Sharekhan Valueline June 2007

THE STOCK IDEAS REPORT CARD

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FROM SHAREKHAN'S DESK

Domestic concerns easing but watch out for earnings

Last month the country's leading stock exchange, the Bombay Stock Exchange, achieved an important milestone. The market capitalisation of all the companies listed on the bourse crossed the "one trillion dollar" mark on May 28. Of course the feat was possible thanks to the rupee's relentless rise against the dollar that resulted in a 60% increase in the combined market capitalisation of all these companies in dollar terms in a year. But the 42% gain in rupee terms over the same period is no mean achievement either and reflects the buoyancy in the Indian stock market. The question is: What is filling the market with so much buoyancy even when it is fairly priced at the current levels?

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Sharekhan top picks

In the May 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on June 1, 2007, the basket of stocks has given absolute return of 7.9% as compared to a 3.5% appreciation in the Sensex and a 3.52% rise in the S&P CNX Nifty.

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STOCK IDEA

Aurobindo Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs914
Current market price: Rs684

Betting big on formulation growth

Key points

• Formulation business grows at 62.2% CAGR: Aurobindo Pharma (Aurobindo) has created a robust product pipeline of 1,172 formulation dossiers for various markets and expects major growth in its speciality generic formulation business. The formulation sales are expected to gallop at a CAGR of 62.2% over FY2006-09.
• Robust product pipeline: During FY2007, Aurobindo filed 32 ANDAs and 41 DMFs, taking the cumulative DMF filings to 110 and ANDA filings to 82 in the US market. With the recent USFDA approval for products like Bisoprolol, Simvastatin and Zolpidem tartarate, we estimate incremental revenue of Rs100 crore from the US generic business during FY2008.
• European business to expand at over 50%: Aurobindo expects to deliver over 50% growth in Europe on the back of increased product registrations and synergetic benefits flowing from the recent acquisitions of Milpharm in the UK and Pharmacin in the Netherlands. It is also contemplating a couple of mid-sized acquisitions in Europe.
• Steady growth in ARV business: With most of the registrations taking place in the recent past, we expect Aurobindo to see steady growth in its ARV formulation revenues. We estimate the ARV formulation business would generate revenues worth $99 million and $128.7 million in FY2008 and FY2009 respectively.
• Consolidated PAT to grow at 70% CAGR: Going forward, the increasing traction in formulation exports would help the consolidated revenue to grow at a 24.3% CAGR during FY2006-09E(Rs3,143.1 crore in FY2009E). The adjusted net profit would gallop at a CAGR of 70% during FY2006-09 (Rs348.4 crore in FY2009E), translating into earnings of Rs57.1 per share.
• Buy with price target of Rs914: At the current market price of Rs684, Aurobindo is trading at 14.9x its FY2008E and 12.0x its FY2009E earnings. We initiate coverage on Aurobindo with a Buy recommendation and a one-year price target of Rs914 (an upside of 34% from the current levels). The price target discounts the FY2009E earnings by 16x.

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STOCK UPDATE

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.

Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs101
Current market price: Rs89

Growth at the cost of margins

Result highlights

• Allahabad Bank's net profit for Q4FY2007 declined by 16.5% year on year (yoy) to Rs125.7 crore. The same was lower than our estimate of Rs143.8 crore mainly due to a higher than expected tax liability of the bank during the quarter.
• During the quarter the bank's adjusted net interest income (NII) marginally declined by 1% yoy. Adjustment has been made for the one-time cash reserve ratio (CRR) interest income of Rs31 crore received during the quarter. The net interest margin (NIM) adjusted for the one-off item has decreased on year-on-year (y-o-y) and sequential bases. A significant increase in the cost of funds unmatched by a commensurate increase in the asset yields has resulted in a 73-basis-point
  y-o-y decline and a four-basis-point sequential decline in the NIM. The bank's aggressive loan growth policy funded by high-cost bulk deposits is taking a huge toll on its margins.
• The bank had booked Rs49.5 crore (credit balances in sundry accounts) as other income in FY2006. However, on Reserve Bank of India's (RBI) direction it reversed the entry during this quarter. Thus adjusted for the same the non-interest income was up by 19.9% yoy to Rs174.7 crore.
• The operating performance was not exciting despite a sedate 6.3% y-o-y rise in the operating expenses. The operating profit was up only 2.2% yoy with the core operating profit (excluding treasury) up by 9.2% on a y-o-y basis.
• Although provisions and contingencies declined by 23.4% yoy, yet tax provisions increased by 395% during the quarter. This resulted in a 16.5% y-o-y decline in the profit after tax (PAT) as against a 17.6% y-o-y rise at the profit before tax level.
• At the current market price of Rs89, the stock is quoting at 4.7x its FY2008E earnings per share, 2.8x pre-provision profits and 0.9x book value. The bank is available at attractive valuations compared with its peers, given its low price to book multiple and high return on equity. We maintain our Buy call on the stock with a price target of Rs101.

Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs101
Current market price: Rs82.4

Stable performance

Result highlights

• For Q4FY2007 Andhra Bank reported a stable year-on-year (y-o-y) growth in its net profit to Rs138.8 crore. The same is better than our profit after tax (PAT) expectation of Rs123 crore. The PAT growth was driven by a lower than expected operating expenditure.
• During the quarter, the bank's net interest income (NII) grew by 18.4% year on year (yoy) to Rs362.2 crore. However there was some sequential pressure on the net interest margin (NIM) as the bank's cost of funds increased at a much faster pace than its asset yields. Also, its low cost deposit base declined sequentially.
• The non-interest income increased by 9% yoy to Rs138.4 crore despite a 40.4% y-o-y decline in the treasury income. The non-interest income excluding treasury was up 20.3% yoy.
• A 15.7% growth in the net income coupled with a 7.3% y-o-y decline in the operating expenses helped the bank to report a 46.7% y-o-y growth in the operating profit to Rs270 crore. The core operating profit (operating profit excluding treasury) reported further improvement of 59.6% yoy to Rs256 crore.
• Provisions and contingencies showed a decline of 23% yoy to Rs81 crore but increased 25.7% quarter on quarter (qoq) mainly due to higher non-performing assets (NPA) and standard asset provisions charged during the quarter.
• The PAT growth was marginal although the profit before tax (PBT) grew by 158.7% yoy. This was mainly due to a Rs76 crore of tax charge in Q4FY2007 compared to a tax write-back in Q4FY2006.
• Its full year tax provision has gone up significantly by 208% to Rs247 crore compared to Rs80 crore. The higher tax incidence is due to a 32.5% jump in the operating profit coupled with the absence of the investment provision amount (which reduces a bank's tax liability) in FY2007.
• We had witnessed a jump in the net NPAs during Q3FY2007. The bank made higher NPA provisions during the fourth quarter and the asset quality, already at healthy levels, showed further improvement during the quarter. The net NPAs improved to 0.17% from 0.44% on a sequential basis.
• The bank has shown an improvement in its operating performance, its capital adequacy ratio (CAR) is comfortable at 11.3% with the Tier-I CAR at 9.98% and its asset quality continues to remain among the best in the industry. At the current market price of Rs82.4, the stock is quoting at 6.5x its FY2008E earnings per share (EPS), 3.6x pre-provision profit (PPP) and 1.1x book value. The bank is available at attractive valuations, given its low price to book multiple compared with its peers, and an average return on equity of 18.1%. We maintain our Buy call on the stock with a price target of Rs101.

Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs318

Strong performance

Result highlights

• Apollo Tyres' Q4 results are ahead of our expectations, on both the top line and the margin front.
• The net sales for the quarter saw a strong growth of 22% year on year (yoy) to Rs910.2 crore. The growth was achieved on the back of a 7% growth in the volumes and about a 14.6% growth in the realisation yoy.
• On the back of numerous price hikes undertaken by the industry, softening rubber prices and improved operating efficiencies the margins also improved. The operating profit margin (OPM) expanded by 340 basis points yoy to 11% as the operating profit increased by 78% to Rs100.4 crore.
• Stable interest and depreciation charges helped the company to post a brilliant net profit growth of 141.4% to Rs42.7 crore. The reported profit is up by 62% due to an extraordinary item last year.
• At the current market price of Rs318, the stock discounts its FY2008E earnings by 10.1x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x. We maintain our Buy recommendation on the stock with a price target of Rs425.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs39.5

Good show

Result highlights

• Ashok Leyland Ltd (ALL) has delivered strong results for Q4FY2007 and the same are ahead of our expectations on the margin front. The top line has grown by 32.1% for the quarter, driven by a volume growth of 28.4% and a realisation growth of 2.9%.
• We are positively surprised by the operating profit margin (OPM), which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison with last year, the OPM has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profits for the quarter have grown by 21.1% to Rs264.9 crore.
• Lower interest cost and taxes helped the company to post a net profit growth of 28.8% to Rs174.6 crore.
• For FY2007 the net sales for the company have grown by 36.5% led by a volume growth of 35%. The OPM has come down slightly by 30 basis points to 9.9% while the profit for the year has grown by 46% to Rs436.3 crore.
• For FY2008 the company has earmarked a capital expenditure of Rs1,000 crore for capacity expansions and new product developments; another Rs400 crore may be spent on acquisitions.
• We would take a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country, which would affect the sales volumes. Consequently, after a dream run in FY2007, we expect the growth rates to moderate and expect a volume growth of 11.9% for FY2008. The company expects the industry to grow at 10-12% in FY2008 and has set a target of reaching the 100,000-vehicle mark during the current fiscal.
• At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,500
Current market price: Rs2,248

