Wednesday, November 08, 2006
Price target: Rs2,430
Current market price: Rs2,126
Infosys plans third ADS issue
Infosys Technologies' third sponsored American depository share (ADS) issue of up to three crore equity shares would open on November 9 and close on November 17, 2006. As part of the offering, the ADSs would be placed with Japanese investors through a public offer without listing. At the prevailing price in the overseas markets, the total size of the issue works out to $1.55 billion.
TVS Motor Company
Cluster: Emerging Star
Price target: Rs135
Current market price: Rs102
Expansion benefits yet to accrue
- TVS Motors' Q2FY2007 results are below our expectations mainly due to lower other income, higher interest costs and lower profit margins.
- The company has recorded a 36.6% growth in its net sales for the quarter, which stood at Rs1,077.9 crore mainly led by a volume growth of 28.8%. The realisation per vehicle grew by 6.1% year on year (yoy) due to higher contribution of high-end vehicles and a price hike affected in mid-September.
- The operating profits grew by 21.9% to Rs56 crore as the operating margins declined by 60 basis points to 5.2% but improved by 70 basis points on a sequential basis. The increased cost of raw materials like steel, aluminium, rubber etc continued to impact the margins of the company as the raw materials cost as a percentage of sales rose to 74.1% as compared to 71.9% in the corresponding period last year.
- The profit before tax (PBT) during the quarter was at Rs36.25 crore compared to Rs46.3 crore last year. However, the last year's PBT included a one-off Duty Export Promotion Benefit (DEPB) target plus an incentive of Rs9.7 crore. Adjusting for the same, the PBT has remained almost flat on a year-on-year (y-o-y) comparison while the profit after tax (PAT) has grown by 11.6% to Rs24.8 crore. The PAT after the one-off items declined by 22.3% to Rs24.8 crore for the quarter.
- The company's foray into the three-wheeler segment, the Himachal Pradesh plant and the Indonesian venture have been delayed and are expected to commence operations by Q1FY2008.
- We are positive on the volume growth sustaining and we expect the operating profit margin (OPM) to improve on a quarter-on-quarter (q-o-q) basis with higher volumes. However, considering the lower margins in H1FY2007, lower other income and higher interest cost we are downgrading our earnings for FY2007 by 40% to Rs4.8 and for FY2008 by 40% to Rs8.2.
- The company has strong brands across segments, is improving its product mix towards high-end bikes, is foraying into the three-wheeler space and setting up a plant in Himachal Pradesh where it will get excise and tax benefits. As a result we maintain our positive outlook for the stock. At the current market price of Rs100, the stock discounts its FY2008E earnings by 12.1x and FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 6.7x. We maintain a BUY recommendation on the stock with a revised price target of Rs135.
New Delhi Television
Cluster: Emerging Star
Price target: Rs260
Current market price: Rs233
Price target lowered to Rs260
- New Delhi Television (NDTV) reported an operating loss of Rs3.7 crore and a loss of Rs7.8 crore before interest and tax for the second quarter of FY2007. The results were below expectations.
- Driven by a slow revenue growth of 28.4% year on year (yoy) to Rs54.2 crore, and a 106% year-on-year (y-o-y) and 3.5% quarter-on-quarter (q-o-q) increase in the expenditure, NDTV reported an operating loss of Rs3.7 crore for Q2FY2007 compared with an operating profit of Rs3.0 crore in Q2FY2006.
- Adjusted for the one-time expenses of an employee stock option plan, the company reported a profit of Rs3.6 crore, but only with the help of a write-back of the deferred tax credit.
- NDTV has formed a new 100% subsidiary, NDTV Ventures, for its entry into the entertainment and lifestyle television segment. NDTV's general entertainment channel (GEC) will be launched under this company.
- We had mentioned earlier that the increased competition in the news channel sector has been inflating NDTV's marketing and distribution (M&D) cost. However, despite the increasing M&D cost the company has not been able to ramp up its ad revenue growth.
- That coupled with the expenditure to be incurred on the new entertainment and other channels is likely to bleed the consolidated financials of the company for at least the next 12-18 months.
- We have lowered our earnings estimates for the stock for FY2007 and FY2008 by 19% and 27% respectively on account of the above-mentioned reasons.
- At the current market price of Rs233, the stock is quoting at 29.2x its FY2008E earnings per share (EPS) and 17.8x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a lower price target of Rs260, based on sum-of-parts valuations.
