Monday, April 24, 2006
Newsletter Dated 23/04/2006 (MidCaps.In)
S.No. Scrips BSE Code Rate Target
1. Jagsonpal Pharma. (FV Rs.5) 507789 30.20 38.00
2. Kanishk Steel 513456 32.00 40.00
3. Carol Info Services 500446 42.35 53.00
4. Bal Pharma 524824 49.80 63.00
5. Gei Hamon Industries 530743 59.90 75.00
Newsletter dated 23/04/2006 (10Paisa.com )
S.No. Scrips BSE Code Rate Target
1. Central India Poly. 500099 10.88 14.00
2. Vikash Metal 532677 12.10 16.00
3. Tamil Nadu Petro 500777 21.15 27.00
4. Natural Capsules 524654 29.40 37.00
5. Abhishek Industries 521064 29.55 37.00
Hero Honda Motors
Research: UBS Investment
CMP: Rs 853 (Face Value Rs 2)
12-Month Price Target: Rs 1,010
Over the past two months, the Hero Honda stock has declined 11%, against 10% rise in the sensex. While part of the underperformance may be a result of concerns on demand slowdown due to rise in interest rates and margin compression due to hike in raw material prices, a major part of the underperformance is due to the recent strike at Hero Honda's Gurgaon plant.
UBS Investment has upgrading the rating from Neutral to Buy. The strike by contract labourers at the Gurgaon plant was resolved in six days. The strike is unlikely to have any negative impact on the company's sales volumes in April and in FY07 as it has adequate pipeline inventory and has increased production at its other (Dharuhera) plant to compensate for production loss at Gurgaon.
UBS maintains the sales volume and earnings estimates for Hero Honda. UBS estimates already take into account the other risks faced by Hero Honda, i.e. entry of HMSI into executive segment and success of Bajaj's products.
UBS has factored in 1.5-2% market share loss for the company in FY07. However, the current valuations are over-discounting the negatives. UBS price target is based on DCF with WACC of 12%, medium-term growth rate of 12% and terminal growth of 5%.
Dr Reddy's Laboratories
CMP: Rs 1,481 (Face Value Rs 5)
12-Month Price Target: Rs 1,650
Dr Reddy's has received USFDA approval for generic Allegra and has launched the product as the third generic after Teva and Prasco. CLSA expects Sandoz to be the next generic in the market on or after June 9, '06.
This will give Dr Reddy's 2-3 months in a three-player generics market. For a $1.4-bn blockbuster, this should be a substantial opportunity (potential of 30-40% pricing and 15-25% marketshare). Dr Reddy's could generate Rs 7-14 of EPS from the opportunity in FY07.
CLSA expects Dr Reddy's to launch the authorised generic of Merck's Proscar in June '06. Cipla/Ivax are the 'real' generics which will get 180-day exclusivity on the product. Since Dr Reddy's authorised generic is contingent on other generics getting 180-day exclusivity, CLSA does not expect Dr Reddy's to get an upside from Zocor's authorised generic.
Zofran ($900m) is another wild card, for which Dr Reddy's could get potential 180-day exclusivity. It could also settle out of court with GSK and launch the product with 180-day exclusivity in December '06 (potential authorised generic).
CLSA continues to be ahead of consensus on the estimates and expects the stock to perform with consensus upgrades. With several near-term triggers like Allegra generics, Proscar authorised generics, as well potential upsides like Zofran's 180-day exclusivity, CLSA expects current valuations to sustain and raise their target to Rs 1,650 (23x Mar08EPS).
Andhra Pradesh Paper Mills
CMP: Rs 142 (Face Value Rs 10)
12-Month Price Target: Rs 224
APPM is part of the fast-growing paper sector that is expected to grow higher than 6% annually. Industry has already achieved a growth rate of 6% in FY05 and is ready to reap the benefit of strong GDP growth of ~8% and improving economic fundamentals of the country.
Low per capita consumption of paper at 5.5 kg in the country vis-à-vis average global consumption of 53 kg and 11 kg in the south Asian market indicates the scope for future demand growth of paper in the domestic market.
Further, upcoming elections in five states during the year will trigger growth for low-end paper. APPM's net sales are expected to grow with a CAGR (FY05/08E) of 15.2% to Rs 680 crore and PAT at 38% to Rs 66.7 crore. Sharp improvement in EBIDTA margins from 13.5% in FY05 to 26.2% in FY08E will gear up the EBIDTA by 196% to Rs 180 crore (Rs 60 crore in FY05).
