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Summary
of Contents
SHAREKHAN
SPECIAL
Listing of
Network18
Pursuant to the restructuring, Network18, the
holding company of the TV18 group will get listed on the bourses on
February 2, 2007. This completes the last leg of restructuring of
the group that was necessary to comply with the regulatory
guidelines.
STOCK UPDATE
Mahindra &
Mahindra
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs1,050
Current
market price: Rs900
Results below expectations
Result highlights
-
The Q3FY2007
results of Mahindra and Mahindra (M&M) are below our
expectations, due to a decline in the profit margin of the
automotive segment. The stand-alone net sales grew by 16.7% to
Rs2,576.1 crore. The automotive revenues grew by 9.7% to Rs1,510.3
crore. The farm equipment division (FED) reported a stronger
revenue growth of 27%.
-
The profit
before interest and tax (PBIT) margin of the automotive segment
declined by 170 basis points to 10.0% while that of the FED rose
by 260 basis points to 15% in Q3FY2007. Consequently, the overall
operating profit margin (OPM) remained stable at 12.0%, leading to
a 17% year-on-year (y-o-y) growth in the operating profit to
Rs309.6 crore.
-
A higher
interest income and stable depreciation helped the company to
report a 30% growth in its pre-extraordinary net profit to Rs242.3
crore. The same quarter last year consisted of extraordinary items
including the profit on sale of the light commercial vehicle (LCV)
division and an octroi refund of Rs20 crore. Consequently, the
reported profit after tax (PAT) grew by just 4.1% to Rs242.9
crore.
-
M&M's
Q3FY2007 consolidated revenues grew by 30.7% to Rs4,757.4 crore,
due to the strong performance of all the subsidiaries. The
consolidated PAT after exceptional items rose by 102% to Rs530.6
crore.
-
Considering
the continuing good growth in the utility vehicle (UV) segment;
the strong growth expected in the tractor segment; the entry into
the passenger car segment and the strong performance of its
subsidiaries, we remain positive on the prospects of M&M. At
the current market price of Rs900, the stock discounts its
consolidated FY2008E earnings by 13.5x. We believe that the
valuations are very attractive and maintain our Buy call on the
stock with our sum-of-parts price target of Rs1,050.
ITC
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs220
Current
market price: Rs176
All-round performance
Result highlights
-
ITC's Q3FY2007
net profit grew by 33% year on year (yoy) to Rs717 crore, which
was above our expectations.
-
The net
revenues for the quarter grew by 24% yoy as most of its businesses
grew strongly: cigarettes (14%), fast moving consumer goods (FMCG;
67%), hotels (28.5%), paperboards (11.0%) and agri-business
(19.5%).
-
The earnings
before interest, tax, depreciation and amort sation (EBITDA)
margin during the quarter remained stable at 34.2%, though the
product mix shifted away from the cigarette business. This was
primarily due to the improvement in the margin of every individual
business segment and a sharp rise in the margin of the hotel
business. The margin in the hotel business moved up from 35% in
Q3FY2006 to 42% in Q3FY2007.
-
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, has
come down considerably. The losses remained flat at Rs46 crore
during the quarter.
-
We have always
liked the way ITC has channelised the strong cash flows generated
from its cigarette business into the other businesses without
affecting its return on capital employed (RoCE). However, the fear
of value-added tax (VAT) may have a dampening effect on the
counter in the short term.
-
At the current
market price of Rs176, the stock is attractively quoting at 20x
its FY2008E earnings per share (EPS) and 13.6x FY2008E enterprise
value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with
a price target of Rs220.
Fem Care
Pharma
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs500
Current market price: Rs373
Growth driven by consumer products
Result highlights
-
Fem Care
Pharma (FCP) reported a growth of 27.4% in its stand-alone
revenues to Rs17.6 crore during the third quarter of FY2007. The
growth was driven largely by the 24.5% growth in the consumer
product business to Rs12.4 crore; the consumer product business
contributed over 70% of the total turnover during the
quarter.
-
The operating
profit margin (OPM) plummeted by 500 basis points to 19.7% during
the quarter. The decline in the margin was contributed largely by
the increased spending on advertisement and publicity (at Rs1.3
crore as compared with Rs0.56 crore in Q3FY2006) to support the
introduction of its premium product, Oxyz Bleach, through retail
channels as against through beauty saloons initially. Moreover,
the margin was also affected by the partial shift of the festive
season sales to Q2 this year due to an early Diwali.
