Summary
of Contents
STOCK UPDATE
ICICI Bank
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs1,173
Current
market price: Rs866
Price target
revised to Rs1,173
Result
highlights
-
ICICI Bank's
fourth quarter results have been below expectations. Its profit
after tax (PAT) has grown by 4% year on year (yoy) and declined by
9% quarter on quarter (qoq) to Rs825 crore compared with our
estimate of Rs1,004 crore. The lower numbers are mainly on account
of a lower than expected non-interest income.
-
We had
expected a much higher non-interest income due to the National
Stock Exchange (NSE) stake sale that was likely to fetch around
Rs500 crore and a sustained robust fee income growth witnessed
during the previous quarters. However, despite the NSE stake sale
the total treasury income stood at Rs446 crore adjusted for the
marked-to-market loss on the corporate bond portfolio, which
implies an insignificant contribution from any other treasury
income source. The core fee income was also lower with a
sequential growth of only 6% compared with 18% and 15% sequential
growth witnessed in the previous two quarters.
-
The core
operations were in line with expectations. The net interest income
was up by 30% yoy and 5% qoq to Rs1,789.7 crore compared with our
estimate of Rs1,763 crore. The reported net interest margin (NIM)
for Q4FY2007 stood at 2.66% compared with 2.6% in Q3FY2007 and
2.79% in Q4FY2006. However, excluding the one-time cash reserve
ratio (CRR) interest of around Rs85 crore we feel there would be a
sequential decline of five basis points in the NIM.
-
The bank plans
to come out with a follow-on public offer (FPO) in the domestic
and international markets by June 2007 to raise Rs20,000 crore. We
have factored in a dilution of 23.5 crore equity shares at an
offer price of Rs850 which will help the bank to raise the desired
amount. The huge FPO of Rs20,000 crore would loom large over the
bank's return on equity (RoE) for the next couple of years as the
RoE is expected to decline from over 13% to 11% in FY2008. The
same has affected our sum-of-the-parts (SOTP) valuations for the
bank and hence we have reduced our price target for the stock by
4.4% to Rs1,173.
-
After the bank
announced its results the stock price declined by 7%, factoring in
the lower than expected profit numbers and the unexpected
announcement of an Rs20,000-crore FPO. We feel the correction in
the stock price already captures these negatives and the downside
risk is limited. However the upside potential based on the current
market price of Rs866 remains at 35%. We continue to remain
bullish on ICICI Bank due to the following facts. First, on the
operational side, the Sangli Bank merger would add 195 branches,
help to increase the low cost deposit base and improve the NIM
going forward. Second, the possible listing of the insurance and
asset management holding company would help to unlock significant
value in the bank's subsidiaries.
-
We have
upgraded our FY2008E PAT and FY2009E PAT by 1.6% and 1.5% to
Rs4,016 crore and Rs5,120 crore respectively. At the current
market price of Rs866, the stock is quoting at 19.2x its FY2009E
earnings per share (EPS), 8.5x its pre-provision profit (PPP) and
2x FY2009E book value (BV). We maintain our Buy recommendation on
the stock with the revised price target of Rs1,173.
Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs380
Current market price: Rs250
On
track
Result
highlights
-
Ahmednagar
Forgings reported a strong performance for Q3FY2007. Its net sales
grew by 69% to Rs175.2 crore during the quarter.
-
The company
has increased its capacity to 110,000 tonne per annum (tpa) and is
currently operating at utilisation levels of about 64%. We expect
the capacity ramp-up to strengthen the top line further in the
coming quarters.
-
The margins
saw a slight improvement, as the same expanded to 21% led by
better operating efficiencies. The operating profit rose by 72.6%
to Rs36.8 crore. The company has been able to maintain good
margins despite a steep rise in steel prices in the past two years
(its raw material cost has risen from 63.5% to 67.9% as a
percentage of sales).
-
The interest
cost was a bit higher due to the capital expenditure (capex)
incurred by the company during the quarter. Stable depreciation
and lower taxes aided the company to report an 86% improvement in
its net profit to Rs20.5 crore.
-
At the current
levels, the stock is discounting its FY2008E earnings by 6.8x and
quoting at an enterprise value (EV)/earnings before interest,
depreciation, tax and amortisation (EBIDTA) of 4.7x. We maintain
our Buy recommendation on the stock with a price target of
Rs380.
Subros
Cluster:
Ugly Duckling
Recommendation: Buy
Price target:
Rs340
Current market price: Rs222
Price target
revised to Rs340
Result
highlights
-
Subros'
Q4FY2007 results are slightly below expectations both on the top
line front and the profit margin front. The net sales for the
quarter grew by 8.7% to Rs183.3 crore.