EBIDTA margins expansion will lead to improved return ratios. Emkay expects RoCE to improve 13.7% (12.8%) and RoE to 15.1% (11.8%) by FY08E. APPM at current price is trading at 5.8 times EPS Rs 21.5 in FY07E and 4.4 times EPS Rs 28 of FY08E.
EV/EBIDTA of 6.2 times and 4.0 times of FY07E and FY08E, respectively, and P/BV of 0.7 times and 0.6 times respectively are very much favourable and indicates the potential upside for the stock.
In light of the quantum jump in EBIDTA margins and strong return ratios, Emkay values the stock at Rs 224 based on 8 times of FY08E earnings in 12-18-months period, i.e. 81% upside from current levels.
Historically, the stock has been traded at these levels. At Emkay's target price, the stock quotes at P/BV of 1.13 times of FY08E and EV/EBIDTA of 5.3 times of FY08E estimated earnings.
Research: Angel Broking
CMP: Rs 344 (Face Value Rs 10)
12-Month Price Target: Rs 410
UTI Bank reported an overall strong performance for the quarter ended March '06. The bank registered a y-o-y net profit growth of 30.2% to Rs 152 crore in the quarter under review, beating expectation of Rs 129 crore.
UTI Bank's balance sheet continued to grow at a rapid pace, led by the strong growth in business volumes. The bank's balance sheet grew by around 32% to Rs 49,700 crore in FY06. Its net advances surged by around 43% to Rs 22,300 crore, led by strong growth in both corporate and retail advances.
Corporate advances were up 38.6% to Rs 15,800 crore, while retail advances witnessed a rapid growth of 55.1% to Rs 64,900 crore. Combined, they constituted around 29.1% of the bank's total advances. In retail advances, housing loans constituted around 41%, while auto loans made up around 39%.
The bank's strategy of Retail Asset Centres (RACs) has led the way for strong growth in its retail portfolio. It has retail distribution centres across 43 towns and cities and plans to extend the centres to additional 30 towns and cities.
UTI Bank's investment portfolio also registered a strong growth of 43% to Rs 21,500 crore. (Rs 15,000 crore). UTI Bank has leveraged on its widespread network and RACs to expand its low-cost deposits, retail portfolio and improve margins.
The bank has also maintained the robust growth in core business and balance sheet. At the current market price, the stock is trading at 16.1 times FY07E EPS of Rs 21.5, 2.4 times FY07E book value of Rs 143.1 and 2.5 times FY07E adjusted book value of Rs 136.8.
Foreign institutional investors have committed $25 billion for the initialpublic offering of Reliance Petroleum Ltd (RPL), which closed on Thursday.
Investment banking sources said 20 FIIs put in applications worth $ 620million each. Some other big institutions which put in bids lower than thisamount include London-based Pictet ($ 500 million) and Merrill LynchOffshore Fund. Prudential Portfolio and Japan's Nomura committed $300million each while the Royal family of Kuwait applied for shares worth $600 million.
The institutions had paid margin money of 10 per cent of their investment.But they will not be able to garner shares equivalent to their applicationsdue to massive oversubscription. It is also learnt that hedge funds appliedfor $10 billion for this issue through participatory notes. The last timefunds applied through the PN route was at the time of the ONGC issue in2004.
The QIB( qualified institutional bidder) portion was subscribed 68.2 times.High net worth individuals (HNI) applied for shares worth Rs 16,700 croreand they paid the full amount, as per Sebi rules.
RPL's issue, which is meant for part financing a refinery at the specialeconomic zone at Jamnagar in Gujarat, attracted the highest retailapplications. As many as 2.13 million lakh applications were submitted byretail investors. The top two issues in terms of retail applications so farwere NTPC (1.422 million) and TCS (1.187 million) .
Merchant banking sources said the average application size by retailinvestors was Rs 59,500, more than double the previous record. Retailinvestors were permitted to apply for shares worth Rs 1 lakh, against theearlier practice of permitting them to apply for Rs 50,000. The merchantbankers were forced to open the collection centres till 9 pm on thepenultimate day of the issue due to the huge retail response.
Cluster: Emerging Star
Price target: Rs650
Current market price: Rs525
Back on track
- At Rs13.1 crore KSB Pumps' Q1CY2006 net profit is in line with our expectations. The quarter marked the recovery of growth in the company's top line, which in turn brought operating leverage into play and boosted its operating profit by 53%.
- The net sales for the quarter registered a growth of 10.3% to Rs96.6 crore driven by the execution of some high-value orders. In the previous quarters the company's top line was affected by a delay in the execution of these high-value orders.
