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Summary
of Contents
STOCK UPDATE
WS Industries
India
Cluster: Vulture's
Pick
Recommendation: Buy
Price target: Rs99
Current
market price: Rs54
Results below
expectations
Result
highlight
-
The Q2FY2007
results of WS Industries (WSI) are below expectations primarily
because of a lower-than-expected top line growth and
higher-than-expected power and fuel costs.
-
The operating
profit for the quarter grew by 30% year on year (yoy) to Rs4.91
crore as the operating profit margin (OPM) expanded by 180 basis
points to 12%. The OPM expanded because of a 10% decline in the
other expenditure and strict control on the employee cost. However
WSI's power and fuel costs increased by 31%. As a percentage of
sales the same increased by 340 basis points to 20.9% on account
of rising crude oil prices. The crude prices have, however, cooled
off substantially from their highs and the same should provide
some respite going forward.
-
The interest
cost increased by 16% and the depreciation rose by 18% on account
of a 20% expansion in the manufacturing capacity of hollow core
insulators. The net profit at Rs1.89 crore grew by 51%
yoy.
-
In a
significant development, WSI has diluted its stake in its relity
subsidiary, WS Electric, from 98% to 59% by placing 42,200 shares
@Rs4,325 each and 50 lakh convertible preference shares with
Schroder, thereby mobilising Rs23.25 crore. This puts the value of
WS Electric at Rs60 crore.
-
The total
value of the realty subsidiary is more or less in line with our
estimates, but the equity dilution in WS Electric is against our
expectations.
-
Out of the 15
lakh square feet of area to be developed into an IT park , WS
Electric will get a total of 300,000 square feet of developed area
and the rest shall go to its partner TCG (the Chatarjee group).
Assuming that the company sells it at the current rate of Rs3,500
per square feet, it would realise Rs105 crore.
Saregama India
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs375
Current market price: Rs217
An
operationally strong quarter
Result
highlight
-
The net profit
before exceptional items of Saregama India Ltd (SIL) is in line
with our expectations.
-
During
Q2FY2007 SIL's revenues grew by 26.2% year on year (yoy) backed by
a three-fold jump in the licence fee income.
-
The
pre-exceptional operating profit for Q2FY2007 grew by 105.5% yoy
with a 700-basis-point expansion in the margins as the licence fee
income rose steeply.
-
However,
during the quarter under review SIL did one-time provisions of
Rs1.4 crore and incurred an asset impairment charge of Rs0.87
crore. Hence, the reported operating profit grew by only
8.4%.
-
The
pre-exceptional profit grew by 66.4% yoy to Rs4.6 crore. With the
above-mentioned provisioning, the reported net profit grew by 16%
to Rs3.2 crore.
-
We believe
there are several positive triggers lined up for SIL over the next
two years, viz the revision of the rates with radio stations,
growth of value-added services in the telecom sector and the
turn-around of its subsidiaries.
-
At the current
market price of Rs217, the stock is quoting at 13.1x its FY2008E
earnings per share (EPS) and 9.7x its FY2008E enterprise value
(EV)/earnings before interest, deprecation, tax and amortisation
(EBIDTA). In view of the stock's attractive valuations, and cash
and cash equivalent of Rs28 per share, we reiterate our Buy
recommendation on the stock with a price target of Rs375.
Orchid Chemicals &
Pharmaceuticals
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs390
Current
market price: Rs210
Strong growth
potential ahead
Result
highlight
-
Orchid
Chemicals reported a 2.7% increase in its net sales year on year
(yoy) to Rs245.7 crore in Q2FY2007. The growth in the sales was
low on account of a high base in the corresponding quarter of the
previous year. On a sequential basis, the sales grew by 21.8%. The
growth in the sales was in line with our expectations, and was
driven mainly by the US generics business and a recovery in the
sales of active pharmaceutical ingredients (API) to the regulated
markets.
-
Orchid's
operating profit margins (OPMs) improved by 90 basis points to
31.7% in the quarter under review. The improvement in the margins
was driven by a 20.4% decline in the company's material costs. The
sharp drop in the material costs was on account of an improved
product and geographical mix, as the company continued to derive
an increasing share of its revenues from the high-margin
formulation exports to the regulated markets. However, the steep
drop in the raw material costs was largely offset by an increase
in the staff costs and regulatory expenses. Consequently, the
company's operating profit (OP) grew by 5.5% to Rs77.8 crore in
Q2FY2007.
-
Orchid's
interest expenses have risen from Rs22 crore in Q1FY2007 to Rs25
crore in Q2FY2007. The increase in the interest cost is due to a
general hardening of the interest rates. Further, the company has
raised its debt level in H1FY2007 by Rs100 crore. The highly
leveraged financial structure of the company continues to remain a
cause of concern.
-
Orchid's net
profit for the quarter rose by 8.2% to Rs29.5 crore. The growth in
the net profit was aided by lower depreciation charges and a lower
tax provisioning in the quarter. The earnings for the quarter
stood at Rs4.5 per share.