Bruised by demerger, disclosures

Result highlights

• The Q4FY2007 results of Bajaj Auto Ltd (BAL) are in line with our expectations. The net sales grew by 6.8% to Rs2,313.6 crore.
• The operating profit of the company declined by 23.2% to Rs326.3 crore as the operating profit margin (OPM) declined by 550 basis points to 14.1%. However, the margins are stable on a sequential basis. The net profit before extraordinary items for the quarter declined by 3.9% to Rs320.75 crore.
• The company announced its long pending demerger, through which two new companies would be created, namely Bajaj Auto Ltd (BAL; new), comprising the manufacturing business, and Bajaj Finserv Ltd (BFL), comprising the insurance, auto finance and wind power businesses. The existing company would be renamed as Bajaj Holdings and Investment Ltd (BHIL). The shareholders would hold 70% in the new companies directly, while 30% of their holding would be routed through the holding company BHIL. We view this process as a negative, as the listed holding company would suffer from a holding company discount.
• For every one share held in the existing BAL (future BHIL), the shareholders would continue to hold one share in BHIL, get one share of the new BAL of Rs10 each and one share of BFL of Rs5 each.
• In another disclosure, BAL has also declared that Allianz has a call option to raise its stake in the life insurance business to 74% from the current 26% at a nominal pre-determined price till 2016. In all likelihood, the foreign direct investment (FDI) norms for insurance are expected to get relaxed till then and hence BAL's stake is likely to get reduced.
• We are downgrading our sum-of-the-parts (SOTP) target on BAL to Rs2,500, valuing the new BAL at Rs1,254 per share and BFL at Rs449 per share. Taking into account the cash and investment portfolio of BAL and also BHIL's stake in the two new companies, we value BHIL at Rs835. We maintain our Buy call on the stock.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs310
Current market price: Rs285

Improved performance

Result highlights

• Bank of Baroda's (BoB) results are marginally below expectations. The profit after tax (PAT) grew by 17.6% year on year (yoy) but declined 25.4% quarter on quarter (qoq) to Rs245.7 crore compared with our estimate of Rs256.7 crore.
• The adjusted net interest income (NII) was up by 21.5% yoy and 9.6% qoq to Rs1,052.6 crore, better than our estimate of Rs1,002 crore. The net interest margin (NIM) has shown a sequential improvement of nine basis points, driven mainly by an improvement in the asset yields.
• The non-interest income grew by only 6.9% yoy to Rs397.8 crore; the growth was restricted mainly due to a 61.7% decline in the treasury income. However the core fee income grew by 36.4% yoy and 13.9% qoq.
• The operating profit was up 21% yoy but the core operating profit (operating profit excluding treasury and recovery) grew by 37.4% yoy.
• Although provisions and contingencies remained stable on a year-on-year (y-o-y) basis, yet the bank's tax liability for the current quarter went up significantly. This restricted the overall profit growth to only 17.6% on a y-o-y basis.
• The asset quality of the bank continues to be healthy with the gross non-performing assets (NPA) at Rs2,092 crore, down Rs300 crore sequentially. The net NPA in percentage terms stood at 0.6%, down from 0.67% in the previous quarter. The capital adequacy ratio (CAR) remains at a comfortable 11.8% with the Tier-I CAR at 8.74%.
• The bank has shown strong business growth with comfortable asset quality levels. However the profitability has not improved in proportion to the growth in the business, thereby leading to a lower return on equity. We feel the bank has successfully made structural changes required to show consistent business growth and the management has now focused on improving the profitability, which should lead to better numbers going forward. At the current market price of Rs285, the stock is quoting at 8x its FY2008E earnings and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs310.

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.

Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,730
Current market price: Rs1,637

Q4FY2007 results: first-cut analysis

Result highlights

• The Q4FY2007 results of Bharat Bijlee Ltd (BBL) are much ahead of our expectations.
• The revenue for the quarter grew by 73% to Rs179 crore on the back of a strong order book. The net profit increased by a superb 123% to Rs29.07 crore, much ahead of our expectations.
• The operating profit for the quarter grew by 105% to Rs44.5 crore, as the operating profit margin (OPM) for the quarter improved by 370 basis points to 24.8% against 21.1% on a year-on-year (y-o-y) basis.
• The improvement in the OPM is on account of a lower raw material/sales ratio, which stood at 62.8% as against 64.9% in the same quarter last year. The OPM also improved because of other operational efficiencies as the other expenses/sales ratio declined to 5.9% from 7.6% on a y-o-y basis.
• The interest cost for the quarter decreased by 20% while the depreciation charge increased by 89%.
• The company has declared a dividend of Rs25 (250%) per share.
• The timely expansion of its transformer manufacturing capacity, by 3000MVA to 8000 MVA per annum, has benefited the company. Going forward, the huge investments lined up in the power sector and the continuing activity in the industrial sector will drive BBL's order book.
• At the current market price of Rs1,637, the stock is discounting its FY2007 earnings by 16.3x and earnings before interest, depreciation, tax and amortisation by 8.6x . Excluding the value of the cash and cash equivalents, the stock is trading at 13x its FY2007 earnings. In view of the better than expected results and strong order backlog, we maintain our Buy recommendation on the stock with a price target of Rs1,730. We shall be upgrading our FY2008 earnings estimates and price target after analysing the annual report of the company. Watch this space.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,020
Current market price: Rs1,740

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).

