Summary
of Contents
STOCK UPDATE
Bharat Heavy
Electricals Cluster: Apple
Green Recommendation: Buy Price target:
Rs2,650 Current market price: Rs2,440
Unexciting
performance
Result
highlight
-
At Rs360 crore
the Q2FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) is
marginally below our expectations, primarily because of
higher-than-expected staff and other expenses.
-
BHEL's
revenues for the quarter grew by a smart 35% year on year (yoy) to
Rs3,341 crore driven by the order backlog of Rs45,700 crore. The
power division registered a 29% growth in its revenues whereas the
industry division recorded a revenue growth of 35%.
-
However the
operating profit margin (OPM) for the quarter declined by 100
basis points to 13.7%, as its staff cost increased by 21% and the
other expenditure rose by 38.6%. The staff cost increased on two
counts. One, the company made an additional outlay of Rs45 crore
during the quarter for gratuity provision on an actuarial basis,
according to the new AS 15 norms. Two, the company also paid
additional performance incentive of Rs15 crore during the
quarter.
-
The other
income increased by 61% to Rs170 crore mainly on account of the
rising yields on the huge cash reserves of the company. Also as
BHEL's export revenue was higher during the quarter, the export
incentive (which BHEL shows in the other income) boosted the other
income.
-
The net profit
for the quarter grew by 38% yoy to Rs360 crore.
-
The order
backlog during the quarter maintained its momentum and grew by a
very impressive 42% yoy to Rs45,700 crore, resulting in an order
inflow of Rs10,035 crore.
Bharat
Electronics Cluster: Apple
Green Recommendation: Buy Price target:
Rs1,525 Current market price: Rs1,120
Better
performance in H2
Result
highlight
-
Bharat
Electronics Ltd (BEL) has reported a lacklustre performance for
the second quarter. On a stand-alone basis, its net revenues grew
marginally by 0.7% to Rs834.3 crore.
-
The operating
profit margin (OPM) declined by 240 basis points to 22.4% from
24.8% in Q2FY2006. The OPM was dented by an increase in the
employee cost as a percentage of sales (up from 12.1% in Q2FY2006
to 13.9% in Q2FY2007) and a jump of 38.8% in the other expenses.
On the other hand, the raw material cost as a percentage of sales
declined by 50 basis points and supported the margins.
-
The other
income more than doubled to Rs50.8 crore, which enabled the
company to report a marginal growth (1.1% year on year [yoy]) in
the net profit to Rs148.3 crore.
-
On a
half-yearly basis, the net revenues grew marginally by 0.7% to
Rs1,317.4 crore. The OPM declined by 180 basis points to 19.6%
during the period. The earnings grew by 2.6% to Rs208.6 crore
aided by a 65.8% jump in the other income to Rs89.2 crore.
-
Notwithstanding the lower-than-expected performance, the
company is likely to achieve the stated gross revenue target of
Rs4,200 crore during the current fiscal. The fresh order intake of
over Rs800 crore during H1FY2007 was much better than that of
Rs285 crore in H1FY2006. Moreover, the company generally accrues
the bulk of its revenues (especially from the government segment)
in the second half of the fiscal.
-
In terms of
valuations, the company trades at attractive valuations of 13.3x
FY2007 and 11.8x FY2008 estimated earnings (without adjusting for
the free cash of Rs229 per share on its books at the end of
FY2006). We maintain our Buy call with a price target of Rs1,525.
Omax Autos Cluster:
Apple Green Recommendation: Buy Price target:
Rs134 Current market price: Rs100
Price target
revised to Rs134
Result
highlight
-
Omax Auto's
Q2FY2007 results are in line with our expectations with the sales
reporting a growth of 12.1% to Rs168.6 crore. However, due to the
delay in the export orders from Arvin Meritor and Tenneco, the
company witnessed a slower-than-expected ramp-up in its
exports.
