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Summary
of Contents
PULSE TRACK
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November 2006 IIP zooms to 14.4%
STOCK
UPDATE
Marico
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs634
Current
market price: Rs580
Intangible gains
Key points
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The board of
directors of Marico has approved a proposal to split the stock in
the ratio of 1:10.
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The board has
also proposed financial restructuring to write off the intangibles
against the reserves.
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The
restructuring will lead to a leaner balance sheet and better
return ratios.
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Due to the
restructuring our earnings estimate would be higher by 17.1% for
FY2008. We are not changing our earnings estimates and price
target but will be revisiting the same after the Q3FY2007
results.
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The stock is
trading at a price/earnings ratio of 24.1x FY2008E and enterprise
value/earnings before interest, depreciation, tax and amortisation
of 13.7x FY2008E. We continue to remain bullish on Marico and
reiterate a Buy on the stock with a price target of Rs634.
Elder Pharmaceuticals
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs508
Current
market price: Rs397
Price target revised to Rs508
Key points
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The revenues
of Elder Pharmaceuticals (Elder) grew by 28.6% in H1FY2007 and by
over 30% in Q2FY2007. We expect this 30% + growth trend to
continue into H2FY2007 on the back of the sustained momentum in
the company's core brands, pick-up in the revenues from the
in-licenced products and the growing contribution from the Fairone
brand.
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Elder has been
spending aggressively on advertising and promoting its existing
products. With the increased penetration of its existing brands,
rapid pace of new product launches and new in-licencing deals, we
believe the growth momentum will continue in FY2008 as
well.
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A lower raw
material cost on account of backward integration into active
pharmaceutical ingredients (APIs), an improving product mix, and
substantial excise and tax savings arising out of the shift of
manufacturing to the plants in the fiscal havens of Uttaranchal
and Himachal are expected to improve the margins of the company.
The increased selling and marketing expenses, on the other hand,
are likely to put pressure on the margins. We expect Elder's
margins to expand by 180 basis points to 19% in
FY2008E.
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To account for
the above, we have revised our revenue and earnings estimates for
Elder. We have revised Elder's revenue estimates upward by 9.2%
and 12.9% to Rs457.5 crore and Rs562.1 crore for FY2007 and FY2008
respectively. We have also upgraded Elder's net profit estimate by
10.4% to Rs55.7 crore and Rs74.8 crore for FY2007 and FY2008
respectively.
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In view of its
strong growth potential, we remain positive on Elder's future
growth prospects. At the current market price of Rs397, Elder is
quoting at 9.9x our revised FY2008 earnings estimate. Based on our
revised earnings, we are upgrading our price target for the stock
to Rs508.
Aban
Offshore
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs2,090
Current
market price: Rs1,670
Results in line with expectations
Result highlights
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Aban Offshore
Ltd (AOL) reported a 4.5% growth in its stand-alone revenues to
Rs126.1 crore for the third quarter ended December
2006.
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The operating
profit margin (OPM) declined by 310 basis points to 54.8% largely
due to higher insurance charges (up 260 basis points) and an
increase in the other expenses (up 660 basis points due to the
amortisation of the expenses related to the foreign currency
convertible bond issue done earlier). On the other hand, the
savings in the staff cost and repairs as a percentage of sales
limited the decline in the OPM.
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The net profit
grew at a relatively higher rate of 13% to Rs20.8 crore in line
with expectations. The growth in the bottom line was aided by an
87% jump in the other income to Rs5.6 crore. However, it should be
noted that the company does not declare consolidated quarterly
results and the stand-alone results do not reflect the robust
growth in the earnings on a consolidated basis. We expect the
performance to improve significantly in FY2008 and FY2009 due to
the huge incremental gains from the additional assets and the
scheduled re-pricing of its assets at relatively much higher day
rates going forward.
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Along with the
results, the company has announced the signing of a joint venture
with the state government of Gujarat to offer offshore drilling
services. The memorandum of understanding (MoU) has been signed
between Gujarat State Petroleum Corporation (nominee of the
Gujarat state government) and AOL's subsidiary, Aban 8 Pte Ltd.
The joint venture would function through a special purpose
vehicle. The company is expected to spell out the specific details
about the scope and scale of the operations of the new venture
over the next couple of months.
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At the current
market price the stock trades at 14x FY2008 and 6.8x FY2009
consolidated earning estimates. We maintain our Buy call on the
stock with a price target of Rs2,090 (based on the derived value
of its subsidiaries combined with the calculated value of its
stand-alone earning estimates).
UTI Bank
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs580
Current market
price: Rs535
Performance above expectations
Result highlights
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UTI Bank's
Q3FY2007 profit after tax (PAT) reported a 40% year on year (yoy)
growth to Rs184.6 crore which is 6.4% higher than our estimate of
Rs173.5 crore, mainly due to a higher trading income reported
during the quarter.