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,125
Current market price: Rs2,724

Price target revised to Rs3,125

Result highlights

• At Rs1,150 crore the Q4FY2007 net profit of Bharat Heavy Electricals Ltd (BHEL) saw a growth of 33%. The same is in line with our estimates. The turnover for the quarter grew by 25% to Rs7,576 crore driven by higher order backlog of Rs46,700 crore at the end of Q3FY2007.
• The order backlog during the quarter grew by an impressive 45% to Rs55,000 crore driven by a strong 56% increase in order inflows of Rs16,300 crore on a year-on-year (y-o-y) basis.
• The power division registered a 23% growth in revenues whereas the industry division recorded a growth of 30% in revenue.
• The operating profit margin (OPM) for the quarter improved by 135 basis points year on year (yoy). Consequently the operating profit for the quarter grew by 33% to Rs1,587 crore.
• The other income increased by 34% to Rs286 crore mainly on account of the rising yields on the huge cash reserves of the company.
• On a full year basis, the turnover for FY2007 grew by 29% to Rs18,702 crore and the net profit grew by 42% to Rs2,385 crore.
• Order inflows during the year grew by a whopping 88% to Rs35,633 crore. In the power segment, BHEL secured orders worth Rs27,722 crore. In the industry business BHEL secured the biggest ever order worth Rs6,008 crore during the year. The order backlog at the end of March 31, 2007 stood at Rs55,000 crore, which is around 3x its FY2007 sales.
• In international business, BHEL secured export orders of Rs1,903 crore during the year in comparison with an average yearly order book of Rs1,275 crore in the last five years.

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs268
Current market price: Rs251

Higher provisions restrict profit growth

Result highlights

• Canara Bank's results have been much above our and market expectations with the profit after tax (PAT) reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year (y-o-y) decline to Rs444 crore. The profit growth was higher than expected mainly due to a substantial jump in the non-interest income driven by a higher treasury income and cash recoveries.
• The net interest income (NII) was up by 11.3% year on year (yoy) and 5.5% quarter on quarter (qoq) to Rs1,014 crore compared with our estimate of Rs1,030 crore. The NII has been adjusted for a one-time cash reserve ratio (CRR) interest income and the interest received on the income tax refund. Our calculations suggest that the adjusted net interest margin (NIM) declined on both y-o-y and sequential bases due to a rise in the cost of funds, as the low-cost deposits remained stable but bulk deposits increased, putting pressure on the cost of funds.
• The non-interest income zoomed by 58% yoy and 120% qoq to Rs626.2 crore, primarily driven by a 172% y-o-y and 186% sequential growth in the trading income to Rs92 crore. The miscellaneous income, which increased by 57% yoy and 247% qoq to Rs343 crore, also contributed to the growth in the non-interest income.
• The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 48% yoy and 65% qoq to Rs1,007 crore, driven primarily by the higher non-interest income.
• The provisions increased by 66.1% yoy and 54% qoq to Rs497 crore mainly on account of higher depreciation on investments provided on the marked-to-market investments book. A higher standard asset 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. Although the operating profit increased by 48% yoy, yet the higher provisions restricted the overall profit growth to 2.3%.
• Higher cash recoveries to the tune of Rs1,025 crore during the year 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%.
• The margins may remain under slight pressure, however the business growth is likely to boost the NII. The bank has also reduced the interest rate risk on its book by bringing down the duration of its "available-for-sale" category to 2.48 years from 3.76 years earlier and stated that the duration is expected to further come down below two years. At the current market price of Rs251, the stock is quoting at 6.6x its FY2008E earnings per share, 3.3x pre-provisioning profits and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs268.

Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs256
Current market price: Rs215

Price target revised to Rs256

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.
• The OPM witnessed a 590-basis-point decline to 15.7% in the quarter due to the higher contribution of low-margin anti-retrovirals and lower API sales to the regulated markets. Consequently, the operating profit stood at Rs147.0 crore, down by 22.8%. With the 40% fall in other income and the higher tax incidence (up from 4.0% to 11.3%), the net profit declined by 40.3% in the net profit to Rs125.7 crore.
• The FY2007 numbers saw a 19% growth in the top line at Rs3,438.1 crore, the margins remained almost flat at 20% and resulted in a mere 9% rise in the net profit to Rs660.8 crore.
• 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 OPM. Hence, we are revising down our FY2008 earning estimate by 17.4%; we are also introducing our FY2009 estimate. As per our revised estimate, the earnings per share (EPS) estimates for FY2008 and FY2009 stand at Rs10.9 and Rs12.8 respectively.
• At the current price of Rs215, the stock trades at 19.7x and 16.7x of its FY2008 and FY2009 earnings respectively. Though, we have toned down our estimate, positive earnings surprises for the company at frequent intervals from exports are not ruled out. We maintain our Buy recommendation on the stock with a revised price target of Rs256 (ie 20x of FY2009E EPS of Rs12.8).

