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Summary
of Contents
STOCK UPDATE
Reliance
Industries
Cluster:
Evergreen
Recommendation: Buy
Price target:
Rs1,250
Current market price: Rs1,215
Results ahead
of expectations
Result
highlight
-
Reliance
Industries (RIL) has positively surprised on its Q2FY2007 results
by reporting a 9.6% year-on-year (y-o-y) growth in its earnings,
much ahead of our estimates.
-
The net
revenues for the quarter grew by 37.4% driven by a strong 33.1%
y-o-y growth in the revenues from the petrochemicals business and
a 25% y-o-y growth in the revenues from the refining
business.
-
In the
petrochemicals business the impact of the shut down at the Hazira
plant was more than compensated for by the increased capacities as
the revenues grew by 33.1% year on year (yoy).
-
The profit
before tax and interest (PBIT) from the petrochemicals business
grew by 38% yoy driven by a 57-basis-point expansion in the profit
before interest and tax (PBIT) margins.
-
The refining
and marketing (R&M) business reported a 24.8% y-o-y growth in
revenues driven by a higher throughput and better prices. The PBIT
declined by just 3% despite a steep fall in the regional Singapore
gross refining margins (GRM). RIL's GRM outperformed Singapore GRM
by 90%.
-
With
extraordinary expenses of Rs34 crore, a higher tax rate and a
lower other income the net profit increased by 9.2% yoy. However,
the same was ahead of our expectations by 6%.
-
We like the
way RIL has been diversifying into new areas of growth like
upstream oil and gas activity, organised retailing and
construction of Special Economic Zones (SEZs). However, these
areas of business would entail a lot of investment for RIL going
forward, and we expect them to generate tremendous shareholders'
value.
-
We expect that
in near future a substantial upside can come from the
higher-than-reported gas find in the KGD6 block owned by RIL (see
our report 'It is solid, not gas' dated September 22, 2006).
However, we would like to see an official confirmation of the same
before taking it into our numbers. We maintain our Buy
recommendation on the stock with a price target of
Rs1,250.
Satyam Computer Services
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs480
Current
market price: Rs428
Growth
continues to be robust
Result
highlight
-
Satyam
Computers Services (Satyam) reported a robust revenue growth of
11% quarter on quarter (qoq) and of 38.7% year on year (yoy) to
Rs1,601.9 crore during the second quarter ended September 2006.
The sequential growth was contributed by a 10.9%
quarter-on-quarter (q-o-q) growth in the stand-alone revenues and
a sequential growth of 14.5% in the revenues from its various
subsidiaries. The sequential growth of 9.5% in the volume on a
consolidated basis was higher than that seen in the previous three
quarters.
-
The operating
profit margin (OPM) declined sharply by 200 basis points to 22.6%
on a sequential basis, largely due to the aggressive annual salary
hikes given with effect from July to its entire workforce (a
negative impact of 420 basis points) and lower employee
utilisation (offshore utilisation declined by 80 basis points
sequentially). On the other hand, the lower visa cost (down 125
basis points), foreign exchange (forex) gains (up 30 basis
points), improvement in profitability of subsidiaries (30 basis
points) and the savings in the selling, general and administration
(SG&A) expenses positively affected the margins.
-
The other
income component plummeted 62.1% qoq to Rs28.2 crore (sharply down
from Rs74.5 crore in Q1FY2007). However, the lower tax rate
limited the decline in the net profit to 9.7% qoq at Rs319.8 crore
(better than the guidance of over 18% q-o-q decline and consensus
estimates of 14-15% q-o-q drop in the earnings).
-
For the full
year, the management has revised upwards the annual growth
guidance for the revenues and earnings by 3.6% and 6%
respectively. As per the revised guidance, the revenues are guided
to grow by 34.6-35.1% (Rs6,452-6,476 crore) and the earnings per
share (EPS; including the non-cash charges related to the
restricted stock options) are guided in the range of Rs20.73-20.81
(35.9-36.4% growth over FY2006).
-
For Q3, the
consolidated revenues and earnings are guided to grow by 4-4.5%
sequentially. The management has factored in the appreciation of
the rupee, as the revenue growth guidance in US dollar terms is
higher at 5.6-6.1%.
-
At the current
price the stock trades at 20.4x FY2007 and 17x FY2008 estimated
earnings (including the non-cash charges for the stock options).
We maintain our Buy call on the stock with a price target of
Rs480.
