Wednesday, May 03, 2006
May 8 – that's when the fuel price bomb starts ticking and, say experts, is expected to explode not very much later than that. For, May 8 is when the state polls get over, giving the Centre political space to raise fuel prices.
A dark hint was dropped on Tuesday by finance minister P Chidamabaram in Coimbatore when he said the decision to increase petrol and diesel prices can't be put off for ''very long as global crude oil prices have crossed $70 a barrel.'' Actually, on Tuesday crude touched $74 a barrel. What's more, the Iranians are saying that the price could cross $100 this winter.
Said a seemingly helpless Chidambaram: ''The finance minister or petroleum minister cannot find a solution in this regard. It has to be decided through consensus, for which all political parties have to meet,'' Chidambaram said. ''When the price of a barrel reached $25 it was an economic issue but when it crossed $65 to $70 it becomes a complex political issue.''
The Iranian whammy came from its deputy oil minister Hadi-Mohammad Nejad-Hosseinian, who said in New Delhi that he would not be surprised if crude touched $100 a barrel this winter.
For India, the reality lies somewhere between these two statements. It is expected that the US, where high oil prices are already pinching the motoring season, will intervene in the market and use its influence with Opec if crude shows no sign of calming. But even at $70-levels, India's state-owned companies can't maintain their profitability if prices are not raised.
Clearly, Chidambaram is drawing the line on how much hand-holding his ministry can do for state-owned oil companies. The firms ran up a loss of Rs 39,595 crore in 2005-06 because the government did not allow them to raise prices in line with international crude.
They lost Rs 14,384 crore on kerosene, Rs 10,245.47 crore on cooking gas, Rs 13,284 crore on diesel and Rs 2,680 crore on petrol. This loss was in spite of the Rs 14,000 crore pooled in by oil and gas producers such as ONGC and Rs 750 crore discounts from suppliers like Reliance Industries.
Cluster: Emerging Star
Price target: Rs850
Current market price: Rs750
Another solid performance
- The net sales of Cadila Healthcare for Q4FY2006 increased by 46.5% to Rs336.4 crore year on year (yoy) due to good growth in the domestic formulations, the French business and the US business.
- The operating profit increased by 250% yoy as the operating margin jumped by 950 basis points to 16.6%.
- The decrease in the other income resulted in the pulling down of the earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs64.7 crore, which showed a growth of 100% yoy.
- The profit after tax (PAT) stood at Rs35.8 crore as against Rs7.5 crore in Q4FY2005, a growth of 377% (partially caused by the low base).
- The board has recommended a 1:1 issue of bonus shares. At the current market price of Rs750, the stock is trading at 16x its FY2008 earnings estimate. We maintain our Buy recommendation on Cadila with a price target of Rs850.
Cluster: Ugly Duckling
Price target: Rs205
Current market price: Rs150
In line with expectations
- Surya Pharma's net sales for Q4FY2006 grew by 7.7% year on year (yoy) to Rs58.4 crore due to the stable income from the contract manufacturing business.
- The operating margins were maintained at 19.4% as the operating profit increased by 7.8% yoy.
- The net profit margin improved due to the lower tax rate, as a result of the commissioning of the plant in a tax free area. The profit after tax (PAT) increased by 28% yoy to Rs6.07 crore. We expected a PAT of Rs5.7 crore; hence the result has been as per expectations.
- We expect the next quarter to bring robust growth as the revenues from the DSM deal starts coming in.
- At the current market price of Rs150, the stock is trading at 5.9x its FY2007 earnings. We maintain our Buy recommendation on Surya Pharma with a price target of Rs205.
Cluster: Apple Green
Price target: Rs406
Current market price: Rs349
Bang on target
- SKF India's Q1CY2006 net profit at Rs22.5 crore is in line with our estimates. The net revenues for Q1CY2006 grew by 74.18% year on year (yoy) to Rs296 crore.
- The revenues are not strictly comparable as the Q1CY2006 revenues include the revenues from the indenting business, which hitherto was conducted on a commission basis and was included in the other income. On a like-to-like basis the revenue growth is close to 22%.
- The operating profit margins (OPMs) for the quarter improved by 30 basis points, which is a positive surprise, as the indenting business, which has a lower margin of close to 5%, was likely to bring down the overall OPMs.
- On a like-to-like basis, the OPMs for the manufacturing business improved by an impressive 350 basis points to 15.5%. Consequently the operating profit for the quarter improved by 80% to Rs36.5 crore.
- With stable depreciation and the net interest income of Rs1.2 crore, the net profit for the quarter grew by 61% yoy to Rs22.5 crore as against the pre-exceptional net profit of Rs14 crore during Q1CY2005. The reported net profit registered a growth of 78%.