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The net
interest income (NII) was up by 44.7% to Rs415.8 crore compared
with our estimate of Rs407 crore. The reported net interest margin
(NIM) expanded by six basis points yoy and by eight basis points
quarter on quarter (qoq).
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The other
income zoomed by 61.3% to Rs279.7 crore due mainly to a higher
trading income while the core fee income growth remained robust at
58.9% yoy.
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The operating
expenses continue to remain high due to a significant increase in
the employee expenses and network expansion.
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The bank
currently has a network of 481 branches with 2,126 automated
teller machines (ATMs). This has helped the bank to grow its
savings and current account deposits by 58.8% and 61.3%
respectively compared with the overall deposit growth rate of
49.7% and improve its current and savings account (CASA) ratio to
37.1% from 34.7% yoy. However on a sequential basis, the CASA
ratio has declined to 37.1% from 40% in Q2FY2007 mainly due to a
14.2% quarter on quarter (q-o-q) decline in the current account
balance.
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The capital
adequacy ratio (CAR) for the bank as on December 2006 stood at
11.8% with the tier-I capital at 6.96%. The bank has already
raised Rs420 crore of hybrid tier-I capital and exhausted the
headroom to raise more funds using the same route. Hence,
considering the growth potential of the bank, we feel the bank
needs to come out with a plain equity issue in FY2008. We have
factored in an equity dilution of 3.6 crore shares (12.8% of
pre-issue equity capital) at an issue price of Rs500 per share.
This would help the bank to raise Rs1,800 crore and improve the
tier-I ratio to above 8%. The book value (BV) per share would
increase by almost Rs40 per share post-dilution from our previous
pre-issue estimates.
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Based on the
improved performance of the bank we have also increased our FY2007
and FY2008 PAT estimates by 7.3% to Rs645 crore and Rs829 crore
respectively. Thus the revised FY2007 earnings per share (EPS)
estimate stands at Rs23.2, up from Rs21.6. The equity dilution
assumed by us has reduced the FY2008 EPS estimate rom Rs27.8 to
Rs26.4. At the current market price of Rs535 the stock is quoting
at 20.3x its FY2008E EPS, 10.3x its FY2008E pre-provisional profit
(PPP) and 2.9x its FY2008E BV. We feel the dilution would be BV
accretive and hence maintain our Buy recommendation on the stock
with a revised price target of Rs580.
Nicholas Piramal
India
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs393
Current
market price: Rs262
Earnings upgraded
Key points
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Nicholas
Piramal India Ltd (NPIL) and Eli Lilly and Co have signed a
landmark new drug development agreement to develop and, in certain
regions, commercialise a select group of Lilly's pre-clinical drug
candidates that span multiple therapeutic areas. This agreement
indicates the world-class research and development (R&D)
capabilities of Nicholas Piramal.
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While NPIL's
landmark deal with one of the leading innovative drug researchers
like Eli Lilly has infused confidence among the investors the
domestic formulations business has reported a more than expected
growth. Alongside, the increased momentum in its CRAMS business
and the successful integration and improvement in the capacity
utilisation of the recently acquired facilities at Morpeth, UK
(from Pfizer) enhances the earning visibility of the company.
Hence, we are revising our estimates upward for FY2007 and
FY2008.
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With the
better than expected growth in the domestic formulation business,
particularly in respiratory, anti-diabetics, gastrointestinal,
dermatology, NSAIDs etc and the strong bounce back in the cough
and cold brand--Phensedyl--we are revising the compounded annual
growth rate (CAGR) of the formulation business from 12% to 14%
during FY2006-08. On the other hand, the exports, largely
supported by the successful integration and improvement in the
capacity utilisation at Morpeth and the steady growth in the CRAMS
business, would grow at a CAGR of 88% during FY2006-08. Hence, we
are revising our revenue estimates to Rs2,347.8 crore and
Rs2,770.1 crore for FY2007 and FY2008, respectively.
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On the margin
front, we estimate a 480-basis-point expansion to 17.3% during
FY2006-08, which would largely be driven by the increasing
high-margin revenue flow from CRAMS, progressive shifting of
manufacturing to excise-exempt facility at Baddi (Uttaranchal) and
improved operating leverage at the Morpeth facility.
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With the
improving revenues and margin coupled with the lower tax burden
due to the commissioning of the manufacturing facility at Baddi,
we estimate the net earnings at Rs232.8 crore (87% growth) and
Rs345 crore (48% growth) for FY2007 and FY2008, respectively. Our
revised earnings estimates stand at Rs11.0 per share for FY2007
and Rs16.4 per share for FY2008. At the current market price of
Rs262, NPIL is discounting its FY2008 estimated earnings by
16.0x.
