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Summary
of Contents
STOCK UPDATE
Tata
Motors
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs1,004
Current market price: Rs729
A real ace in the pack
Result highlights
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Tata Motors' Q1FY2007 results are ahead of our
expectations. The net sales for the quarter stood at Rs5,819 crore
(adjusting for the export benefit reversal of Rs35.6 crore),
rising by 50% over Q1FY2006. The sales growth was driven by a
strong volume growth of 44.5% due to a low base effect and a
positive impact of the ban imposed on the overloading of
trucks.
-
Adjusting for a foreign exchange (forex) loss
of Rs78.3 crore in the quarter, the operating profit margin (OPM)
has improved by 70 basis points on a like-to-like basis. After
accounting for this adjustment, the operating profit has grown by
58.6% to Rs750.5 crore.
-
A higher other income due to higher dividend
income and export benefits caused the net profit to grow by 52.7%
year on year (yoy) to Rs417.8 crore.
-
Tata Motors' consolidated net sales grew by 51%
yoy to Rs6,770.9 crore compared with Rs4,493.1 crore last year.
The consolidated profit after tax (PAT) for the quarter grew by
46% to Rs381.7 crore.
-
At the current market price of Rs729, the stock
discounts its FY2008E earnings by 10.3x and FY2008E earnings
before interest, depreciation, tax and amortisation (EBIDTA) by
7.3x. We believe that the stock is trading at attractive
valuations and maintain our Buy recommendation on it with a price
target of Rs1,004.
KEI
Industries
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs500
Current market price: Rs213
Price target lowered to Rs500
Result highlights
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At Rs7.6 crore the Q1FY2007 net profit of KEI
Industries Ltd (KIL) was slightly below our expectation due to a
delay in the ramp-up in the capacity of the new high-tension (HT)
cable plant and higher raw material cost.
-
The company's net revenues for Q1FY2007 grew by
52.7% year on year (yoy) to Rs99.3 crore. The growth was 6.9% on a
sequential basis. The cable division led the growth in the
revenues by growing at a strong 54.3% yoy and 6.0% quarter on
quarter (qoq).
-
The operating profit margin (OPM) grew by 228
basis points to 15.3% and this led to a year-on-year (y-o-y)
growth of 79.6% in the operating profit to Rs15.2 crore. On a
sequential basis, the margins contracted by 170 basis points due
to a higher raw material cost.
-
During the quarter under review, the raw
material cost went up substantially due to an increase in the
aluminium prices (which cannot be hedged), a loss of material in
the start-up of the HT cable plant and the execution of one low
margin order during the quarter.
-
There has been a delay of about two to three
months in the execution of the HT cable plant. We expect the
company to take around eight to ten months to obtain the approvals
for the product. In the meanwhile, it would produce low-tension
(LT) cables from the plant.
-
We have lowered our earnings estimate for
FY2008 by 8% to take into account the higher raw material cost. We
have revised downward our price target for the stock by 8% to
Rs500 to take into account the higher raw material cost, and the
uncertainty over the funding and timing of the future capacity
expansion plans.
-
At the current market price of Rs213, the stock
quotes at 4.3x its FY2008E earnings per share (EPS) and 3.1x its
enterprise value (EV)/earnings before interest, depreciation, tax
and amortisation (EBIDTA). We maintain our Buy recommendation on
KIL with a revised price target of Rs500.
UltraTech
Cement
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs1,000
Current market price: Rs687
Stellar performance
Result highlights
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At Rs211 crore the Q1FY2007 net profit of
UltraTech Cement Ltd (UTCL) was way ahead of our expectation,
primarily because of higher-than-expected cement realisations and
a lower-than-expected increase in its costs.
-
The revenue for the quarter grew by 44.8% to
Rs1,180.32 crore and the net earnings grew by a staggering 251% to
Rs211 crore.
-
The revenue growth of 44.8% was driven by an
11.4% growth in the cement volumes and a 30% growth in the cement
realisations. During the quarter capacity utilisation too inched
up to 104% from 95% in Q1FY2006.
-
With UTCL's high leverage to cement prices, its
operating profit for the quarter grew by 151% as the operating
profit margin (OPM) expanded by 13.4% points to 31.7%.