Cluster: Apple Green
rice target: Rs3,300
Current market price: Rs2,631
Price hike to ease margin pressure
- Bajaj Auto has hiked the prices of all its three-wheeler models and two of its two-wheeler models (ie Pulsar twins and Platina). With the high input prices, the price hikes affected should help to ease the pressure on its margins.
- The price of the upgraded Pulsar twins has been raised by Rs2,000-2,200 per vehicle, while the price of Platina has been raised by Rs500 per vehicle. The three-wheeler prices have been raised by Rs1,000 per unit.
- Bajaj Auto is looking to exit the 100cc segment in the next two-three years with the introduction of two new platforms next year, which are expected to be around the same price points. Further, the company also plans to revitalise its Pulsar brand through the recent launch of the upgraded versions and would follow it up with the launch of the higher displacement Pulsars (220cc) in Q4FY2007.
- The company has reported strong sales numbers during this year recording a year-till-date growth of 34%. Going forward, due to a high base effect, we expect the company to record a growth of 19.8% for H2FY2007.
- At the current market price of Rs2,631, the stock discounts its FY2008E earnings by 17.4x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 14.3x. We maintain our Buy recommendation on the stock with a price target of Rs3,300.
Indian Hotels Company
Cluster: Apple Green
Price target: Rs170
Current market price: Rs150
Room for more upside
- The revenues of Indian Hotels Company Ltd (IHCL) increased by 27.8% year on year (yoy) to Rs266.7 crore in Q2FY2007 on the back of a 37.5% rise in room revenues, in line with our estimates. The food and beverages income (F&B) rose by 13.6% yoy, the other operating income increased by 31.0% yoy and the management fee saw a rise of 46.5% yoy.
- The occupancy rates (ORs) in Q2FY2007 increased by 200 basis points yoy at 66%, whereas the average room rate (ARR) grew by a robust 345% to Rs7,583, in line with our estimates.
- The operating profit margins (OPMs) expanded by 300 basis points to 21.8% on account of the healthy revenue growth and a continuous operating leverage that the company enjoys. Consequently the operating profits grew by a robust 48.2% yoy to Rs58.1 crore, marginally ahead of our estimates.
- The expansion in the OPMs, higher other income (up 52.0% yoy) and a reduction in the net interest costs (down 30.8% yoy) saw the net profit grow by a whopping 77.6% yoy to Rs46.5 crore, marginally ahead of our estimates.
- IHCL has executed a letter of intent with the owners of the Ritz Carlton Hotel, Boston for the outright purchase of the hotel for US$170 million. The sale and purchase agreement is scheduled to be executed in early November 2006 with the transaction closure targeted for early January 2007.
- The tight demand-supply scenario in the hotels industry lends a positive bias to the ARR in the short term and we expect IHCL, the largest hotel chain in India with its pedigree of hotels to be the key beneficiary of this uptrend. The ARR and ORs may come under pressure post H1FY2008, but till that time we believe that the investors should remain checked in. We like the performance of H1FY2007 and we are revising our consolidated earnings estimates for FY2007 and FY2008 by 1.4% and 16.3% respectively.
- We are valuing IHCL at 25x its FY2008 earnings and the revised price target now stands at Rs170. IHCL�s value of non-hotel investments on its books is around Rs20 per share and the same provides a margin of safety to our price target of Rs170. At the current market price (CMP) of Rs149.6 the stock provides an upside of 10.3%.
FII Gross purchases Rs 2099.70 Cr Gross Sellers Rs 1764.20 Cr Net Buyer Rs 335.50Cr
MF Gross Purchases Rs 521.41Cr Gross Sellers Rs 536.39 Cr Net sellers Rs 14.98 Cr
Nothing exciting and this was also expected as indicated in the provisional numbers. The key will be for today’s numbers and that’s likely to have an impact.
* Satra Properties rallied sharply on reports that it has signed a MOU for the acquisition of property at Calicut, Kerala.
* ICSA India declined despite bagging an order worth Rs17.65 crore from Kerala State Electricity Board.
* Mazda slipped despite reports that the company has bagged an order from Inertia Iron & Steel worth Rs59 lakh.
* HOEC inched lower despite reports that it has entered into a $100 million loan agreement with a consortium of banks.
* KPIT Cummins ended lower despite announcing a 1:1 bonus and a 5:2 stock split.
