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Summary
of Contents
STOCK UPDATE
Ranbaxy
Laboratories
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs558
Current
market price: Rs354
Strong recovery in operating performance
Result highlights
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The consolidated sales of Ranbaxy Laboratories
(Ranbaxy) grew by 8.8% year on year (yoy) to Rs1,433.9 crore in
Q2CY2006. The sales growth was led by strong performances in North
America (+11%) and Asia Pacific & Middle East (+35%). On the
other hand, the company posted a decline in its sales in Brazil,
China and the European markets, mainly because of regulatory
reforms (in Brazil and Europe) and pricing pressures (in the UK).
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The company's operating profit margin (OPM)
improved by 570 basis points yoy to 18.2% in the quarter, largely
due to a 27% reduction in the research and development (R&D)
expenses and a 7% drop in the selling, general &
administrative (SG&A) expenses. Consequently, the operating
profit (OP) grew by 56% yoy to Rs264.8 crore.
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The profit after tax (PAT) stood at Rs121
crore, growing by 20% yoy and by 70% quarter on quarter. The PAT
growth was subdued on account of a lower other operating income
and a foreign exchange (forex) loss of Rs50.6 crore in the
quarter.
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Starting from June 23, 2006, Ranbaxy secured
180-day exclusivity rights to market generic Simvastatin 80mg in
the US market. In its first week of launch, the product has
garnered a market share of almost 50% in the USA.
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The US Food and Drug Authority (USFDA) has
issued a warning letter to Ranbaxy's plant at Paonta Sahib for
deviations from good manufacturing practices. This might delay
Ranbaxy's launch of Pravastatin in the USA. However, the company
is proactively working to resolve the issue.
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The company maintains its growth guidance of
18% and of earnings before interest, depreciation, tax and
amortisation (EBIDTA) margin target of 16% for CY2006. It has
achieved a growth of 10.6% in H1CY2006 and thus expects to grow at
a higher rate in H2CY2006, in order to grow at its targeted rate
during the year.
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In line with the management guidance, we are
revising our earnings estimates marginally downwards for CY2006E
and CY2007E. CY2006E earnings have been revised downwards by 1.1%
to Rs17.4 per share and CY2007E have been revised downwards by
7.6% to Rs22.3 per share. Assigning a price/earnings multiple of
25x, the revised price target stands at Rs558. At the current
market price of Rs354, Ranbaxy is trading at 15.9x its CY2007E
earnings. Considering the strong growth prospects for the future,
the robust R&D pipeline and the good performance in this
quarter, we maintain our Buy call on the company with a revised
price target of Rs558.
ITC
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs220
Current
market price: Rs168
Cheers for all businesses
Result highlights
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ITC's adjusted net profit grew by 22.7% year on
year (yoy) to Rs652.0 crore, in line with our expectations.
-
The net revenues for the quarter grew by 25.7%
yoy as most of its businesses grew strongly. However, the growth
in the revenues from cigarettes as well as the paperboard business
was slightly below our expectations.
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The profit before interest and tax (PBIT) grew
by 21.6% yoy with margin expansion in all the businesses. Overall
the PBIT margins (adjusted for one-off items) expanded by 8.4
basis points yoy.
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The non-cigarette fast moving consumer goods
(FMCG) business is the only business in ITC's portfolio which is
making losses. However, with the strong growth in the revenues,
the magnitude of the losses ie, the loss margins have come down
considerably.
-
We have always liked the way ITC has
channelised the strong cash flows generated from the cigarette
business into the other businesses without affecting its return on
capital employed. At the current market price of Rs168, the stock
is attractively quoting at 19.0x its FY2008E earnings per share
(EPS) and 12.0x FY2008E enterprise value (EV)/earnings before
interest, depreciation, tax and amortisation (EBIDTA). We maintain
our Buy recommendation on ITC with a price target of Rs220.
3i
Infotech
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs244
Current
market price: Rs137
In line with expectations
Result highlights
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3i Infotech reported a growth of 7.1% quarter
on quarter (qoq) and of 45.2% year on year (yoy) to Rs128.5 crore
for Q1FY2007. Excluding the impact of its recent acquisition
Datacons, the growth in the organic business stood at 5.4% qoq,
which is below our expectation.
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The operating profit margin (OPM) improved by
150 basis points to 22.8% on a sequential basis. Despite the
annual salary hikes in Q1, the OPM improved on the back of the
increase in the proportion of the contribution from the
high-margin product business (up 50 basis points to 48.9% of the
net revenues), higher gross margins in the service business (a
270-basis-point improvement to 39.3%) and favourable foreign
exchange (forex) movement.
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The other income component stood at Rs4.8 crore
as compared with Rs1.6 crore in Q4FY2006 and Rs1.5 crore in
Q1FY2006. The other income was boosted by forex gains of Rs1.1
crore and the incremental interest income of Rs2 crore on the
foreign currency convertible bond (FCCB) proceeds of $50 million.
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The higher other income negated the adverse
impact of the higher interest outgo and depreciation charges
during the quarter. Consequently, the consolidated earnings grew
by 21.7% qoq and by 107% yoy to Rs21.3 crore, ahead of our
expectation of Rs20 crore.
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The order backlog has grown by 10.1% qoq to
Rs293.2 crore, with the product order book growing by 10.7% qoq to
Rs146.5 crore and the software service backlog was up by 9.4% qoq
to Rs146.7 crore. This is the second consecutive quarter of a
double-digit sequential growth in the order backlog.