-
The operating
profit margin (OPM) improved by 220 basis points to 9.9% on the
back of lower power costs and other expenses. Consequently, the
operating profit grew by 44.7% to Rs16.7 crore.
-
However,
higher interest and depreciation charges as a result of the
capital expenditure incurred by the company led the profit before
prior period expenses to grow by 22.2% to Rs5.8 crore. The net
profit after the prior period expenses grew by 18.7% to Rs5.7
crore.
-
Due to the
delay in the export revenues and a muted performance in the
domestic business (Hero Honda contributes 60% of the company's
sales), higher interest and depreciation charges, we are
downgrading our FY2007 and FY2008E earnings by 23% and 32%
respectively.
-
At the current
market price of Rs100, the stock quotes at 6.8x its FY2008E
earnings and enterprise value/earnings before interest,
depreciation, tax and amortisation of 3.9x. Considering the cheap
valuations we maintain our BUY recommendation on the stock with a
revised price target of Rs134.
ITC
Cluster:
Apple Green Recommendation: Buy Price target:
Rs220 Current market price: Rs188
All-round
performance
Result
highlight
-
ITC's Q2FY2007
net profit grew by 18.7% year on year (yoy) to Rs680.0 crore, in
line with our expectations.
-
The net
revenues for the quarter grew by 32.3% yoy as most of its
businesses grew strongly: cigarettes (14%), fast moving consumer
goods (FMCG; 66%), hotels (30.5%), paperboards (11.3%) and
agri-business (86.6%).
-
The profit
before interest and tax (PBIT) grew by 19.4% yoy as the PBIT
margin contracted by 100 basis points, as per our
expectations.
-
The
contraction in the margin was on account of a higher contribution
from the low-margin agri-business. Except the agri-business all
the other businesses witnessed a healthy expansion in their PBIT
margin.
-
The
non-cigarette FMCG business is the only business in ITC's
portfolio that is making losses. However, with a strong growth in
the revenues, the magnitude of losses, ie the loss margin, 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 (RoCE). At the current market price of Rs188,
the stock is attractively quoting at 21.3x its FY2008E earnings
per share (EPS) and 13.6x 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.
Godrej Consumer Products
Cluster: Apple
Green Recommendation: Buy Price target: Rs205 Current
market price: Rs182
First-cut
analysis
Result
highlight
-
The
stand-alone revenues of Godrej Consumer Products Ltd (GCPL) grew
by 16.2% year on year (yoy) to Rs182.5 crore in Q2FY2007. The
revenue growth was below our expectations. The soap business grew
by 16.5% yoy to Rs127.2 crore whereas the personal care business
grew by 15.4% yoy to Rs55.3 crore.
-
GCPL's
operating profit (OP) grew by a meagre 3.8% yoy to Rs33.8 crore in
Q2FY2007, also below our expectations. The operating profit margin
contracted by 220 basis points to 18.5%. The mediocre growth in
the OP was a result of a sharp increase in the material cost,
which jumped by 27.8% to Rs92.2 crore during the quarter. This
increase was a result of the hardening prices of vegetable oil,
which is a key raw material for the fast moving consumer goods
companies.
-
The profit
before interest and tax (PBIT) margin of the soap division reduced
by 400 basis points yoy to 10.8% whereas that of the personal care
division increased by 60 basis points yoy to 42.7% during the
quarter.
-
The interest
cost zoomed by 87.1% to Rs1.6 crore. The effective tax rate also
increased from 5.8% in Q2FY2006 to 12.7% Q2FY2007. The
higher-than-expected interest cost and tax expenses coupled with
the lower-than-expected operating performance led to a 6% decline
in the profit after tax to Rs26.1 crore. The same was below our
expectations.
-
GCPL's
consolidated revenues for Q2FY2007 stood at Rs231.8 crore. Its
consolidated OP and net profit stood at Rs39.7 crore and Rs31.0
crore respectively. The company's consolidated numbers reflect the
stand-alone numbers of Keyline, UK and Rapidol, South Africa (the
latter is the subsidiary company GCPL acquired this
quarter).
