Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,378
Performance ahead of expectations
Result highlights
- Bharat Electronics (BEL) has announced a robust growth of 27.6% in its net sales to Rs863.8 crore, which is ahead of our expectations.
- The operating profit margins have improved by 150 basis points to 22.9% in spite of the 620-basis-point jump in the raw material cost as a percentage of sales. However, the saving of 770 basis points in the staff cost and the other expenses as a percentage of sales more than made up for the adverse impact of the higher raw material cost.
- Consequently, the earnings jumped by 52.7% to Rs148.2 crore, which is ahead of our expectations of around Rs119 crore.
- On the nine-month basis, the revenues have grown by 9.9% to Rs2,181.2 crore. The operating profit has declined by 50 basis points to 20.9%, largely due to the increase in the raw material cost as a percentage of sales. However, the jump of 72.1% in the other income component aided the growth in its earnings, which grew at a relatively higher rate of 18.8% to Rs356.6 crore. The company is expected to comfortably achieve our full year earning estimates of Rs672.6 crore (which implies a growth of 12.5% in Q4FY2007).
- The company has declared an interim dividend of 40% (or Rs4 per share).
- At the current price, the stock trades at 12.2x FY2007 and 9.7x FY2008 estimated earnings (price has been adjusted for cash on the books). We maintain the Buy call on the stock with a target price of Rs1,525 (12x adjusted FY2008 earnings).
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs412
Growth momentum continues
Result highlights
- Elder Pharmaceuticals (Elder) continued its strong performance during the quarter. The company's net sales rose by 31.7% to Rs115.7 crore in Q3FY2007, on the back of a steady momentum in its core brands, a ramp-up in the sales of the Fairone brand due to the launch of the product in south India and the growing revenues from the in-licenced portfolio. The sales were in line with our estimate.
- Elder reported a 150-basis-point drop in its operating profit margin (OPM) to 18% during the quarter, on account of a 34.9% rise in the raw material cost and a 32.6% increase in the staff cost. The raw material cost was higher on account of the distribution of free samples as a promotional initiative and the staff cost was higher due to an increase in the sales force in order to expand its market reach and penetration.
- Consequently, the company's operating profit rose by 21.8% to Rs20.8 crore in Q3FY2007.
- Despite a 20% drop in the other income, and an increase in the interest and depreciation costs, Elder's net profit grew by 35.7% to Rs14.6 crore. The net profit was in line with our estimate. It was aided by a sharp 41.2% reduction in the company's tax outgo. The tax incidence halved from 24% in Q3FY2006 to just 12% in Q3FY2007, as the company increased the production from its tax-exempt plants of Himachal Pradesh and Uttaranchal.
- In view of its strong growth potential, we remain positive on Elder's future growth prospects. At the current market price of Rs412, the stock is quoting at 10.2x its estimated FY2008 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.
Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs569
Margins disappoint, but stay on course!!
Result highlights
- In Q3FY2007 the net revenues of Marico grew by 34.7% year on year (yoy) to Rs409.2 crore, ahead of our estimate. The top line growth was higher in this quarter on account of the full contribution from the acquired brands of Nihar, Manjal, Camelia and Aromatic, partial contribution from the Fianc�e acquisition, and the strong growth of 20% in the focused brand portfolio (organic growth).
- The operating profit margin (OPM) declined by 210 basis points to 13.5% on account of an increase in the selling and administration expenses, and the other expenses as a percentage of sales. Consequently, the operating profit grew by 16.2% year on year (yoy) to Rs55.1 crore. The same was below our estimate.
- The interest cost for Q3FY2007 grew to Rs5.4 crore from Rs1.3 crore in Q3FY2006, on account of the debt taken to achieve inorganic growth. The depreciation and amortisation cost was lower by 20.2% due to a one-time write-off in Q3FY2007 on account of the change in the depreciation policy.
- The net profit before extraordinary items grew by 26.4% yoy to Rs27.7 crore and it was below our expectation. The net profit after the extraordinary items grew by 29.6% yoy to Rs28.4 crore. But due to the placement with the qualified institutional buyers and the resultant equity dilution, the earnings per share (EPS) grew by a slower 20.4% to Rs4.5.
- Marico has acquired two brands (Fianc�e and HairCode) in Egypt which will generate revenues of Rs90-95 crore in FY2008. Significantly, these brands provide 15-18% profit after tax (PAT) margin against that of 7-7.5% for Marico. This indeed comes as a positive surprise as it will help Marico expand its OPM next year.