-
However, the
substantial decline in the tax rate (to 11.9% from 32.3% in
Q3FY2006 due to the transfer of production to its new facility at
Himachal Pradesh that enjoys tax benefits) enabled the company to
post earnings growth of 12.9% to Rs2.9 crore, in line with ou
expectations.
-
On the
nine-month basis, the performance was quite encouraging. The
stand-alone revenues grew by 22.8% to Rs51.4 crore. The OPM
improved by 50 basis points to 22.5% despite the fact that the
advertisement and publicity expenses grew to 7.2% of the sales (up
from 4.8% in the corresponding period last fiscal). Moreover, the
anticipated decline in the effective tax rate (to 13.6% from
34.6%) resulted in a robust growth of 66% in the earnings to
Rs10.2 crore.
-
We are
upgrading the consolidated earnings estimates by 3.5% for FY2007
and by 2% for FY2008, largely to factor in the lower than expected
decline in the effective tax rate. At the current market price the
stock trades at 10x FY2007 and 8.1x FY2008 consolidated earnings
estimates. We maintain our Buy call on the stock with a price
target of Rs500.
Solectron Centum
Electronics
Cluster: Emerging Star
Recommendation: Book
Profit
Current market price: Rs300
Book profits
Result highlights
-
Solectron
Centum Electronics (Solectron) reported a robust growth of 132.7%
in its revenues to Rs48 crore during the third quarter of FY2007.
The growth was driven largely by the 186% jump in the electronic
manufacturing service (EMS) business to Rs36.8 crore. The
component business is also showing signs of improvement with a
growth of 44.8% to Rs11.3 crore as compared with a rather stagnant
performance in the past seven quarters.
-
The operating
profit margin (OPM) declined by 330 basis points to 13%, largely
due to the continued increase in the proportion of the low-margin
EMS revenues in the total turnover. Moreover, the margins in the
component and EMS businesses have been declining gradually.
Consequently, the operating profit grew at a relatively lower rate
of 86.1% to Rs6.3 crore.
-
The increase
in the interest charges and depreciation outgo further dented the
overall growth in the earnings, which grew by 21.2% to Rs3.7
crore. However, after adjusting for the one-time item (a
write-back of Rs0.7 lakh provisions made for the on-going
restructuring in Q2), the earnings growth stood at Rs3 crore, a
decline of 1.8% as compared with Q3FY2006.
-
On a
nine-month basis, the revenue grew at a robust rate of 160.6% to
Rs125.7 crore. The OPM declined by 600 basis points to 13.2% due
to the cumulative impact of the shift towards the low-margin EMS
business and a steep decline in the profitability of both
component and EMS businesses. Consequently, the earnings grew at a
rate of 37.4% to Rs10.5 crore.
-
At the current
price the stock trades at 32.2x FY2007 and 27.6x FY2008 estimated
earnings. The de-merger of the EMS business would unlock value for
the shareholders and the sum-of-the-parts (STOP) based fair value
works out to Rs315. Since the current market price is quite close
to the fair value, we recommend investors to book profit on the
stock.
Thermax
Cluster:
Emerging Star
Recommendation: Buy
Price target:
Rs433
Current market price: Rs411
Robust performance continues
Result highlights
-
The
consolidated revenues of Thermax grew by a whopping 49.9% year on
year (yoy) to Rs594.8 crore in Q3FY2007, sharply ahead of our
expectation. The energy segment grew by a robust 36.2% yoy to
Rs517.8 crore whereas the environment segment grew by an
impressive 49.6% yoy to Rs130.4 crore.
-
The company's
operating profit margin grew by 190 basis points yoy to 12.4% in
the quarter. Consequently, the operating profit grew by 48.5% yoy
to Rs72.1 crore, ahead of our expectation. Though the margins
expanded on a y-o-y basis, sequentially they were down 150 basis
points, below our estimates. The sequential margin squeeze was due
to the rise in the raw material prices and a change in the product
mix.
-
The energy
segment continued its robust performance with a revenue growth of
36.2% yoy to Rs517.8 crore and a 230-basis-point expansion in the
profit before interest and tax (PBIT) margin to 11.8%. The
environment segment reported an impressive 49.6% y-o-y growth in
the revenues to Rs130.4 crore while the PBIT margin improved by
230 basis points yoy.
