in the electronic
manufacturing services (EMS) business to Rs32.4 crore. The
component business grew by 12.7% to Rs8.9 crore.
-
The operating profit margin (OPM) declined by
840 basis points to 11.5% due to the continued increase in the
proportion of the low-margin EMS revenues in the total turnover.
Moreover, the margins in the EMS business itself have been
declining gradually (in line with the global benchmark decline of
5-6%).
-
The robust jump of 363% in the other income
component to Rs1.3 crore mitigated the impact of higher interest
and depreciation charges. Consequently, the company posted a net
profit growth of 51.2% to Rs3.6 crore. This is after including the
provisions of Rs0.7 crore made for the proposed restructuring of
the organisation.
-
On the half yearly basis, the net revenues grew
by 181.3% to Rs77.7 crore. However, the 810-basis-point decline in
its OPM has limited the earnings growth to 31.5% (Rs6.8
crore).
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Along with the results, the company announced
that its board has approved the scheme to de-merge the EMS
business into a separate new company, Solectron EMS India Ltd
(SEIL), which would be controlled directly by Solectron
Corporation. On the other hand, the current management (the Indian
promoter) would manage the component manufacturing business. The
move is aimed at enhancing the focus on the two diverse business
lines and is likely to be beneficial to the existing shareholders
over the long term.
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At the current price the stock trades at 22.3x
FY2007 and 20.5x FY2008 estimated earnings. We are upgrading the
stock to a Buy recommendation with a revised price target of
Rs315.
Hyderabad
Industries
Cluster:
Apple Green
Recommendation: Buy
Price target:
Rs700
Current market price: Rs250
Disappointing
performance
Result highlights
-
Hyderabad Industries Ltd's (HIL) Q2FY2007
results are below our expectations. Lower-than-expected sales and
higher raw material costs primarily affected the company's
performance during the quarter.
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The net sales for the quarter rose by 15.4% to
Rs101 crore. The sales were lower than estimates as the company
faced rejection of products from its new Satharia plant due to
certain quality issues.
-
The operating margins have come down
drastically from 17.6% to 3.2% due to the production problems
faced at the new plant, and high ruling prices of cement, which is
the key raw material. Consequently, the operating profits for the
quarter declined by 79.2% to Rs3.2 crore. The raw material cost as
a percentage of sales increased significantly from 45.1% to 56.3%
in Q2FY2007.
-
Higher depreciation costs due to the
commissioning of its new plant at Satharia further impacted the
profits as the net profit after extraordinary items for the
quarter declined by 90.4% to Rs0.7 crore.
-
At the current market price of Rs250, the stock
is trading at very attractive valuations of 3.9x FY2008 earnings
and 2.6x its FY2008 earnings before interest, depreciation, tax
and amortisation (EBIDTA). We maintain our Buy recommendation on
the stock with a price target of
Rs700. |