- During the quarter the company's operating profit margin (OPM) improved sharply by 610 basis points on the back of a reduction in the raw material cost. The raw material cost as a percentage of the company's sales dropped from 46% earlier to 39% in Q1CY2006.
- Margins in both the businesses, ie of pumps and valves, improved remarkably. The earnings before interest and tax (EBIT) margin in the pump business grew by 560 basis points whereas that in the valve business expanded by 650 basis points.
- With a stable depreciation cost and a reduction in the tax rate, the net profit for the quarter jumped by 68% to Rs13.1 crore.
- KSB Pumps' Q1CY2006 results are in line with our expectations. In the absence of any top line growth, the stock has largely underperformed the broader market for the last six to nine months (it gave a negative return of 11.4% relative to the Sensex over this period). However given the recovery of growth in its top line in Q1CY2006 and the resulting momentum in its profitability, we believe the stock is all set for action and we expect it to outperform the broader market going forward.
With huge investments lined up in the user industries like power and in fluid handling industries like petrochemical and sugar, the outlook for KSB Pumps remains positive. We are introducing our CY2007 earnings estimate for KSB Pumps: Rs40 per share. At the current market price of Rs525, the stock is discounting its CY2007E earnings by 13x and CY2007E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 7.2x. We believe the stock's valuation is attractive as compared with that of its peers. We maintain our Buy recommendation on the stock with a price target of Rs650. At our price target the stock will be discounting its CY2007E earnings by 16x and EBIDTA by 9x.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Price target: Rs520
Current market price: Rs386
Price target revised to Rs520
Ratnamani Metals and Tubes Ltd (RMTL), we believe, will be one of the key beneficiaries of the massive investments being made in the power, refinery, petrochemical and oil & gas sectors currently. The company is witnessing strong order flows from these sectors. Its current order book position stands at Rs350 crore as compared with Rs200 crore in Q3FY2006. RMTL recently bagged a Rs90-crore order from Reliance Petroleum for the supply of SS pipes/CS pipes.
We expect RMTL to report revenue of Rs442.5 crore in FY2007 and of Rs525.7 crore in FY2008. That amounts to a compounded annual growth of 33.8% over FY2006-08. We expect the company to report a net profit of Rs37.5 crore in FY2007 and of Rs46.7 crore in FY2008. At the current market price of Rs386, the stock trades at 7.5x its FY2008E earnings and 5.0x its FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We are raising our price target for RMTL to Rs520, at which level the stock shall trade at 10x its FY2008E earnings and 6.3x its FY2008 EV/EBIDTA.
Satyam Computer Services
Cluster: Apple Green
Price target: Rs900
Current market price: Rs808
Margin pressure ahead
- Satyam's consolidated revenues for Q4FY2006 grew by 3.8% quarter on quarter (qoq) and by 35.2% year on year (yoy) to Rs1,313.6 crore. The lower-than-expected revenue growth was largely due to the impact of the rupee appreciation. The consolidated volume growth of 6.8% was as per expectations and the revenues in the dollar terms grew by 5.4% on a stand-alone basis.
- The operating profit margin (OPM) improved by 60 basis points qoq to 25.5%—one of the highest in the past eight quarters. The overall improvement in the profitability was driven by the cumulative impact of the marginal improvement in the billing rates, the higher contribution from the offshore business and the improved performance of its loss making subsidiaries. The company's largest subsidiary Nipuna achieved cash break even during the fourth quarter.
- The consolidated earnings grew by 5.5% qoq and by 38.2% yoy to Rs284.6 crore, which were below the market expectations.
- On the full year basis, the consolidated revenues and earnings (excluding extraordinary items) grew by 36.1% (Rs4,793 crore) and by 38% (Rs982 crore) respectively. The OPM declined by 40 basis points to 24.3% over the year (lower than the guidance of a 50-basis-point decline given at the beginning of the year).
- The concerning factor was the muted growth guidance for the first quarter of FY2007 as well as for the full year FY2007. The management has given a growth guidance of 25.2-27.3% (Rs6,000-6,100 crore) in the revenues and the earnings guidance in the range of 21.4-23.4% (Rs37.1-37.4 per share) for FY2007. In the first quarter, the company expects a tepid sequential growth of 3.5-4% in the revenues and a decline of 1.5-1.9% in its earnings.
- The company has declared a bonus issue of 1:1 and a final dividend of 250% (or Rs5 per share).
- At the current price the scrip trades at 16.4x its FY2008 earnings. We maintain our Buy call on the stock with the target price of Rs900