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Summary
of Contents
PULSE TRACK
SHAREKHAN
SPECIAL
Monetary policy
review
The Reserve Bank of India (RBI) has raised the repo
rate by 25 basis points to 7.5% in the third quarter review of its
Monetary Policy for 2006-07 in line with the market expectations.
The RBI has maintained its inflation target stating that the current
high inflation levels may be transitional. Overall the RBI continues
to remain vigilant. While the rate hike was on expected lines the
prudential measures on standard assets provisioning announced by the
RBI reaffirms its focus on the quality of assets in the system.
STOCK UPDATE
Ahmednagar
Forgings
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs380
Current market price: Rs280
Great show
Result highlights
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Ahmednagar
Forgings has reported a stellar performance for Q2FY2007 and the
results are better than our expectations.
-
The top line
for the quarter grew by 48.5% to Rs152.4 crore. We believe that
the utilisation level of even the new capacities improved during
the quarter. The company had added 40,000 tonne per annum (tpa) of
capacity in June last year. Further, it has raised the capacity by
another 40,000tpa in January 2007 as the lines acquired from Anvil
International last year were shifted to India. Last year, the
company had acquired two forging lines from Anvil International,
which is a part of Tyco International, for Rs35 crore. Anvil
International Inc is one of the largest manufacturers of pipe
fittings and pipe hangers in the world.
-
The operating
profit margin (OPM) of the company improved by 80 basis points to
20.7% as the operating profit rose by 54.2% year on year (yoy) to
Rs31.6 crore. The margin improved despite a rise in the raw
material cost from 61.9% to 66.6% as a percentage of sales. The
margin improvement was possible as a result of significant savings
made in its staff cost and other expenses.
-
The interest
cost was higher as a result of the higher debt taken to fund its
expansion plans. Stable depreciation charge and taxes caused the
profit to grow by a brilliant 65.8% to Rs17.5 crore for the
quarter.
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We expect a
very strong growth in the top line from hereon, triggered by the
Rs850-crore order book of the company and the commencement of the
forging lines of Anvil. The increased capacity would also start
contributing from the next quarter onwards. A higher contribution
from the machined product business and higher non-automotive
revenues should also trigger a growth in the margins going
forward.
-
At the current
market price of Rs280, the stock discounts its FY2008E earnings by
7.3x and trades at an enterprise value (EV)/earnings before
interest, depreciation, tax and amortisation (EBIDTA) of 4x. We
believe that the valuations are very attractive and maintain our
Buy recommendation on the stock with a price target of
Rs380.
Subros
Cluster: Ugly
Duckling
Recommendation: Buy
Price target: Rs370
Current
market price: Rs248
Results in line with expectations
Result highlights
-
The Q3FY2007
results of Subros, adjusted for extraordinary expenses, are in
line with our expectations.
-
The top line
grew by 17.8% year on year (yoy) to Rs182.7 crore led by a volume
growth of 12.6% and a realisation growth of 4.5%.
-
The operating
margins grew by 50 basis points to 11.1% as the operating profits
grew by 24.1% to Rs20.3 crore. This is after adjusting for an
extraordinary item of Rs1.5 crore relating to the voluntary
retirement scheme (VRS) expenditure during the quarter. The raw
material cost as a percentage of sales has come down by 40 basis
points to 69.4% while the staff cost has risen slightly.
-
Both the
interest cost and depreciation rose considerably due to the high
capital expenditure of the company. Its Gurgaon facility has begun
its operations and the benefits of the same should start rolling
in from the next quarter.
-
The profit
after tax (PAT) for the quarter marked a growth of 23.1% to Rs8.1
crore. The PAT after extraordinary items was flat yoy at Rs6.6
crore.
-
At the current
market price of Rs248 the stock is trading at compelling
valuations of 6.1x FY2007E earnings per share (EPS) and 3.1x
FY2008E enterprise value (EV)/earnings before interest,
depreciation, tax and amortisation (EBIDTA). The valuations are at
a huge discount to the valuations commanded by its peers. We
maintain our Buy recommendation on the stock with a price target
of Rs370.
Tata
Elxsi
Cluster: Emerging Star
Recommendation:
Buy
Price target: Rs356
Current market price: Rs309
Price target revised to Rs356
Result highlights
-
Tata Elxsi Ltd
(TEL) announced a revenue growth of 7.3% quarter on quarter (qoq)
and 39.1% year on year (yoy) to Rs80.5 crore. The revenue growth
was largely contributed by a growth of 8.3% qoq and of 51% yoy in
the software service business to Rs69 crore. On the other hand,
the system integration business remained largely stagnant at
Rs11.6 crore, down 5.9% yoy and up 2% on a sequential
basis.
-
The operating
profit margin (OPM) improved by 190 basis points sequentially and
by 420 basis points yoy to 22.7%, which is one of the highest
reported in the past 12 quarters. The company continues to show an
improving trend in its margin due to the shift in the revenue mix
towards the high-margin software service business The software
service business contributed 86.4% of the revenues in the first
nine month of FY2007 as compared with 80% in FY2006 and 78% in
FY2005. Moreover, the margin in the software service business
itself has improved over the past few quarters due to the efforts
taken to focus on the high-end business.