Cluster: Apple Green
Price target: Rs300
Current market price: Rs292
Strong domestic FMCG growth
- The net sales of Hindustan Lever (HLL) for the quarter rose by 11.6% to Rs2,798.1 crore on the back of a strong 18.3% rise in the domestic fast moving consumer goods (FMCG) sales to Rs2,500 crore, while the exports declined by 19.5% year on year (yoy).
- The operating profits for the quarter rose by 35.8% to Rs330.6 crore. The selective price increases, improved sales mix and cost savings led the margins to expand by about 210 basis points to 11.8% in Q1CY2006. However, these gains were somewhat offset by the increase in the advertising and promotion expenditure during the quarter.
- The net profits (before exceptional items) for the quarter grew by 13.6% to Rs294 crore. HLL had Rs149 crore of exceptional income, primarily due to the sale of its brand Nihar to Marico. Hence, the profits after the exceptional items recorded a growth of 77% yoy.
- At the current market price of Rs292, the stock is quoting at 31.5x its CY2007E EPS and 27.9x CY2007E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs300.
Cluster: Vulture�s Pick
Price target: Rs575
Current market price: Rs460
Results in line with expectation
- ESAB India's (ESAB) Q1CY2006 net profit of Rs8.9 crore is in line with our expectations. The net sales for the quarter stood at Rs62.9 crore registering a growth of 16.3% driven by a 54% growth in the revenues of the equipment division.
- However the operating profit margins (OPMs) for the quarter have declined by a marginal 40 basis points on account of a steep increase in the purchase of finished goods (FG), which are basically trading products for the equipment division. Consequently the operating profit for the quarter was slightly lower than the top line growth and grew by 14.1%.
- As mentioned earlier there was a steep increase in the purchase price of FG for the equipment division and consequently the earnings before interest and tax (EBIT) margins of the equipment division declined by 580 basis points.
- With a 6% decline in the depreciation and a lower tax rate, the net profit for the quarter was up 18.6% and stood at Rs8.9 crore.
International Combustion (India)
Price target: Rs519
Current market price: Rs418
Price target revised to Rs519
- The revenues of International Combustion India Ltd (ICIL) grew by a robust 50.0% year on year (yoy) to Rs20.9 crore in Q4FY2006 on the back of the strong performance of both its divisions.
- The revenues of the heavy engineering division (HED) grew by 53.3% yoy to Rs14.8 crore and the revenues of the gearbox & geared motor drive system division (GMGBD) grew by 42.3% to Rs6.1 crore, driven by the strong order bookings and a substantial backlog.
- The operating profit margin (OPM) of the company improved by 560 basis points yoy to 16.6% in Q4FY2006. The margin expansion was largely driven by the leverage in the business.
- The strong order booking coupled with a 560-basis-point margin expansion due to the leverage effect resulted in a 122.6% year-on-year (y-o-y) rise in the profit after tax (PAT) to Rs1.9 crore. The earnings for the quarter stood at Rs8.7 per share.
- The outstanding order book stands at Rs57.0 crore as against Rs50.0 crore in Q3FY2006, a growth of 14.0% quarter on quarter (qoq). The current order backlog stands at 0.8x its FY2006 revenues, imparting a strong visibility to the earnings.
- We have introduced the FY2008E earnings estimates with earnings of Rs47.2. ICIL is currently trading at a PER of 8.9x its FY2008E earnings and 5.1x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a BUY recommendation on the stock with a revised price target of Rs519.
Motorcycles continue to grow strongly
We have been mentioning about the rising interest rates acting as a dampener for the passenger vehicle sales thereby negating the impact of the lower prices post the excise duty cut in the budget. The same fact has been acknowledged by many industry leaders post their FY2006 results. The strategy being adopted by industry players is to offer various schemes and exchange offers to push up their sales. We have reduced our sales volume growth in the segment to lower double-digit rates against the anticipated higher double-digit growth rate earlier.
Copper division bounces back
- The net sales of Hindalco Industries for Q4FY2006 increased by 45% to Rs3,657.4 crore as against Rs2,515.6 crore in the same quarter last year. The net profit in the quarter increased by 40% to Rs626.3 crore as against Rs448.5 crore in the comparable three months last fiscal.
- Looking at the segmental numbers, the aluminium revenues rose by 18.5% to Rs1,726.3 crore while the copper revenues grew by 82.4% to Rs1,931.7 crore. The profit before interest and tax (PBIT) for the aluminium division rose by 61% to Rs713.1 crore and the copper division bounced back with a PBIT growth of 85.9%.
- The full year's net sales were also up 20% to Rs11,396.5 crore as against Rs9,523.1 crore during the previous fiscal. The company posted a net profit of Rs1,655.5 crore for FY2006, up 25% as against Rs1,329.4 crore posted during the previous year, riding a boom in the prices of metals.
- At the current market price of Rs235, the stock is quoting at 14x its FY2006 earnings.