-
The stock
trades at a price/earnings ratio of 22.4x FY2008E consolidated
earnings. In view of the lower-than-expected results in the second
quarter we are revising our earnings estimates for the company. We
shall update our estimates after attending the company's earnings
conference call for the Q2FY2007 results.
Universal Cables Cluster: Ugly
Duckling Recommendation: Buy Price target:
Rs179 Current market price: Rs118
Performance in
line with expectations
Result
highlight
-
Universal
Cables' Q2FY2007 net profit at Rs5.64 crore is in line with our
expectations.
-
The net
revenues have grown by 20.4% year on year (yoy) to Rs91 crore
driven by a 19.6% growth in the cable sales. The sales of
capacitators grew by 45.3% yoy.
-
The operating
profit margin (OPM) contracted by 49 basis points yoy, resulting
in a slower operating profit growth of 15.5% yoy.
-
The margin at
the profit before interest and tax (PBIT) level in the cable
business contracted by 48 basis points yoy. This resulted in a
slower growth of 14.8% yoy in the PBIT to Rs9.85 crore. The PBIT
margin in the capacitator business contracted by 77 basis points,
leading to a slower PBIT growth of 40.3% yoy to Rs0.87
crore.
-
The net profit
growth too was lower at 14.4% due to higher depreciation during
the quarter.
-
At the current
market price of Rs118, the stock is quoting at 5.5x its FY2008E
earnings per share (EPS) and 3.2x FY2008E enterprise value
(EV)/earnings before interest, depreciation, tax and amortisation
(EBIDTA).
-
We reiterate
our Buy recommendation on the stock with price target of
Rs179.
Allahabad Bank
Cluster:
Cannonball Recommendation: Buy Price target:
Rs106 Current market price: Rs93
Core
performance remains weak
Result
highlight
-
Allahabad
Bank's net profit grew by 24.8% year on year (yoy) to Rs210.2
crore in Q2FY2007. The net profit grew at a rate higher than our
expectations of 13.2% mainly due to a write-back in provisions, as
at the operating level the profit growth was below our
expectations at just 0.8% yoy.
-
During the
quarter, the bank's net interest income (NII) grew by 6.1% yoy to
Rs389.9 crore, much below our expectations of a 16.9% year-on-year
(y-o-y) growth.
-
The NII growth
was lower since the net interest margin (NIM) slipped by 47 basis
points yoy and by 41 basis points quarter on quarter (qoq) to
2.6%. The yield on advances improved by 25 basis points yoy and by
11 basis points quarter on quarter (qoq) to 8.88%. However, the
same and a 47.4% growth in the advances couldn't restrict the fall
in the NIM. That is because the deposit cost increased by 56 basis
points yoy and by 31 basis points qoq, and the deposits grew by
23.6% yoy during the quarter.
-
The other
income decreased by 24.6% yoy to Rs122.2 crore mainly due to a
fall in the trading and other non-fee incomes. The other income
excluding the treasury income also reported a fall of 15.5%. The
core fee income, however, grew by 8% yoy.
-
The operating
expenses reported a fall of 6.8% yoy on account of a 12% fall in
the staff expenses. As a result, the operating profit grew
marginally by 0.8% yoy to Rs243.3 crore. The operating profit
excluding the treasury income grew by 12.4% yoy, much below our
expectations of a 21.5% growth.
-
However,
despite a marginal rise at the operating level, the bank reported
a 41.8% rise in its profit before tax (PBT). This was mainly on
account of a Rs19.7-crore write-back in the total provisions
arising due to a Rs38.4-crore write-back in depreciation on
investments.
-
Even though
the operating performance was below expectations and the
write-back in the provisions higher than expected, the net profit
at Rs210.2 crore was much above our expectations.