-
Adjusting for
the one time VRS expenditure, the operating margins of the company
has increased slightly to 13% against 12.6% last year as higher
raw material costs restricted margin growth. Consequently the
operating profits for the year grew by 11.8% to Rs23.75
crore.
-
Higher
interest and depreciation costs due to the commissioning of its
new plant at Gurgaon affected the profitability further.
Consequently, the company reported a 4% growth in its adjusted net
profits to Rs10.1 crore.
-
Rising
interest rates would have a negative impact on the whole
automobile sector, which would also affect the volumes of
companies like Subros. We are therefore downgrading our volume
estimate for Subros and consequently cutting our earnings estimate
for FY2008 by 23.5% to Rs32.8. We are introducing our FY2009
estimates for Subros and expect earnings of Rs40.1.
-
We maintain
our positive outlook on Subros. At the current levels, the stock
is available at attractive valuations of 5.5x FY2009E earnings and
an enterprise value (EV)/earnings before interest, depreciation,
tax and amortisation (EBIDTA) of 2.2x. We maintain our Buy
recommendation on the stock with a revised target of Rs340.
Bank of India
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs219
Current market price: Rs200
Price target
revised to Rs219
Result
highlights
-
Bank of
India's (BOI) Q4FY2007 profit after tax (PAT) was way above
expectations. It grew by 76% year on year (yoy) to Rs447 crore
compared with our estimate of Rs288.9 crore, mainly due to an
unexpected 78.0% year-on-year (y-o-y) jump in the non-interest
income.
-
The net
interest income (NII) grew by 28.8% yoy and 7.7% quarter on
quarter (qoq) to Rs991 crore against our estimate of Rs973 crore.
The NII figures are adjusted for one-off items to the tune of Rs40
crore and Rs107 crore in Q4FY2007 and Q4FY2006 respectively.
Higher yields and controlled costs with a stable low cost deposit
base have helped the bank to show an improvement in the margin
sequentially.
-
The
non-interest income was a surprise as it grew by 78% yoy and 79%
qoq to Rs576 crore. The 40.4% y-o-y and 38.5% q-o-q growth in the
fee income is very promising and looks to be sustainable, as it
was driven by a growth in the core fee income generating
businesses like remittances, cash management, bank guarantees
etc.
-
The operating
expenses grew by 22% yoy, in line with the business growth. The
operating profit was up by 63.6% yoy and 49.5% qoq to Rs918.3
crore.
-
Provisions
increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore mainly on
account of higher other provisions influenced by standard assets
provision, as the non-performing asset (NPA) provisions reported a
decline on y-o-y and q-o-q bases.
-
The bank's
asset quality has showed consistent improvement with the net NPA
and gross NPA both showing a decline in percentage and absolute
terms. The net NPAs stood at 0.74% as on March 2007 compared with
0.95% reported in December 2006 while the gross NPAs showed a
decline to Rs2,100 crore from Rs2,186 crore in the previous
quarter.
-
We feel BOI
has so far proved to be the best performing public sector bank
(PSB) in FY2007 based on all parameters and its management has
shown proper intent to maintain the improved performance. We have
revised our FY2008E PAT by 15% to Rs1,352 crore, based on the
improved earnings visibility for the bank. At the current market
price of Rs200, the stock is quoting at 7.2x its FY2008E earnings
per share (EPS), 3.1x pre-provisioning profit (PPP) and 1.5x
FY2008E book value (BV). We maintain our Buy recommendation on the
stock with a revised price target of Rs219.
Nicholas Piramal India
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs393
Current market price: Rs243
Q4 results
above our expectations
Result
highlights
-
Nicholas
Piramal's consolidated sales for the quarter were 52% higher at
Rs645.2 crore on the back of a 13% increase in the domestic sales
and a whopping 146% surge in the global revenues. The
consolidation of businesses acquired from Avecia Pharmaceuticals
and Pfizer's former Morpeth facility, UK has scaled up the global
revenues.
-
It has
reported a 480-basis-point expansion in the OPM to 13.2% in
Q4FY2007, but the same was much lesser than the expectation of an
OPM of 15.6% due to one-time charge of Rs20 crore. Otherwise, if
we discount the one-time charge, the OPM expanded by 790 basis
points to 16.3%.
-
It has
reported an impressive growth of 260% year on year (yoy) in its
consolidated net profit to Rs54.9 crore for Q4Y2007. The same is
above our expectation of Rs50.5 crore.
