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Summary
of Contents
STOCK
UPDATE
Navneet Publications
(India)
Cluster: Emerging Star
Recommendation:
Buy
Price target: Rs67
Current market price: Rs55.5
Price target revised to Rs67
Result highlights
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Navneet
Publications reported a tepid growth of 2.9% in its revenues to
Rs45.7 crore during the third quarter. The publication business
showed a decent growth of 11.7% to Rs28.6 crore. However, the
stationary business continues to remain sluggish and declined by
11.4% to Rs16.4 crore.
-
The operating
profit margin (OPM) of 13.7% is 20 basis points lower than 13.9%
reported in Q3FY2006. Consequently, the operating profit grew by
just 1.1% to Rs6.3 crore.
-
However, the
healthy other income component of Rs0.9 crore (includes foreign
exchange [forex] gains of Rs0.6 crore) against the negative other
income of Rs0.2 crore in Q3FY2006, enabled the company to report a
healthy earnings growth of 43.2% to Rs3.4 crore.
-
On a
nine-month basis, the revenues and earnings have grown by 12.1% to
Rs279.9 crore and by 18.6% to Rs42.2 crore respectively. The OPM
has improved by 190 basis points to 24.2%, largely due to the
better profitability in the publication business.
-
Grafalco, the
wholly-owned subsidiary in Spain, reported revenues of 1.05
million euros and a net loss of 0.02 million euros in its first
full year of operations ended December 2006. It reported profit on
the operational level and is expected to show a profit on the net
level in the calendar year 2007. The results of Grafalco are not
yet consolidated in the quarterly performance.
-
Along with the
results the company announced that it would invest Rs25 crore to
set up a windmill-based power generation plant in Gujarat. The
same has been approved in the recently held board meeting.
-
To factor in
the lower-than-expected performance of the stationary business, we
have revised downwards the earnings estimates by 1.7% and 4.1% for
FY2007 and FY2008 respectively. At the current price the stock
trades at 12x FY2007 and 10x FY2008 estimated earnings. We
maintain our Buy recommendation on the stock with a one-year
target price of Rs67 (12x FY2008 earnings).
TVS Motor
Company
Cluster: Emerging Star
Recommendation: Book
Profit
Current market price: Rs75
Book Profit
Result highlights
-
TVS Motors'
Q3FY2007 results are below our expectations primarily due to the
intensifying competition in the two-wheeler segment and rising raw
material prices leading to lower profitability.
-
The company
has recorded a 7.3% growth in its net sales for the quarter, which
stood at Rs935.4 crore due to a marginal volume growth of 1.4% and
a realisation growth of 5.8% year on year (yoy).
-
The operating
profit for the quarter declined by 51% to Rs29.6 crore as the
operating margins declined by 380 basis points to disappointing
levels of 3.2%. Even on a sequential basis, the margins were down
200 basis points. The lower margins are largely attributed to the
lower sales volumes and a rise in the raw material
costs.
-
The profit
before tax (PBT) during the quarter stood at Rs14.1 crore as
compared to Rs45 crore a year ago. The profit after tax (PAT)
declined by 63% to Rs11.5 crore.
-
Considering
the competitive pressures in the two-wheeler industry, we expect
the pressure on the profit margins to continue in spite of the new
product launches. We are downgrading our estimates for FY2007 by
30% and for FY2008 by 80%.
-
At the current
market price of Rs75, the stock discounts its FY2008E earnings by
17.2x and FY2008E EBIDTA by 9.1x. We advise to book profit in the
stock.
Bharat Heavy
Electricals
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs2,650
Current market price: Rs2,506
Back on course!
Result highlights
-
At Rs667.7
crore, the Q3FY2007 net profit of Bharat Heavy Electricals Limited
(BHEL) grew by 57.8%. The same is above our expectations,
primarily because of an increase in the margins sequentially and a
robust top line growth.
-
BHEL's
revenues for the quarter grew by a robust 30.5% year on year (yoy)
to Rs4,339.7 crore driven by order booking. The power division
registered a 28.6% growth in the revenues whereas the industry
division recorded a 33.2% growth in the revenues.
-
The operating
profit margin (OPM) for the quarter increased by 329 basis points
yoy and by 775 basis points sequentially to 21.4%, much above our
estimates. Consequently the operating profit for the quarter
registered a growth of 54.1%, higher than the revenue
growth.
-
The other
income increased by 56.2% to Rs185.5 crore mainly on account of
the rising yields on the huge cash reserves of the
company.
-
The order
inflows during the quarter were slower at 9.5% yoy at Rs5,710
crore. There are some orders that have been awarded post the
quarter. We are not overtly concerned about this slow-down because
the order backlog continues to be robust at Rs46,700 crore, which
is 3.2x its FY2006 sales imparting great visibility to the
stock.