* IDFC, which announced that it has entered into a MOU with Bank of India and Union Bank of India for financing of infrastructure projects, ended with losses.
According to bokerage house, Prithvi Information Solutions has posted a very strong performance in Q2 FY07: robust revenue growth of 21.5% qoq (and 68.2% yoy), coupled with 320-bp qoq improvement in the EBITDA margin, led to a 20.1% qoq (and 85.6% yoy) growth in net profit, to Rs 222m.
It is finalising plans for an overseas acquisition, for which it is considering raising about $50m to $70m through an FCCB issue.
They further added, At the CMP of Rs 391, the stock trades at 8.3x FY07 estimates and 5.3x those of FY08. These seem undervalued from a 12-month perspective. Hence they re-iterate our buy rating, with a target price of Rs 525.
Emkay Research believe that the sales momentum of TVS Motors is likely to continue with the recent launch of new variant of the already successful TVS Star with electric start features. The company seems more focused on topline at the cost of bottomline.
According to the brokerage house, they estimated earnings for FY07 and FY08 stand at Rs 4.8 and Rs 6 respectively for a full year. They reiterate a Hold at current levels.
IDBI Capital in its company report on Maruti Udyog, recommend a buy with a 1-year price target of Rs.1,068.
According to the brokerage house, operating profit (EBITDA) for H1FY07 showed a jump of 35.7% vis-à-vis same period of the earlier year. The EBITDA margins for H1FY07 have expanded to 18.3% as compared to 15.6% for H1FY06. Average vehicle realization of the Company was flat at around Rs2.15 lac during H1FY07 vis-à-vis H1FY06. However, the margins showed improvement due to tighter control over the raw material costs.
The weakness in the Asian markets weighed on the domestic indices, with the Sensex shedding 84 points and slipping below the 13000 mark on substantial selling pressure. After resuming 19 points above its previous close at 13176, the Sensex fell and languished in negative territory for a major portion of the trading session. The index slipped deeper into the red in the afternoon to touch the day's low of 12950. The Sensex finally ended the session with losses of 84 points at 13073, while the Nifty tumbled 21 points to close at 3777.
The market breadth was weak. Of the 2,594 stocks traded on the BSE, 1,704 stocks declined, 837 stocks advanced and 53 stocks ended unchanged. Barring the BSE IT index and the BSE Bankex, the remaining sectoral indices lost ground. The BSE CD index dropped 3.66% at 3198, the BSE Oil & Gas index shed 2% at 6141 and the BSE Auto index was down 1.73% at 5255.
Dragging down the market, Hero Honda shed 4.07% at Rs713, Bajaj Auto dropped 3.35% at Rs2,631, RIL lost 2.97% at Rs1,252 and HDFC tumbled 2.49% at Rs1,521. Reliance Communication, Tata Motors, ITC, Dr Reddy's, NTPC and BHEL were down by around 2% each. Hindalco, L&T, Maruti, Tata Steel, Satyam, Grasim, ACC, Ranbaxy, HLL, ONGC and Bharti Airtel also ended the day in the red. However, SBI rose 2.08% at Rs1,128, ICICI Bank jumped 1.77% at Rs783, Infosys added 1.12% at Rs2,126, Wipro gained 0.98% at Rs534 and REL moved up by 0.64% at Rs510. Cipla, Gujarat Ambuja Cements and TCS closed with marginal gains.
Consumer durables stocks came under considerable selling pressure. Videocon Industries shed 4.78% at Rs431, Titan Industries fell 3.77% at Rs741, Lloyd Electric declined 2.97% at Rs128, Goldiam International shed 2.07% at 121 and Rajesh Exports was down Rs2.02% at Rs228.
Over 72.10 lakh IFCI shares changed hands on the BSE followed by Shyam Telecom (68.33 lakh shares), Development Credit Bank (53.39 lakh shares), Morepen Laboratories (38.35 lakh shares) and HFCL (34.12 lakh shares).
Reliance Industries was the most actively traded counter on the BSE and clocked a turnover of Rs281.74 crore followed by Hindustan Zinc (Rs163.74 crore), Jaiprakash Associates (Rs146.89 crore), Shyam Telecom (Rs113.06 crore) and SBI (Rs105.76 crore).
The market, seemingly, is tired after a sharp rally in the recent past. It ended in the red for the second straight day, as profit-booking continued. India’s premier index, the BSE Sensex, which has surged close to 40% during this calendar year, lost 84.15 points (0.64%), to settle at 13,072.51.