Canara Bank
Cluster:
Apple Green
Recommendation: Buy
Price target:
Rs320
Current market price: Rs277
Operationally
strong results
Result
highlight
-
Canara Bank's
net profit at Rs362.0 crore was in line with expectations driven
by a strong growth in the net interest income (NII) and
lower-than-expected operating expenditure.
-
During the
quarter the bank's NII grew by 21.6% year on year (yoy) to Rs981.1
crore compared to our expectations of a 16.6% year-on-year (y-o-y)
growth.
-
The better
growth could be attributed to a 26.8% y-o-y growth in the
advances. A sharp improvement in the yields on advances helped the
net interest margin (NIM) remain stable despite the cost of
deposits moving up.
-
The other
income at Rs313.3 crore was lower than our expectations as the
same decreased by 20.3% yoy. The fall in the other income could be
a result of lower recoveries in Q2FY2007 compared to
Q2FY2006.
-
The operating
expenses reported a sedate 9.8% y-o-y growth, slightly below our
expectations.
-
As a result,
the operating profit grew by 5.9% yoy to Rs615.2 crore broadly in
line with our expectations as higher NII and lower operating
expenses compensated for the higher unanticipated fall in the
other income. The operating profit excluding the treasury income
grew by 5.6% yoy.
-
The decline in
the bond yields has helped the bank to write back provisions on
the investment book. The bank has used the opportunity to provide
higher provisions on its advances book. Despite higher provisions
for non-performing assets (NPAs), the total provisions have
declined by 24.3%.
-
With the
operating performance in line with expectations and a decline in
the provisions, the net profit at Rs362 crore was in line with our
expectations.
-
Canara Bank is
planning to go for raising hybrid tier I capital funds to the tune
of Rs300 crore soon to shore up its Tier I capital adequacy
ratio.
-
We have
revised our earnings per share (EPS) estimates for FY2007 and
FY2008 from Rs32 and Rs39 to Rs36 and Rs47 respectively to take
into account the lower provisioning requirement.
-
At the current
market price of Rs277, the stock is quoting at 6.0x its FY2008E
EPS, 3.2x pre-provision profits (PPP) and 1.2x book value. The
stock is available at attractive valuations looking at its strong
average return on equity (RoE) of 20.2% over FY2006-08E. We
reiterate our Buy call on the stock with a revised price target of
Rs320.
Nicholas Piramal India
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs325
Current
market price: Rs243
Q2 results in
line with expectations
Result
highlight
-
Nicholas
Piramal India Ltd (NIPL) reported an 18.6% quarter-on-quarter
(q-o-q) and 29.8% year-on-year (y-o-y) growth in its earnings to
Rs63.89 crore for the second quarter ended September 2006.
-
The revenues
were up by 21.9% quarter on quarter (qoq) and 74.4% year on year
(yoy) to Rs636.86 crore. The 393% jump in the international sales
(largely due to the incremental revenue of Rs260 crore flowing
from the new acquisitions of Pfizer's Morpeth facility, UK and
Avecia) supported by a 22% rise in the domestic formulation
business contributed to the revenue growth.
-
The operating
profit margin (OPM) declined by 250 basis points yoy to 15.1%
largely due to a substantial 650-basis-point jump in the staff
cost driven by the integration of the acquired businesses like
Pfizer's Morpeth facility, UK and Avecia.
-
During the
quarter, NPIL acquired the balance 51% equity stake in its 49:51
joint venture company, Boots Piramal Healthcare Pvt. Ltd (BHPL).
In the process it got a one-time income of Rs17.8 crore as
compensation for losing three brands, Strepsils, Clearasil and
Sweetex.
-
Due to the
acquisitions, the depreciation and interest costs were higher by
31% and 58% at Rs7.64 crore and Rs24.36 crore
respectively.
-
In terms of
valuation, at Rs243 the stock trades at 15.9x FY2008 estimated
earnings. We maintain our Buy call on the stock. Considering the
recent acquisitions of Pfizer's Morpeth facility, the acquisition
of the 51% stake in BHPL etc, we are evaluating the financials and
are likely to revise our estimates
soon.
Associated Cement Companies
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs1,050
Current market price: Rs978
Results ahead
of expectations
Result
highlight
-
In Q2FY2007
the pre-exceptional net profit of Associated Cement Companies
(ACC) grew by 228% year on year (yoy) to Rs243 crore, ahead of our
expectations.
-
The net
revenues grew by a healthy 36.7% yoy to Rs1,373.5 crore driven by
a 41% growth in the realisations (bolstered by the reduction in
the excise duty) and a 5.6% growth in the volumes.
