JM Financial
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs900
Current market price: Rs727
On strong financial wicket
Result highlight
- JM Financial Ltd (JMFL) reported a strong 74.7% year-on-year (y-o-y) growth in the revenues for H1FY2007 to Rs183.5 crore. The strong growth in the revenues was backed by the institutional broking and investment banking divisions. The revenues of these divisions together grew by 62.2% year on year (yoy).
- The operating profit of JMFL grew by 70% yoy to Rs92.1 crore as the operating profit margin (OPM) was stable at 50.2%.
- The company's net profit for H1FY2007 stood at Rs41.2 crore, up by 68.6%.
- On a quarter-on-quarter (q-o-q) basis, its income for Q2FY2007 was lower by 11.1% to Rs86.4 crore as there were no big initial public offerings (IPOs) during Q2FY2007 and the income for Q1FY2007 was also abnormally higher due to the Reliance Petroleum IPO.
- On a q-o-q basis, the net profit for Q2FY2007 was lower by 37%.
- At the current market price of Rs727 the stock is quoting at 17x its FY2008E earnings per share and 2.7x its FY2008E book value per share.
- We have revised our price target on the stock to Rs900, as we have valued JMFL at 20x its FY2008E earnings.
HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,080
Current market price: Rs1,010
Strong operational growth
Result highlight
- HDFC Bank's Q2FY2007 results were better than our expectations driven by a higher fee income and controlled expenses.
- The net interest income (NII) grew by 38.1% year on year (yoy) to Rs845.6 crore in line with our expectations. The advances grew by 34.4%. The net interest margin (NIM) declined by eight basis points to 3.92%, albeit the same remained the highest in the industry.
- The other income grew by a strong 52.9% driven by a 44.2% year-on-year (y-o-y) growth in the fee income, which was higher than our expectations.
- The operating profit grew by 41.1% yoy to Rs664.2 crore as the operating expenses remained under check. The operating expenses grew by 44.2% yoy, lower than expected, probably because there was no expansion in its branch network during the quarter.
- That the bank did not add any branch in Q2FY2007 (for want of new licences from the Reserve Bank of India) is a cause for concern. Because of this the proportion of the CASA deposits in the total deposits fell to 52.2% in Q2FY2007 compared with 59.7% (Q2FY2006) and 52.6% (Q1FY2007).
- The growth in the advances was also lower than an average growth of 50%+ recorded over the previous four quarters.
- At the current market price of Rs1,010, the stock is quoting at 21.1x its FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provision profits (P/PPP) and 4.3x its FY2008E book value (BV).
- We believe that the current market price fairly discounts the growth expected over FY2006-08E, leaving very marginal upside to the stock price. We are revising our price target for the stock to Rs1,080. At this level the stock would discount its FY2008E EPS by 22.6x and FY2008E BV at 4.6x.
Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs230
Profit meter ticking on
Result highlight
- Genus Overseas reported a year-on-year (y-o-y) growth of 87% in its net profit to Rs5.6 crore for Q2FY2007. The same is above our expectations, primarily because of higher-than-expected revenue booking and operating profit margin (OPM) for the quarter.
- As a result of the healthy revenue booking for the project business and impressive offtake in the metering business, the company's net sales for the quarter grew by a smart 105% year on year (yoy) to Rs78 crore. Notably, the growth in the net sales was higher than that in the gross sales (y-o-y growth of 97%). This was primarily because the project business earned higher revenues, which were free of excise duty. The growth was also aided by the sales from the new excise-free plant at Uttaranchal.
- The operating profit for the quarter grew by 140 percentage points to Rs12 crore, as the OPM improved by 220 basis points to 15.4%. The margin improved on the back of higher order booking that brought operating leverage into play. This was clearly visible as the other expenditure as a percentage of sales came down to 11.6% in Q2FY2007 from 20.1% in Q2FY2006.
- However the interest expenses for the quarter trebled to Rs4.82 crore as the company had to avail of large working capital loans to execute project orders. The depreciation charge also rose by 135% to Rs1.2 crore as the company commissioned the first phase of its Uttaranchal plant.
- Consequently the net profit for the quarter grew by 87% yoy to Rs5.6 crore.
- The order book for the quarter jumped by 123% to Rs491 crore as the company started taking metering orders on project basis as against on the basis of pure metering sales.