The market turned extremely volatile in the late-afternoon session of trade, slipping to a low of 12,950.07. However, it recovered later, as buying resumed. Its high for the day was 13,202.68, having oscillated around 253 points for the day.
The S&P CNX Nifty lost 21.45 points (0.56%), to 3,777.30.
The market-breadth, which was positive in the opening session, turned negative as smallcap and midcap stocks also were sold. On BSE, there were close to 2 losers for every single gainer. Only 881 shares advanced, against 1,1628 that declined. Just 64 shares were unchanged.
The BSE clocked a turnover of Rs 4,305 crore, which is lower compared to Rs 4,688 on Tuesday.
Among the 30-Sensex pack, 22 declined while the rest advanced.
Bike maker Hero Honda was the top loser, down 3.77% to Rs 715, on 2.16 lakh shares. It slipped to a low of Rs 705.45, after hitting a high of Rs 744 in early trade. Rising input costs and intense competition triggered investors to unload shares of two-wheeler firms. The costs of inputs such as nickel, aluminium, rubber and steel is going up. Bajaj Auto hiked prices of its popular motorcycle models `Platina’ and `Pulsar’. It has raised the price of Platina by Rs 500 at the ex-showroom level. It may be recalled that in September 2006, Bajaj had cut price of Platina by Rs 2,000 in the face of stiff competition from rivals. Stocks such as TVS Motor (down 5.16% to Rs 102) and Bajaj Auto (down 3.55% to Rs 2,625) lost.
Bank stocks witnessed rally from their lows, in the fag hours of trade. The BSE Bankex was the major gainer among sectoral indices, up 60.34 points (0.94%), to end at 6,488.04. ICICI Bank was the top gainer, up 2% to Rs 785. IndusInd Bank (up 5.20% to Rs 46.45), UTI Bank (up 2.87% to Rs 437.50), ICICI Bank (up 2% to Rs 785), ING Vysya Bank (up 1.71% to Rs 178) were the gainers among private sector banks. State-run banks also participated in the rally. SBI (up 1.76% to Rs 1124.50), Allahabad Bank (up 2.30% to Rs 91) and Bank of Maharashtra (up 1.31% to Rs 34.85) moved higher.
Software major Infosys advanced 1.07% to Rs 2,125 on a voume of 4.52 lakh shares. It had surged to a 52-week high of Rs 2,151 in early trade. The scrip rose for the second day in a row after Infosys' shareholders on Tuesday approved an issue of up to 30 million sponsored American Depositary Receipts (ADRs). Infosys' ADR had risen 1.1% to $52.26 on the Nasdaq on Tuesday, following this news.
Index heavyweight Reliance Industries (RIL) slumped 2.93% to Rs 1,252.50 on a volume of 22.32 lakh shares. It slipped to a low of Rs 1,240.30, while its high for the day was Rs 1,295.
Car major Maruti Udyog lost 0.82% to Rs 936.25, amid volatile trade following reports that the Ministry of Commerce and Industry rejected the automaker's plea for granting special economic zone (SEZ) status to its upcoming facility at Manesar.
Tata Motors (down 2.36% to Rs 799), Reliance Communications (down 1.82% to Rs 380) and HDFC (down 2.88% to Rs 1515) also slipped.
Among side-counters, Hyderabad Industries surged 20% to Rs 298, on a high volume of 6.90 lakh shares. Its low has been Rs 250.
Ashok Leyland surged 4% to Rs 46.20, on high volumes of 21.87 lakh shares on renewed buying.
UTV Software surged 6.55% to Rs 248.80, on high volumes of 13.45 lakh shares. The stock surged to a 52-week high of Rs 261.35. There were reports that Rupert Murdoch's News Corp is eyeing a sizeable stake in the company, which was later denied by the company.
KPIT Cummins lost 1.30% to Rs 591. The company’s board approved a 1:1 bonus issue and a stock-split from Rs 5 per equity share to Rs 2 per equity share.
KS Oils rose 2.61% to Rs 192.55, amid reports that private equity firms Actis and CLSA Capital, are in the race to buy 12-14% stake in the company.
Falcon Tyres jumped 10% to Rs 118.75, after India's market regulator ordered Wealth Sea to make an open offer to Falcon shareholders within 45 days.