-
On the cost front, the total cost per tonne
increased by 8.65% against per tonne realisation growth of 30%.
Consequently the earnings before interest, depreciation, tax and
amortisation (EBIDTA) per tonne increased by 125% to Rs842 per
tonne.
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The performance at the operating level
sweetened as the other income increased by 21%, and the interest
charge and depreciation stayed almost flat year on year (yoy). As
a result the net profit for the quarter grew by a whopping 251% to
Rs211 crore.
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UTCL has announced a major capital expenditure
(capex) of Rs2,700 crore to be spent over the next two to three
years. Of this Rs1,424 crore would be spent to modernise and set
up captive power plants and Rs1,274 crore would be used to set up
a 4-million-tonne greenfield plant in the southern region.
Lupin
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs1,130
Current market price: Rs851
Mixed bag
Result highlights
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Lupin's net sales increased by 35.4% year on
year (yoy) to Rs476.9 crore in Q1FY2007. The robust sales growth
was on the back of a 38.7% increase in the domestic sales to
Rs286.9 crore and a 25% rise in the export revenues to Rs198.2
crore.
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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 13.4% to Rs183.5 crore in the
quarter. The subdued growth in the API sales was on account of
diminished sales of Ceftriaxone bulk drug to Lupin's marketing
partner Baxter Travineol in the US market.
-
Lupin's operating profit margins (OPMs) took a
hit of 210 basis points to 15.4% in the quarter mainly on account
of a 41% rise in the material costs and certain one-time charges.
Consequently, the operating profit grew by only 18.6% to Rs73.3
crore.
-
The company's profit after tax (PAT) rose by
17.4% to Rs50.7 crore. The subdued growth in the PAT was on
account of an exceptional litigation expense of Rs8.2 crore
pertaining to the challenge of a patent in the quarter. Adjusting
for this one-time charge, the pre-exceptional net profit stood at
Rs58.9 crore, up 36.4% yoy.
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Lupin plans to increase its presence in the
European generic market through strategic partnerships and
continues to aggressively spend on research and development
(R&D), which it believes will yield results in the future.
-
At the current market price of Rs851, Lupin is
quoting at 11.3x its FY2008E earnings estimate. In view of the
strong growth potential lined up for the company--a pick-up in the
sales of Suprax, an increased presence in the high-margin
regulated markets of Europe and the USA and new product launches
arising out of the aggressive R&D efforts�we reiterate our Buy
recommendation on Lupin, with a price target of Rs1,130.
International
Combustion (India)
Cluster:
Cannonball
Recommendation: Buy
Price target:
Rs519
Current market price: Rs250
Prospects are bright
Result highlights
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The revenues of International Combustion India
Ltd (ICIL) grew by 15.0% year on year (yoy) to Rs15.89 crore in
Q1FY2007, in line with our estimates. The strong growth is
attributable to the good performance of the heavy engineering
division (HED).
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The revenues of the HED grew by 30.3% yoy to
Rs13.83 crore, in line with our estimates. The geared motor drive
system and gearbox division (GMGBD) reported a 37.7% drop in its
revenues to Rs2.13 crore, on account of a Rs1.2 crore order
spilling into the subsequent quarter. Had this order been
executed, the growth would have been better.
-
The operating profit margin (OPM) of the
company improved by 140 basis points yoy to 18.4% in Q1FY2007, in
line with our estimates. The margin expansion was largely driven
by the lower raw material costs and a shift in the revenue mix in
favour of high-margin heavy engineering products.
-
Lower other income (a 45.8% drop), higher bad
debts provisioning (a 16% jump) and higher depreciation (34.1%)
resulted in the net profit growing by 22.3% yoy to Rs1.37 crore.
The net profit growth was slightly below our estimates, but is not
indicative of the full year's performance.
-
The outstanding order book stands at Rs68.0
crore as against Rs57.0 crore in Q4FY2006, a growth of 19.3%
quarter on quarter (qoq). The current order backlog stands at 1.0x
its FY2006 revenues, imparting a strong visibility to the
earnings.