-
We have
revised our earnings per share (EPS) estimates for FY2007 from
Rs14.6 to Rs15.7 mainly on account of the lower provisioning
requirements and operating expenses of the bank. Our FY2008 EPS
estimates however remain unchanged at Rs21.8.
-
At the current
market price of Rs93, the stock is quoting at 4.3x its FY2008E
EPS, 3x pre-provision profit (PPP) and 0.8x book value. The bank
is available at attractive valuations, considering its strong
average return on equity (RoE) of 20.2% over FY2006-08E. We
maintain our Buy call on the stock with a price target of Rs106.
Andhra Bank
Cluster:
Cannonball Recommendation: Buy Price target:
Rs109 Current market price: Rs92
In line with
expectations
Result
highlight
-
In Q2FY2007
Andhra Bank's net profit grew by 10.2% year on year (yoy) to
Rs146.4 crore, in line with our expectations.
-
During the
quarter the bank's net interest income (NII) grew by 14.7% yoy to
Rs330.9 crore, below our expectations of a 23.8% year-on-year
(y-o-y) growth.
-
The growth in
the NII was lower because of an 8.7-basis-point fall in the net
interest margin (NIM) due to a lower yield on investments and a
higher cost of deposits.
-
The other
income increased by 9.1% yoy to Rs128.7 crore. The growth was in
single digits mainly due to a fall of 39.7% in the trading income.
However, the other income excluding the treasury income reported a
strong growth of 25% with the core fee income growing by 22.3% yoy
to Rs47.7 crore.
-
The operating
expenses reported a rise of 14.8% yoy and the operating profit
grew by 11.3% yoy to Rs223.1 crore. The operating profit excluding
the treasury income grew by 19.9% yoy, below our
expectations.
-
With the
provisioning lower than expected, the net profit grew by 10.2% yoy
to Rs146.4 crore, in line with our estimates.
-
We have
revised our earnings per share (EPS) estimates for FY2007 from
Rs10.7 to Rs11.3 mainly on account of the improving core banking
performance and the stable other income growth. Our FY2008 EPS
estimates however remain at Rs13.3.
-
At the current
market price of Rs92, the stock is quoting at 6.9x its FY2008E
EPS, 4.1x pre-provision profits (PPP) and 1.2x book value. The
bank is available at attractive valuations given its improving
operating performance, the adequate capital available in its books
to meet the Basel II requirements and asset quality that is one of
the best in the industry. We maintain our Buy call on the stock
with a price target of Rs109.
Bank of India Cluster: Apple
Green Recommendation: Buy Price target: Rs185 Current
market price: Rs167
Exceptional
results
Result
highlight
-
Bank of
India's net profit grew by 60.5% year on year (yoy) to Rs212.1
crore, which is above our expectations of a 52.5% growth. The
excellent numbers were driven by an improvement in all the key
parameters of the bank's business.
-
During the
quarter the bank's adjusted net interest income (NII) grew by a
robust 39.6% yoy to Rs908.5 crore compared to our expectations of
a 27% year-on-year (y-o-y) growth. The improvement in the NII was
due to the expansion in the net interest margins (NIMs) coupled
with the growth in the advances.
-
The domestic
NIMs improved by 45 basis points yoy while the global NIMs
improved by 43 basis points yoy. The expansion was also robust on
a quarter-on-quarter (q-o-q) basis as the domestic NIMs improved
by 21 basis points while the global NIMs improved by 15 basis
points.
-
The other
income showed a good growth of 16.5%, with the fee-based income
showing a strong 30.7% growth.
-
The operating
expenses were up 31.2% mainly due to the expenses incurred on the
implementation of the core banking solution (CBS) that the bank
charges to the profit and loss account unlike the other banks that
prefer to capitalise and claim depreciation on the same. Some
promotional expenses for the centenary year celebration also kept
the operating expenses on the higher side.
-
As a result,
the operating profit grew by 33.9% yoy to Rs538.2 crore. The
operating profit excluding the treasury income grew by 37.6%
yoy.
