Wednesday, October 11, 2006
Price target: Rs2,430
Current market price: Rs1,981
Far ahead of street expectations
- Infosys Technologies has reported an impressive revenue growth of 14.5% quarter on quarter (qoq) and of 50.4% year on year (yoy) to Rs3,451 crore for the second quarter ended September 2006. The sequential growth in the revenues was driven largely by an 11.2% growth in the volume in the information technology (IT) service business. The uptick in the blended billing rate (up 1.2%) and depreciation of the rupee (1.3%) also aided the sequential growth in the revenues.
- But the highlight of the performance was the smart improvement of 260 basis points in the operating profit margin (OPM) on a sequential basis. The margin improvement was possible due to the cumulative impact of a lower visa cost (1.1%), the positive impact of foreign exchange (forex) fluctuation (0.9%) and savings in the selling, general and administration (SG&A) expenses (0.6%) as a percentage of sales.
- Consequently, the earnings grew 17.1% qoq and 58.5% yoy to Rs929 crore, despite the substantial reduction in the other income to Rs66 crore (as compared with Rs128 crore in Q1). The rupee depreciation resulted in a net positive impact of Rs11 crore (reflected in the other income component) as compared with Rs52 crore in Q1.
- In addition to announcing a robust performance in Q2, the management revised upward its growth guidance once again. The consolidated revenues are now guided to grow in the range of 45.5-46% to Rs13,400-13,899 crore (up from Rs13,350-13,400 crore revised guidance given with the Q1 results). The earnings are guided to grow by 46.6% to Rs66 per share (up from Rs62.25-62.85 given with the Q1 results).
- In terms of the guidance for Q3, the revenues and earnings (in rupee terms) are guided to grow sequentially by 4.4-5% and 0.5% respectively. The management expects appreciation of the rupee and relatively lesser number of working days to not only limit the growth in the revenues but also adversely affect the margins in Q3.
- At the current market price the scrip trades at 29x FY2007 and 22x its FY2008 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs2,430 (27x FY2008E earnings).
Cluster: Ugly Duckling
Price target: Rs300
Current market price: Rs231
- BASF India (BASF) reported unexciting results for Q2FY2007, as the net profit for the quarter grew by 19.8% year on year (yoy) aided by lower depreciation, higher other income and stable tax rate.
- The net sales for the quarter under review grew by 14.2% yoy to Rs218.5 crore on the back of a strong growth (23.9%) in the sales of performance products.
- The operating profit grew by a slower 7.1% as the operating profit margin (OPM) declined by 100 basis points to 15.5%. The steep rise in the other expenses led to contraction in margins. The raw material cost remained stable during the quarter.
- The lower depreciation led to a stronger growth in the profit before interest and tax (PBIT) at 17.2% to Rs31.6 crore.
- With a flat interest outgo and a stable tax rate, the net profit grew by 19.8% to Rs20.4 crore.
- At the current market price of Rs231, the stock is quoting at 8.3x its FY2008E earnings per share (EPS) and 4.7x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We believe that the stock is trading at attractive valuations, given the bright outlook for the company's business over the next two years. We reiterate our Buy recommendation on BASF with a price target of Rs300.
Dr Reddy's Laboratories
Migraine drug adds to profitability
Dr Reddy's Laboratories has settled a patent litigation with GlaxoSmithKline (GSK) in relation to GSK's anti-migraine drug Imitrex. Under the terms of the settlement, Dr Reddy's will be permitted to launch the authorised generic version of Imitrex (in the 25mg, 50mg and 100mg strengths) in the USA in the fourth quarter of CY2008. The launch of the product will be ahead of the expiry of the paediatric exclusivity on Glaxo's patent number 5037845 for Imitrex on February 6, 2009. However, the terms of the settlement are subject to review by US federal agencies.
MUTUAL FUNDS: WHAT�S IN�WHAT�S OUT
Fund Analysis: October 2006
An analysis has been undertaken on equity and mid-cap funds� portfolios, indicating the favourite picks of fund managers for the month of September 2006. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 17 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.
- Geometric Software Solutions moved up on acquiring Modern Engineering's engineering division for $25 million.
- Shree Renuka Sugars gained on getting the SEZ status for its sugar unit in Karnataka.
- BSEL Infrastructure Realty slipped despite signing a joint venture contract with Unity Infraprojects for participating in the tenders offered by the Nagpur Municipal Corporation.
- Bank of Maharashtra tumbled in spite of reports that the bank is considering raising Rs300 crore via Tier-II bonds.
- Dr Reddy�s Laboratories inched up on reports that the company has settled its patent litigation with GlaxoSmithKline relating to sumatriptan succinate tablets.
- JBF Industries rallied sharply after the company reported that it has completed the expansion of its polyester yarn manufacturing facilities at Silvassa.
- Mohit Industries hit the upper circuit breaker of 10% on expansion plans worth Rs90 crore and receiving an order to the tune of Rs9.50 crore.
- Elecon Engineering advanced on bagging an order worth Rs36.75 crore from Madras Cement.
- Abee Info Consumables declined despite signing an agreement with HPCL to open cartridge collection and refilling centres at selected petrol pumps in Pune.
- Kewal Kiran Clothing slipped even as the company announced acquisition of land measuring 53,000 square feet and building space measuring about 40,000 square feet at Daman