Sical Logistics a market performer; target Rs 301: Karvy

Karvy Broking has recommended market outperformer rating on Sical Logistics with upgraded target price of Rs 301 from Rs 252.

For Q4FY07 (standalone), Sical reported revenue growth of 17.3% YoY (QoQ growth of 40.6%) to Rs 3.15 billion on back of strong growth of 22.8% YoY to Rs 2.12 billion in logistics segment. Non logistics business grew by 7.3% YoY to Rs 1.03 billion. Revenue was higher by 36% than our estimate of Rs 2.3 billion.

The company reported loss of Rs 121 million at operating level due to higher cost of services. Cost of services as a percentage of sales increased from 49% in Q4FY06 to 64.5% in Q4FY07. The net Interest income was Rs 51.8 million during the quarter as against interest cost of Rs 15.3 million in Q4FY06. Other income and tax credit of Rs 158.7 million and Rs 78.6 million respectively, helped the company to report profits of Rs 158.6 million. Adjusted EPS was Rs 5.3 as against expectations of Rs 4.5. The company has exceptional loss of Rs 115.9 million on account of disposal of non logistics business (refractories, Agri-bio products, flexible shafts, palm oil).

For FY07 (Consolidated), revenue increased by 6.5% to Rs 10.5 billion while net profit declined by 53.6% to Rs 341 million. Research firm expect consolidated net profit to increase at a CAGR of 30% to Rs 763 million in FY09 on back of business restructuring and growth in offshore business. At current market price of Rs 280, the stock is trading at 17x FY08 and 13x FY09 earnings. Based on EV/EBIDTA it is trading at 12.9x FY08E and 8.9x FY09E. Karvy has valued the company at 14xFY09E (previous 14xFY08E) with target price of Rs 301 (previous Rs 252).




Buy Ranbaxy Laboratories; target of Rs 475: Angel Broking

Angel Broking has recommended buy rating on Ranbaxy Laboratories with 12 months target price of Rs 475.

Valuation

At the CMP, the stock trades at 22.3x CY2007E and 16.8x CY2008E (excluding any upsides from inorganic growth and major FTF product launches in CY2008) Earnings. At current valuations, the company trades at the lower end and at a significant discount to its historical valuations. With the operating performance of the company expected to be on improvement path coupled robust earnings growth of 27.4%, we expect the stock to be an Outperformer on the bourses. We maintain a Buy on the stock. However, on account of pruning our Earnings estimate factoring in Rupee appreciation, we are downgrading our Target price of Rs 475.




Orbit Corporation hits 52-week high; Religare initiates coverage with price target of Rs 350

Orbit Corporation has touched a 52 week high of Rs 291.70 and an intra day low of Rs 282.20. Currently, the share is quoting at Rs 287.00, up Rs 8.40, or 3.02%. It is trading with volumes of 1,051,507 shares, compared to its 5-day average of 1,647,807 shares. Yesterday the share closed up 9.99% or Rs 25.30 at Rs 278.60.

Religare has initiated coverage on Orbit Corporation with a Buy rating and a price target of Rs 350. The rport states that they like Orbit’s story because a) it is a niche real estate company with a unique business model - redevelopment of dilapidated buildings. Consequently, it is not land bank dependent, b) It operates in the Island city of Mumbai - the most lucrative region in India, c) Its projects are either premium or super premium buildings with top quality construction, innovative designs with warranty programs, and d) Valuations
are attractive.

"At CMP of Rs 253, the stock trades at a significant discount to our NAV valuation of Rs 350," the report states.





Buy ONGC; target of Rs 1013: IDBI Capital

ONGC’s FY07 results reflect the impact of the sharp increase in subsidy allocation on upstream companies. In addition, profits have been hit by the some non-recurring items and the appreciating rupee. Factors such as government pricing, subsidy and poor domestic reserve replacement ratio weigh on the valuations. ONGC currently trades at 5x EV/EBIDTA, a discount to nearly every global peer. Going forward, we believe things can only improve. There is some discussion on the likelihood of government allocation of subsidy on upstream companies declining (ONGC was around 41% in FY07). The company is making a concerted effort to improve its reserve replacement ratio with aggressive capex plans especially through OVL (ONGC Videsh Ltd.). In the current year, OVL has reported a significant improvement in performance reporting a PAT of Rs 16.6 billion. This shored up ONGC’s consolidated EPS to Rs 81.6, up 17% YoY. Currently ONGC trades at 10.7x of our FY08E earnings. Also our DCF valuation works out to Rs 1,013 i.e. a 10% upside from the current level.