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Along with the quarterly results, the company
announced the acquisition of a 51% stake in a Mumbai-based
business process outsourcing (BPO) company, Delta Services (India)
Ltd. The acquired company has annual revenues of around $3 million
and is profitable at the net level.
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The management has maintained the annual
revenue growth guidance at 25-30% and the diluted earnings
guidance at Rs13-13.5 per share (net of dividend on preference
share capital) in FY2007. However, the guidance does not include
the incremental revenues and earnings from the acquisition of
Delta Services.
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At the current market price the stock trades at
10.2x FY2007 and 7.4x FY2008 estimated earnings. We maintain our
Buy call with a price target of Rs244.
Ratnamani Metals and
Tubes
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs520
Current market price: Rs285
Performance shows the mettle
Result highlights
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Ratnamani Metals and Tubes Ltd (RMTL) reported
a strong 103% year-on-year
(y-o-y) growth in its net
profit for Q1FY2007 to Rs8.3 crore on the back of robust sales and
operating profit margins (OPMs).
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The net sales grew by 60% year on year (yoy) to
Rs88.1 crore on the back of a five-fold increase in the booking of
its exports sales. The domestic sales grew by 28.5% yoy.
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The operating profit grew by 107.6% yoy as the
OPM expanded by 495 basis points.
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As a result, the net profit grew by 103.4% yoy
to Rs8.3 crore.
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We believe that there is a strong visibility of
earnings for RMTL with key user industries for its products going
in for capital expansion over the next two years.
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At the current market price of Rs285, the stock
is trading at 5.1x its FY2008E earnings per share (EPS) and 3.3x
its FY2008E enterprise value (EV)/earnings before interest,
depreciation, tax and amortisation (EBIDTA). We reiterate our Buy
recommendation on the stock with a price target of Rs520.
Union Bank of
India
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs150
Current market price: Rs86
Strong operating performance
Result highlights
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Union Bank of India's (UBI) net interest income
(NII) grew by a strong 18.7% year on year (yoy) to Rs634.5 crore
on the back of a 34.1% growth in its advances and a fairly stable
net interest margin (NIM).
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A 23.8% year-on-year (y-o-y) growth in the fee
income to Rs137 crore was also a positive surprise.
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The operating profit grew by 21% yoy to Rs426.5
crore with a strong growth in the income and stable expenses.
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However, high provisions on account of
investment depreciation and amortisation led to a decline of 30%
yoy in the net profit to Rs167 crore.
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We have lowered our FY2007 earnings per share
(EPS) estimate by 17% to take into account the increased
amortisation and depreciation expenses due to the rising interest
rates.
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At the current market price of Rs86, UBI is
quoting at 3.9x its FY2008E EPS and 0.7x its FY2008E book value.
We reiterate our Buy recommendation on the stock with a price
target of Rs150.
Satyam Computer
Services
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs900
Current
market price: Rs687
Beats market expectations
Result highlights
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Satyam reported a 9.8% quarter-on-quarter
(q-o-q) and a 36.3% year-on-year
(y-o-y) growth in its
consolidated revenues to Rs1,443 crore. The sequential growth was
contributed by a 10.1% q-o-q growth in the stand-alone revenues
and a sequential growth of 4.6% in the revenues from its various
subsidiaries. The sequential growth in the volume at 7.2% on a
consolidated basis was higher than the sequential growth shown in
the previous two quarters. The performance was ahead of the
revenue guidance of 3.7% q-o-q growth to Rs1,363 crore given at
the beginning of the quarter.
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The operating profit margin (OPM) declined by
90 basis points to 24.6% on a sequential basis but was better than
22.7% reported in Q1FY2006 (not comparable as the annual salary
hikes were given in Q1 itself in FY2006). The sequential decline
in the OPM was contributed by a drop in the offshore employee
utilisation rate by 95 basis points (this was expected due to a
record intake of employees in Q4), an increase of 30 basis points
in the selling, general and administration (SG&A) expense as a
percentage of sales and the additional visa charges.
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The other income component jumped to Rs74.5
crore, sharply up from Rs29 crore in Q4FY2006. The other income
component was boosted by the net foreign exchange (forex) gains of
Rs45.2 crore during the quarter. In addition to this, the lower
depreciation charges and a decline in the tax rate also boosted
the earnings.
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Consequently, the consolidated earning grew by
24.4% quarter on quarter (qoq) and by 86.2% year on year (yoy) to
Rs354 crore, much higher than the market expectations. The earning
per share (EPS) stood at Rs10.9 as against the guidance of Rs8.6.
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For the full year, the management has revised
upwards the annual growth guidance for the revenues and earnings
by 3% and 8% respectively. As per the revised guidance, the
revenues are expected to grow by 29-31% (Rs6,190-6,290 crore) and
the EPS (excluding the non-cash charges related to the restricted
stock options) is expected in the range of Rs40-40.6 (31.3-33.3%
growth over FY2006).
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However, the Q2 guidance is quite muted. The
consolidated revenues are expected to grow by 5.4-6% sequentially
and the EPS is expected to decline by 18.4-18.8% to Rs8.8. The
annual salary hikes and the expectations of a lower other income
is the reason behind the expected drop in the earnings. The
management has assumed an exchange rate of Rs45.8 per US dollar
for its guidance that leaves scope for a better performance given
the current movement of the rupee against the US dollar.
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At the current price the stock trades at 16.8x
FY2007 and 13.8x FY2008 estimated earnings (excluding the non-cash
charges for the stock options). The EPS estimates for FY2007 have
been revised upwards by 5.4% to Rs41.1. We maintain our Buy call
on the stock with a target price of Rs900.
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