-
Consequently,
the earnings grew at a robust rate of 17.4% qoq and 83.1% yoy to
Rs14 crore during the quarter, way ahead of expectations. This is
the second consecutive quarter of over 15% sequential growth in
the earnings.
-
In terms of
operational highlights, the management continues to be confident
about the growth visibility of the software service business. It
is reflected in the efforts taken to expand the existing
development facilities, and set up new offshore centres in Kerala
and a near-shore development facility in Japan.
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To factor in
the robust performance of the third quarter, we have revised
upwards the earnings estimates by 6.1% for FY2007 and by 4.2% for
FY2008. At the current market price the stock trades at 19x FY2007
and 14.8x FY2008 estimated earnings. We maintain our Buy call on
the stock with a revised target price of Rs356.
Sun Pharmaceutical
Industries
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs1,341
Current market price: Rs1,028
Results beat expectations; upgrading
earnings
Result highlights
-
The
consolidated net sales of Sun Pharmaceuticals (Sun Pharma) grew by
27.1% year on year (yoy) to Rs540.0 crore in Q3FY2007. The strong
growth was driven by an increase of 36.3% in its exports and a
19.0% growth in its domestic business. The sales growth was ahead
of our expectations.
-
Its US
subsidiary, Caraco Pharma, continued its growth momentum. Caraco
Pharma's sales grew by 51% yoy to $31.3 million and its profits
expanded by over 15 times to $10.1 million during the
quarter.
-
A sharp spike
of 54.1% in the research and development (R&D) expenses of Sun
Pharma led to a decline in its operating profit margin (OPM),
which contracted by 40 basis points to 32.1% in Q3FY2007. The
margin contraction caused the operating profit (OP) to increase by
25.6% to Rs173.3 crore. Barring the higher R&D cost, the
company's margin actually showed an expansion of 190 basis
points.
-
Sun Pharma's
net profit for Q3FY2007 stood at Rs198.9 crore, up 35.8% yoy. The
growth in the profit was aided by a 1.5- old increase in the
company's other income to Rs63.6 crore and a deferred tax
write-back of Rs4.0 crore.
-
In view of the
better than expected performance in M9FY2007, led by Caraco
Pharma's improved profitability, the higher than industry growth
in the domestic formulation business, a higher than expected other
income and reduced tax rates, we are revising our earnings
estimates for FY2007 and FY2008. We are however keeping our
revenue estimates intact. We have revised upwards our net profit
estimates by 5% for FY2007 to Rs748.6 crore and by 1% for FY2008
to Rs936.5 crore. Our revised earnings estimates stand at Rs38.3
per share for FY2007 and Rs47.9 per share for FY2008.
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At the current
market price of Rs1,028, Sun Pharma is valued at 26.9x FY2007E and
21.4x FY2008E fully diluted earnings. The company's future growth
prospects, the positive contributions from its past acquisitions
and the unlocking of value to take place after the demerger of the
R&D division reinforce our positive stance on the company. We
maintain our Buy recommendation on the stock with a price target
of Rs1,341.
Selan Exploration
Technology
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs94
Current market price: Rs77
Ramp-up in volumes delayed
Result highlights
-
Selan
Exploration Technologies (SETL) reported a revenue growth of 22.6%
to Rs5.4 crore. The softening of the crude oil prices globally
dented the overall growth in the company's revenues during the
quarter.
-
The operating
profit margins stood at 50.4% (as compared to 62% in Q3FY2006) and
were largely impacted due to the higher provisioning for the
development of hydrocarbon reserves (provisioning of Rs1 crore as
compared to Rs0.3 crore in Q3FY2006).
-
However, the
jump in the other income to Rs0.7 crore (up from Rs0.2 crore)
aided the growth in the company's earnings. Consequently, the
earnings grew by 20% to Rs1.9 crore.
-
On a
nine-month basis, the revenues and earnings have grown by 23.5% to
Rs17.7 crore and by 33.2% to Rs7.2 crore respectively. However,
after adjusting for the one-time income in the form of arrears of
Rs1.44 crore received in Q1FY2006, the revenues and earnings have
grown by 37.3% and 56.5% respectively.
-
The efforts
taken to further develop the oil fields are also yielding results.
The commercialisation of two new wells and the work over drilling
in some of the old wells have resulted in volume growth of 16.5%
to around 64,000 barrels of oil & oil equivalents (boe) during
the first nine months of FY2007.
-
The management
has reiterated its guidance of 30-40% growth in the volumes during
the current fiscal. However, given the lower-than-expected growth
in the volumes in the first nine-month period, the company is
unlikely to achieve its stated guidance. To factor in the
lower-than-expected growth in the volumes, but higher than assumed
average realisations, the earnings estimates for FY2007 are
revised upwards by over 10% to Rs9.1 crore. On the other hand, we
are downgrading the earnings estimates for FY2008 to factor in the
lower-than-expected ramp-up in the volumes.
-
At the current
market price the stock trades at 12.2x FY2007 and 6.8x FY2008
estimated earnings. We maintain our Buy call on the stock with a
target price of
Rs94. |
