Summary
of Contents
SHAREKHAN
SPECIAL
Monetary
Policy Review
In its
mid-term review of the Annual Monetary Policy for 2006-07, the Reserve Bank
of India (RBI) has raised the repo rate by 25 basis points from 7% to
7.25%, leaving the reverse repo and bank rates unchanged.
STOCK
UPDATE
Madras
Cement
Cluster:
Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,386
Price
target revised to Rs4,000
Result highlight
- At
Rs90 crore the Q2FY2007 net profit of Madras Cement Ltd (MCL) is in
line with our expectations. Cement prices for the year till date have
remained extremely strong and on account of the same we are upgrading
MCL's FY2007 and FY2008 earnings estimates by 28.1% and 21.4%
respectively. Our earnings per share (EPS) estimates now stand at
Rs257.7 for FY2007 and Rs303.7 for FY2008.
- The
revenues for the quarter grew by a whopping 66% year on year (yoy) to
Rs407.2 crore driven by a 19% growth in the cement volumes and a
staggering 39.4% growth in the cement realisation.
- As
the cement realisation improved sharply, MCL's operating leverage came
into play and consequently the operating profit for the quarter grew
by a huge 208% yoy to Rs158.2 crore. The operating profit margin (OPM)
for the quarter improved by 1,800 basis points to 38.9%.
- On
the cost front, MCL implemented strict cost-control measures as the
total cost per tonne saw a rise of just 7.7% compared with a 39.4%
growth in the cement realisation. Hence most of the Rs800-increase in
the realisation per tonne flowed into the earnings before interest,
depreciation, tax and amortisation (EBIDTA) per tonne. As a result the
EBIDTA per tonne jumped to Rs1,127, one of the highest in the entire
industry.
- With
a 40% decline in the interest cost and a 66% increase in the other
income, the net profit for the quarter grew by a staggering 378% to
Rs90 crore.
Cadila
Healthcare
Cluster:
Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs350
Above
expectations on net profit front
Result highlight
- The
net sales of Cadila Healthcare increased by 25.2% year on year (yoy)
to Rs467.3 crore in Q2FY2007, driven by a 97% growth in the
formulation exports and a 56% rise in the exports of active
pharmaceutical ingredients (APIs). The improved performance of the
French (growth of 87% year on year [yoy]) and US (growth of 352% yoy)
businesses also aided the robust sales growth. The sales growth was in
line with our expectations.
- The
operating profit margin (OPM) expanded by 200 basis points to 23.0% in
the quarter. The margin improvement was driven by a sharp decline of
380 basis points in the company's raw material cost, on account of an
improved product mix (a higher share of formulations and exports in
the overall sales mix). Consequently, the operating profit (OP) of the
company rose by 34.1% to Rs109 crore in the quarter under review.
- The
reported profit after tax (PAT) of the company grew by a whopping
46.9% to Rs70.5 crore in Q2FY2007. The profit growth surpassed our
expectations. The earnings for the quarter stood at Rs5.6 per share as
against Rs4 per share in Q2FY2006.
- The
company has signed three new contracts during the quarter under review
for contract manufacturing with international companies, taking the
cumulative number of contracts to 17, with peak revenue potential of
$25.5 million.
- Cadila
has filed 2 abbreviated new drug applications (ANDAs) and 5 drug
master files (DMFs) in Q2FY2007, taking the total number of filings to
45 ANDAs and 45 DMFs.
- At
the current market price of Rs350, the company is quoting at 15.0x its
FY2008E estimated earnings. We maintain our Buy recommendation on the
company with a price target of Rs425.
KSB Pumps
Cluster:
Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs550
Results
below expectations
Result highlight
- KSB
Pumps' Q3CY2007 results are below our expectations primarily because
of lower-than-expected top line growth and lesser operating profit
margin (OPM).
- The
top line is lower because of a delay in the dispatch of some orders,
as is reflected by the inventory, which stood at Rs6.3 crore. The
revenues for the quarter grew by a meagre 2.9% to Rs90.2 crore.
- The
operating profit for the quarter stood flat year on year (yoy) at
Rs16.4 crore, as the OPM declined by 40 basis points to 18.2%. The OPM
declined on account of higher raw material cost (adjusted for stocks)
and other expenditure.
