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Summary
of Contents
SHAREKHAN SPECIAL
Monetary policy
preview
RBI's dilemma: to
hike or not to hike
We believe the Reserve Bank of India
(RBI) will find it difficult to choose between one more interest
rate hike and a pause in the rate hike exercise when it
meets on October 31, 2006 for the mid-term review of its Annual
Monetary Policy 2006-07. It would be a tough call for the apex bank
for several reasons...
STOCK UPDATE
Esab India
Cluster: Vulture's
Pick
Recommendation: Buy
Price target: Rs575
Current
market price: Rs360
Impressive
numbers
Result
highlight
-
Esab India's
Q3CY2006 results are good and in line with our expectations. In
the quarter the company achieved the much-needed top line growth
aided by both its businesses, ie equipment and
consumables.
-
The top line
for the quarter grew by a handsome 26% year on year (yoy) to Rs81
crore, driven by a 24.3% growth in the consumable segment and a
30.7% growth in the equipment segment.
-
The operating
profit for the quarter grew by a decent 24% to Rs20.33 crore,
driven by a 29.5% growth in the earnings before interest and tax
(EBIT) of the consumable segment.
-
The overall
operating profit margin (OPM) declined by 40 basis points
primarily because of a 420-basis-point decline in the EBIT margin
of the equipment division. The division incurred significant
overheads in expanding its capacity during the quarter. The new
unit has just started operations and gradually as the revenues of
the division begin to move up as a result of the additional
capacity, the margins would improve again.
-
However the
EBIT margin of the consumable division improved by 120 basis
points and stood at 30.1%, the highest in the last 10-12
quarters.
-
The other
income for the quarter grew by 200% to Rs1.23 crore primarily
because of the commission earned from its parent Esab AB, Sweden,
on an ISRO order secured earlier this year.
-
With the
depreciation charge remaining flat yoy (an increase of 14%
sequentially because of the commissioning of the new equipment
plant), the net profit for the quarter grew by an impressive
26.7%.
Selan Exploration Technology
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs94
Current market price: Rs73.5
Growth driven
by higher realisations
Result
highlight
-
Selan
Exploration Technology (Selan) reported a 30.7% year-on-year
(y-o-y) growth in its net revenues to Rs6.3 crore during the
second quarter ended September 2006. The revenue growth was driven
by the cumulative impact of the incremental volumes from the
commercialisation of two new wells in the first half (one in June
2006 and the second well in September 2006) and relatively higher
realisations.
-
The operating
profit margin (OPM) at 65.8% was higher than 65.3% reported in
Q2FY2006. This is despite the higher provisioning for the
development of hydrocarbon properties (Rs0.94 crore as compared
with Rs0.35 crore in Q2FY2006) during the quarter. The operating
profit grew 31.6% to Rs4.1 crore.
-
The earnings
of Rs2.7 crore grew by 47.5% year on year (yoy) but were slightly
below our estimates due to the higher provisioning for the
development of hydrocarbon reserves in Q2FY2007.
-
On a
sequential basis, the revenues grew by 3.8% and the earnings were
largely flat (a growth of 0.8%). The decline in the OPM on a
sequential basis was largely due to the higher provisioning for
the development of hydrocarbon reserves.
-
In terms of
the outlook, the revenue growth is likely to be driven largely by
the growth in volumes. The production volume would be boosted by
the full impact of the incremental volumes from the two new wells
already commercialised in the first half of FY2007. Moreover, the
planned commercialisation of two more wells in the second half of
the fiscal would further aid the overall growth in revenues. On
the other hand, the lower realisation is likely to limit the
growth in the third quarter.
-
At the current
price the stock trades at 13x FY2007E and 6x FY2008E earnings. In
terms of the enterprise value (EV) by proven and probable (2P)
barrel of oil & oil equivalents (boe) reserves, Selan trades
at an attractive valuation of $0.9 per boe (as compared to the
global benchmark of around $8 per boe). We maintain our Buy
recommendation on the stock with the price target of
Rs94.
