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Summary of Contents
SHAREKHAN SPECIAL
Q4FY2006 earnings
review
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The earnings of the Sensex companies for
Q4FY2006 grew by 22.3% year on year (yoy) and by 17.6% quarter on
quarter (qoq) compared with the consensus expectations of an 18.0%
year-on-year (y-o-y) and a 13.5% quarter-on-quarter (q-o-q) growth
respectively.
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While the sales of the non-banking companies in
the Sensex grew by 26.5% yoy, the operating profit grew by a
slower 23.1% as the operating profit margin (OPM) contracted by 56
basis points yoy to 20.1%.
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The earnings of the Mid-cap 200 Index grew by
21.3% yoy. While the sales of the non-banking mid-cap companies
grew by 15.8% yoy, their operating profit grew by a slower 10.8%
as the OPM declined by 52 basis points.
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The earnings of the Sensex companies for FY2006
grew by 22.4% yoy. At the current level of 9,811, the Sensex is
quoting at 13.5x FY2007E earnings and 12.2x FY2008E earnings.
STOCK IDEA
Wipro
Cluster: Apple Green
Recommendation: Buy
Price
target: Rs552
Current market price: Rs418
Rekindling old flame
Key points
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Wipro is witnessing strong traction in its
existing information technology (IT) service business. In addition
to this, the incremental growth from the recent inorganic
initiatives has considerably improved the visibility of growth in
its global software service business.
-
The margins are also sustainable at the current
level, given the positive pricing environment and the other
operating levers (like a higher offshore contribution and
utilisation rate) that are likely to cushion any adverse impact of
wage inflation on the company's profitability.
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The company has effectively addressed the two
key concerns of a slow-down in its business process outsourcing
(BPO) operations and a lack of focus on large outsourcing deals
over the past few quarters.
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Consequently, we expect Wipro's earnings to
grow at a compounded annual growth rate (CAGR) of 27% over the
two-year period of FY2006-08E.
-
The stock's valuations are quite compelling
with its premium to the Sensex close to a two-year low. We are
re-initiating coverage on Wipro with a Buy recommendation and
one-year target price of Rs552 (24x its FY2008 estimated earnings
of Rs23 per share).
STOCK UPDATE
Surya
Pharmaceuticals
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs205
Current market price: Rs67
Story intact
Surya Pharma is involved in the contract
manufacturing of anti-infectives. The company is changing its
product mix from manufacturing low-margin betalactums to
manufacturing higher end high-margin cephalosporins. It is also
targeting the manufacture of lifestyle drugs in the future.
SECTOR UPDATE
Banking
Rate hike to increase provisioning
In an
unexpected move the Reserve Bank of India (RBI) has raised the repo
and reverse repo rates by 25 basis points each. It may be recalled
that in its annual statement on the monetary policy for 2006-07, the
central bank had kept all the key rates unchanged. The timing of the
rate increase was totally unexpected and most market players were
expecting a hike in the quarterly review of the monetary policy in
July 2006.
We do not expect the rate hike to have any impact
on the core earnings of banks immediately; however it would surely
affect their mark-to-market (MTM) losses as the benchmark 10-year
government security (G-Sec) yield inches up. The yield on 10-year
G-Sec moved up by 15 basis points a day after the hike was
announced. We expect Canara Bank, Punjab National Bank and Allahabad
Bank (in that order) to be the worst hit in a scenario of rising
10-year G-Sec yield.
Cement
A re-look at cement
Following the recent
sharp correction in the broader indices and the news of the
government's intervention to control the prices of cement, the
stocks of cement companies have witnessed a sharp correction during
the last few trading sessions. The fear of an earnings downgrade as
well as the overall lower valuations for the broader indices are now
acting as an overhang on the stocks. However we believe the positive
outlook for the sector, strong earnings growth and the new valuation
benchmarks set by Holcim's recent acquisitions in India, shall act
as positive triggers for cement stocks. We maintain our positive
view on the sector with UltraTech Cement, ACC and Madras Cement as
our picks. We also like Orient Paper and JK Cement on account of
their compelling valuations, which are much less than the sector
average.
MUTUAL
GAINS
Sharekhan's top equity fund
picks
We have identified the best
equity-oriented schemes available in the market today based on the
following parameters: the past performance as indicated by the
returns, the Sharpe ratio and Fama (net selectivity).
The past
performance is measured by the returns generated by the scheme.
Sharpe indicates risk-adjusted returns, giving the returns earned in
excess of the risk-free rate for each unit of the risk
taken.
FAMA measures the
returns generated through selectivity, ie the returns generated
because of the fund manager's ability to pick the right stocks. A
higher value of net selectivity is always preferred as it reflects
the stock picking ability of the fund manager.
MUTUAL FUNDS: WHAT�S IN�WHAT�S
OUT
Fund Analysis: June
2006
An analysis has been undertaken on equity
and mid-cap funds' portfolios, indicating the favourite picks of
fund managers for the month of May 2006. Equity funds comprise of
all diversified, index, sector and tax planning funds, whereas
midcap funds include a universe of 17 funds such as Reliance Growth,
Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund
etc.
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