- The
interest and depreciation charges declined by 65% and 5.6%
respectively.
- However
the tax rate jumped up significantly from 34.2% in Q3CY2005 to 39.3%
in Q3CY2006. Consequently, the net profit for the quarter declined by
4.2% yoy to Rs9.4 crore.
- On
account of the lower-than-expected top line growth and OPM we are
downgrading our CY2006 earnings estimates by 9% to Rs33.7 per share.
We maintain our CY2007 EPS estimates at Rs40.4.
Ratnamani
Metals and Tubes
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs570
Current market price: Rs457
Price
target revised to Rs570
Result highlight
- For
Q2FY2007 Ratnamani Metals and Tubes Ltd (RMTL) reported a whopping
growth of 135% in its net profit year on year (yoy) to Rs16.4 crore,
far ahead of our expectations.
- The
net revenues grew by 90% yoy to Rs143.1 crore driven by a four-fold
jump in the exports. The domestic sales grew by 10% yoy.
- The
operating profit grew by 116% yoy to Rs32.4 crore with a
273-basis-point expansion in the operating profit margin (OPM), again
much ahead of our expectations.
- The
OPM expanded because of controlled other expenses, which grew by 21.6%
and as a percentage of sales declined by 620 basis points. However,
the gains were partially offset by the pressure on the raw material
cost, which increased by 340 basis points as a percentage of sales.
- The
net profit increased by 135% yoy to Rs16.4 crore driven by operational
efficiency.
- We
have upgraded our earnings per shares (EPS) estimates for FY2007 and FY2008
by 8.0% and 5.4% to Rs47.7 and Rs57.0 respectively to take into
account the better-than-expected earnings growth and margin expansion.
- At
the current market price of Rs457, the stock is trading at 7.5x its
FY2008E EPS and 4.6x its FY2008E enterprise value (EV)/earnings before
interest, depreciation, taxes and amortisation (EBIDTA). We reiterate
our Buy recommendation on the stock with a revised price target of
Rs570.
Television
Eighteen India
Cluster:
Emerging Star
Recommendation: Buy
Price target: Rs850
Current market price: Rs776
Price
target revised to Rs850
Result highlight
- The
Q2FY2007 net profit of Television Eighteen India (TV18) at Rs16.2
crore is in line with our expectations.
- The
net revenues grew by a strong 72% year on year (yoy) and 27.8% quarter
on quarter (qoq) to Rs53 crore. During the quarter under review, TV18
consolidated the revenues from the Awaaz channel.
- Even
after excluding the revenues from the Awaaz channel, the revenues grew
by a strong 44.1% yoy and 8.0% qoq to Rs45 crore, in line with our
estimates.
- The
operating profit grew by a slower 43.3% yoy and 16.8% qoq to Rs23.5
crore as the operating profit margin (OPM) declined by 820 basis
points yoy and 400 basis points qoq. The decline in the OPM was on
account of the inclusion of the numbers of Awaaz, which is still at a
nascent stage.
- With
stable deprecation and interest expenses, the net profit grew by 42.6%
yoy and 17% qoq to Rs16.2 crore, in line with our estimates.
- During
the quarter under review, Web18 Caymans (a TV18 group company) raised
$10 million from Tracer Capital Management LP (TCML), valuing Web18 at
more than Rs460 crore.
- At
the current market price of Rs776, the stock is quoting at 21.3x its
FY2008E earnings per share (EPS) and 13.3x FY2008 enterprise value
(EV)/earnings before interest, depreciation, tax and amortisation
(EBIDTA).
- We
like the way TV18 has been monetising its various media properties.
The TCML deal, for instance, which gives a rough idea of the
valuations that its other Internet ventures may enjoy. TV18 is also
bringing out the initial public offering (IPO) of Global Broadcast
News (GBN). We reiterate our Buy recommendation on the stock with a
revised price target of Rs850 which captures the unlocking of the
value of its media ventures that are still at a nascent stage.
India
Cements
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs219
Upgrading
earnings
Result highlight
- India
Cements Ltd (ICL) achieved a net profit of Rs117 crore for Q2FY2007,
much ahead of our expectations.