-
During the
quarter, the company filed 4 drug master files (DMFs), 2
abbreviated new drug applications (ANDAs) and 4 dossiers for
marketing authorisations (MA) in Europe. The company plans to
continue this accelerated pace of filings in the upcoming
quarters.
-
Going forward,
the addition of non-antibiotic products to the US generics
portfolio, the ramp-up in the European business and contract
research and manufacturing (CRAMS) deals are likely to drive the
company's growth. With these growth drivers in place, Orchid aims
to become a $1 billion company by FY2012.
-
At the current
price of Rs210, Orchid is quoting at an enterprise value
(EV)/earnings before interest, depreciation, tax and amortisation
(EBIDTA) of 8.1x for FY2007 and 5.8x for FY2008. This is way below
its peers like Lupin, Wockhardt and Aurobindo Pharma, which are
trading at an EV/EBIDTA range of 9.0-10.2x. Given the strong
growth drivers of the company and the untapped potential, we
maintain our Buy recommendation on Orchid with a price target of
Rs390.
South East Asia Marine Engineering &
Construction
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs270
Current market price: Rs183
Read between
the lines
Result
highlight
-
For Q3CY2006
South East Asia Marine Engineering & Construction Limited
(Seamec) reported a net profit of Rs0.5 crore, which is below our
expectations. However if we read between the lines, there are
three extraordinary costs, to the extent of Rs13 crore that are
not related to the fleet that was operational during the quarter
under review. Adjusted for these extraordinary costs, the
pre-exceptional net profit at Rs13.5 crore is ahead of our
estimates.
-
The
extraordinary costs include a Rs8 crore mobilisation and repairs
cost incurred on Seamec Princess, a newly acquired vessel all set
to begin its operations. Further Rs4 crore were paid as salary to
the crew of this vessel, which anyway was not operational during
the quarter. There was also an additional depreciation cost of Rs1
crore, charged on account of Seamec Princess.
-
The revenue
for the quarter increased by 90% year on year (yoy) to Rs33.6
crore, as all the company's vessels operated for a higher number
of days and that too at higher charter rates.
-
The operating
profit for the quarter, adjusted for the extraordinary costs
mentioned above, grew by 232% to Rs16.5 crore. The reported
operating profit declined by 9%.
-
The other
income declined by 52% as the company utilised its excess cash to
buy Seamec Princess. The depreciation charges jumped by 52%, as
there was an additional depreciation of Rs1 crore charged on
account of Seamec Princess.
-
Adjusted for
the three extraordinary costs, the net profit for the quarter grew
by 413% to Rs13.5 crore. The reported net profit at Rs0.5 crore
declined by 81%.
VIEWPOINT
Glenmark
Pharmaceuticals
Rides high on
milestone anticipations
Highlights of
analyst meet
-
Glenmark
believes that the creation and ownership of intellectual property
(IP) are critical for differentiation and value creation;
therefore it plans to focus on building IP assets and
out-licencing these to drive its growth.
-
The company
expects to receive $30 million from Forest Laboratory in FY2008.
As per the company, the said milestone payment is already due, but
has been delayed. Currently, the company is scouting for a partner
in Europe to out-licence the GRC 3886 molecule for the European
market, which would also trigger a milestone payment.
-
In October
2006, the company signed an out-licencing agreement with Germany's
Merck KgaA for its prospective diabetes molecule GRC 8200 for a
total of €190 million (approximately Rs1,110 crore), including an
up-front payment of €25 million (approximately Rs146
crore).
-
For the USA,
the company believes that to maintain the growth momentum it must
continuously expand its product basket either by its own product
filings or by product development alliances or by licencing
marketing rights or by acquiring registrations in the USA.
-
For Europe,
Glenmark plans to focus on select branded generic markets like
Spain, Italy and Eastern European countries. It is looking to
acquire a company in Europe (having sales of 8-12 million euros
and a strong product pipeline) to establish a front end. It plans
to conclude the acquisition by the end of FY2007.
-
Glenmark has a
target for a 100% growth in Latin America in FY2007.
-
Glenmark
currently has 6 new chemical entity (NCE) molecules in its
pipeline; 2 in Phase II trials, 3 entering the Phase I trials
shortly and one in the pre-clinical stages. Its target is to take
one molecule into the clinical trials every year. The company
plans to conclude one more out-licencing deal in the current
financial year.
-
The company is
upbeat on its growth prospects for the next two years. It has
raised its growth guidance and its profit guidance for FY2007 and
FY2008. As per the company's projections, it is planning to grow
at a compounded annual growth rate (CAGR) of 52% over FY2006-08E,
with profits growing at a CAGR of over 137% over the same period.
It has raised its earnings per share (EPS) guidance from Rs36
earlier to Rs42. But the projected EPS has been powered largely by
the anticipated milestone payments of $31 million in FY2007 and
$69 million in FY2008. Considering the uncertainty of the
milestone receipts, if we remove them from the projected earnings
of Glenmark, the revised EPS would reduce by 50%.
-
At the current
market price (CMP) of Rs437, the stock is trading at 18.9x its
consensus FY2008
earnings. |