Eveready Industries lost 0.20% to Rs 75.50, after rising to a high of Rs 78.80 on reports that it plans to raise product (battery) prices by 10 - 15% 1 December 2006 onwards, to counter rising prices of key input zinc.
Hindustan Zinc witnessed high volatility, moving in a range of Rs 1,008.90 and Rs 943.35. It closed 1.47% lower, at Rs 966.85 on a volume of 16.71 lakh shares. Zinc futures on the London Metal Exchange extended their rise, attaining a fresh record high of $4,525 a tonne, as short supplies and strong demand prompted funds to snap up the metal which is now up 137% so far this year.
Petron Engineering Construction lost 5% to Rs 168.70, despite bagging a contract worth Rs 15.50 crore from a firm in Kuwait.
Japan's Nikkei slipped 1.08% on Wednesday as investors sold Softbank Corp stock ahead of its earnings results, and due to caution before the outcome of US congressional elections. The Nikkei lost 177.67 points, to end at 16,215.74. The Hang Seng index extended its fall and was down 128.07 points (0.68%), at 18,811.24.
Most European markets were trading weak, the FTSE 100 declining 0.48% and the CAC 40 slipping 0.48%.
US stocks rallied on Tuesday, pushing the Dow Jones industrial average to an all-time high as investors bet mid-term elections will leave the government gridlocked, maintaining business-friendly policies. US stocks ended higher ahead of polling results, the Dow Jones rising 51.22 points (0.42%), to settle at 12,156.77. The Nasdaq Composite Index added 9.93 points (0.42%), to close at 2,375.88.
FIIs have been relentless in their support to the Indian market. As per provisional data, foreign funds were net buyers to the tune of Rs 316.66 crore on Tuesday (7 November).
After taking a small dip of 30 points in yesterday's trades, the market may remain cautious amid weakness in several Asian indices. However the European & US markets ended with marginal gains. Major Asian indices like Nikkei, Kospi, Straits Times and Jakarta are trading with steep losses in morning trades and may drag down the market in early trades. On the technical front, the Nifty in the short term could test 3860 on the upside and has a support in the 3755-3780 range. The Sensex may face resistance at 13258 and could test lower levels at 13020.
U.S. indices rallied on Tuesday, with the Dow Jones reaching the all-time high by adding 51 points to close at 12157, as investors bet midterm elections would leave U.S. government gridlocked, maintaining business-friendly policies, while the Nasdaq added 10 points to close at 2376.
Barring, few all the Indian ADRs ended in the red. Rediff was the biggest loser and tumbled over 3% while Tata Motors, MTNL, VSNL, ICICI Bank, Dr Reddy's and Satyam dropped marginally below 1% each. However, Infosys rose aove 1%. HDFC Bank, Wipro and Patni Computers ended with marginal gains.
Crude oil prices moved down, with the Nymex Light Crude oil for December delivery dropping $1.09 to close at $58.93 a barrel, while the London Brent crude gained $0.60 to close at $59.75 per barrel. In the commodity space, the Comex gold for December series declined $0.20 to settle at $627.70 an ounce.
On Nov 06 2006, FIIs were net buyers of stocks to the tune of Rs422.90 crore (purchases worth Rs1,907.40 crore and sales of Rs1,484.60 crore) while domestic mutual funds were net buyers of stocks to the tune of Rs164.30 crore (purchases worth Rs575.52 crore and sales of Rs411.22 crore).
Sensex closed in Negative Territory down by 30 points with decent volume of Rs 4714 cr.
Choppy session continued for the 2nd consecutive day as Sensex opened with upside gap and made a new 'psychological' high of 13300 levels and slipped almost 150 points from the top. A minor correction was seen on On 5th day, which is a Fibonacci ratio.
Sensex has formed a Bearish candle with higher upper shadow pattern which shows weakness' in the current trend and could lead the correction upto 12920 levels.
To nullify the bearishness, Sensex must hold above 13270 levels for next two days. If it does then 13700 level could be possible but if it fails then there could be chance of 12920 levels.
Daily Strategy: - If opens up and hold below 13260 level then sell for the target of 12920 levels with sl of 13320 levels for the second half.
Support 1) 13120 2) 13020 3) 12920 imp 4) 12800 as part of triangle
Resistance 1) 13260 2) 13320 3) 13460
We are raising our earnings estimates by 6% and 7% for CY07E and CY08E as we think its recent acquisition of FocusFrame Inc is likely to be EPS accretive. We are increasing PO by 6% to Rs211, offering potential upside of 16% from current levels. Maintain Buy on the stock.