- The
net revenues grew by a healthy 31.9% to Rs517 crore and the net profit
grew by a staggering 1,900% year on year (yoy) to Rs117 crore. (For
detailed quarterly analysis refer to our report dated October 23,
2006).
- Cement
consumption in the southern region has grown at 18% in the first six
months of the current fiscal as against the industry growth rate of
10%. As a result, the cement capacity utilisation levels stand at
92-95% which is reflected in the cement prices that are hovering at
Rs200-210 per 50kg bag as against Rs135-140 per 50kg bag last
year.
- The
company has also lined up a capital expenditure (capex) plan of Rs350
crore to augment its production capacity by 2 million metric tonne by
December 2007.
- The
company has also revamped its balance sheet by infusing capital in
bouts. Consequently, the debt:equity ratio reduced to a much
respectable 1.8:1 at the end of FY2006. Now with a strong free cash
flow, we expect the debt:equity ratio to reduce further to 0.8:1 by
FY2007 and to 0:3:1 by FY2008.
- Also
the date for the conversion of 13.5% optionally convertible debentures
(OCDs) worth Rs109 crore into equity shares (convertible at a price of
Rs125) elapsed in September 2006. Consequently, the company has redeemed
these high-cost OCDs. This in effect is a positive, as it not only
reduces the company's interest cost but also adds value to its
shareholders on account of the lower-than-expected equity dilution.
For example, we had expected the conversion of these OCDs to result in
higher equity capital of Rs229 crore. However on non-conversion of the
OCDs, the equity capital stands at Rs220 crore.
- Encouraged
by the stellar performance of ICL we are upgrading our net profit
estimates for FY2007 and FY2008 by 14% and 10% respectively. Our
earnings per share (EPS) estimates now stand at Rs20 for FY2007 and
Rs28.6 for FY2008. Our EPS estimates have been upgraded by 19% for
FY2007 and by 14% for FY2008 on account of the non-conversion of the
OCDs.
- At
the current market price of Rs219, ICL is trading at 7.7x its FY2008E
earnings and 5.4x its EV/EBITDA. On an EV/tonne basis, it is trading
at USD105/tonne, which is a huge discount of 30% to its peers. We
maintain a Buy on the stock with a price target of Rs315.
Bank of Baroda
Cluster:
Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs281
Asset
growth drives numbers
Result highlight
- Bank
of Baroda's net profit grew by 11.3% year on year (yoy) in line
with our estimates of a growth of 12.1% as the lower-than-expected net
interest income (NII) growth was compensated by higher other income
growth and flat operating expenses.
- During
the quarter the bank's NII grew by 13.9% yoy to Rs890.8 crore,
driven by a robust growth of 45% yoy in the advances.
- The
net interest margins (NIMs) declined by 26 basis points yoy to 3.1%
for H1FY2006 mainly due to lower investment yields due to a change in
the accounting practice.
- The
other income increased by 3.9% yoy to Rs321.7 crore due to a lower
treasury income. However, the core fee income has shown a robust
growth of 24.3% yoy.
- With
the net income growing by 11.1% and the operating expenses remaining
flat yoy, the operating profit was up by 24.3% yoy to Rs615.7 crore.
The core operating profit reported a 43.1% year-on-year (y-o-y)
growth.
- We
have downgraded our earnings per share (EPS) estimates for FY2008 from
Rs38.1 to Rs35.1 mainly on account of the pressure on the margins and
higher expected non-performing asset (NPA) provisioning required going
forward.
- At
the current market price of Rs281, the stock is quoting at 8x its
FY2008E EPS, 3.6x pre-provision profits (PPP) and 1.1x book value. The
bank is available at attractive valuations given its low price to book
multiple compared to its peers and earnings upside possibilities if we
see the margins improving going ahead. We maintain our Buy call on the
stock with a price target of Rs327.
Ahmednagar
Forgings
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs269
A stellar
performance
Result highlight
- Ahmednagar
Forgings has reported a stellar performance for Q1 and the results are
better than our expectations.