-
In full year
FY2007, the company's consolidated sales grew by 55.0% to Rs2,470
crore, while its operating profit increased by 83.0% to Rs380
crore. The net profit for the year was up 80.7% to Rs220
crore.
-
For FY2008,
the company has guided for about a 100% growth in the contract
manufacturing business and a 25% growth in the overall revenue. It
expects to maintain the margin at 15.5%.
-
We revised
FY2008 estimates and introduce FY2009 numbers as per which the
company's net earnings stand at Rs297.0 crore (a 30.1% growth) and
at Rs355.3 crore (a 20% growth) for FY2008 and FY2009
respectively. At the current market price of Rs256, Nicholas
Piramal discounts its FY2009 estimated earnings by 15.1x. We
maintain a Buy call with a price target of Rs393.
Wockhardt
Cluster:
Ugly Duckling
Recommendation: Buy
Price target:
Rs552
Current market price: Rs431
Results in line
with expectations
Result
highlights
-
Wockhardt's
net sales increased by 48.7% to Rs522.8 crore in Q1CY2007. The
growth came on the back of a 35% growth in the domestic business
and a 57% growth in the international business. The sales growth
was ahead of our estimates.
-
The sales in
the European market grew by 93%, largely driven by the
consolidation of the Pinewood acquisition. The sales in the US
market grew by 15%.
-
Wockhardt's
operating profit margin (OPM) expanded by 260 basis points to
22.2% in Q1CY2007. However, the margin picture remains clouded due
to the capitalisation of research and development (R&D) cost.
Adjusting for the capitalised cost of Rs18.5 crore, the OPM
actually showed a decline of 100 basis points. The company
reported an operating profit (OP) of Rs115.9 crore, a growth of
68.2% year on year (yoy). The decline in the margin was also
attributed to the acquisition of the lower-margin Dumex and
Pinewood businesses.
-
Wockhardt's
pre-exceptional net profit rose by 17% to Rs66.3 crore. The growth
was despite higher interest cost, depreciation charge and tax
outgo. The profit was in line with our estimates.
-
Wockhardt has
announced the acquisition of France-based Negma Laboratories
(Negma), with sales of $150 million and earnings before interest,
tax, depreciation and amortisation (EBITDA) margin of around 18%,
in an all-cash deal worth $265 million. This acquisition is in
line with the company's aim to achieve a turnover of $1 billion by
2009. With its successful track record of creating value
post-integration, we believe the acquisition of Negma too will be
value accretive for Wockhardt. We await details of the
acquisition, after which we will review our numbers to incorporate
the same into our estimates.
-
At the current
market price of Rs431, the stock is available at 14.2x its CY2007E
and 12.4x its CY2008E earnings, on a fully diluted basis. The
valuations seem very attractive at these levels and should be
viewed as a strong buying opportunity. We maintain our Buy
recommendation on the stock with a price target of Rs552.
Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation:
Buy
Price target: Rs101
Current market price: Rs84
Price target
revised to Rs101
Result
highlights
-
Selan
Exploration Technology (Selan) has announced a growth of 93.2% in
its net sales for Q4FY2007 to Rs8.5 crore. The growth was higher
than expectations due to a surge in the volumes during the last
quarter. The average realisation of $55 per barrel was lower than
the average of $58 per barrel realised for the full year.
-
The operating
profit margin (OPM) improved considerably to 61.6%, up from 43.7%
in Q4FY2006. Consequently, the operating profit grew by 171.9% to
Rs5.2 crore.
-
The adjusted
net profit grew by 134.7% to Rs3.4 crore, up from Rs1.4 crore in
Q4FY2006 (adjusted for the one-time income of Rs1.9 crore).
-
On a full year
basis, the net sales grew by 39.8% to Rs26.2 crore, driven by a
39% increase in the volumes. The company crossed the mark of one
lakh barrels of oil sold during FY2007. The margins were largely
flat and the adjusted net profit grew by 60% to Rs10.6
crore.
-
Encouraged by
the positive results of the first phase of the development of its
oil fields, the company intends to drill six to eight new wells
during the current fiscal. The incremental volumes from the
commercialisation of new wells (two wells in Bakrol during Q4) and
the expected addition from the phase II of development in the
current fiscal are expected to boost the overall production volume
by 40-50% in the current year.
-
At the current
market price the scrip trades at 7.5x FY2008 and 5.8x FY2009
estimated earnings. We maintain Buy call on the stock with a
revised price target of Rs101 (7x FY2009 estimated earnings and
1.2x enterprise value [EV]/oil reserves [proven and
probable]).
