STOCK UPDATE
KEI Industries
Cluster: Ugly
Ducking Recommendation: Buy Price target:
Rs140 Current market price: Rs75
Q4FY2007
results: First-cut analysis
Result
highlights
-
KEI
Industries' (KEI) net sales grew by 123% to Rs207.4 crore in
Q4FY2007, in line with our expectations. However the net
profit grew by 37.3% to Rs11.4 crore and the growth was
below our expectations on account of rising raw material
prices and a higher interest cost.
-
The
power cable segment's revenues grew by a robust 125% to
Rs208 crore while the stainless steel wire segment's
revenues grew by 97% to Rs25 crore.
-
The
operating profit margin (OPM) for the quarter declined by
490 basis points to 12.1% due to a rise in raw material
prices. The raw material cost as a percentage of sales
increased to 76.6% from 63.9% in Q4FY2006.
-
The
operating profit for the quarter grew by 59% to Rs25.1
crore.
-
The
interest expense for the quarter increased by 148% to Rs7.5
crore due to a rise in the interest rates and also because
the company availed of higher working capital loans since
the business is growing at a rapid pace. The depreciation
cost for the quarter increased by 31% to Rs1.2 crore.
-
For the
full year, the net sales grew by 99% to Rs681.5 crore and
the net profit grew by 54.3% to Rs40.1 crore.
-
At the
current market price of Rs75, the stock is quoting at around
11x its FY2007 earnings per share and 6.6x its FY2007
enterprise value/earnings before interest, depreciation, tax
and amortisation. We maintain our Buy recommendation on the
stock with a price target of Rs140. We shall be upgrading
our FY2008 earnings estimates after analysing the annual
report of the company. Watch this space.
Allahabad Bank
Cluster:
Cannonball Recommendation: Buy Price target:
Rs101 Current market price: Rs89
Growth at
the cost of margins
Result
highlights
-
Allahabad Bank's net profit for Q4FY2007 declined by
16.5% year on year (yoy) to Rs125.7 crore. The same was
lower than our estimate of Rs143.8 crore mainly due to a
higher than expected tax liability of the bank during the
quarter.
-
During
the quarter the bank's adjusted net interest income (NII)
marginally declined by 1% yoy. Adjustment has been made for
the one-time cash reserve ratio (CRR) interest income of
Rs31 crore received during the quarter. The net interest
margin (NIM) adjusted for the one-off item has decreased on
year-on-year (y-o-y) and sequential bases. A significant
increase in the cost of funds unmatched by a commensurate
increase in the asset yields has resulted in a
73-basis-point y-o-y decline and a four-basis-point
sequential decline in the NIM. The bank's aggressive loan
growth policy funded by high-cost bulk deposits is taking a
huge toll on its margins.
-
The bank
had booked Rs49.5 crore (credit balances in sundry accounts)
as other income in FY2006. However, on Reserve Bank of
India's (RBI) direction it reversed the entry during this
quarter. Thus adjusted for the same the non-interest income
was up by 19.9% yoy to Rs174.7 crore.
-
The
operating performance was not exciting despite a sedate 6.3%
y-o-y rise in the operating expenses. The operating profit
was up only 2.2% yoy with the core operating profit
(excluding treasury) up by 9.2% on a y-o-y
basis.
-
Although
provisions and contingencies declined by 23.4% yoy, yet tax
provisions increased by 395% during the quarter. This
resulted in a 16.5% y-o-y decline in the profit after tax
(PAT) as against a 17.6% y-o-y rise at the profit before tax
level.
-
At the
current market price of Rs89, the stock is quoting at 4.7x
its FY2008E earnings per share, 2.8x pre-provision profits
and 0.9x book value. The bank is available at attractive
valuations compared with its peers, given its low price to
book multiple and high return on equity. We maintain our Buy
call on the stock with a price target of Rs101.
Bajaj Auto
Cluster: Apple
Green Recommendation: Buy Price target:
Rs2,500 Current market price: Rs2,248
Bruised by
demerger, disclosures
Result
highlights
-
The
Q4FY2007 results of Bajaj Auto Ltd (BAL) are in line with
our expectations. The net sales grew by 6.8% to Rs2,313.6
crore.
-
The
operating profit of the company declined by 23.2% to Rs326.3
crore as the operating profit margin (OPM) declined by 550
basis points to 14.1%. However, the margins are stable on a
sequential basis. The net profit before extraordinary items
for the quarter declined by 3.9% to Rs320.75 crore.