- The
top line for the quarter grew by 72.5% to Rs122 crore. The
company's additional capacity of 40,000 tonne per annum (tpa)
commenced operations from June 2006 and hence was operational for the
whole quarter.
- The
operating profit margin (OPM) has improved by 140 basis points to
19.3% as the operating profit rose by 86.5% year on year (yoy) to
Rs23.6 crore. The margin improved despite a rise in the raw material
cost from 60.7% to 66.7% as a percentage of sales. However, the
company made savings in its staff cost and other expenditures.
- Stable
depreciation charge and taxes caused the profit to grow by a stellar
92.2% to Rs13.5 crore for the quarter.
- The
company has an order book of Rs850 crore which is to be executed in
the next twelve months, triggering a strong top line growth going
forward. A higher contribution from the machined products and higher
non-automotive revenues should also trigger a growth in the margins
going forward.
- At
the current market price of Rs269, the stock discounts its FY2008E
earnings by 7.1x and trades at an enterprise value (EV)/earnings
before interest, depreciation, tax and amortisation (EBIDTA) of 3.9x.
We believe that the valuations are very attractive and maintain our
Buy on the stock with a price target of Rs380.
Godrej
Consumer Products
Cluster:
Apple Green
Recommendation: Book Profit
Current market price: Rs171
Book
profits
Result highlight
- Godrej
Consumer Products Limited's (GCPL) stand-alone revenues grew by 16.2%
year on year (yoy) to Rs182.5 crore in Q2FY2007--below our
expectations. The soaps 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, which is below our expectations. The operating profit
margins (OPM) contracted by 220 basis points to 18.5%. This mediocre
growth in the OP was attributable to a sharp increase in the material
cost by 27.8% to Rs92.2 crore. The material cost as a percentage of
sales spiked to 50.5%, up 460 basis points yoy and 120 basis points
sequentially, due to the hardening of the vegetable oil prices.
Vegetable oil is a key ingredient for fast moving consumer goods
(FMCG) companies.
- The
profit before interest and tax (PBIT) margins of the soaps division
reduced by 400 basis points yoy to 10.8%, while the PBIT margins of
the personal care division increased by 60 basis points yoy to 42.7%.
- 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, leading to a
122.9% year-on-year (y-o-y) increase. 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, which is below our expectations.
- GCPL's
consolidated revenues for Q2FY2007 were Rs231.8 crore, the operating
profit was Rs39.7 crore and the net profit was Rs31.0 crore. GCPL's
consolidated numbers reflect the stand-alone numbers, Keyline, UK's
numbers and the numbers of Rapidol, South Africa (the subsidiary
company, which was acquired this quarter).
- Though
we like the space in which GCPL is operating, we are concerned over
GCPL's continued subdued growth for the last three quarters in the
high-margin hair colour business. In the soaps business, while we see
GCPL sustaining its robust growth traction, the profitability in the
business will remain limited as the mass segment brand (Godrej No. 1)
continues to outpace the other brands besides the margins pressures
due to the increase in the vegetable oil prices. In light of its muted
H1FY2007 performance, we are downgrading our consolidated earnings
estimates for FY2007 and FY2008 by 12.7% and 10.6% and recommend
booking profits on the stock.
SECTOR
UPDATE
Automobiles
Subdued
growth despite festive season
- Bajaj
Auto reported decent numbers for October, with an overall growth of
15.7% year on year (yoy).
- Hero
Honda Motors' sales bounced back in the festive season as the
company reported a strong sales growth of 20.4% yoy to 363,480 units.
- TVS
Motors' sold 142,325 vehicles in the month, posting a disappointing
growth of just 3.2% yoy even though October is usually a good month
for the automobile industry.
- Maruti
Udyog sold overall 60,163 vehicles in October as compared with 51,543
units in last October, marking a growth of 16.7% yoy.
- The
utility vehicle (UV) segment of Mahindra and Mahindra (M&M) marked
a decline of 3.8% for the month due to lower Scorpio sales as the
total UV sales stood at 11,789 units. The Scorpio sales declined by
13.3% to 2,947 units for the month.
- Tata
Motors overall sales stood at 43,540 vehicles (including exports) for
the month of October 2006, growing by 5.6% compared to 41,219 vehicles
sold last year.
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