Investment highlights

Development and redevelopment projects will drive domestic production

With most of its fields having reached maturity and declining at a rate of 0.3% in the last 5-years, ONGC has taken a number of redevelopment projects and increased production from joint venture fields to arrest the current decline in crude production.

Profitability could improve with increased contributions from OVL

OVL remains a key growth engine for ONGC. In FY06, OVL’s proved reserves accounted for almost 22% of ONGC’s consolidated reserves. We estimate that OVL’s share in ONGC’s consolidated production should also keep on increasing. This could provide a big boost to the profitability if OVL’s production truly fetches international crude prices.

A more transparent pricing and subsidy mechanism should improve valuations

The probability of the government abolishing the price fixing mechanism in the near-to-intermediate term is remote. But, we hold out hope that the pricing mechanism will be made more transparent. This would spare the upstream companies of sharing subsidies in an ad-hoc manner, improve valuations for upstream companies. Recently, a 12.5% hike in ONGC’s regulated gas price has been proposed by the tariff commission. If implemented, this will boost FY08 earnings.

ONGC is becoming increasingly vertically integrated and global in scope

ONGC’s current business revenue mainly comes from E&P. It already has presence in refining and LNG through holdings in MRPL and Petronet, both to be expanded through capacity expansion plans in refining and gas exploration.

Little downside at current levels

ONGC is trading at a discount to nearly every global peer, according to our estimates. If crude prices fall significantly (albeit unlikely, in our opinion) ONGC would be impacted less than peers. Lower oil prices would be largely compensated by a commensurate decline in the subsidy ONGC has to bear and the net realization of the company would remain steady.

Investment positives

Development and redevelopment projects will drive domestic production

ONGC’s reserves have been on a decline due to aging of Mumbai high fields. Falling reserves and stagnant production levels have led to reducing reserves-to-production ratio. Its recovery factor is estimated to be 28% as compared with 40% globally. With most of its fields having reached maturity and declining at a rate of 0.3% in the last 5-years, ONGC has taken the following initiatives to increase domestic production: Establish redevelopment projects to arrest the current decline in crude production. Develop projects of ONGC’s new discoveries. Increase production from joint venture fields: The company believes that the three JV fields – Cairn Energy’s Rajasthan block, Essar Ratna fields and British Gas/Reliance’s Panna-Mukta-Tapti fields) should drive growth.

Valuation

ONGC is trading at a discount to nearly every global peer, according to our estimates

If crude prices fall significantly ONGC would be impacted less than peers. Lower oil prices would be largely compensated by a commensurate decline in the subsidy ONGC has to bear and the net realization of the company would remain steady, whereas the realizations of peers would fall. As a result we find there to be little downside at current levels. Currently, we have not valued ONGC on a net asset value basis, because of the pricing/subsidy policy, the value of ONGC’s assets in the ground is only as valuable as the government permits from period to period.

ONGC’s crude realization depends on the subsidy policy, which is ad-hoc in nature. We find it highly unlikely that the government will eliminate the price control/subsidy program in the near-to-intermediate term. Even if OVL, which is theoretically not subject to price controls, were to contribute more to consolidated results, there is the risk that the government could demand even more from the company’s domestic operations, already subject to price controls.

Going forward valuations could improve, especially given the firm crude oil prices, increasing contributions from OVL (the company’s international arm) and the possibility of introduction of a more transparent subsidy scheme. The current price discounts our FY08E earnings by 10.7x. A strong catalyst to multiple expansion would be the government's providing any transparency to the price/subsidy policy, in our opinion.





Sell Zicom Electronic Security Systems; Edelweiss

Zicom Electronic Security Systems declared its FY07 results which were above our expectations in terms of revenues but were below our expectations in terms of profitability. Based on lower than expected profitability, non accrual of service income from video & central monitoring services and continuous increase in selling and distribution expenses going forward we revise our FY08E revenues upwards by 11% and net profit downwards by 36%. We believe that the stock is expensive on our revised FY08E & FY09E estimates and so we downgrade the stock from ‘BUY’ to ‘SELL’

Robust sales growth

Revenues were up 106% y-o-y at Rs 1.54 billion, led by growth in the existing security solutions business and the launch of the retail business during the year. This revenue growth has come on the back of a small revenue base in FY06 and traction in its electronic systems and project business (security solutions group), apart from the kick off of the consumer services group. We expect sales to grow at 34% CAGR over FY07-09E.

