Summary
of Contents
STOCK UPDATE
Marico
Cluster: Apple
Green
Recommendation: Buy
Price target:
Rs63.4
Current market price: Rs55
Margins
disappoint, but stay on course!!
Result
highlights
-
In Q4FY2007
the net revenues of Marico grew by 33% year on year (yoy) to Rs396
crore, as per our estimate. The top line growth was higher in this
quarter on account of the full contribution from the acquired
brands of Nihar, Manjal, Camelia, Aromatic and Fiancée, and the
strong growth of 21% in the focused brand portfolio (organic
growth).
-
The operating
profit margin (OPM) declined by 210 basis points to 10.1% on
account of an increase in the selling and administrative expenses,
and the other expenses as a percentage of sales. Consequently, the
operating profit grew by 10% yoy to Rs40.1 crore. The same was
below our estimate.
-
The interest
cost for Q4FY2007 grew to Rs4.68 crore from Rs2.3 crore in
Q4FY2006, on account of the debt taken to achieve inorganic
growth.
-
The net profit
after the extraordinary items grew by 17% yoy to Rs28.1 crore and
the earnings per share (EPS) grew to Rs0.47 (share split to
Rs1).
-
Marico has
acquired two brands (Fiancée and HairCode) in Egypt; these will
generate revenues of Rs90-95 crore in FY2008. Significantly, these
brands provide 15-18% of the profit after tax (PAT) margin against
that of 7-7.5% for Marico. This indeed will help Marico expand its
OPM next year. Higher advertising spend for new brands would help
the company to fuel future growth.
-
The Kaya
business grew by an impressive 52% yoy to Rs22 crore. It managed
to achieve a positive profit before tax (PBT) in the current
quarter. The Kaya business broke even on a full-year basis. This
is a big positive because going forward the business will be
contributing to the bottom line and its higher margin profile will
contribute to the margin of Marico. For the full year, revenue
from the Kaya business stood at Rs75 crore. Marico plans to open
roughly 15-20 new Kaya clinics in FY2008 and wants to concentrate
on increasing the utilisation and penetration levels of the Kaya
products going forward.
-
The stock is
trading at attractive valuations of a price/earnings ratio (PER)
of 22.8x FY2008E and enterprise value (EV)/earnings before
interest, depreciation, tax and amortisation (EBIDTA) of 15.8x
FY2008E. We continue to remain bullish on Marico and reiterate a
Buy on the stock with a price target of Rs63.4.
SKF India
Cluster:
Apple Green
Recommendation: Buy
Price target:
Rs406
Current market price: Rs379
Solid
performance
Result
highlights
-
SKF India's
Q1CY2007 results are ahead of our estimates because of a strong
improvement in its margins. The net sales for the quarter have
risen by 21.6% to Rs359.8 crore.
-
The margin
improvement during the quarter was a positive surprise. We believe
that the margin growth is a result of improved product mix, lesser
contribution of the direct customer delivery (DCD) business and
better utilisation of the new capacities.
-
The operating
profit margin (OPM) jumped up by 450 basis points to 16.8% during
the quarter. Consequently, the OPM has improved by 450 basis
points as the operating profit jumped up by 65.7% to Rs60.5
crore.
-
A higher
interest income and stable depreciation helped the company to post
a profit growth of 62.8% to Rs36.7 crore.
-
The capacity
expansion plans of the company are on schedule. It would also be
spending close to Rs150 crore to set up a plant in Uttarakhand.
The company would also de-risk its business model going forward,
by reducing its dependence on bearings, which currently contribute
almost 90% of its sales. In the next three-four years, this
proportion is expected to decline to 80%, while the contribution
of the other business segments, namely seals, mechanotronics, and
services would reach 20%.
-
At the current
levels, the stock quotes at 12.2x its CY2008E earnings and at an
enterprise value (EV)/earnings before interest, depreciation, tax
and amortisation (EBIDTA) of 6.5x. We maintain our Buy
recommendation on the stock with a price target of Rs406.
Bharti Airtel
Cluster:
Apple Green
Recommendation: Buy
Price target:
Rs900
Current market price: Rs825
Price target
revised to Rs900
Result
highlights
-
Bharti Airtel
has announced a robust revenue growth of 9.8% quarter on quarter
(qoq) and 58.1% year on year (yoy) to Rs5,393 crore for Q4FY2007.