-
The operating
cost jumped by 18.3% yoy on account of a 12% increase in the power
and fuel cost, and a sharp jump of 43% in the other expenditure,
which included a one-time maintenance & shutdown expenditure
of Rs18-20 crore. But this was overshadowed by the steep revenue
growth that caused the company's operating profit to increase
sharply by 139.2% yoy to Rs366 crore and the operating profit
margin (OPM) to expand by a massive 1,150 basis points to
26.7%.
-
The reduction
in the interest expense was partially offset by a decline in the
other income whereas the depreciation charge increased by 21% on
account of the commissioning of the Chaibasa plant and expansion
at the Gagal plant.
-
A lower tax
provision of 22.5% as against 32.4% in the same quarter last year
boosted the pre-exceptional net profit by 228% to Rs243.5
crore.
Lupin
Cluster:
Apple Green
Recommendation: Buy
Price target:
Rs565
Current market price: Rs510
A mixed
bag
Result
highlight
-
Lupin's net
sales increased by 21.1% year on year (yoy) to Rs491.1 crore in
Q2FY2007. The growth in the top line is in line with our
expectations. The sales growth was driven by a healthy growth of
25% in the domestic business to Rs288.6 crore and a 17% increase
in the exports to Rs218 crore.
-
The
formulation sales advanced by 48.6% to Rs298.9 crore, with a
strong growth in both the domestic business and exports. However,
the sales of active pharmaceutical ingredients (APIs) rose by a
meagre 6.9% to Rs195 crore in the quarter. The subdued growth in
the API sales was on account of lower sales of Ceftriaxone bulk
drug to Baxter (due to one-time production constraints) and a
strategic change of focus from the Lisinopril API to Lisinopril
formulations.
-
Lupin's
operating profit margins (OPMs) took a hit of 60 basis points to
17.0% in Q2FY2007 mainly on account of a 38% rise in the research
and development (R&D) expenditure and a 34.5% increase in the
other expenses. Consequently, the operating profit grew by only
17.2% to Rs83.4 crore in the quarter.
-
A
substantially higher tax outgo impacted Lupin's net profit, which
nevertheless grew by 29% to Rs58.3 crore in the quarter. At the
profit before tax (PBT) level, Lupin reported a 32% rise in its
profits to Rs79.2 crore.
-
Lupin's
R&D expenses for the quarter stood at Rs31.8 crore or 6.5% of
sales. This is in line with the company's plans to accelerate the
spend on R&D, which it believes will yield results in the
future.
-
At the current
market price of Rs510, Lupin is quoting at 13.5x its FY2008E
earnings estimate. In view of the strong growth potential lined up
for the company�a pick-up in the sales of Suprax, a healthy growth
in the domestic market and new product launches arising out of the
aggressive R&D efforts�we reiterate our Buy recommendation on
Lupin, with a price target of Rs565.
3i Infotech
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs244
Current
market price: Rs187
Robust
operating performance
Result
highlight
-
3i Infotech
reported a growth of 12.9% quarter on quarter (qoq) and of 49%
year on year (yoy) to Rs145 crore during the second quarter. The
two acquisitions (Delta Tech and G4 Software) contributed
incremental revenues of Rs4.5 crore during the quarter.
-
The operating
profit margin (OPM) improved by 70 basis points to 23.5% on a
sequential basis. The sequential improvement in the OPM was
largely contributed by the 250-basis-point improvement in the
gross margins of the product business to 55% (due to better
revenue mix). On the other hand, the gross margins of the service
business declined by 100 basis points sequentially to 38.3%. On an
annual comparison basis, the OPM has improved sharply by 300 basis
points largely due to increased contribution from the high-margin
product business.
-
The other
income component stood at Rs3.9 crore as compared with Rs4.8 crore
in Q1FY2007. The other income declined due to lower gains from the
foreign exchange (forex) fluctuations during the quarter (the
company had reported Rs1.1 crore of forex gain in
Q1).
-
The lower
other income, and higher interest and depreciation charges limited
the sequential growth in the earnings to 5.6% at Rs22.5 crore
(exactly in line with our estimates).
-
The order
backlog has grown by 9.9% qoq to Rs322.3 crore, with the product
order book growing by 9.8% qoq to Rs160.9 crore and service
backlog rising by 10% qoq to Rs161.4 crore. This is the third
consecutive quarter of a double-digit sequential growth in the
order backlog.