-
The net profit
grew by 109.6% yoy to Rs52.7 crore in Q3FY2007, ahead of our
expectation. The strong top line growth, y-o-y margin expansion,
higher other income and lower effective tax rate are attributable
to the jump in the net profit.
-
The order
backlog grew at 94% yoy to Rs3,024 crore. The order backlog is
equivalent to 1.9x FY2006 consolidated revenues and 1.5x trailing
one-year revenues, imparting a very strong visibility to the
revenues.
-
In light of
the continued growth traction over the last few quarters and the
revised guidance for a 35% top line growth for FY2007, we are
revising our FY2007 and FY2008 earnings upwards by 2.8% and 1.6%
respectively. We also revising our one-year price target upwards
to Rs433 discounting its FY2008 arnings per share (EPS) by 19.0x.
The Rs43 per share of cash and cash equivalent on the company's
books provides a margin of safety to our price target. We maintain
our BUY recommendation on the stock with a revised price target of
Rs433.
Ashok
Leyland
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs56
Current market price: Rs49.4
Great show; price target revised
Result highlights
-
The Q3FY2007
results of Ashok Leyland Ltd (ALL) are ahead of our expectations
because of a substantial improvement in its profitability.
-
The top line
grew by 47.8% to Rs1,777.6 crore led by a strong volume growth of
54%, while the realizations declined by 4% year on year.
-
The operating
profit margin (OPM) improved by 70 basis points to 10.4%, leading
to a 59% rise in the operating profit. Excluding the foreign
exchange (forex) gain/loss, the margin is stable on a year-on-year
basis but has risen substantially on a sequential basis. The
sequential rise in the margin is mainly owing to the savings in
the staff cost and other expenses, which declined as a percentage
of sales due to a surge in the volumes.
-
The interest
cost for the year was lower due to better working capital
management of the company; this helped ALL to mark a strong growth
of 91.5% in its profit after tax (PAT) year on year (yoy) to
Rs108.4 crore.
-
The management
expects the strong growth to continue in the commercial vehicle
(CV) segment and the CV industry to grow at 15-20% for the next
two years. Considering strong volume growth registered in the
current year, we are also raising our earnings estimates for
FY2007 and FY2008 by 6% and 6.4% respectively.
-
Considering
the buoyancy in the CV segment, the company's capacity expansion
plans and better overseas prospects, we maintain our positive
outlook on ALL. At the current market price of Rs49.4, the stock
quotes at FY2008E price/earnings ratio (PER) of 12.3x and at an
enterprise value (EV)/earnings before interest, depreciation, tax
and amortisation (EBIDTA) of 6.8x. We maintain our Buy
recommendation on the stock with a revised price target of
Rs56.
Union Bank of
India
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs150
Current market price: Rs112
Sequential improvement looks promising
Result highlights
-
The Q3FY2007
results of Union Bank of India are in line with our expectations
with the profit after tax (PAT) reporting a growth of 11.4% yoy to
Rs255.2 crore compared to our estimate of Rs251.3 crore.
-
The net
interest income (NII) was up 7.3% year on year (yoy) and 9.3%
quarter on quarter (qoq) to Rs685.9 crore compared to our estimate
of Rs695 crore.
-
The net
interest margin (NIM) of the bank has improved on a sequential
basis by 23 basis points from 2.76% for Q2FY2007 to 2.99% for
Q3FY2007. The bank's low-cost current and savings account (CASA)
base has improved to 34.90% from 33.49% sequentially and from
32.74% on a year-on-year (y-o-y) basis.
-
The margins
have improved sequentially after the management put its act
together to shed low yielding advances and focus on more quality
advances to improve the yields on the asset side. On the liability
side the bank has reduced high-cost term deposits and improved its
low-cost deposits, which helped in containing the costs.
-
The operating
profit was up 17.8% yoy and the provisions showed an increase of
9.5% yoy.
-
The net
non-performing assets (NPAs) of the bank improved to 1.12% as on
December 31, 2006 from 1.24% on a y-o-y basis and from 1.15% on a
sequential basis.
-
At the current
market price of Rs112, the stock is quoting at 5x its FY2008E
earnings and 0.9x expected FY2008E book value. We maintain our Buy
recommendation on the stock with a price target of
Rs150. |
