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Summary
of Contents
STOCK UPDATE
Associated Cement
Companies
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs1,050
Current market price: Rs780
A whopper performance
Result highlights
- At Rs291 crore ACC's Q2CY2006 pre-exceptional net profit is
above our expectation primarily because of a higher-than-expected
improvement in the cement realisation.
- The net sales for the quarter grew by a healthy 32% driven by
a 5.2% growth in the cement volume and a whopping 33.8%
year-on-year (y-o-y) growth in the cement realisation.
- The growth in the cement realisation has been higher than the
average rise of 20-22% in cement prices on account of two reasons.
One, ACC's higher exposure to the southern region, where cement
price hikes have been higher and two, higher dispatches from ACC's
Gagal unit in Himachal Pradesh, which is an excise-free zone.
Further on an overall basis also the excise duty as 5% of sales
has fallen to 9.7% from 11.8% last year.
- The company's operating profit margin (OPM) for the quarter
improved by a staggering 1,190 basis points to 31.2%, driven by
the sharp increase in the cement realisation.
- With a 32% growth in the revenues and a 1,190-basis-point
improvement in the OPM, the operating profit for the quarter
jumped by a steep 113.6% to Rs455 crore.
- On a like-to-like basis, cement revenues have grown by 39.6%
and cement earnings before interest and tax (EBIT) have grown by
123%.
- On the cost front, despite a 34% increase in the staff cost, a
12% increase in the freight cost and a 9.8% increase in the power
and fuel cost per tonne, the total cost per tonne increased by
just 7%.
- With a strong cash flow from the operations, the company was
able to repay its debts and hence the interest cost declined by
33% in the quarter. The pre-exceptional net profit for the quarter
jumped by a handsome 123% to Rs291 crore. The reported net profit,
which includes the gains from the sale of land and the Mancherial
unit (which have been treated as extraordinary items by us
including the tax of Rs32 on the same) stood at Rs405 crore, up
191%.
Ashok
Leyland
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs53
Current market price: Rs31
Acquisition positive
Ashok Leyland Ltd (ALL) has signed a framework
agreement to acquire the truck business of the Czech truck maker,
Avia. We view the acquisition in positive light since it would aid
ALL to gain a foothold in some of the European markets. The
acquisition would also give ALL access to the superior technological
and designing capabilities of Avia and may also boost the revenues
from its auto component business in the future. Further, Avia has
some strong brands in the light commercial vehicle (LCV) category
which can be launched in India by ALL. The acquisition is expected
to get completed by August 2006 and the company has not yet
disclosed the cost of the acquisition.
In another development, the Hindujas have bought
out Iveco's 30% stake in the holding company, Land Rover Leyland
International Holding (LRLIH). LRLIH holds a 49.53% stake in ALL and
hence Iveco indirectly controls a 15% stake in ALL. The transaction
is believed to have been struck at close to Rs600 crore. Since Iveco
was not adding any value to the company, we view this as a positive
development.
Reliance
Industries
Cluster:
Evergreen
Recommendation: Buy
Price target:
Rs1,200
Current market price: Rs996
Results in line with expectations
Result highlights
-
The Q1FY2007 net profit of Reliance Industries
Ltd (RIL) grew by 10.6% year on year (yoy) to Rs2,547 crore in
line with our expectation. The growth could have been higher but
for the partial shut-down of its refinery and some petrochemical
units.
-
The refining & marketing (R&M) business
witnessed another quarter of strong performance with its sales
growing at 29.6% yoy despite a lower capacity utilisation. The
company achieved the highest ever gross refining margin (GRM) of
$12.4 per barrel (bbl) during the quarter.
-
The profit before interest and tax (PBIT) in
the R&M business grew by 13.8% yoy despite the facts that the
company had to bear high losses on retailing of the products and
its capacity utilisation was lower than last year's.
-
The petrochemical business also saw a strong
momentum with the revenue growing by 46.7% yoy. However, the PBIT
grew by a slower 23.2% yoy. The PBIT margin declined by 211 basis
points due to higher input cost and the partial shut-down of some
cracking units.
-
The overall operating profit grew by 18.8% yoy.
The operating profit margin (OPM) declined by 277 basis points.
-
RIL has identified organised retailing, and oil
exploration and production (E&P) activities as the future
growth drivers. While we have factored the value of the oil
E&P activities in our price target (Rs362 per share), we
believe that the organised retailing business could add anything
between Rs100 and Rs160 to the stock's value. However we have not
factored the same in our price target.
-
We are reiterating our Buy recommendation on
the stock with a revised price target of Rs1,200 based on the
sum-of-parts valuation method.
NIIT
Technologies
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs296
Current market price: Rs181
Results in line with expectations
Result highlights
-
NIIT Technologies reported a growth of 14.9%
quarter on quarter (qoq) and of 39.9% year on year (yoy) in its
consolidated revenues to Rs191 crore during the first quarter. The
sequential growth was driven by a 4.5% sequential growth in the
organic business. The incremental revenues (of around Rs17.4
crore) from the acquisition of the UK-based Room Solutions (RM)
accounted for an 11.4% growth on a sequential basis.
-
The operating profit margin (OPM) improved by
20 basis points as compared with that in Q1FY2006 but slipped by
100 basis points qoq to 19%. The sequential decline was caused by
the adverse impact of the annual wage hikes (17% average hike to
the offshore employees and around 5% hike to the onsite employees)
and the relatively low margin of RM. The adverse impact was
partially mitigated by the depreciation of the rupee and the
decline in the selling, general and administration (SG&A)
expenses (from 22% to 20%) as a percentage of sales.