-
Along with the
quarterly results, the company announced the acquisition of a 100%
stake in a UK-based product company, Rhyme Systems. The acquired
company has annual revenues of around $28 million and has OPM of
over 20%. The acquisition has been made at consideration of $52
million, which works out to 1.9x its annual revenues.
-
The management
has revised the annual revenue growth guidance to Rs620-640 crore
(48-53% growth). The diluted earnings are guided in the range of
Rs16-17 per share (net of dividend on preference share capital) in
FY2007, which amounts to a growth of 69-79% over the earnings of
Rs9.5 reported in FY2006. The guidance factors in the impact of
the acquisitions already made in the current year.
-
At the current
market price the stock trades at 14.4x FY2007 and 9.6x FY2008
revised earning estimates(On the fully diluted equity base of Rs69
crore). We maintain our Buy call with a price target of
Rs244.
NIIT Technologies
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs296
Current market price: Rs207
First-cut
analysis of Q2FY2007 results
Result
highlight
-
NIIT
Technologies (NIIT) reported a growth of 15.1% quarter on quarter
(qoq) and of 39.9% year on year (yoy) in its consolidated revenues
to Rs219.9 crore during the second quarter of FY2007. Excluding
the incremental contribution from Room Solutions (acquired in May
2006), the organic revenues grew at a healthy rate of 10.6%
sequentially. The strong sequential growth of 14.9% (as compared
with that of 4.3% in Q1) in the BPO business also aided the
overall growth in the consolidated revenues.
-
The operating
profit margin declined marginally by ten basis points qoq but
improved by 120 basis points yoy as compared with 17.7% reported
in Q2FY2006. The sequential decline was largely contributed by the
one-time transition cost related to the integration of Room
Solutions (around Rs1 crore). The adverse impact of the same was
mitigated by the savings in the selling, general and
administration expenses as a percentage of sales.
-
The other
income declined to Rs2.4 crore as compared with Rs3.5 crore in
Q1FY2007, largely due to the lower gains from the foreign exchange
(forex) fluctuations during the quarter (forex gains of Rs0.4
crore as compared with Rs1.7 crore in Q1). However, the lower
depreciation charges and minority interest enabled the company to
post an impressive earnings growth of 23.9% qoq and of 79.1% yoy
to Rs27 crore (much ahead of expectations).
-
In terms of
the outlook, the growth in the organic business is likely to
remain robust on the back of healthy fresh order intake of $42
million in Q2, one of the highest in any quarter. The pending
order backlog of $87 million is executable over the next one
year.
-
At the current
market price the stock trades at 9.5x FY2007 and 7.8x FY2008
estimated earnings. However, we would be revising our earning
estimates to factor in the higher-than-expected Q2 performance and
robust net addition of employees in the first half of FY2007. We
maintain our Buy call on the stock with the price target of
Rs296.
Ranbaxy Laboratories
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs558
Current
market price: Rs412
Q3CY2006
results below expectations
Result
highlight
-
Ranbaxy
Laboratories (Ranbaxy) reported a 15.0% quarter-on-quarter (q-o-q)
in its earnings to Rs139.3 crore for the third quarter ended
September 2006; the earnings saw a six-fold jump on a year-on-year
(y-o-y) basis. Though the net profit seems higher, the same is
much below the expected earnings of Rs193.2 crore.
-
The revenues
are up 26.8% to Rs1,627.10 crore, largely driven by a 25% jump in
the US sales, a 39% rise in sales in the European and CIS markets,
and a 49% increase in the sales in the Asia-Pacific and
Middle-East markets.
-
The operating
profit margin (OPM) witnessed a 140-basis-point fall sequentially
to 16.8%. The fall was largely due to the company incurring a
Rs18.4 crore other operating loss as against an income of Rs75.5
crore in the previous quarter.
-
Further, the
company has charged a one-time cost of Rs22.6 crore relating to a
settlement of its contract manufacturing arrangement.
-
Finally, with
higher depreciation, the loss at the other operating income level
and the one-time provision, the net profit grew by 6.5x against
the estimated 9.5x. Though Ranbaxy has disappointed the market
with below expected earnings, we believe the company would perform
well going forward by following a comprehensive business model
that involves aggressive new launches, in-licencing, strategic
partnering, widening geographical presence etc. Also, its margins
will remain firm, thanks to its cost-cutting initiatives. At the
current price of Rs412, the stock trades at 19.8x its CY2007
earnings per share (EPS). We maintain our confidence in the stock
and reiterate the Buy recommendation with price target of
Rs558. |
