Summary
of Contents
STOCK
UPDATE
JM Financial
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs900
Current market price: Rs727
On strong
financial wicket
Result highlight
- JM
Financial Ltd (JMFL) reported a strong 74.7% year-on-year (y-o-y)
growth in the revenues for H1FY2007 to Rs183.5 crore. The strong
growth in the revenues was backed by the institutional broking and
investment banking divisions. The revenues of these divisions together
grew by 62.2% year on year (yoy).
- The
operating profit of JMFL grew by 70% yoy to Rs92.1 crore as the
operating profit margin (OPM) was stable at 50.2%.
- The
company's net profit for H1FY2007 stood at Rs41.2 crore, up by 68.6%.
- On
a quarter-on-quarter (q-o-q) basis, its income for Q2FY2007 was lower
by 11.1% to Rs86.4 crore as there were no big initial public offerings
(IPOs) during Q2FY2007 and the income for Q1FY2007 was also abnormally
higher due to the Reliance Petroleum IPO.
- On
a q-o-q basis, the net profit for Q2FY2007 was lower by 37%.
- At
the current market price of Rs727 the stock is quoting at 17x its
FY2008E earnings per share and 2.7x its FY2008E book value per share.
- We
have revised our price target on the stock to Rs900, as we have valued
JMFL at 20x its FY2008E earnings.
HDFC Bank
Cluster:
Evergreen
Recommendation: Buy
Price target: Rs1,080
Current market price: Rs1,010
Strong
operational growth
Result highlight
- HDFC
Bank's Q2FY2007 results were better than our expectations driven by a
higher fee income and controlled expenses.
- The
net interest income (NII) grew by 38.1% year on year (yoy) to Rs845.6
crore in line with our expectations. The advances grew by 34.4%. The
net interest margin (NIM) declined by eight basis points to 3.92%,
albeit the same remained the highest in the industry.
- The
other income grew by a strong 52.9% driven by a 44.2% year-on-year
(y-o-y) growth in the fee income, which was higher than our
expectations.
- The
operating profit grew by 41.1% yoy to Rs664.2 crore as the operating
expenses remained under check. The operating expenses grew by 44.2%
yoy, lower than expected, probably because there was no expansion in
its branch network during the quarter.
- That
the bank did not add any branch in Q2FY2007 (for want of new licences
from the Reserve Bank of India) is a cause for
concern. Because of this the proportion of the CASA deposits in the
total deposits fell to 52.2% in Q2FY2007 compared with 59.7%
(Q2FY2006) and 52.6% (Q1FY2007).
- The
growth in the advances was also lower than an average growth of 50%+
recorded over the previous four quarters.
- At
the current market price of Rs1,010, the stock is quoting at 21.1x its
FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provision
profits (P/PPP) and 4.3x its FY2008E book value (BV).
- We
believe that the current market price fairly discounts the growth
expected over FY2006-08E, leaving very marginal upside to the stock
price. We are revising our price target for the stock to Rs1,080. At
this level the stock would discount its FY2008E EPS by 22.6x and
FY2008E BV at 4.6x.
Genus
Overseas Electronics
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs230
Profit
meter ticking on
Result highlight
- Genus
Overseas reported a year-on-year (y-o-y) growth of 87% in its net
profit to Rs5.6 crore for Q2FY2007. The same is above our
expectations, primarily because of higher-than-expected revenue
booking and operating profit margin (OPM) for the quarter.
- As
a result of the healthy revenue booking for the project business and
impressive offtake in the metering business, the company's net sales
for the quarter grew by a smart 105% year on year (yoy) to Rs78 crore.
Notably, the growth in the net sales was higher than that in the gross
sales (y-o-y growth of 97%). This was primarily because the project
business earned higher revenues, which were free of excise duty. The
growth was also aided by the sales from the new excise-free plant at
Uttaranchal.
- The
operating profit for the quarter grew by 140 percentage points to Rs12
crore, as the OPM improved by 220 basis points to 15.4%. The margin
improved on the back of higher order booking that brought operating
leverage into play. This was clearly visible as the other expenditure as
a percentage of sales came down to 11.6% in Q2FY2007 from 20.1% in
Q2FY2006.
- However
the interest expenses for the quarter trebled to Rs4.82 crore as the
company had to avail of large working capital loans to execute project
orders. The depreciation charge also rose by 135% to Rs1.2 crore as
the company commissioned the first phase of its Uttaranchal
plant.
- Consequently
the net profit for the quarter grew by 87% yoy to Rs5.6 crore.
- The
order book for the quarter jumped by 123% to Rs491 crore as the
company started taking metering orders on project basis as against on
the basis of pure metering sales.