The sequential revenue growth was driven by a 12.9% rise in the
mobile revenues whereas the non-mobile businesses grew at
relatively lower rate of 5.6% sequentially to Rs1,871
crore.
-
The operating
profit margin (OPM) at 41.5% is the highest reported in any
quarter. The sequential improvement of 70 basis points came as a
positive surprise and was driven by a 160-basis-point sequential
improvement in the OPM of the mobile business. The ability to
boost margins in spite of the adverse impact of the reduction in
the roaming charges (adverse impact of Rs50-60 crore) is quite
commendable. Consequently, the operating profit grew by 11.8% qoq
and 419.4% yoy to Rs2,241 crore.
-
The profit
before tax (PBT) grew by 4.5% qoq to Rs1,507 crore and was in line
with expectations. However, the decline in the effective tax rate
to 9% (as compared with 14.8% in Q3) resulted in a higher than
expected net profit of Rs1,353 crore (up by 11.4% qoq and 98.3%
yoy).
-
For the full
year, the consolidated revenues and earnings grew by 58.8% to
Rs18,520 crore and 88.6% to Rs4,257 crore. The OPM improved by 320
basis points to 40.2% (contributed by a 160-basis-point
improvement in the OPM of the mobile business and a
320-basis-point uptick in the margin of the non-mobile business).
The total subscriber base grew by 86.4% to over 39 million in
FY2007 (including 37.14 million mobile subscriber base, which grew
by 89.7% during the year).
-
In terms of
key highlights, there were a number of regulatory changes
introduced during the quarter. The reduction in the roaming
charges was negative whereas the introduction of revised access
deficit charge (ADC) regime and reduction in the port charges
payable to state-owned telecom operators would have a positive
impact on the earnings.
-
In terms of
business environment, the government announced the increase in the
limit for foreign direct investment (FDI) from 49% to 74% and
steps are being taken to implement the same. Another key
development was the entry of Vodafone as a competitor through the
acquisition of a controlling stake in Hutch Essar.
-
To factor in
the better than expected performance, we have revised upwards our
earnings estimates by 2.8% for FY2008 and introduced our FY2009
estimates. At the current market price the stock trades at 25.8x
FY2008 and 20.2x FY2009 estimated earnings. We maintain our Buy
call on the stock with a revised one-year price target of
Rs900.
Cadila Healthcare
Cluster: Emerging Star
Recommendation:
Buy
Price target: Rs425
Current market price: Rs318
Mixed
bag
Result
highlights
-
The total
operating income of Cadila Healthcare increased by 26.4% year on
year (yoy) to Rs437.2 crore in Q4FY2007, driven by a 25.8% growth
in the formulation exports and a 22.1% rise in the exports of
active pharmaceutical ingredients (APIs). The sales growth was
ahead of our expectations.
-
The 105.1%
jump in the formulation exports was driven by the improved
performance of the French (growth of 48.8% yoy) and US businesses
(growth of 96.4% yoy).
-
The operating
margins shrank by 270 basis points, largely due to a 35.8% rise in
the staff cost and a 54.8% rise in the research and development
(R&D) costs. Consequently, the operating profits grew by 8.4%
to Rs71.1 crore.
-
Cadila's
adjusted net profit grew by 27.1% to Rs38.9 crore. The profit
growth was slightly below our expectation.
-
For FY2007,
Cadila's revenues jumped by 23.2% to Rs1,829 crore, driven by a
91% growth in the formulation exports, a 31% growth in the API
exports and a 54% rise in the consumer business. The sales growth
was ahead of our estimates. The 91% rise in the formulation
exports came on the back of a 186% growth in the US business, a
103% growth in France and a 26% surge in the exports to the rest
of the world (ROW) markets.
-
The net profit
for FY2007 increased by 53.7% to Rs233.8 crore. The growth in the
profit was slightly below our expectations.
-
At the current
market price of Rs318, the company is trading at 14.4x its FY2007E
and at 11.9x its FY2008E estimated earnings. With all the growth
drivers in place and on track, we reiterate our Buy recommendation
on Cadila with a price target of Rs425.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs558
Current market price: Rs370
Q1CY2007
results—first cut analysis
Result
highlights
-
Ranbaxy
Laboratories (Ranbaxy) reported a 78.7% year-on-year (y-o-y)
growth in its earnings to Rs127.60 crore for the first quarter
ended March 2007. The earnings were marginally below our
expectation of Rs131.52 crore.
