Monday, June 19, 2006
Research: JM Morgan Stanley
CMP: Rs 164.25(Face Value Rs 2)
12-Month Price Target: Rs 228
JM Morgan Stanley has put a buy on Cummins India with a 12-month price target of Rs 228. Cummins posted a strong set of numbers with revenues, EBITDA and net earnings increasing by 22%, 26% and 17% respectively. Domestic business, which comprised nearly 65% of total revenues, posted yoy growth of 32% with export sales rising by 8% yoy.
Historically, this has been the strongest quarter for Cummins. CIL posted its highest-ever EBITDA margins in the past three years' last quarter, at 15.1%. This quarter, CIL managed to maintain its margins at 15%, a yoy growth of 40 bps. Margins improved due to aggressive cost reduction initiatives employed by the company, operating leverage, productivity improvement and better product mix.
This was despite CIL booking approximately Rs 9 crore as a one-time charge for a change in its pension scheme from a defined benefit plan to defined contribution plan, provident fund impact on leave encashment and excess inventory cost.
Therefore, while other expenses, as a percentage of sales, declined 90 bps yoy to 11.4%, raw materials and staff expenses increased marginally by 10 bps and 30 bps respectively. EBITDA grew 26% yoy to Rs 58.3 crore. For full-year F2006, EBITDA grew 46% yoy with margins rising by 230 bps to 14.3%.
The company hopes to sustain margins at these levels through cost-reduction initiatives that would enable the firm to offset cost volatility in commodities. At the current market price, Cummins trades at 15.7 times the estimate for F2007 EPS and 14.0 times the estimate for F2008 EPS. In terms of EV/EBIDTA, the multiples for F2007E and F2008E are 13.2 times and 11.2 times, respectively, and in terms of P/BV, the multiples are 4.1 times and 3.7 times.
Recommendation : Buy
CMP: Rs 210.35 (Face Value Rs 2)
12-Month Price Target: Rs 280
CLSA has put a 'buy' on Cipla with a target price of Rs 280. With over 300 products across 65 therapies, product registrations in over 160 countries and a renewed thrust on growing exports, Cipla as strongly positioned to rapidly expand its share in the global generics market.
Cipla's exports rose at a 29% CAGR from $338m in FY06 to $720m in FY09 as its partnership-centric model enables low-risk high growth.
CLSA upgrading earnings by 19-22% driven by strong growth in formulation exports corroborated by aggressive investments in manufacturing facilities. The generic opportunity outside of the US, Europe and Japan is expected to reach $52bn by '09 (from $34bn in '04).
The opportunity is huge in 160-odd countries and growing. Cipla is one of the best proxies to the growth of generics in these countries. Cipla's model of developing partnerships with local companies enables it to leverage local market knowledge from its partners; and its own R&D, product development and manufacturing skills.
It's a win-win situation for both, and in particular, enables Cipla to grow its export markets with little investment in the front end, which substantially mitigates risk.
Having built relationships with more than 200 partners in 160 countries, Cipla now has 4,000 product registrations and 7,000 pending approval. These include tablets and capsules, respiratory products, oncology products and hormones. These products come from 31 manufacturing plants across six Indian locations.
This manufacturing strength, a rich product basket and partnerships have driven a 58% CAGR on formulation exports in the past three years. More importantly, US generics, which is the growth driver for most peer companies, contributes less than 6% of top line, making Cipla far less vulnerable to a pricing decline in that market.
With earnings set to double over FY06-09 (27% CAGR), valuations at 17.5 times FY08CL are reasonable. The target price of Rs 280 (22x FY08CL) implies a 26% upside.
Research: Enam Securities
CMP: Rs 528.30 (Face Value Rs 10)
12-Month Price Target: Rs 700
Enam has rated AIA Engineering's as an outperformer as its FY06 results are stronger-than-expectations. On a consolidated basis, AIAE reported revenues of Rs 400 crore (38%) and net profit of Rs 52.3 crore (up 91%). EBIDTA margin jumped 570 bps to 21.8% due to a 20% increase in realisation and favourable product mix.
AIAE's order backlog, at the end of FY06, stands at a healthy Rs 295 crore, and has grown by 84% from the level of Rs 160 crore at the end of H1FY06. Over 30% of the company's order backlog comprises project business where margins are higher. On a like-to-like basis, consolidated production volumes were up at 59,329MT in FY06. Of this, about 28,000MT were exported, while the balance was domestic sales.
AIAE's year-end capacity stood at 65,000MT. AIAE is augmenting its capacity from 65,000MT to 1,69,000MT by setting up a 100% export oriented unit (EOU) at Changodar. The capacity expansion would be in phases with the first phase of 52,000MT commencing production in December '06 and second phase of 52,000MT coming into production by December '07.
AIAE has an estimated 20% share in cement grinding market and seeks to increase its share to 35% once the new capacity is on stream. In addition to this, the company expects to enter the mining segment where the market potential is 10x larger than cement.
During FY06, AIAE has also made inroads into China — the largest market for grinding media in the world. Enam is raising the estimates for FY08 to factor in the increased capacity addition, and likely improvement in margins due to economies of scale and tax savings, once the EOU at Changodar becomes operational.
At the current market price, the stock trades at 12 times FY07E EPS of Rs 40.3 and seven times FY08E EPS of Rs 69.2
Tata Teleservices (M)
Research: IL&FS Investsmart
CMP: Rs 18.00 (Face Value Rs 10)
12-Month Price Target: Rs 55
IL&FS Investsmart has put a 'buy' on Tata Teleservices (M) with a price target of Rs 55. In past two months Tata Tele released its excellent Q4FY06 results when it turned cash positive and a lower stock price brought about by the recent fall in the stock market.
This anomaly gives investors an opportunity to buy into a turnaround story at prices driven down purely by extraneous events. In this report IL&FS has reiterated its arguments with renewed confidence, with additional focus on the above recent events, even though net profits may be over a year away and a currently negative net worth.
TTML turned cash positive as expected by us. At 64.8% qoq, EBITDA growth was stronger-than-expectations of 40%, driven by revenue growth and strict cost controls.
EBITDA margins expanded to 17.7% from 11.4% in Q3FY06, higher than the expectation of 14.4%. The net loss was lower at Rs 104.5 crore compared to Rs 129.8 crore in Q3FY06. IL&FS Investsmart expects this to continue.
Based on DCF analysis with projections until FY22, TTML is currently worth Rs 55 per share – even after assuming an expanded equity base of 2,279m shares after about Rs 1,100 crore of fresh capital infusion that they have assumed during FY07.
The merger of TTML with Tata Teleservices (TTSL) is inevitable as both work closely on the operational front and TTSL owns 47% of TTML. This will create a much larger all-India entity with huge economies of scale. TTML could be an entry to TTSL much as MTNL is touted for BSNL.