Sharekhan Investor's Eye - Nov 15 2006

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Thermax Cluster: Emerging Star Recommendation: Buy Price target: Rs340 Current market price: Rs335 Mind-blowing results Result highlights The consolidated revenues of Thermax grew by 23.0% year on year (yoy) to Rs520.2 crore in Q2FY2007, in line with our expectation. The energy segment grew by a robust 20.9% yoy to Rs433.4 crore whereas the environment segment grew by 17.8% yoy to Rs118.7 crore. The company’s operating profit margin grew by 240 basis points yoy and 350 basis points sequentially to 13.9% in the quarter, way above our expectation. The margin growth was attributed to the strong order booking, lower material cost and a shift in the product mix towards the high-margin energy segment. Consequently, the operating profit grew by 48.5% yoy to Rs72.1 crore, again ahead of our expectation. The energy segment continued its robust performance with a revenue growth of 20.9% yoy to Rs433.4 crore and a 430-basis-point expansion in the profit before interest and tax (PBIT) margin to 15.0%. The environment segment too bounced back with a 17.8% year-on-year growth in the revenues to Rs118.7 crore. The margins bounced back in this quarter after remaining subdued in Q1FY2007. The PBIT margin improved by 330 basis points sequentially. The net profit grew by 76.4% yoy to Rs53.7 crore in Q2FY2007, ahead of our expectation. The robust margin expansion, higher other income and lower effective tax rate are attributable to the jump in the net profit. The order backlog maintained its growth momentum during the quarter, recording a strong growth of 11.5% sequentially and of 142% yoy to Rs2,973 crore. The order backlog is equivalent to 1.8x FY2006 consolidated revenues, imparting a very strong visibility to the revenues. Another development during the quarter was that ME Engineering, UK, its loss making wholly-owned subsidiary was referred to the administrator in the UK as its performance was mediocre and it continued to make losses. Due to this event Thermax has provided for Rs23.1 crore as extraordinary expenses in the stand-alone financials. However, the net impact of the above provisions in the consolidated accounts was Rs2.0 crore only. The positive of this event is that in H2FY2007 the performance of ME Engineering won’t be a drag on the company’s results. The stock is trading at a price/earnings ratio of 17.5x FY2008E consolidated earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 10.1x FY2008E. We continue to remain bullish on the company. In light of the continued growth traction over the last few quarters and the blow-out H1FY2007 performance, we are looking to upgrade our estimates and price target for the company after attending its conference call. Watch this space. ICICI Bank Cluster: Apple Green Recommendation: Buy Price target: Under Review Current market price: Rs881

Leading private banks can breathe easy
The RBI has started granting branch licenses to banks caught in the IPO scam. ICICI Bank has received permission for 100 new branches and 500 ATMs to add to its current network of 625 odd branches and 2,325 ATMs across the country.

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SECTOR UPDATE

Pharmaceuticals

US court rules in Ranbaxy’s favour
A US appeals court has upheld a district court ruling that gave Israel's Teva Pharmaceutical Industries and India's Ranbaxy Laboratories exclusive rights to sell generic forms of Merck & Co. Inc.'s blockbuster anti-cholesterol drug simvastatin (brand name: Zocor).

Banking

Improved performance across bank groups

Key points

• The impressive financial performance is likely to sustain as the banking sector is all poised for improved financial performance in FY2007 on the back of the robust credit demand, improving asset quality and stable costs.
• There has been a significant improvement in the asset quality across all bank groups as the NPAs at the gross and net levels showed a significant improvement due to lower incremental NPAs and historical write offs and provisioning.
• The sensitive sectors are under the scanner and the RBI has been repeatedly coming out with cautionary statements regarding the banks’ exposure to the sensitive sectors, especially real estate. The PSBs have more than doubled their exposure to real estate. However, the exposure still remains lower than the other bank groups at 14.2%.
• The credit growth for the last couple of years has been in excess of 30%. The flow of credit to the different sectors has remained unchanged except for the bank credit to the industrial sector (small, medium and large), which decreased by 200 basis points to 40% in March 2006 compared to 42% in March 2005.
• The new priority sector lending guidelines are negative for foreign banks. The off-balance sheet exposure of the foreign banks on an aggregate is significantly offline than the entire banking sector data mainly due to their presence in the derivatives market. The RBI wants to realign the operations of foreign banks and make direct lending a larger part of their total assets.

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VIEWPOINT

United Phosphorus

United Phosphorus to buy Cerexagri
United Phosphorus Ltd (UPL) is to buy Cerexagri, the France-based crop science business unit with an annual revenue of 250 million euros. Cerexagri specialises in plant protection products, mainly fungicides. The deal size is estimated at around 111 million euros (Rs640.47 crore). Cerexagri has a strong distribution network in the USA and Europe, which accounts for 70% of the company’s revenues. This would be UPL’s fifth acquisition in the calendar year, making it the third largest generic agrochemical company in the world.

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