-
On the other
hand, the revenues, which were up by 23% to Rs1,553.50 crore, were
better than our expectation of Rs1,437.16 crore. The revenue
growth was largely driven by the consolidation of Terapia, which
resulted in a 78% jump in the European business. The markets in
the Commonwealth of Independent States showed a 61% growth while
the Asia Pacific and Middle-Eastern markets witnessed a 34%
growth. The performance of the domestic business was impressive,
with a growth of 26%, which is way ahead of the industry growth of
about 9-10% during the quarter.
-
The operating
profit margin expanded by 150 basis points year on year (yoy), but
showed a contraction of 60 basis points on a sequential basis to
10.4% yoy. The pricing pressures in the USA and Europe continued
to hit the margins during the quarter. However, the company
reported a 43.3% growth in the operating profit to Rs162.2
crore.
-
During the
quarter, the depreciation was up by 30% and the tax incidence
increased to 21.6% from 15.8%. Despite this, the net profit grew
by an appreciable 78.7% to Rs127.6 crore in Q1CY2007. The net
profit was boosted by a foreign exchange gain of Rs55
crore.
-
Based on the
performance in Q1CY2007 and the improved outlook for the future,
the management has revised its growth guidance upwards to 20% from
the earlier 15%.
-
At the current
price of Rs370, the stock is trading at 17.7x its estimated CY2007
earnings. We maintain our Buy recommendation on Ranbaxy with a
price target of Rs558.
Cipla
Cluster:
Cannonball
Recommendation: Buy
Price target: Under
review
Current market price: Rs217
Q4FY2007
results—first cut analysis
Result
highlights
-
Cipla reported
lower than expected results for Q4FY2007 with a net profit of
Rs125.7 crore against the expectation of Rs199.6 crore. The
earnings have been lower due to the disappointing exports of
active pharmaceutical ingredients (APIs) and significant
contraction in the operating profit margin (OPM).
-
The revenues
were marginally higher by 6.3% to Rs938.5 crore. The sales growth
was lower due to a 27% decline in the API exports to Rs141.46
crore mainly on account of higher sales to the regulated markets
in the corresponding quarter of the previous year. Also, the
formulation exports moderated to 16.8% during the quarter to
Rs387.87 crore. The exports growth was the cause for concern
during the quarter. However, the only cushion was that the
domestic formulation business reported a 14.4% growth to Rs399.70
crore, which was slightly better than the industry's.
-
The OPM
witnessed a 590-basis-point decline to 15.7% in the quarter. The
contraction in the margin was due to a change in the product mix
(higher volume of anti-retrovirals where the margins are low) and
lower API sales to the regulated markets. Also, a higher other
expenditure due to higher factory overhead, selling expenses,
professional fees etc affected the margins. Consequently, the
operating profit stood at Rs147.0 crore, down by 22.8%.
-
Subsequently,
the other income was lower by 40%, depreciation higher by 4.3% and
the tax incidence up from 4.0% to 11.3%, resulting in a 40.3%
decline in the net profit to Rs125.7 crore.
-
The full-year
numbers reported a 19% growth in the top line at Rs3,438.1 crore,
as the domestic formulation sales and exports saw a growth of
16.4% and 17.6% respectively. With the increasing share of the
low-margin business of anti-retrovirals, the margins remained
almost flat at 20% and resulted in a just 9% rise in the net
profit to Rs660.8 crore.
-
Though Cipla
delivers better than industry growth in the domestic market, it
struggles hard to maintain the growth in its exports, particularly
of its APIs. While the API exports keep fluctuating, the growth of
the formulation exports has moderated. Further, with the increased
focus of Cipla on the low-margin business of anti-retrovirals, the
OPM has been subdued in past couple of quarters. We believe the
margin pressure would also sustain going forward.
-
Cipla reported
disappointing numbers for both Q4FY2007 and FY2007, largely due to
the lower than expected performance of the export business and the
decline in the margin. Hence, we are reviewing our FY2008
estimate. We shall downgrade the FY2008 estimate and introduce the
FY2009 estimate in a detailed note shortly.
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