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs374
Current market price: Rs317

Numbers in line with expectations

Result highlights

• Corporation Bank's results are in line with our expectations; the profit after tax (PAT) grew by 18.2% year on year (yoy) but declined 19.1% quarter on quarter (qoq) to Rs118.5 crore compared with our estimate of Rs116.1crore.
• Adjusted net interest income (NII) was up by 31.2% yoy and 16.1% qoq to Rs387 crore. A moderate loan growth and significant increase in float balances helped the bank to improve its margins by 25 basis points to 3.06% on a sequential basis.
• The non-interest income increased by 14.4% yoy and 13% qoq to Rs180 crore. The core fee income was up 15.9% yoy and 5% qoq.
• With the net income up 25.4% yoy and the operating expenses up only 11.3% yoy, the operating profit was up by 36.4% yoy to Rs345.3 crore. The core operating profit (operating profit less treasury and recovery income) showed a good growth of 36.2% yoy and 29.2% qoq.
• Provisions and contingencies grew by 55.5% yoy and 103.7% qoq due to higher non-performing assets (NPA) and standard asset provisioning during the quarter. The significant increase in the provisions on a sequential basis resulted in a 19.1% sequential decline in the PAT although the operating profit grew by 17.8% qoq.
• The asset quality of the bank continues to be healthy with stable gross NPA at Rs624 crore and the net NPA at 0.47% in percentage terms. The capital adequacy ratio (CAR) remains at a comfortable 12.7% with Tier-I CAR at 11.3%.
• At the current market price of Rs317, the stock is quoting at 7.4x its FY2008E earnings per share (EPS), 3.4x pre-provision profit (PPP) and 1.1x book value. We maintain our Buy call on the stock with a price target of Rs374.

Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs378

Beating expectations

Result highlights

• Esab India's Q1CY2007 results are ahead of our expectations. Its top line grew by 29% to Rs81.2 crore and bottom line grew by a strong 38% to Rs12.3 crore during the quarter.
• The higher top line growth was aided by the company's new facility as Chennai, which on a fully operational basis can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 29% growth as the equipment division's revenue increased by 31.7% and the consumable division's revenue grew by 28.1%.
• The operating profit for the quarter grew by 44% to Rs19.6 crore as operating profit margin (OPM) improved by 250 basis points to 24.1%. The improvement in the OPM was on account of better profitability of both the divisions. The earnings before interest and tax (EBIT) margin of the equipment division improved by 396 basis points to 16.5% and that of the consumable division improved by 282 basis points to 27.7%.
• The depreciation for the quarter increased by 24% as the company has commissioned its new plant at Chennai.
• The interest cost was negligible as the company has repaid its entire debt and become a debt-free company.

Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs182

Results in line with expectations

Result highlights

• Gateway Distriparks Ltd's (GDL) revenues from the container business grew by 24% year on year (yoy) to Rs41 crore in Q4FY2007. With Snowman Frozen Foods, the cold chain subsidiary, contributing Rs6.65 crore for the quarter, the total revenues for the quarter stood at Rs47 crore.
• The operating profit grew by 22% yoy to Rs22.6 crore whereas the operating profit margin (OPM) declined by 840 basis points to 47.4%. Snowman Frozen Foods continued to remain unprofitable at the earnings before interest, tax, depreciation and amortisation (EBITDA) level, registering a loss of Rs0.17 crore for the quarter.
• The interest cost decreased by 66% yoy to Rs0.20 crore, thanks to the repayment of debt whereas the depreciation provision increased by 62.6% yoy to Rs4.57 crore on account of higher capital expenditure (capex) during the quarter.
• The tax provision stood at 17% as the company continued to enjoy the 80 IA benefit for investment in inland container depots (ICDs). The net profit increased by 8.5% yoy to Rs19.27 crore.
• Last month, GDL through its subsidiary GatewayRail had formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
• We are in the process of revising our numbers and will update you soon on the revised numbers. Meanwhile we maintain our Buy recommendation on the stock with a price target of Rs250 per share.

Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,975
Current market price: Rs2,505

Price target revised to Rs2,975

Result highlights

• The stand-alone revenues of Grasim Industries (Grasim) grew by a robust 37.4% year on year (yoy) to Rs2,490 crore, driven by strong cement realisations and higher volume in viscose staple fibre (VSF) and sponge iron businesses.
• The operating profit grew by 66% yoy to Rs771 crore largely on account of a 77% year-on-year (y-o-y) rise in cement earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs470 crore. Cement margins expanded by 800 basis points on the back of a strong realisation growth. The VSF business witnessed a lower growth of 29% yoy in profits to Rs201 crore as the pulp prices remained high during the quarter.
• The interest expenses were up by 55% yoy to Rs36 crore in the quarter on account of higher borrowings in the period. Depreciation increased by 15% yoy to Rs87.6 crore.
• Boosted by an other income component of Rs78 crore (on account of the deployment of surplus funds), Grasim's net profit rose by 69.1% yoy to Rs437 crore.
• As mentioned in our previous updates, Grasim is augmenting its cement capacity at Kotputli and Shambhupura units by 4 million metric tonne (MMT) each by putting up greenfield plants. The capital expenditure (capex) is progressing well and the new capacities are expected to get commissioned in the first quarter of FY2009.
• The company is expanding its VSF capacity at Kharach, Gujarat from 45,625 tonne to 63,725 tonne and is in the process of getting regulatory clearances for expanding the capacity by 31,000 tonne at Harihar. On completion of both these projects, the company's VSF capacity will expand to 350,000 tonne.
• Looking at the better than expected performance of the VSF and sponge iron businesses, we are upgrading our consolidated FY2008 earnings per share (EPS) estimate by 3.8% to Rs245 and introducing our FY2009 EPS estimate of Rs208.
• At the current market price of Rs2,505 the stock is trading at 10.1x FY2008E EPS and 11.9x FY2009E EPS. Looking at the stability imparted to the company by the higher cash flows from the VSF business, we maintain our Buy recommendation with a price target of Rs2,975 per share.

Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs195

Good sales growth but disappointing margins

Result highlights

• The Q1CY2007 net profit of Hindustan Lever Ltd (HLL) grew by 13.6% year on year (yoy) to Rs333.9 crore, which is slightly below our expectations.
• The net revenues grew by 13.8% yoy on the back of an 8.73% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses. The lower growth in the personal product range is disappointing but is expected to pick up in the coming quarters.
• The profit before interest and tax (PBIT) margin showed a contraction of 70 basis points to 13.6%. The contraction in the PBIT margin is attributable to the lower growth in the personal care segment.
• The soap and detergent business has shown a growth of 9.6% whereas the personal care product business has reported a lower growth of 7.4%. Adjusting for the disposal of the Nihar brand, personal products grew by 10.5%.
• The beverage business has shown a growth of 16.6% yoy whereas the processed food business has grown by 26% yoy.
• The operating profit margin (OPM) of HLL contracted by 44 basis points to 11.37% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales increased by 35 basis points which led to further erosion in the margin.
• The soap and detergent segment was able to maintain its earnings before interest and tax (EBIT) margin at 12.1% yoy whereas the EBIT margin in the personal care product range recorded an improvement of 30 basis points to 24.7%.
• At the current market price of Rs195, the stock is quoting at 22.8x its CY2007E earnings per share (EPS) of Rs8.5 and 20x its CY2008E EPS of Rs9.6. We maintain our Buy recommendation on the stock with a price target of Rs280.

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs165

Strong growth across segments

Result highlights

• In Q4FY2007 the net revenues of ITC grew by 24.4% year on year (yoy) as most of its businesses saw a strong growth: cigarettes (revenue up 14.3%), fast moving consumer goods (FMCG; revenue up 63%), hotels (revenue up 15.6%), paperboards (revenue up 12%) and agri-business (revenue up 16%).
• The company's earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped by 220 basis points to 23.9% in Q4FY2007 primarily due to higher other expenditure.
• The tax provisioning was on the higher side during the quarter which along with a decline in the operating profit margin (OPM) led to a lower than expected profit after tax (PAT). The Q4FY2007 net profit grew by 14.7% yoy to Rs650 crore.
• We believe that the company's cigarette business would see a stable growth despite the slowdown in demand witnessed by the cigarette industry earlier in the year.
• The non-cigarette FMCG business is the only business in ITC's portfolio that is not making a profit. However, its losses were stable despite the roll-out of the Bingo brand of products throughout the country which led to higher sales and promotion expenses during the quarter. We expect this business to break even by FY2009.
• In the hotel segment, the profitability was lower primarily due to a one-time transition cost incurred on account of upgrading 7 Sheraton Hotel to Starwood Hotels and Resorts' The Luxury Collection brand.
• At the current market price of Rs165, the stock is attractively quoting at 20.6x FY2008E earnings per share (EPS) and 13.1x FY2008E enterprise value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs200.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs850
Current market price: Rs667

Cement division boosts overall performance

Result highlights

• The overall revenue growth of Jaiprakash Associates (Jaiprakash) was muted at 3.6% year on year (yoy) to Rs886 crore during the quarter.
• The cement revenues increased by 45.8% yoy to Rs602 crore whereas the construction revenues fell by 34% yoy to Rs330 crore as the new projects were in the ramp-up phase while the old projects were close to completion during the quarter.
• Jaiprakash's overall operating margin (OPM) improved sharply by 1,170 basis points to 29.7%, thanks to the sharp jump in the earnings before interest and tax (EBIT) margin of the cement business by 1,660 basis points yoy to 35% on the back of strong realisations and cement volumes during the quarter.
• The interest expenses increased by 12% yoy to Rs65 crore during the quarter while the depreciation charge increased by 11% yoy to Rs42 crore mainly due to the commissioning of the 38-megawatt (MW) captive power plant (CPP) in Q2FY2007. The other income during the quarter fell by 44% yoy to Rs30 crore.
• The net profit witnessed a strong growth of 87% yoy to Rs130 crore.
• The cement business will contribute increasingly to the revenues of the company. The construction revenues will provide the stability to the company's overall business with the cement cycle turning downwards in FY2009. The Taj project as well as the real estate business will add value to the company's share. We are keeping our FY2008 earnings per share (EPS) estimate of Rs29.5 unchanged and introducing our FY2009 EPS estimate at Rs33.2. At the current market price of Rs671, the stock is trading at 20x its FY2009 EPS. We continue to remain positive on the company's outlook and maintain our sum-of-the-parts (SOTP) price target of Rs850 per share.