-
The other income component was boosted by the
foreign exchange fluctuation gains of Rs1.7 crore and stood at
Rs3.5 crore, up from Rs1.1 crore in Q4FY2006 and a negative other
income of Rs0.1 crore reported in Q1FY2006. Thus, despite the
higher-than-expected tax rate and minority interest, the earnings
growth of 13.4% qoq and of 55.7% yoy to Rs21.8 crore was higher
than our estimate.
-
In terms of the outlook, the growth in the
organic business is likely to accelerate on the back of healthy
fresh order intake of $38 million in Q1 and the consequent jump in
the pending order backlog to $90 million (up from $76 million in
Q4) executable over the next one year. The margins are likely to
get dented in Q2 due to one-time charges related to the
integration of RM but the same would get normal in the following
quarters.
-
At the current market price the stock trades at
8.3x FY2007 and 6.6x FY2008 estimated earnings. We maintain our
Buy call on it with the price target of Rs296.
Thermax
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs340
Current
market price: Rs245
Q1FY2007 results�first cut analysis
Result highlights
-
Thermax' consolidated revenues grew by 23.7%
year on year (yoy) to Rs355.2 crore in Q1FY2007, in line with our
expectations. The energy segment grew by a robust 21.9% yoy to
Rs281.2 crore while the environment segment grew by 26.1% yoy to
Rs112.5 crore.
-
The company's operating profit margin (OPM)
grew by 400 basis points yoy to 10.4% in the quarter, beating our
expectations. The robust margin expansion was on the back of the
fall in the raw material cost, which as a percentage of sales
declined from 63.9% in Q1FY2006 to 58.0% Q1FY2007. The operating
profit grew by 101.3% yoy to Rs37.0 crore, ahead of our
expectations.
-
The energy segment saw a sharp increase in the
profit before interest and tax (PBIT) margins, which ballooned by
620 basis points to 11.5%. The environment segment had a lower
PBIT of 6.5%.
-
The net profit grew by 202.6% yoy to Rs25.9
crore in Q1FY2007, way ahead of our expectation. The robust margin
expansion, higher other income and lower effective tax rate are
attributable to the massive upward swing in the net profit.
-
The stand-alone profit after tax (PAT) stood at
Rs27.5 crore for Q1FY2007. The difference between the consolidated
and the stand-alone PAT is attributable to the Rs1.5 crore loss of
ME Engineering, UK, Thermax' wholly-owned subsidiary.
-
The consolidated order backlog stood at Rs
2,666 crore in Q1FY2007 as against Rs1,730 crore in Q4FY2006, a
strong growth of 54.1% quarter on quarter (qoq) and a growth of
131.8% yoy.
-
The stock is trading at a price/earnings ratio
(PER) of 12.8x FY2008E consolidated earnings and enterprise value
(EV)/earnings before interest, depreciation, tax and amortisation
(EBIDTA) of 7.0x FY2008E. We continue to remain bullish on the
company and maintain a BUY on Thermax with a price target of
Rs340.
SKF
India
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs406
Current
market price: Rs280
Impressive performance
Result highlights
-
SKF India's Q2CY2006 net profit at Rs25.3 crore
grew by 29.2% year on year (yoy).
-
The net sales for the quarter stood at Rs328
crore marking a growth of 84.5%. The steep growth in the revenues
has come from the indenting business, which hitherto was conducted
on a commission basis.
-
On a like-to-like basis the operating profit
margins (OPMs) have shown an improvement of 130 basis points to
13% yoy. The reported OPMs for the quarter were down 3.1% as the
indenting business, which has a lower margin of close to 4%,
brought down the overall OPMs.
-
The operating profit for the quarter has shown
a significant improvement of 49% and the same stood at Rs42.6
crore.
-
The stock trades at compelling valuations of
8.3x CY2007 earnings.
VIEWPOINT
Sona Koyo Steering
Systems
Steering to high-growth zone
Result highlights
-
The net sales of Sona Koyo Steering Systems
(Sona Koyo) increased by an impressive 50.3% to Rs115.6 crore
during Q1FY2007. The sales were higher because the company began
to supply electronic power steering (EPS) systems to Maruti Udyog
during the quarter. Currently, Sona Koyo is the only company in
India to manufacture EPS systems.
-
The operating profit margin (OPM) improved by
148 basis points due to the savings on account of lower employee
cost and other expenditure. Consequently, the operating profit
rose by 75.5% to Rs11.95 crore. The sharp rise in the raw material
cost (up from 69.1% of sales in Q1FY2006 to 73.4% in Q1FY2007)
restricted the profit growth.
-
The company incurred a loss of Rs1 crore on
account of foreign currency loan translation. The interest cost
was higher due to the additional loans taken to fund the capital
expenditure (capex) and increased working capital
requirements.
-
As a result, the net profit for the quarter
rose by 31.5% to Rs3.67 crore.
-
The rising exports and a strong demand for EPS
systems should bolster Sona Koyo's growth in the next few years
whereas a higher localisation of components should help the
company to expand its margins. New client addition and
commencement of supplies to Fuji Autotech would also drive the
revenue growth for the company. For the current fiscal, the
company is targeting exports of Rs80 crore and revenues of Rs475
crore. At the current market price of Rs81, the stock quotes at
21.6x its FY2006 earnings and 10.9x its enterprise value
(EV)/earnings before interest, depreciation, tax and amortisation
(EBIDTA).
SECTOR
UPDATE
Information
technology
Infosys ahead of its
peers
On an overall basis, the performance of the front-line
information technology (IT) companies in Q1FY2007 has been ahead of
expectations. The volume growth was robust and the demand
environment continues to be favourable. The billing rates were
largely stable with the new business coming in at higher than
average billing rates. Also some of the existing businesses were
getting renegotiated at higher billing rates. However, the positive
impact was partially mitigated by the volume discounts offered to
the large clients (with an annual revenue run rate of over $10
million
dollars). |