-
The
company announced its long pending demerger, through which
two new companies would be created, namely Bajaj Auto Ltd
(BAL; new), comprising the manufacturing business, and Bajaj
Finserv Ltd (BFL), comprising the insurance, auto finance
and wind power businesses. The existing company would be
renamed as Bajaj Holdings and Investment Ltd (BHIL). The
shareholders would hold 70% in the new companies directly,
while 30% of their holding would be routed through the
holding company BHIL. We view this process as a negative, as
the listed holding company would suffer from a holding
company discount.
-
For
every one share held in the existing BAL (future BHIL), the
shareholders would continue to hold one share in BHIL, get
one share of the new BAL of Rs10 each and one share of BFL
of Rs5 each.
-
In
another disclosure, BAL has also declared that Allianz has a
call option to raise its stake in the life insurance
business to 74% from the current 26% at a nominal
pre-determined price till 2016. In all likelihood, the
foreign direct investment (FDI) norms for insurance are
expected to get relaxed till then and hence BAL's stake is
likely to get reduced.
-
We are
downgrading our sum-of-the-parts (SOTP) target on BAL to
Rs2,500, valuing the new BAL at Rs1,254 per share and BFL at
Rs449 per share. Taking into account the cash and investment
portfolio of BAL and also BHIL's stake in the two new
companies, we value BHIL at Rs835. We maintain our Buy call
on the stock.
Sundaram Clayton
Cluster: Apple
Green Recommendation: Buy Price target:
Rs1,350 Current market price: Rs941
Spinning off
its brake division
Result
highlights
-
Sundaram
Clayton has finally decided to spin off its brake division
into a subsidiary. The new entity will be called WABCO-TVS
and will be listed on the stock exchange.
-
We
believe that the demerger would help both the companies to
focus on their core areas. WABCO would control the brake
division while the TVS group would run the casting division.
The higher control of WABCO in the brake division is in line
with WABCO's strategy and may open new outsourcing
opportunities for the brakes company as WABCO is scouting
for a low-cost producer of brakes.
-
For
FY2008, Sundaram Clayton has raised its capex plans to Rs200
crore, out of which Rs90 crore would be spent on the brake
business and Rs110 crore on the die-casting business.
-
We are
introducing our FY2009 estimates for Sundaram Clayton. We
expect the company to record a revenue growth of 17% and a
profit growth of 26% during the year. We expect its earnings
to reach Rs74.5 in FY2009.
Sun Pharmaceutical Industries
Cluster: Ugly
Duckling Recommendation: Buy Price target:
Rs1,297 Current market price: Rs1,064
Q4 first-cut
analysis and acquisition highlights
Result
highlights
-
The
consolidated net sales of Sun Pharmaceutical Industries (Sun
Pharma) grew by 33.8% year on year (yoy) to Rs544.2 crore in
Q4FY2007. The strong growth was driven by an increase of
43.4% in the domestic business and a 22.4% growth in the
exports.
-
Its US
subsidiary, Caraco Pharma (Caraco), continued its growth
momentum. Caraco's sales grew by 32% yoy to $32.7 million in
Q4FY2007 and by 41% to $117 million in FY2007.
-
Sun
Pharma's operating profit margin (OPM) expanded by 610 basis
points on a lower base to 28.3%, resulting in a 70% spike in
its operating profit to Rs154.5 crore.
-
Sun
Pharma's other income was higher by 24.2% to Rs94.2 crore,
which was more than double of our estimate of Rs42.7 crore
for the quarter.
-
With an
impressive revenue growth in both domestic formulation and
export businesses, a 610-basis-point expansion in the OPM
and a higher than expected other income, Sun Pharma's net
profit for Q4FY2007 stood at Rs212.1 crore, up 48.4% yoy.
The net profit was ahead of our estimate of Rs184.4
crore.
-
For the
full year, the company's sales were up 30% at Rs2,132.1
crore and the OPM expanded by 190 basis points to 31.9%,
resulting in a net profit of Rs774.1 crore (up 35%). The
full-year net profit was above our expectations of Rs737.2
crore.
-
Between
Sun Pharma and its US subsidiary Caraco 34 abbreviated new
drug applications (ANDAs) are now approved compared with 22
at the end of 2006. A total of 16 ANDAs have been filed
during the fourth quarter (eight each by Sun Pharma and
Caraco). With this, 77 ANDAs await the approval of the US
Food and Drug Administration (USFDA) including seven
tentative approvals.
-
The
company has guided for a conservative 15-18% consolidated
revenue growth for FY2008 (which is less than our estimate
of a 30% growth) whereas Caraco has guided to a growth of
30% during the year. Sun Pharma expects to maintain the OPM
in FY2008.
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