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs200
Current market price: Rs162

Price target revised to Rs200

Result highlights

• The overall revenues of JK Cement grew by 49% year on year (yoy) to Rs366 crore, as the overall volumes grew by 11% yoy and the realisations improved by 34.9% yoy.
• The expenditure for the quarter increased by 27% yoy to Rs255 crore mainly on account of a 13% year-on-year (y-o-y) increase in the raw material cost and a 31% y-o-y rise in the freight cost.
• The company's high leverage to cement prices resulted in a 145% y-o-y surge in its operating profits to Rs111.7 crore which helped the operating profit margin (OPM) to expand by 1,200 basis points yoy to 30.5%.
• As the interest cost and depreciation provision remained flat, the profit after tax (PAT) ballooned by 274% yoy to Rs61.4 crore.
• We had mentioned in our previous reports, the company is incurring a capital expenditure (capex) of Rs290 crore for setting up three captive power plants (CPPs). But as there has been a delay in the commissioning of all the projects, we don't expect the company to avail of the complete savings in the power cost in FY2008 as expected earlier.
• Consequently, we are revising our earnings estimate downwards by 5.2% to Rs211 crore from Rs222 crore. We are also introducing our FY2009 earnings estimate at Rs180 crore.
• At the current market price of Rs162 per share, JK Cement is trading at 5.3x its FY2008 earnings and 6.2x its FY2009 earnings. We maintain our Buy recommendation on the stock with a reduced price target of Rs200 per share.

KEI Industries
Cluster: Ugly Ducking
Recommendation: Buy
Price target: Rs140
Current market price: Rs75

Q4FY2007 results: First-cut analysis

Result highlights

• KEI Industries' (KEI) net sales grew by 123% to Rs207.4 crore in Q4FY2007, in line with our expectations. However the net profit grew by 37.3% to Rs11.4 crore and the growth was below our expectations on account of rising raw material prices and a higher interest cost.
• The power cable segment's revenues grew by a robust 125% to Rs208 crore while the stainless steel wire segment's revenues grew by 97% to Rs25 crore.
• The operating profit margin (OPM) for the quarter declined by 490 basis points to 12.1% due to a rise in raw material prices. The raw material cost as a percentage of sales increased to 76.6% from 63.9% in Q4FY2006.
• The operating profit for the quarter grew by 59% to Rs25.1 crore.
• The interest expense for the quarter increased by 148% to Rs7.5 crore due to a rise in the interest rates and also because the company availed of higher working capital loans since the business is growing at a rapid pace. The depreciation cost for the quarter increased by 31% to Rs1.2 crore.
• For the full year, the net sales grew by 99% to Rs681.5 crore and the net profit grew by 54.3% to Rs40.1 crore.
• At the current market price of Rs75, the stock is quoting at around 11x its FY2007 earnings per share and 6.6x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs140. We shall be upgrading our FY2008 earnings estimates after analysing the annual report of the company. Watch this space.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs625
Current market price: Rs490

Price target revised to Rs625

Result highlights

• KSB Pumps' Q1CY2007 results are below our expectations on the margin front. The company's net sales grew by 13.5% to Rs109.6 crore during the quarter. A higher inventory of Rs9.3 crore during the quarter reflects that there was a delay the implementation of certain orders and the same are expected to materialise in the next quarter.
• On segmental basis, the revenues of the pump business went up by 7.1% to Rs78.9 crore while that of the valve business grew by a strong 35.6% to Rs30.1 crore. However, the margin in the pump business declined to 11.4% from 19.8% last year, as last year's sales included the supply of nuclear pumps, which carry higher margins. The profit before interest and tax (PBIT) margin in the valve business continued to be strong and grew by 220 basis points to 25.6%.
• On the back of higher raw material cost and lower contribution of the high-margin project business, the overall operating profit margin (OPM) declined by 590 basis points to 15.9% as the operating profit declined by 17.1% to Rs17.4 crore. The raw material cost as a percentage of sales went up from 40.1% to 49%.
• On the back of stable interest and depreciation costs, the profit after tax (PAT) for Q1CY2007 declined by 4.6% to Rs12.5 crore. The management remains bullish on the prospects of the company, which is witnessing a 40% growth in its order book. The margins are also expected to be maintained at last year's levels or show a slight improvement due to a better product mix.
• The pump industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a market share of 12-14%, would stand to gain from this and hence is expected to sustain the growth momentum going forward. However, considering the high raw material cost and lower than expected margin in the first quarter, we are downgrading our CY2007 earnings estimate by 6.8% to Rs34.8 and our CY2008 earnings estimate by 9.1% to Rs41.8. At the current market price of Rs490, the stock quotes at CY2008E price/earnings ratio (PER) of 12x and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of Rs6.5x. We maintain our Buy recommendation on the stock with a revised price target of Rs625.

Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs840
Current market price: Rs707

Price target revised to Rs840

Result highlights

• Lupin's net sales increased by 22.8% year on year (yoy) to Rs518.1 crore in Q4FY2007. The growth in the top line is above our expectations. The sales growth was driven by a 12% rise in the domestic formulation business to Rs144.3 crore and a 53.4% increase in the formulation exports to Rs165.9 crore.
• Lupin's operating profit margin (OPM) expanded by 460 basis points yoy to 14.5% in Q4FY2007; the same was lower than our expectation of 15.7%. The OPM was below expectations on account of a higher than anticipated rise in the company's raw material cost and higher research and development (R&D) expenses. Consequently, the company's operating profit grew by 80.0% yoy to Rs75.0 crore in Q4FY2007.
• The company's reported net profit stood at Rs137.1 crore, up by 173.1% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs61.3 crore, a jump of 22% yoy. The same was above our estimate of Rs57.5 crore.
• For FY2007, the company's net sales increased by 22.7% to Rs1,970.9 crore, which was above our estimate. The OPM expanded by 70 basis points to 14.9% as against our estimate of 15.7%, driven largely by higher R&D expenses. The company's reported net profit stood at Rs302.1 crore, up by 65.3% yoy. However, this includes the one-time income related to the sale of the Perindopril patent. Based on our estimates, the net profit excluding the post-tax consideration received from the sale of the Perindopril patent stood at Rs226.2 crore, a jump of 23.8% yoy. The same was in line with our estimate of Rs228.4 crore.
• Lupin 's FY2007 profit performance (exclusive of the one-time gain) was just in line with our expectations. Hence, we are maintaining our FY2008 sales and profit estimates at Rs2,600 crore and Rs328.9 crore respectively. For FY2009, we expect the revenue to grow by 18% to Rs3,054.4 crore and the profit to rise by 25% to Rs410.5 crore. As per FY2009 estimates, the revenue and profit (exclusive of the one-time gain from the patent sale) would grow at compounded annual growth rate (CAGR) of 24% and 35% respectively. We have not included the earnings upside from the R&D pipeline in our estimates.
• The management has given an impressive revenue guidance of Rs3,000 crore for FY2008 (a 50% growth) and of Rs4,200 crore (a 40% growth) for FY2009. The growth would be achieved through various initiatives in the USA, Europe and semi-regulated markets. As per the management, a small part of the growth would also come from acquisitions. However, as per our organic growth estimates, at the current price Rs707 the stock is available at Rs19x its FY2008E and 15.2x its FY2009E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs840 (18x of FY2009E earnings).

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs765

In investment mode

Result highlights

• Mahindra and Mahindra's (M&M) stand-alone net sales grew by 20% year on year (yoy) to Rs2,747 crore in Q4FY2007. The operating profit margin (OPM) for the quarter declined by 48 basis points to 11.4% yoy. Higher other income and interest income resulted in a 59% growth in the pre-exceptional profit after tax (PAT) to Rs247.1 crore. An extraordinary income of Rs166 crore realised from the sale of shares of Mahindra and Mahindra Financial Services Ltd (MMFSL) last year depressed the reported PAT. The reported PAT declined by 21% to Rs233 crore from Rs255 crore in Q4FY2006.
• On a stand-alone basis, the net sales for FY2007 grew by 22% to Rs10,050 crore. The operating profit rose by 30% to Rs1,263 crore. In the automotive business, the domestic volumes grew by 17.8% while the exports surged by 45%. The tractor segment however recorded a strong growth of 22%.
• On a consolidated basis, the net sales for FY2007 grew by 43% to Rs17,617 crore. The OPM surged to 15.3% from 14.0% in FY2006. Consequently, the operating profit grew by 56% to Rs2,704 crore. The consolidated pre-exceptional PBT for the year stood at Rs2,320 crore, marking a growth of 50.7% yoy.
• The company plans to increase its capital expenditure (capex) for the year to Rs2,000 crore, which is going to be utilised for capacity expansions, new product launches and research and development (R&D) activities. Apart from this, the company also needs to carry out the Punjab Tractor Ltd (PTL) and Swaraj Engine acquisitions, and invest in joint ventures. All these projects would be financed through a combination of debt and equity which would lead to nominal equity dilution.
• The contribution of the non-automotive business has increased significantly in the recent years. For FY2007, the non-automotive business contributed 39% to the top line and 51% to the bottom line.
• We expect FY2008 to be the year of consolidation for the company while all new product launches would take place in FY2009. At the current market price of Rs764, the stock discounts its consolidated FY2009 earnings by 8.7x. We maintain our Buy recommendation on the stock with a sum-of-the-parts (SOTP) price target of Rs1,050.

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