Moving up the value chain in testing
FocusFrame's presence in automated testing, testing strategy and consulting are
likely to enhance Hexaware's positioning and addressable space in the industry.
FocusFrame's 'Accelerator' technology, which cuts testing costs by 40%, is under
evaluation by SAP and likely to be a key marketing tool for Hexaware. This could
help build its offering outside PeopleSoft business
Banking Q2FY2007 earnings review
- After two relatively dull quarters, the latest quarterly results truly justified the run-up in the banking stock prices. The exuberance in the banking sector is based on the core fundamentals and improved visibility in the earnings of the sector, a glimpse of which we have seen during Q2FY2007.
- The net interest income (NII) witnessed a handsome growth, backed by a strong advances growth and the relatively stable net interest margins (NIMs). Higher growth in the fee income helped a commendable growth in the core operating profits.
- With the benchmark yields down almost 50 basis points from the quarter ended June 30, 2006, instead of a mark-to-market provisions charge that was seen in the previous couple of quarters, we saw most banks writing back excess provisions. This kept the overall provisions down and helped the robust growth in profits.
- Based on the improved visibility in the earnings for the banking sector, we have revised the earnings for certain banks. We feel that with the busy season ahead the banking sector is poised to see better times. Our top picks among the public sector banks remain Bank of India, Canara Bank and Punjab National Bank while in the private banking space UTI Bank is our preferred choice.
Solectron Centum Electronics
Cluster: Emerging Star
Price target: Rs315
Current market price: Rs227
- Solectron Centum Electronics (SCEL) has reported a robust growth of 146.3% in its net revenues to Rs41.3 crore during the second quarter ended September 2006. The growth was largely driven by a 264.5% jump in the electronic manufacturing services (EMS) business to Rs32.4 crore. The component business grew by 12.7% to Rs8.9 crore.
- The operating profit margin (OPM) declined by 840 basis points to 11.5% due to the continued increase in the proportion of the low-margin EMS revenues in the total turnover. Moreover, the margins in the EMS business itself have been declining gradually (in line with the global benchmark decline of 5-6%).
- The robust jump of 363% in the other income component to Rs1.3 crore mitigated the impact of higher interest and depreciation charges. Consequently, the company posted a net profit growth of 51.2% to Rs3.6 crore. This is after including the provisions of Rs0.7 crore made for the proposed restructuring of the organisation.
- On the half yearly basis, the net revenues grew by 181.3% to Rs77.7 crore. However, the 810-basis-point decline in its OPM has limited the earnings growth to 31.5% (Rs6.8 crore).
- Along with the results, the company announced that its board has approved the scheme to de-merge the EMS business into a separate new company, Solectron EMS India Ltd (SEIL), which would be controlled directly by Solectron Corporation. On the other hand, the current management (the Indian promoter) would manage the component manufacturing business. The move is aimed at enhancing the focus on the two diverse business lines and is likely to be beneficial to the existing shareholders over the long term.
- At the current price the stock trades at 22.3x FY2007 and 20.5x FY2008 estimated earnings. We are upgrading the stock to a Buy recommendation with a revised price target of Rs315.
Cluster: Apple Green
Price target: Rs700
Current market price: Rs250
- Hyderabad Industries Ltd's (HIL) Q2FY2007 results are below our expectations. Lower-than-expected sales and higher raw material costs primarily affected the company's performance during the quarter.
- The net sales for the quarter rose by 15.4% to Rs101 crore. The sales were lower than estimates as the company faced rejection of products from its new Satharia plant due to certain quality issues.
- The operating margins have come down drastically from 17.6% to 3.2% due to the production problems faced at the new plant, and high ruling prices of cement, which is the key raw material. Consequently, the operating profits for the quarter declined by 79.2% to Rs3.2 crore. The raw material cost as a percentage of sales increased significantly from 45.1% to 56.3% in Q2FY2007.
- Higher depreciation costs due to the commissioning of its new plant at Satharia further impacted the profits as the net profit after extraordinary items for the quarter declined by 90.4% to Rs0.7 crore.
- At the current market price of Rs250, the stock is trading at very attractive valuations of 3.9x FY2008 earnings and 2.6x its FY2008 earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs700.