EBITDA margins decline

Although raw materials as a percentage of sales have fallen by 200 bps from 69% in FY06 to 67% in FY07 EBITDA margins have declined by 310 bps during the same period. The decline in operating margins can be attributed to increase in employee costs, selling and distribution expenses, advertising and travel expenditure. Employee costs have increased from Rs 54 million in FY06 to Rs 124 million in FY07 on account of the aggressive sales growth strategy and shortage of skilled manpower in the electronic security industry. Advertising expenses increased from Rs 34 million in FY06 to Rs 86 million in FY07. We expect advertising expenses to more than double y-o-y in FY08E further dragging EBITDA margins. On account of the fall in EBITDA margins and the increased depreciation and tax rates, the net margins have declined by 227 bps y-o-y to 5.1% in FY07.

Outlook

The stock has given a 51% return from our initiating coverage report dated July 12, 2006. We expect Zicom’s revenues to grow at 34% CAGR from FY07-09E, however on account of equity dilution (conversion of FCCB) and fall in margins we do not see upside to the stock at these levels. At the CMP of Rs 221, the stock trades at 33x our revised FY08E diluted EPS of Rs 6.7. Given the expensive valuations, poor return ratios, no growth in earnings over the next two years, we downgrade our recommendation from ‘BUY’ to ‘SELL’.

Preferential Issue to Bennett, Coleman and Co

Zicom has approved allotment of 5,00,000 equity shares of Rs 10 each in favour of Bennett, Coleman & Co at a price of Rs 200 per share aggregating Rs 100 million on preferential basis. This will enable the company to increase the visibility and create brand awareness thereby increasing sales over the next three years. The amount of Rs 100 million will be utilized by Zicom for their media spending through Bennett Coleman’s network.

Investment in Unisafe

Zicom has acquired 49% stake in Unisafe Fire Protection Specialists LLC, Dubai, by executing a Share Sale deed in May, 2007 with an existing partner of the said Joint Venture. Unisafe Fire Protection Specialists LLC, Dubai, a Limited Liability Company, has taken over business of an erstwhile partnership firm M/s. Unisafe Dubai. Unisafe has been engaged in providing fire protection products and services in U.A.E. for almost a decade. Unisafe has handled many prestigious projects in UAE like Emirates Towers, Dubai Airport Hangars, etc. Its clientele includes the government, corporate, refineries, shopping malls, multi storey building, resorts etc. It offers a comprehensive range of solutions for all Fire Protection needs starting from the basic Hydrant and Sprinkler Systems to advance Analogue Addressable Fire Alarm Systems and specialized Gaseous Fire Suppression Systems. Unisafe recorded sales of Rs 390 million in FY06 (November ended) with losses at the net level. Though the management expects this JV to have sales of Rs 650 million next year, we are apprehensive about its profitability. We have assumed profits from the investment in JV as other income.

Tie-up with Future group

Zicom has entered into a strategic tie-up with Future Media for retailing its products from exclusive Zicom retail counters placed in 100 outlets of Future Group's select retails formats. These formats include Big Bazaar, Brand Factory, Collection I, Central, E Zone, Electronic Bazaar, Food Bazaar, Furniture Bazaar, M Port, WSC, etc. In the sector of electronic security systems, the Company is the first Company to introduce display counters in such retail formats, kiosks for its consumers. We expect sales of Rs 140 million over the next two years from this tie-up.

Possibility of further equity dilution

Zicom has passed enabling resolutions to issue securities not exceeding USD 35 million or equivalent thereof in Indian Rupees by way of Foreign Currency Convertible Bonds and/ or Global Depository Receipts and/or Other Foreign Securities / Instruments convertible into or linked to equity.

Outlook

Although we remain bullish on the electronic security industry we don’t see any upside to the stock. Given the muted EPS growth, fall in margins, non accrual of service revenues from video & central monitoring services, we believe that the stock looks expensive. We downgrade our recommendation from ‘BUY’ to ‘SELL’.




Buy Bilcare; target of Rs 1220: HDFC Sec

Over the years, Bilcare has emerged as an integrated pharmaceutical packaging solution provider from a mere packaging company. It is the largest producer of ‘Blister packaging’ in India with about 62% market share. Its clients include companies like GSK, Merck, Pfizer and Ranbaxy. It has recently forayed into the clinical service business, which has a promising future. It has shown a significant growth in earnings and we feel, its future is very promising.

The company has shown superb financial performance in the past 3 years. Net profit in the period has grown by 57% CAGR and operating profit by 43% CAGR. Its operating margins have gone up from 18% to 26% in the last few years.

We believe, the company is on a high growth trajectory and expect it to grow by about 35% in the next 2-3 years. At our estimated EPS of Rs 43.6 for FY08 and Rs 61 for FY09, the stock is trading at a forward PE ratio of 22x and 16x respectively. With a strong growth potential and superb financial management, we believe, there is immense potential upside in the stock price. So, we recommend a Buy with price target of Rs 1220 over the next 12 months, an upside of 23% from current levels.