-
We have
revised our earnings per share (EPS) estimates for FY2007 and
FY2008 from Rs15.5 and Rs18 to Rs18.8 and Rs22.2 respectively to
take into account the improved expected operating performance of
the bank going forward. The improved performance of the bank is
based on the improving margins, which should stabilise going
forward coupled with the stable other income and the operating
expenses growth.
-
The capital
adequacy ratio (CAR) of the bank stood at 11.85% with the Tier-I
ratio at 6.19%. This leaves very little room for the bank to grow
its assets without diluting its equity in the medium term.
However, the bank has shown no intent of raising its equity
capital, unless absolutely necessary. Hence, we feel that the bank
would initially use all the options available like innovative
Tier-I capital. A plain equity issue may follow in H1FY2008, which
would enhance the bank's book value and be value accretive going
forward for the investors.
-
At the current
market price of Rs167, the stock is quoting at 7.5x its FY2008E
EPS, 3.3x pre-provision profits (PPP) and 1.2x its book value. The
bank is available at attractive valuations looking at the strong
visibility in its earnings and is less prone to interest rate risk
shocks unlike some leading PSU banks. We reiterate our Buy call on
the stock with a revised price target of Rs185.
State Bank of India
Cluster: Apple
Green Recommendation: Buy Price target:
Rs1,116 Current market price: Rs1,095
Strong growth
in core operating profits
Result
highlight
-
State Bank of
India's (SBI) Q2FY2007 stand-alone net profit at Rs1,184.5 crore
was down 2.5% year on year (yoy), but above our expectations of a
fall of 11.4% largely due to the lower-than-expected operating
expenses reported by the bank and on account of lower
provisions.
-
The net
interest income (NII) grew by 8.1% yoy to Rs3,898.7 crore, above
our expectations of a 6.9% growth. The improved yield on the
advances (up by 67 basis points) to 8.48% over a 21.2% advances
growth coupled with the lower cost of deposits (down 15 basis
points) to 4.64% mainly resulted in a better NII growth. The
reported core net interest margin (NIM; adjusted for a one-time
interest income) for H1FY2007 has improved by 40 basis points to
3.32%.
-
Most other PSU
banks have reported an increase in the cost of deposits, while SBI
has reported a fall mainly due to the improvement in its CASA
ratio to 42.6% from 39.5% and the lowering of the bulk deposit
rates to discourage high-cost deposits in its books.
-
The other
income increased by 10.7% yoy to Rs1,433.8 crore, restricted
mainly due to a drop of 96.9% in the trading income during
Q2FY2007 to Rs7.7 crore from Rs246.7 crore in Q2FY2006. The other
income excluding the treasury income reported a very strong growth
of 36.1%.
-
With the net
income up by 8.8% yoy and a decrease of 2% in the operating
expenses, the operating profit increased by a healthy 24.7% yoy.
The operating profit excluding the treasury income was up 42%
yoy.
-
The provisions
were down 16.7% yoy mainly on account of the absence of investment
depreciation during the quarter. However the tax outflow at Rs606
crore with an effective tax rate of 33.9% was much above our
expectations.
-
At the current
market price of Rs1,095, the stock is quoting at 9.6x its FY2008E
earnings per share (EPS), 4.5x its pre-provision profits (PPP),
1.6x its stand-alone book value and 1.3x its consolidated book
value. The bank is definitely a proxy investment for the Indian
economy and the improved operating performance post the redemption
of India Millennium Deposits (IMDs) could still provide some
upside from the current levels. We maintain our Buy call on the
stock with a price target of Rs1,116.
Orient Paper and Industries Cluster: Vulture's
Pick Recommendation: Buy Price target: Rs800 Current
market price: Rs590
Performance
below expectations
Result
highlight
-
Orient Paper
& Industries Ltd's (OPIL) Q2FY2007 net profit at Rs20.4 crore
is below our expectations primarily because of a 33-day
maintenance shutdown at the company's Amlai paper unit for a major
overhaul. This plant shutdown resulted in a 21% decline in the
paper division's revenues, leading to a loss of Rs8.5 crore.
