Thursday, April 20, 2006
Cluster: Ugly Duckling
Price target: Rs550
Current market price: Rs452
Price target revised to Rs550
KEI Industries Ltd (KIL) has firmed up plans to take on further capital expenditure (capex) to ride the spending in the power sector. On August 30, 2005 we had mentioned in our report titled "A live wire" that KIL was planning a capex of Rs106 crore to increase its capacity for low-tension (LT) cable and set up a new capacity for high-tension (HT) cable. The company has plans to make incremental capex of Rs100 crore to expand its LT cable capacity by March 2007. The additional capacity shall start contributing to the company's revenue from FY2008.
At the current market price of Rs452, the stock is trading at 10.7x its FY2008E diluted earnings per share (DEPS) and at 4.0x its FY2008E EV/EBIDTA. We have revised our price target for the stock to Rs550, at which level it shall discount its FY2008E DEPS of Rs45 by 12.2x. At Rs550, the stock will also trade at 4.7x its EV/EBIDTA.
Robust Q4 but relatively weaker Q1 guidance
- Wipro's consolidated revenues have grown by 13.5% quarter on quarter (qoq) and by 34.6% year on year (yoy) to Rs3,113 crore.
- The global information technology (IT) service revenues grew by 9.2% qoq to Rs2,317 crore, which is higher than the company's guidance but lower than the market's expectations.
- However, the company has surprised positively on the margin front, with an improvement in the profit before interest and tax (PBIT) margin of its global IT service business by 30 basis points to 25.1%.
- The margins improved as a result of an improvement in the realisation (the onsite billing rate per employee improved due to a higher number of working days in Q4 as compared with Q3) and the employee utilisation rate (up by 200 basis points qoq). The margins in the Indian IT service business also improved by 50 basis points to 9.9%. (These two businesses together contribute 93% of the company's consolidated revenues).
- Consequently, the consolidated earnings of the company were higher than expectations at Rs618 crore (amounting to a sequential growth of 13.7%).
- On the full year basis, the consolidated revenues have grown by 29.9% to Rs10,603 crore whereas the earnings have grown at 26.7% to Rs2,067.3 crore. The overall operating profit margin (OPM) slipped by 110 basis points to 21% in FY2006, largely owing to the 180-basis-point drop in the PBIT margin of the global IT service business.
- The revenue guidance of $533 million (a 3.5% growth qoq—marginally higher than the $515 million reported for Q4) for the global IT service business in Q1FY2007 is relatively lower than that of its other front-line peers.