- The Kaya business grew by an impressive 64% yoy to Rs19.7 crore. It managed to achieve a profit before tax (PBT) in the current quarter. Marico expects the Kaya business to also break even on a full-year basis. This is a big positive because going forward the business will be contribute to the bottom line and its higher margin profile will contribute to the margin of Marico. Marico plans to open roughly 12 new Kaya clinics in FY2008 and Marico wants to concentrate on increasing the utilisation levels and product penetration going forward.
- We are revising our FY2007 and FY2008 earnings estimates higher by 0.6% and 0.7% to Rs18.5 and Rs24.2 respectively. The stock is trading at attractive valuations of a price/earnings ratio (PER) of 23.1x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.2x FY2008E. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs634.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs175
Current market price: Rs159
Another good quarter
Result highlights
- For the third quarter of FY2007, Indian Hotels Company Ltd (IHCL) reported a top line growth of 29% at Rs409 crore against Rs317 crore in the third quarter of the previous year. The bottom line of the company grew by a healthy 43% to Rs87.9 crore from Rs61.5 crore in Q3FY2006, resulting in earnings of Rs1.5 per share.
- The operating profit margin (OPM) improved by 450 basis points from 32.9% in Q3FY2006 to 37.4%. The operating profit has shown a growth of 35% year on year (yoy) to Rs155 crore.
- The healthy trend in the top line is due to the rise in the number of foreign tourist arrivals into India, which has pushed up the average room rate (ARR) and the occupancy rate (OR). During the third quarter, the ARR grew by 32% to Rs10,772 from Rs8,150 in Q3FY2006; the OR zoomed to 76% from 74% in the corresponding quarter of the last fiscal. The hotel industry has witnessed continued buoyancy in the arrival of foreign tourists. During the period January-December 2006, the number of foreign tourist arrivals increased to 4.4 million from 3.9 million in Q3FY2006, representing a 13% growth yoy.
- At the current market price of Rs159 the stock is quoting at a price/earnings ratio (PER) of 25x FY2007E consolidated earnings per share (EPS) of Rs6.2. We maintain our Buy recommendation on the stock with a revised price target of Rs175.
Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs300
Current market price: Rs248
Growth triggers remain intact
Result highlights
- Cipla reported lower than expected numbers for Q3FY2007 with a net profit of Rs184.4 crore against the expectation of Rs192.1 crore.
- The earnings were lower due to the disappointing revenues, which grew by only 13% to Rs880.5 crore against the expectation of a 22% growth to Rs952.7 crore.
- The exports of active pharmaceutical ingredients (APIs) declined by 35% due to reduced supplies of Simvastatin and Finasteride APIs to Teva owing to the expiration of the 180-day exclusivities for the said products in December 2006. This affected the company�s revenue growth. Also, the sales of domestic formulations were lower than expected at Rs435.7 crore.
- However, the company reported a strong 35% growth in the formulation exports to Rs319.7 crore on the back of its global partnerships. The stellar performance of the formulation business was however overshadowed by the 35% decline in the API exports.
- The operating profit margin (OPM) witnessed a 450-basis-point expansion to 24.9% in the quarter, as the other expenses saw savings of 490 basis points caused by the foreign exchange (forex) fluctuation gain and lower factory overheads. Consequently, the operating profit increased by 38% to Rs219.3 crore.
- With the reduction in tax incidence to 14.9% from 22.6% (possibly due to the commissioning of the new export-oriented unit at Patalganga), the net profit before the extraordinary items was up 79.7% at Rs184.4 crore.
- At the current market price of Rs248, the stock is trading at 20.6x its estimated FY2008 earnings. Expecting a strong momentum in the company�s formulation exports, we maintain our Buy recommendation on the stock with a price target of Rs300.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs916
Forex gains lift profits
Result highlights
- The net sales (excluding the foreign exchange [forex] gain/loss) of Tata Motors for Q3FY2007 have marked a strong growth of 34.5% to Rs6,825.2 crore, ahead of our expectations. This was led by a 27.7% volume growth and a 7.7% growth in the realisations. The total income for the quarter stood at Rs6,956.8 crore and includes the forex gains of Rs131.6 crore.
- The operating profit margins (excluding the effect of the forex gains) have declined by 80 basis points year on year (yoy) but have improved slightly sequentially to 12.3%. Consequently, the operating profits excluding the forex gain/loss have improved by 26.5% to Rs842.6 crore. The sequential improvement in the margins is due to the stable raw material costs and cost savings in the other overheads.
- Both the interest costs as well as the depreciation costs have risen due to the higher capital expenditure (capex) of the company. As a result, the adjusted net profits for the quarter stood at 535.6 crore as against Rs80.4 crore a year ago.