However the performance of the cement business (earnings before
interest, depreciation, tax and amortisation [EBIDTA] per tonne of
Rs929 as against Rs111 per tonne) is above our
expectations.
-
The revenues
for the quarter grew by 34.6% to Rs229 crore entirely driven by
its cement division, which almost doubled its revenues to Rs141
crore. The paper division registered a decline of 21% in its
revenue due to a shutdown and the fans division showed a decent
performance registering a 22.6% growth in its revenues.
-
The operating
profit for the quarter grew by a whopping 288% to Rs43.8 crore as
the cement division's earnings before interest and tax (EBIT)
reported a significant jump to Rs49 crore signifying the effect of
the cement prices on the company's profitability. The paper
division reported an overall loss of Rs8.5 crore out of which
Rs5.6 crore is the loss because of a 33-day plant shutdown and the
balance is on the already non-operational Brijrajnagar unit. The
other two units together reported a loss of Rs1 crore. Hence the
overall profitability was significantly affected.
-
The operating
profit margins (OPMs) for the quarter jumped three-fold to 19.1%,
driven by the stellar performance of the cement division.
-
The
performance at the operating level was strengthened by a 26%
decline in the interest cost and a 25% increase in the other
income to Rs2.44 core and consequently the pre-exceptional net
profit for the quarter stood at Rs20.4 crore as against a loss of
Rs3.36 crore a year ago. Q2FY2006 included a profit of Rs6.6 crore
on the sale of investments which we have treated as an
extraordinary income. Hence OPIL's reported net profit jumped by
526%.
VIEWPOINT
Moser
Baer
Strong reversal
in fortune Incorporated in 1983, Moser Baer has emerged as one of the
top three optical storage media manufacturers in the world. It has a
wide range of products ranging from floppy disks, compact discs
(CDs) to digital versatile discs (DVDs). It has relationship with
all the top 12 global technology brands and has steadily gained
market share over the past few years.
Recently, the company
has diversified into manufacturing of photovoltaic cells to tap the
growing demand for solar power generation globally. The company is
likely to commission the first phase of its photovoltaic cell
manufacturing facility in the fourth quarter of this
fiscal.
Dr Reddy's Laboratories
Results above
expectations
Result
highlight
-
Dr Reddy's
Laboratories (DRL) reported revenues of Rs2,003.9 crore in
Q2FY2007, as against Rs580.4 crore in Q2FY2006, representing an
increase of 245% year on year (yoy).
-
The revenues
from the international markets increased by 391% yoy at Rs1,760
crore largely because of the contributions from the authorised
generics and acquisitions.
-
The revenues
from its core businesses (excluding the contributions from the
authorised generics and acquisitions) increased by an impressive
42% to Rs820 crore during the quarter.
-
The overall
gross margin declined to 41.3% from 51.6% in the corresponding
quarter of the previous year, largely because of the pricing
pressures in the USA and Europe and due to the integration of the
Betapharma acquisition.
-
However, with
the impressive reduction in the selling, general and
administrative (SG&A) cost to 18.3% of sales from 30% in
Q2FY2006, the operating profit margin (OPM) expanded to 19.0% from
11.9% in Q2FY2006.
-
The net profit
increased by over two times (up by 214%) at Rs279.8 crore.
-
At the current
market price of Rs752, the stock trades at 18.2x and 22.0x of
FY2007 and FY2008 consensus earnings. Currently, the management
plans to focus strategically on enhancing the earnings by
leveraging its Day-1 launches (as 55 ANDAs are in the pipeline)
and authorised generic deals. On the cost front, DRL plans to
curtail its litigation costs by out of court settlements and has
already started tightening its SG&A expenses. On the R&D
front, the company has already de-risked its model by partnering
with financial partners. With all these developments we are
positive about the
stock. |