-
The board has
announced a bonus of 1:1 and an interim dividend of Rs12.5 per
share.
-
At the current
levels, the stock is trading at 20.0x its FY2008E earnings and
12.0x its FY2008E earnings before interest, depreciation, tax and
amortisation (EBIDTA). Given the expectations of the continued
growth in its order book, a strong compounded annual growth rate
(CAGR) of 35.1%, we believe the valuations are attractive. Even on
a comparative basis the stock is trading at a significant discount
to its peers like Siemens, ABB and Areva. We maintain our Buy
recommendation on the stock with a price target of Rs2,650.
JK
Cement
Cluster: Cannonball
Recommendation:
Buy
Price target: Rs295
Current market price: Rs193
Q3FY2007 results beat expectations
Result highlights
-
JK Cement has
reported a net profit of Rs50 crore, much ahead of our
expectations, clocking a mammoth year-on-year (y-o-y) growth of
544%.
-
The net sales
grew by a healthy 44% year on year (yoy) to Rs319 crore on the
back of a buoyant 36% growth in the average cement realisations to
Rs3,186 per tonne. The grey cement realisations improved by 45%
yoy and by 6% quarter on quarter (qoq) to Rs2,917 per tonne
whereas the white cement realisations improved by 14.6% yoy and by
5% qoq to Rs7,609 per tonne.
-
The company's
operating expenditure grew by 22% yoy to Rs230.7 crore, lower than
expected. The power & fuel costs reduced marginally to Rs77.2
crore on a y-o-y basis on account of an increase in the share of
blended cement to 56% vis-à-vis 40% last year. The freight
expenses increased by 24% yoy to Rs59.2 crore whereas the costs
per tonne declined marginally by Rs15 on a sequential
basis.
-
On account of
the company's high leverage to the cement prices as well as a
benign increase in the costs, the company's operating expenditure
increased by 168% yoy to Rs88.3 crore. The operating margins
expanded by a huge 1,430 basis points yoy and by 5% qoq to 28%.
The cumulative impact of the rising prices and lower costs
resulted in the earnings before interest, tax, depreciation and
amortisation (EBITDA) per tonne multiplying 2.75x yoy to
Rs882.
-
The company's
net interest cost has reduced by 47% yoy to Rs8.1 crore on account
of a) an interest income component of Rs4 crore from the
unutilised proceeds of the foreign currency convertible bonds
(FCCBs); and b) the quarterly repayment of the long-term debt. The
depreciation provision stood flat at Rs8.2 crore. Consequently,
the net profit zoomed by 544% yoy to Rs50 crore.
-
The company
has acquired the manufacturing facilities of Nihon Nirmaan Limited
from IDBI Limited for Rs42 crore and thus will be able to add
close to 3.5 lakh tonne of grey cement to its existing
capacity.
-
Considering
the better-than-expected performance in the 9-month period as well
as factoring in the acquisition of the new facility, we are
upgrading our FY2007 and FY2008 earnings estimates by 13% to Rs167
crore and by 3% to Rs222.3 crore respectively. The revised
earnings per share (EPS) would stand at Rs24.9 for FY2007 and
Rs31.8 for FY2008.
-
At the current
price of Rs193, the stock is discounting its FY2007E earnings by
7.9x and FY2008E earnings by 6.1x. On an enterprise value/tonne
basis, the stock is trading at a valuation of USD73.5 per tonne
whereas its closest peer Shree Cement commands a valuation of
USD179 per tonne. Even after discounting for the efficient cost
structure and the consistent performance of Shree Cement, we
believe such a steep discount is unjustified and thus the company
should command higher valuations. We maintain our Buy
recommendation on the stock with a price target of Rs295.
SECTOR
UPDATE
Information
Technology
A quarter of strong performance
Key points
-
The Indian information technology (IT) services
companies reported a robust performance in a difficult quarter.
The volume growth continues to be healthy and most of the
companies were able to show an improvement in the margins on a
sequential basis, despite the adverse impact of the steep
appreciation of the rupee.
-
The outlook is optimistic in terms of the
demand environment as well as the pricing scenario. Despite the
expected slow-down in the growth of the IT budgets, the growing
awareness and willingness to increase offshore outsourcing is
likely to drive the growth in the calendar year 2007. However, the
exchange rate fluctuations continue to be the wild card that could
potentially spoil the party.
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In the note, we have revised the price targets
of the companies under our coverage in line with the expected
growth in the coming years. We prefer Infosys Technologies and HCL
Tech among the front-line stocks. In the mid-cap space, our top
picks are NIIT Tech and 3i
Infotech . |