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As per our
revised estimates, we have valued NIPL's continuing business at
Rs360 and have valued the drug development deal at Rs33 (ie 10x of
the risk-adjusted EPS of Rs3.3). While valuing the drug
development deal, we have just valued the potential milestone
earning and ignored the potential royalties from the sale of the
product by Eli Lilly in the USA, the EU & Japan and the
revenue potential from the sale of the product by NPIL in other
selected markets. Hence, we are fixing a revised target price of
Rs393.
HCL Technologies
Cluster: Ugly
Duckling
Recommendation: Buy
Price target: Rs720
Current
market price: Rs630
Firing on all cylinders
Result highlights
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HCL
Technologies has reported a revenue growth of 6.2% quarter on
quarter (qoq) and 39% year on year (yoy) to Rs1,465.1 crore for
the second quarter ended December 2006, which is slightly below
expectations. The sequential growth was largely driven by a 12.5%
increase in the revenues of the infrastructure management service
(IMS) business. On the other hand, the business process
outsourcing (BPO) and software services businesses grew at a
relatively lower rate of 5.4% and 5.2% respectively, on a
sequential basis.
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The earnings
before interest, tax, depreciation and amortisation (EBITDA)
margins improved by 40 basis points to 22.1% on a sequential
basis, despite the annual salary hikes given to 15% (senior and
middle management level) of its work force with effect from
October, the adverse impact of the steep appreciation in the rupee
(3.6% appreciation in the average realised exchange rate against
the US dollar) and the relatively higher selling, general and
administration (SG&A) cost as a percentage of sales. The
margin expansion was primarily driven by the higher employee
utilisation (positive impact of 120 basis points) and better
realisations (positive impact of 140 basis points).
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In terms of
segments, the EBITDA margins of the software service and BPO
businesses improved by 60 basis points and 40 basis points
respectively. On the other hand, the IMS business reported a
marginal decline in the margins to 17.5%, down 10 basis points
sequentially.
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The earnings
grew a a robust rate of 14.4% qoq and 57.8% yoy to Rs286.2 crore
(ahead of our expectations of Rs258.8 crore and the consensus
estimates of a flat growth sequentially). The growth in the
earnings was also aided by the huge foreign exchange [forex] gains
of Rs34.7 crore on the open forward contracts.
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In terms of
operational highlights, the management indicated that the ramp-up
in the large deals is beginning to make a material impact on the
overall performance. The revenues from the six multi-million
multi-year deals contributed to around 10% of the total turnover
and is reflected in the third consecutive quarter of over 8%
quarter-on-quarter (q-o-q) growth in the software services
business in the dollar terms. What's more, the EBITDA margin on
the revenues from the large deals is indicated to be higher than
the average margins of the company.
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At the current
market price the stock trades at 18.8x FY2007 and 15.2x FY2008
estimated earnings. We maintain our Buy recommendation on the
stock with a price target of Rs720.
Tata Consultancy Services
Cluster:
Evergreen
Recommendation: Buy
Price target: Under
review
Current market price: Rs1,328
Q3FY2007—fist cut analysis
Result highlights
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Tata
Consultancy Services (TCS) has reported a growth of 8.4% quarter
on quarter (qoq) and of 40.8% year on year (yoy) in its
consolidated revenues to Rs4,860.5 crore. The sequential revenue
growth was largely driven by a 7.87% growth in volumes, a 2%
improvement in the billing rates and productivity gains of 2.6% on
the fixed price projects. On the other hand, the revenue growth
was dented by 2.46% due to the appreciation of the rupee and by
1.56% from the shift towards offshore business.
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The earnings
before interest and tax (EBIT) margins improved by 79 basis points
to 26.1% on a sequential basis. The steep appreciation of the
rupee dented the margins by 1.37% that was more than made up by
the positive impact of 1.74% from the higher billing rates, 0.28%
from the shift towards offshore business and 0.14% from the cost
efficiencies. The company maintained its broad guidance of
maintaining the full year margins close to 25.8% reported in
FY2006.
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The other
income stood at Rs30 crore (includes foreign exchange fluctuation
gain of around Rs5 crore), up from Rs7.7 crore in Q2FY2007.
Consequently, the earnings grew at a relatively higher rate of
11.4% qoq and 47.2% yoy to Rs1,104.7 crore.
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In terms of
operational highlights, the company added 5,562 employees and 5
new clients during the quarter. It also bagged five large deals;
two deals of over $100 million and three deals of over $50
million.
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Given the
higher-than-expected performance, we would be revising upward the
earnings estimates and the price target in the detailed result
update. We maintain the Buy call on the
stock. |
