Summary
of Contents
STOCK
UPDATE
Orchid Chemicals &
Pharmaceuticals Cluster: Emerging
Star Recommendation: Buy Price target: Rs390 Current market
price: Rs242
FCCB issue to be EPS accretive
Key points
-
Orchid Chemicals & Pharmaceuticals (Orchid)
has raised $200 million through a zero coupon foreign currency
convertible bond (FCCB) offering of $175 million, with a greenshoe
option of $25 million. The bonds are convertible into equity
shares at an initial conversion price of Rs348.34.
-
Further, the company is proposing to issue 5
million warrants to the promoter group, which are convertible into
equity shares of face value Rs10 at a conversion price of Rs202.58
within 18 months of their effective date of issue in January
2007.
-
With majority of its capital expenditure
(capex) over, Orchid intends to use the entire funds to repay a
large portion of the Rs1,012-crore debt that it has on its books.
With this, we believe that the company will save interest costs of
approximately Rs81 crore in FY2008, leading to an incremental
earnings per share (EPS) of Rs0.6.
-
At the initial conversion price of Rs348.34,
the FCCB issue is likely to result in an equity dilution of 37%.
Despite the equity dilution, we believe that the FCCB issue will
be earnings accretive for the company as it will reduce its debt
level and interest burden going forward.
-
In order to incorporate the effect of the
equity dilution from the FCCB issue and the resultant savings in
the interest cost due to the reduced debt burden, we are revising
our FY2008 earnings estimate for Orchid; we are however keeping
our FY2007 estimate unchanged. We are also maintaining our revenue
projections for both the years. We have upgraded our FY2008
earnings estimate by 2.2% to Rs26.1 per share on a fully diluted
basis.
-
At the current market price of Rs242, Orchid is
trading at 9.3x its estimated FY2008 earnings. In view of the
bright prospects for the company, we retain our positive stance on
Orchid and maintain our Buy call with a price target of Rs390.
Corporation
Bank Cluster: Apple Green Recommendation:
Buy Price target: Rs380 Current market price: Rs295
Price target revised to Rs380
Result highlights
-
Corporation Bank's results are slightly above
our expectations; its profit after tax (PAT) grew by 27.2% to
Rs146.4 crore compared with our estimates of Rs135.9 crore due to
a higher than expected non-interest income led by a higher
treasury income.
-
During the quarter, one of the wholly-owned
subsidiaries of the bank, Corp Bank Homes, was merged with the
bank. Due to the merger the current quarter numbers include an
additional provision of Rs16.8 crore excluding which the PAT
growth would have been higher at 41% to Rs162.4 crore.
-
The net interest income (NII) was up by 1.5% to
Rs333.3 crore compared with our estimates of Rs343 crore. The net
interest margin (NIM) was down five basis points to 3.15% for the
nine-month period ended December 2006 compared with 3.2% for
H1FY2007.
-
The non-interest income increased by 49.6% to
Rs159.3 crore, mainly due to a higher treasury income, which
increased by 212.5% year on year (yoy) to Rs40 crore compared with
a treasury income of Rs12.8 crore in Q3FY2006 and a treasury loss
of Rs5.4 crore in Q2FY2007. The fee income was up 20.3% yoy and
3.3% quarter on quarter (qoq).
-
With the net income up 13.2% yoy and the
operating expenses up only 3.1% yoy, the operating profit was up
by 21.4% yoy and 24.4% qoq to Rs293.1 crore.
-
Provisions declined by 8.4% to Rs83.2 crore
despite a one-time higher provision charge on account of the
merger mainly due to nil standard assets provisions. A moderate
operating profit growth and a decline in the provisions helped the
PAT grow by 27.2% to Rs146.4 crore.
-
The asset quality of the bank continues to be
healthy with the net non-performing asset (NPA) in percentage
terms at 0.47%, down from 0.8% yoy and 0.5% qoq. The capital
adequacy ratio (CAR) remains at a comfortable 13.7% with the
Tier-I capital at 12.3%. However with the implementation of the
Basel II norms the same is expected to come down to 12.5%.
-
The bank has witnessed serious pressure on the
NIM front, which we feel would sustain considering the rise in the
deposit rates and the bank's inability to mobilise more low cost
deposits. The non-interest income growth excluding the treasury
income remains weak and going forward the incremental recovery
amounts would decrease. Hence the overall non-interest component
would also not add significantly to the operating level. The above
concerns have led us to decrease the FY2008E PAT estimate by 5.4%
to Rs628.5 crore from the earlier projection of Rs664.6 crore. We
have also revised our one-year price target from Rs425 to Rs380.
-
At the current market price of Rs295, the stock
is quoting at 6.7x its FY2008E earnings per share (EPS), 3.3x
pre-provision profits (PPP) and 1x book value (BV). We maintain
our Buy call on the stock with a revised price target of Rs380.
Mahindra &
Mahindra Cluster: Apple Green Recommendation:
Buy Price target: Rs1,050 Current market price: Rs870
Bidding for Punjab Tractors
Key points
-
Mahindra & Mahindra (M&M) has made a
non-binding bid to acquire the private equity fund Actis' 29%
stake and the Burman Family's 14.5% stake in Punjab Tractors Ltd
(PTL).
-
PTL, with an installed capacity to manufacture
60,000 tractors, enjoys an overall market share of 10% in the
domestic tractor market. We believe that acquiring PTL makes good
strategic sense for M&M as it would help consolidate its
presence in the 31-40 horse power (HP) category, and help it to
acquire a dominant status in the >51HP category. This would be
a huge positive as a strong growth is expected in the higher-end
tractor segment.
-
Further, M&M can take advantage of the
strong brand equity of PTL and its strong distribution network.
-
The deal could cost M&M somewhere between
Rs1,200 and Rs1,500 crore (includi g the open offer). Though PTL's
valuations appear to be a bit stretched due to the recent run-up
in its stock price, we do feel that the acquisition would yield
substantial long-term benefits to M&M considering that the
deal would give M&M a dominant status in the tractor industry
(particularly in the higher HP category), and a strong
distribution network.
-
Many other players including TAFE, Escorts,
Tata Motors, the Sonalika group and Ashok Leyland are also in the
race to acquire a stake in PTL, which may heat up the valuations
further.
-
At the current levels, M&M trades at 13.1x
its FY2008E consolidated earnings. We maintain our Buy
recommendation on the stock with a price target of Rs1,050.
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