HCL Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs609
Results ahead of expectations
Result highlight
- HCL Technologies has reported a robust revenue growth of 10% quarter on quarter (qoq) and 42.1% year on year (yoy) to Rs1,379.5 crore for the first quarter ended September 2006. The sequential growth was driven by a 9.7% increase in the revenues of the software service business and a growth of 16.6% in the infrastructure management service (IMS) business. On the other hand, the business process outsourcing (BPO) business continues to lag behind with a relatively lower growth rate of 5.4% on a sequential basis.
- The earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 70 basis points to 21.7% on a sequential basis, largely due to the salary hikes given to almost 85% (employees below "project manager" level) of its work force with effect from July. The worst affected was the profitability of the software service business that reported a 90-basis-point decline in the EBITDA margin to 22.3%. On the other hand, the IMS business reported another quarter of margin expansion (up 20 basis points to 17.6%). The operating profit grew 6.2% qoq and 43.9% yoy to Rs298.9 crore.
- The earnings grew at a relatively lower rate of 7.4% qoq and 49.6% yoy to Rs250.2 crore (ahead of our expectations of Rs239.5 crore and consensus estimates of a sequential drop in the earnings). The growth in the earnings was also aided by the 25.2% sequential growth in the other income (due to the lower base resulting from a negative foreign exchange [forex] impact of Rs16.6 crore in Q4).
- In terms of operational highlights, the company added 3,826 employees during the quarter, one of the highest in the past 10 quarters. The revenues from the top 10 clients grew at a robust rate of 13% on a sequential basis.
- At the current market price the stock trades at 19x FY2007 and 15.2x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs720 (18x FY2008 revised earning estimates).
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs258
Current market price: Rs237
Price target revised to Rs258
Result highlight
- Crompton Greaves' revenues grew by 48.6% year on year (yoy) in Q2FY2007 to Rs824.0 crore, way ahead of our expectations. Although all its three divisions reported a strong performance, the power system division led the pack with a revenue growth of 68.7% yoy to Rs449.7 crore. The revenues of the consumer product division and the industrial system division grew by 33.3% and by 36.8% respectively.
- The raw material cost/sales ratio spiked to 75.6% in Q2FY2007 from 69.5% in Q2FY2006 largely due to an increase in the prices of the base metals like copper and the inability of the company to pass on the same to its customers. However, lower employee cost and other expenses muted the impact of the same. Consequently, the operating profit margin (OPM) reduced by 60 basis points yoy to 8.9%.
- The profit before interest and tax (PBIT) margin of the power system division declined by 50 basis points to 8.0% during the period. The high-margin businesses maintained their margins (the consumer product division's margin was up 10 basis points to 9.7% and the industrial system division's margin was up 20 basis points to 13.6%).
- Crompton Greaves provided for the full tax rate in Q2FY2007 as against the minimum alternate tax (MAT) rate in Q2FY2006.The increased tax provisioning led to a slower growth of 25.0% yoy to Rs40.7 crore in the profit after tax. But the growth was still in line with our expectations.
- Pauwels' top line grew by 86.4% yoy to Rs520.0 crore in Q2FY2007, way ahead of our estimates and the profit before tax (PBT) stood at Rs21.3 crore.
- The stand-alone order book grew by 0.6% sequentially and by 20.0% yoy to Rs1,800.0 crore in Q2FY2007. The consolidated order book stood at Rs3,739.0 crore, up 16.5% sequentially largely on account of the 36.5% jump in the order book of Pauwels.
- The Ganz acquisition, which was announced in July but is yet to be concluded will further accelerate the growth of the consolidated numbers. Though currently loss making, it is expected to contribute 70 million euros in FY2008 and turn profitable by then. We have not currently included these estimates in our numbers.
- The board has announced a bonus of two shares for every five shares held.
- Given the robust top line growth, higher raw material costs, the consequent margin contraction and higher provisioning for income tax, we are tweaking our FY2007 and FY2008 estimates. The FY2007 earnings per share (EPS) stand revised lower by 10% to Rs9.2. Although with the margins stabilising in FY2008 and the robust top line growth coupled with the strong performance of Pauwels we are revising our earnings estimates upward by 7.9%.
- At the current market price of Rs237, Crompton Greaves is trading at 25.7x its FY2008E stand-alone earnings and 17.4x its FY2008E consolidated earnings. We maintain a Buy on the stock with a revised price target of Rs258 discounting its FY2008E consolidated earnings by 19x.
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