HCL
Technologies
Cluster:
Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs609
Results
ahead of expectations
Result highlight
- HCL
Technologies has reported a robust revenue growth of 10% quarter on
quarter (qoq) and 42.1% year on year (yoy) to Rs1,379.5 crore for the
first quarter ended September 2006. The sequential growth was driven
by a 9.7% increase in the revenues of the software service business
and a growth of 16.6% in the infrastructure management service (IMS)
business. On the other hand, the business process outsourcing (BPO)
business continues to lag behind with a relatively lower growth rate
of 5.4% on a sequential basis.
- The
earnings before interest, tax, depreciation and amortisation (EBITDA)
declined by 70 basis points to 21.7% on a sequential basis, largely
due to the salary hikes given to almost 85% (employees below
"project manager" level) of its work force with effect from
July. The worst affected was the profitability of the software service
business that reported a 90-basis-point decline in the EBITDA margin
to 22.3%. On the other hand, the IMS business reported another quarter
of margin expansion (up 20 basis points to 17.6%). The operating
profit grew 6.2% qoq and 43.9% yoy to Rs298.9 crore.
- The
earnings grew at a relatively lower rate of 7.4% qoq and 49.6% yoy to
Rs250.2 crore (ahead of our expectations of Rs239.5 crore and
consensus estimates of a sequential drop in the earnings). The growth
in the earnings was also aided by the 25.2% sequential growth in the
other income (due to the lower base resulting from a negative foreign
exchange [forex] impact of Rs16.6 crore in Q4).
- In
terms of operational highlights, the company added 3,826 employees
during the quarter, one of the highest in the past 10 quarters. The
revenues from the top 10 clients grew at a robust rate of 13% on a
sequential basis.
- At
the current market price the stock trades at 19x FY2007 and 15.2x
FY2008 estimated earnings. We maintain our Buy recommendation on the
stock with a revised price target of Rs720 (18x FY2008 revised earning
estimates).
Crompton
Greaves
Cluster:
Apple Green
Recommendation: Buy
Price target: Rs258
Current market price: Rs237
Price
target revised to Rs258
Result highlight
- Crompton
Greaves' revenues grew by 48.6% year on year (yoy) in Q2FY2007 to
Rs824.0 crore, way ahead of our expectations. Although all its three
divisions reported a strong performance, the power system division led
the pack with a revenue growth of 68.7% yoy to Rs449.7 crore. The
revenues of the consumer product division and the industrial system
division grew by 33.3% and by 36.8% respectively.
- The
raw material cost/sales ratio spiked to 75.6% in Q2FY2007 from 69.5%
in Q2FY2006 largely due to an increase in the prices of the base
metals like copper and the inability of the company to pass on the
same to its customers. However, lower employee cost and other expenses
muted the impact of the same. Consequently, the operating profit
margin (OPM) reduced by 60 basis points yoy to 8.9%.
- The
profit before interest and tax (PBIT) margin of the power system
division declined by 50 basis points to 8.0% during the period. The
high-margin businesses maintained their margins (the consumer product
division's margin was up 10 basis points to 9.7% and the industrial
system division's margin was up 20 basis points to 13.6%).
- Crompton
Greaves provided for the full tax rate in Q2FY2007 as against the
minimum alternate tax (MAT) rate in Q2FY2006.The increased tax
provisioning led to a slower growth of 25.0% yoy to Rs40.7 crore in
the profit after tax. But the growth was still in line with our
expectations.
- Pauwels'
top line grew by 86.4% yoy to Rs520.0 crore in Q2FY2007, way ahead of
our estimates and the profit before tax (PBT) stood at Rs21.3
crore.
- The
stand-alone order book grew by 0.6% sequentially and by 20.0% yoy to
Rs1,800.0 crore in Q2FY2007. The consolidated order book stood at
Rs3,739.0 crore, up 16.5% sequentially largely on account of the 36.5%
jump in the order book of Pauwels.
- The
Ganz acquisition, which was announced in July but is yet to be
concluded will further accelerate the growth of the consolidated
numbers. Though currently loss making, it is expected to contribute 70
million euros in FY2008 and turn profitable by then. We have not
currently included these estimates in our numbers.
- The
board has announced a bonus of two shares for every five shares
held.
- Given
the robust top line growth, higher raw material costs, the consequent
margin contraction and higher provisioning for income tax, we are
tweaking our FY2007 and FY2008 estimates. The FY2007 earnings per
share (EPS) stand revised lower by 10% to Rs9.2. Although with the
margins stabilising in FY2008 and the robust top line growth coupled
with the strong performance of Pauwels we are revising our earnings
estimates upward by 7.9%.
- At
the current market price of Rs237, Crompton Greaves is trading at
25.7x its FY2008E stand-alone earnings and 17.4x its FY2008E
consolidated earnings. We maintain a Buy on the stock with a revised
price target of Rs258 discounting its FY2008E consolidated earnings by
19x.
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