-
The new gear motor and gearbox facility will go
on line in Q2FY2007 (August 2007) as against the earlier guidance
of Q1FY2007. This, however, doesn't impact our forecast for the
GMGBD. On the full year basis it will still earn the revenues in
line with our estimates.
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ICIL is currently trading at a price/earnings
ratio (PER) of 5.3x its FY2008E earnings and 3.4x its FY2008E
enterprise value (EV)/earnings before interest, depreciation, tax
and amortisation (EBIDTA). We maintain a BUY recommendation on the
stock with a price target of Rs519.
VIEWPOINT
Kewal Kiran
Clothing
Killer instinct
Key points
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Kewal Kiran Clothing (KKCL) is a leading
manufacturer and marketer of men's branded apparel in the country.
Its brand portfolio includes Killer, Easies,
Lawman and Integriti. The company also has presence
in the retail segment through "K-Lounge", its fashion stores
operated on the franchise model.
-
KKCL's group revenues have grown at a
compounded annual growth rate (CAGR) of 15% over FY2003-06 to Rs86
crore. In the same period, the group profit after tax (PAT) has
grown at a CAGR of 27% to Rs11.7 crore. For Q1FY2007, KKCL has
reported a sales turnover of Rs29.3 crore and a PAT of Rs4.57
crore.
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KKCL's brands are well positioned so as to tap
the premium as well as the economy segment. While brands like
Killer for denim wear and Easies for casual wear are present in
the premium segment, the other two brands, Integriti and Lawman,
are in the economy segment. On the retail front, at present there
are 38 "K-Lounge" stores and with another 50 such stores in the
pipeline, the company plans to increase the number of such fashion
stores to 90 by March 2007 and to 145 by March 2008.
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KKCL had raised Rs80 crore from its initial
public offer (IPO) in March 2006. The company plans to utilise the
amount raised mainly towards setting up a new manufacturing unit.
KKCL's present manufacturing capacity is 2 million pieces per
annum which the management plans to take up to 2.7 million pieces
per annum by October 2006 and up to 4 million pieces per annum by
March 2008.
-
At present, KKCL's product portfolio consists
entirely of men's wear and as such is dependent only on one user
segment. To increase its user segment and de-risk its business
model, which is dependent on men's fashion, KKCL will offer
women's and children's wear by December 2006.
-
With its capacity set to grow up to 2.7 million
pieces per annum by December 2006, the management expects to clock
a turnover of Rs130 crore for FY2007 by selling 2.4 million pieces
during the year. At the current market price of Rs170, KKCL trades
at 11x its annualised FY2007 earnings per share (EPS) of Rs15. On
a comparative basis, KKCL is available at a discount to Provogue,
which is into a similar kind of
business.
Mphasis BFL
EDS India to merge with Mphasis
BFL
According to media reports, the boards of Mphasis BFL and
EDS (India) have approved the merger of EDS (India), a wholly-owned
subsidiary of EDS, into Mphasis BFL. The swap ratio of the merger
has been announced at 5:4 (five shares of Mphasis BFL for every four
shares of EDS India). Post-merger the stake of EDS would increase
from 51.4% to 61.8% in the combined entity.
MONSOON WATCH
Final countdown
The cumulative rainfall
from June 1 to July 19 is 292.3mm, 14% below normal. The rainfall
during the week July 13 to July 19 was 45.9mm, 32% below normal. The
deficient monsoon so far has resulted in an impact on the sowing of
crops like bajra and groundnut, which are the main crops in
Rajasthan. The sowing of soybean, which was lagging behind, gained
momentum covering 85% of the targeted area, thanks to the revival of
the monsoon in Madhya Pradesh. The crops, which have witnessed good
momentum in the sowing and are in their final lap of covering the
normal area under cultivation, are maize, cotton and sugar cane.
Although, the sowing of rice is ahead at present as compared to last
year, it still needs to cover a lot of ground as nearly 50% of the
normal area under cultivation is yet to be covered by plantation. On
the front of crop-wise areas under the influence of the deficient
monsoon, the crops of soybean and bajra have been hurt the most, as
67% of the area for soybean cultivation and 57% of the area for
bajra cultivation fall under the areas that have received deficient
rainfall.
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