Wockhardt
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs552
Current market price: Rs394
Margins remain
under pressure
Result
highlight
-
Wockhardt's
net sales increased by 21.8% to Rs437.7crore in Q3CY2006. The
growth came on the back of a 38.5% growth in the domestic business
and a 10.4% growth in the international business.
-
The sales in
the European market grew by 9.7%. The European sales were buoyed
by the strong performance of the UK business. The sales in the US
market grew by 19.6%, showing a substantial turnaround from the
previous quarter.
-
Wockhardt's
operating profit margin (OPM) shrank by 220 basis points to 22.2%
in Q3CY2006. The contraction in the margin was on account of an
increase in the staff cost as the company increased its domestic
field force. The decline in the margin was also attributed to the
acquisition of the lower-margin Dumex business and the
commissioning of the company's biotech facility (which raised the
other expenditure by 460 basis points). Consequently, the
company's operating profit (OP) increased by 10.8% to Rs97.1 crore
in the quarter.
-
The company's
margins have been clouded by the capitalisation of ANDA
development costs, which would have been otherwise added to the
operating expenses. Adjusting for the capitalised costs, the
company's OPM stands at 18.3% for the quarter (a decline of 610
basis points), whereas the OP shows a decline of 8.6% to Rs80.1
crore.
-
Wockhardt's
net profit rose by 13.7% to Rs74 crore. The growth in the net
profit was aided by a higher other income (which doubled in the
quarter). A higher tax outgo of 17.4% as compared to 12.7% in
Q3CY2005 restricted the company's net profit growth. The tax outgo
was higher on account of an increase in the minimum alternative
tax (MAT) rate effected in the previous quarter.
-
Wockhardt
recently acquired Pinewood Laboratories, an Irish generic firm,
for $150 million. The acquisition is expected to be complementary
to Wockhardt's existing business in Europe and add marginally to
its earnings.
-
At the current
price of Rs394, Wockhardt is quoting at 14.2x its CY2007 estimated
earnings on a fully diluted basis. We reiterate our Buy
recommendation on Wockhardt, with a price target of
Rs552.
Mahindra & Mahindra
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs870
Current
market price: Rs762
Price target
revised to Rs870
Result
highlight
-
The Q2FY2007
results of Mahindra and Mahindra (M&M) are way ahead of our
expectations. The stand-alone net sales grew by 30.1% to Rs2,490.5
crore. The strong growth was led by the brilliant performance of
the farm equipment division (FED) and higher margins of the
automotive division due to an improved product mix.
-
On a segmental
basis, the automotive revenues rose by 21.7% to Rs1,556.5 crore.
The FED reported a stellar performance, marking a revenue growth
of 45.1%. The profit before interest and tax (PBIT) margin of the
automotive segment improved by a whopping 470 basis points to
14.9% while that of the FED rose by 240 basis points to 14.3% in
Q2FY2007. Consequently, the overall operating profit margin (OPM)
grew by 345 basis points to 14.8% and the operating profit rose by
69.4% year on year (yoy) to Rs369.6 crore.
-
A higher
interest income aided the pre-extraordinary net profit to grow by
54.6% to Rs245.4 crore. If you consider the special dividend
received from Tech Mahindra, the profit on the sale of the stake
in Tech Mahindra and an octroi refund received during the quarter,
the reported profit after tax (PAT) grew by 146% to Rs386.5
crore.
-
M&M's
Q2FY2007 consolidated revenues were also strong and grew by 46% to
Rs4,617.6 crore. The consolidated PAT after minority interest rose
by 133% to Rs510 crore.
-
Considering
the growth in the various business segments, higher realisations
and higher OPM for Q2FY2007, we have upgraded our FY2007 earnings
estimates (consolidated) for M&M by 5% to Rs57.8. We have
maintained our FY2008 earnings estimates at Rs64.1.
-
Using the
sum-of-parts model, we have valued M&M's core business at
Rs607 (14x FY2008E earnings) and its subsidiaries at Rs263,
arriving at a higher price target of Rs870.