Canara Bank
Cluster:
Apple Green
Recommendation: Buy
Price target: Rs268
Current
market price: Rs226
Q4FY2007—first-cut analysis
Result
highlights
-
Canara Bank's
results have been much above our and market's expectations with
the profit after tax reporting a growth of 2.3% to Rs505 crore
compared with our estimate of a 10% year-on-year decline to Rs444
crore. The profit growth is higher mainly due to a very high
growth witnessed in the non-interest income category.
-
The net
interest income (NII) is up by 7.7% to Rs1,059 crore compared to
our estimate of Rs1,083 crore.
-
The
non-interest income has zoomed by 51% year on year (yoy) and 109%
quarter on quarter (qoq) to Rs626.2 crore. However a detailed
break-up of the same is still awaited.
-
The operating
expenses grew by a marginal 1% yoy to Rs633 crore. The operating
profit was up by 36.4% yoy and 50% qoq to Rs1,052 crore. The
growth was primarily driven by a higher non-interest
income.
-
Provisions
increased by 66.1% yoy and 89% qoq to Rs497 crore mainly on
account of higher depreciation on investments provided on the
marked-to-market investment book. Higher standard assets
provisioning requirement also kept the provisions elevated as the
non-performing asset (NPA) provisions declined by 67% yoy to Rs102
crore from Rs306 crore in Q4FY2006.
-
Higher cash
recoveries during the year to the tune of Rs1,025 crore as against
Rs972 crore during the previous financial year helped the bank to
bring down its gross NPAs. In absolute terms, the gross NPAs have
reported a sequential decline of Rs380 crore while the net NPA
ratio has declined sequentially from 0.96% to 0.94%.
-
Canara Bank's
global business grew by 23% yoy to Rs240,887 crore as in March
2007. Aggregate deposits grew by 22% to Rs142,381 crore and
advances were up 24% yoy to Rs98,506 crore.
-
The higher
non-interest component in this quarter has caused the bank's PAT
to grow by 2.3% yoy to Rs505 crore compared to our estimate of
Rs444 crore. We would provide our detailed result update later. At
the current market price of Rs226, the stock is quoting at 6x its
FY2008E earnings per share, 3x pre-provisioning profit and 1x
FY2008E book value. We maintain our Buy recommendation on the
stock with the price target of Rs268.
Bharat Electronics
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs2,020
Current market price:
Rsx1,740
Price target
revised to Rs2,020
Result
highlights
-
For Q4FY2007,
Bharat Electronics Ltd (BEL) has announced a growth of 10.1% in
its net sales to Rs1,734.2 crore, which is lightly lower than our
expectations.
-
The operating
profit margin (OPM) has improved smarty by 150 basis points to
28%, primarily due to the saving of 460 basis points in the raw
material cost as a percentage of the sales. On the other hand, the
higher staff cost and the other expenses had an adverse impact of
210 basis points on the margin.
-
In addition to
the margin expansion, the 62.8% growth in the other income
resulted in a robust growth of 27.1% in the earnings to Rs357.1
crore, which is ahead of our expectations of around Rs330
crore.
-
On a full year
basis, the net sales have grown by 9.4% to Rs3,894.3 crore. The
OPM has improved by 50 basis points to 24.2%, largely due to the
savings in the raw material cost as a percentage of sales.
Moreover, the jump of 69.1% in the other income component aided
the growth in the earnings, which grew at a relatively higher rate
of 22.4% to Rs713.9 crore.
-
The highlight
of the performance was the much higher than expected jump in the
order backlog to Rs9,000 crore. This coupled with the recent
alliances/tie-ups with global defence companies has vastly
improved the growth visibility in the revenues.
-
To factor in
the same, we have revised upwards the earnings estimate of FY2008
by 10.9% and have also introduced our FY2009 estimate in the note.
At the current price, the stock trades at 12.5x FY2008 and 9.9x
FY2009 estimated earnings (price has been adjusted for cash on the
books). We maintain the Buy call on the stock with a revised price
target of Rs2,020 (rolling over the target price on FY2009
estimates; 12.5x FY2009 earnings plus the estimated free cash on
the books).
SECTOR UPDATE
Automobiles
Interest rate
blues
The downfall in the two-wheeler segment continued in
the month of April, with only the market leader Hero Honda Motors
recording positive growth numbers. The slow-down can also be seen in
the commercial vehicle (CV) segment, particularly in the medium and
heavy commercial vehicle (M&HCV) segment. The same is evident
from the 14.2% drop in the M&HCV sales of Tata Motors for the
month. Led by strong performance of its new launches, Maruti Udyog
continued to report strong numbers in
April. | |