- On a consolidated basis, the company has marked a 37% growth in its net sales and a 14% growth in the net profits.
- Due to a very strong volume growth registered in the first nine months, we are revising our estimates upwards for both FY2007 and FY2008. Our net profit estimates are revised upwards by 7.4% and 3.8% respectively.
- At the current market price (CMP) of Rs916, the stock trades at 13.1x its consolidated earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs1,075.
Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs327
Current market price: Rs246
First-cut analysis of Q3 results
Result highlights
- Bank of Baroda's Q3FY2007 results are much above expectations with the profit after tax (PAT) reporting a growth of 62.8% to Rs329 crore compared to our estimates of Rs258.9 crore. The higher than expected total income growth was mainly driven by the other income and resulted in the actual PAT exceeding expectations.
- The net interest income (NII) was up 17.8% to Rs960.8 crore compared to our estimates of Rs921.3 crore. The other income increased by 22.6% to Rs333.7 crore with the net total income up 19% yoy and up 6.8% quarter on quarter (qoq).
- With the net income up 19% yoy and the operating expenses up only 4.5% yoy, the operating profit was up by 37.6% yoy to Rs656.9 crore.
- The provisions declined by 26.7% to Rs141.7 crore primarily due to the nil non-performing assets (NPAs) provisions made during the quarter as compared to Rs42.6 crore in Q3FY2006. The strong operating profit growth and a decline in the provisions helped in the PAT reporting a sharp rise of 62.8% to Rs329.1 crore.
- The total business of the bank increased by 37.06% to Rs189,959 crore, while the deposits increased by 31% to Rs112,298 crore and the advances increased by 46.8% to Rs77,661 crore. The retail credit has increased by 49.2% yoy and constitutes 19.3% of the total gross domestic credit.
- The asset quality has improved as the gross NPAs have come down on a y-o-y and q-o-q basis with the net NPAs in percentage terms also down to 0.67% from 1.1% yoy and 0.77% qoq. The capital adequacy stood at 12.24% compared to 12.93% on a sequential basis.
- The numbers have been strong for Q3FY2007 and based on the higher than expected PAT numbers we have revised our FY2007 PAT upwards by 3.6% to Rs1,015.6 crore. At the current market price of Rs246, the stock is quoting at 7x its FY2008E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 0.9x book value. The bank is available at attractive valuations given its low price to book multiple compared to its peers and earnings upside possibilities. We maintain our Buy call on the stock with a price target of Rs327.
Grasim Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,350
Current market price: Rs2,800
Q3 results ahead of expectations
Result highlights
- The Q3FY2007 net profit of Grasim Industries (Grasim) stood at Rs412 crore. The same was ahead of our expectations on account of the better than expected performance of the viscose staple fibre (VSF) and sponge iron businesses.
- The top line grew by 38.3% year on year (yoy) to Rs2,280 crore on account of the excellent performance of the cement business, higher realisations in the VSF business and strong volumes in the sponge iron business.
- The operating profit jumped by 108% to Rs666 crore whereas the operating profit margin (OPM) expanded by 980 basis points to 29.2%. The margin expansion was driven by a jump of 50% in the cement realisation and a rise of 24% in the VSF realisation. It was also aided by a robust 49% volume growth yoy in the sponge iron business.
- The other income increased substantially by 191% yoy to Rs44 crore, thanks to the deployment of the surplus cash during the quarter.
- The interest cost increased marginally by 2.2% quarter on quarter (qoq) to Rs24 crore whereas the depreciation provision rose by 10% qoq to Rs80.6 crore.
- The excellent performance at the operating level was sweetened by the other income component and this led the net profit to zoom by 154% to Rs412 crore.
- The consolidated results too were of stellar kind on account of a superlative performance of UltraTech Cement Ltd (UTCL). The consolidated net profit (after minority interest) stood at Rs555 crore, up 184% yoy.
- At the current market price of Rs2,800, the stock is discounting its FY2008E earnings by 11.4x and FY2008E enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) by 5.4x. Taking cognisance of the sanguine outlook, we maintain our Buy recommendation on the stock with a price target of Rs3,350.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,386
Upgrading earnings for FY2007
Continuing the trend witnessed in the earlier two quarters, Madras Cements (MCL) is once again expected to report a stellar 795% year-on-year (y-o-y) growth in its net earnings to Rs85 crore for the third quarter of FY2007. The top line is expected to witness a 67% y-o-y increase to Rs405 crore on the back of a 26% jump in the volumes and a 33% rise in the realisations. MCL, which has one of the highest earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne in the industry, is expected to see the same triple to Rs1,070.