ICI India
Cluster: Ugly
Duckling
Recommendation: Buy
Price target:
Rs430
Current market price: Rs342
Price target
revised to Rs430
Result
highlight
-
ICI India's
Q2FY2007 net profit (adjusted for extraordinary items) at Rs19.2
crore is in line with our expectations. The net profit has grown
by 23.7% year on year (yoy).
-
The net
revenues have grown by 6.1% yoy to Rs244 crore due to the
discontinuation of the rubber chemical and surfactant
businesses.
-
The paint
business has grown by 27% yoy to Rs217.2 crore. The continued
chemical business has grown by 28.4% yoy to Rs33.7 crore.
-
The profit
before interest and tax (PBIT) in the paint business has grown by
54% yoy with a 157-basis-point expansion in the margin. The PBIT
margin in the residual chemical business has risen by 52% yoy with
a 200-basis-point expansion in the margin.
-
The overall
operating profit (including all businesses) grew by 12.4% yoy with
a 73-basis-point expansion in the operating profit margin
(OPM).
-
With a higher
other income and stable depreciation charge, the net profit grew
by 23.7% yoy to Rs19.2 crore.
-
We have
upgraded our earnings per share (EPS) estimates for the stock for
FY2007 and FY2008, from Rs17.4 and Rs23.2 to Rs18.3 (5.5%) and
Rs24.2 (4.3%) respectively, to take into account the
better-than-expected margins in the paint business. Accordingly we
have revised our price target on the stock to Rs430.
-
At the current
market price of Rs342, the stock is quoting at 15.1x its FY2008E
EPS and 5.9x FY2008E enterprise value (EV)/earnings before
interest depreciation tax and amortisation (EBIDTA). We maintain
our Buy recommendation on the stock with the revised price target
of Rs430.
Corporation Bank
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs425
Current
market price: Rs402
Price target
revised to Rs425
Result
highlight
-
Corporation
Bank's Q2F2007 net profit at Rs127 crore is up 20.3% year on year
(yoy) and is below our expectations.
-
The net
interest income (NII) grew by a modest 3.3% yoy to Rs316.7 crore
due to a 69-basis-point fall in the net interest margin (NIM),
even as the advances grew by 38.5% yoy.
-
The fall in
the NIM was due to a lower yield on investments (down 27 basis
points) and a higher cost of funds (up 88 basis points; mainly on
account of a sharp rise of 77 basis points in the deposit
costs).
-
The other
income declined by 18.1% yoy to Rs113.1 crore due to losses on
treasury operation and a sedate 11.4% growth in the fee and other
incomes.
-
With the net
income declining by 3.3% yoy and the operating expenses increasing
by 7.4%, the operating profit declined by 10.7% yoy to Rs235.7
crore.
-
With a
significant fall in the provisioning requirement the net profit
grew by 20.3% to Rs127 crore. The provisioning requirement for the
non-performing assets (NPAs) declined due to a fall in the gross
NPAs on account of higher recoveries and upgradations as well as a
write-back of investment depreciation.
-
Going forward,
we expect the bank's NIM to remain stable or show some marginal
improvement over Q2FY2007, as some of its high-priced deposits are
likely to mature over the coming fortnight and some of its
low-yielding advances are due for re-pricing.
-
We have
revised our earnings per share (EPS) estimates for FY2007 and
FY2008 from Rs35.1 and Rs43.1 to Rs36.7 and Rs46.5 respectively to
take into account the lower provisioning requirement and stable
NIMs going forward.
-
At the current
market price of Rs402, the stock is quoting at 8.7x its FY2008E
EPS, 4.3x pre-provision profit (PPP) and 1.3x book value
(BV).
-
Although the
upside to the current market price is limited, the same could come
from a better-than-expected improvement in the NIM. Further,
Corporation Bank is best placed to leverage its balance sheet due
to its high Tier-I capital adequacy ratio (CAR) of 13.3%. It is
also the best bank in the industry to implement the Basel II norms
due to its high Tier-I CAR and would not require an equity
dilution. We would like to wait and watch the improvement in the
NIM before factoring the same into our numbers. We maintain our
Buy recommendation on the stock with price target of
Rs425. |
