GlaxoSmithkline Consumer Healthcare Ltd (F12/06)
Result Update
GlaxoSmithkline Consumer Ltd. recorded 15% yoy growth in net sales at Rs11.1bn during F12/06 driven by average volume growth of ~8% in Horlicks and Boost. Revenues for the quarter increased by 9.2% yoy (down 12.2% qoq) to Rs2.6bn, led by a average volume growth of ~4% in Horlicks and Boost. Biscuits category recorded a ~11% yoy growth during the year. The company has taken ~5% price increase in Horlicks and 2% price hike in Boost (in November) resulting in a average price increase of ~4.5%.
Operating profit for the year remained almost stable at Rs1.8bn. Operating margins dipped by 250bps to 16.6% mainly due to the sharp 190bps rise in raw material cost. Milk prices increased significantly by 16% this year and are expected to remain higher by ~20-25% in F12/07. Prices of other key raw materials like malted barley (expected to remain higher by 5% yoy in F12/07), wheat, sugar, coco powder etc are also expected to remain firm. During Q4 F12/06, margins dipped by 540bps to 10.4% due to higher input (370bps) and staff (250bps) cost. Lower adspend (12.7% of net sales in Q4 F12/06 from 14.9% of net sales in Q4 F12/05) restricted further margin erosion.
Other income (including cross charge of Rs70mn per quarter received on account of OTC products sold on behalf of GlaxoSmithkline Pharmaceuticals Ltd) for the quarter and year was higher at Rs169mn and Rs522mn respectively. PBT rose by 17.3% yoy to Rs1.9bn during F12/06 driven by higher other income and lower interest cost. Effective tax rate was at 33.4% resulting in a tax outgo of Rs636mn. Net profit for the year increased by 18.5% yoy to Rs1.3bn translating into an EPS of Rs30.1.
The management expects to record a double-digit topline growth in F12/07 driven by strong growth in Horlicks and Boost and expects to maintain the margins at ~20% (including other income). However, higher input cost could put pressure on margins. Exports account for 5% on the company’s total sales and are expected to continue at the same level. Acquisitions, if any could be a growth driver for the company. At the current market price of Rs582, the stock is trading at 19.3x FY07 EPS of Rs30.1 per share. We recommend a ‘Hold’ rating this stock.
Madras Cements Ltd. (MCL) - Q3 FY07
esult Update
MCL’s cement volumes increased by 27% y-o-y to 1.48mn ton and on sequential basis it went up by 1%. MCL has increased its despatches despite monsoon in the Southern States. We expect MCL’s despatches to be at 5.78mn ton for FY07, up from 5.66mn ton as per our previous estimation. We retain our FY08 and FY09 cement volume at 6.02mn ton and 7.49mn ton as new capacities comes in at FY08/FY09.
MCL’s OPM increased by 1560 bps to 32.7% on y-o-y basis but went down 620 bps on sequential basis due to increase in cost per ton of cement. Cost per ton increased by 4.8% sequentially to Rs1784 in Q3FY07. On y-o-y basis it increased by 3.0%. Higher coal prices in international market and increase in freight charges has led to increase in costs. Power & Fuel expenses per ton went up by 6.7% sequentially to Rs551 and freight charges increased by 9.8% to Rs374. Realization per ton fell by 4.7% sequentially to Rs2651. We have factored 2.3% fall in our estimations for the quarter. Cement price have rebound in Southern markets post monsoon and hovering at pre-monsoon levels at present.
Interest cost for the quarter has come down 24.6% y-o-y to Rs85mn. Sequentially it has more than doubled. Higher requirement for working capital due to fund requirement for ongoing expansion and interest rates firming up has increased the interest burden for Q3FY07 over Q2FY07.
We revise our FY07 earnings estimate from Rs291.2 to Rs280.7 and retain our FY08 and FY09 earnings estimates at Rs339.3 and Rs355.8 respectively. We consider MCL as better play in Southern region going forward. MCL is expanding cement capacity by 4mn ton to take the total capacity to 10mn ton by FY09. MCL is putting up 18MW CPP at Jayanthipuram facility by Q1FY08. MCL is trading at 10.1x and 9.6x of its estimated FY08 and FY09 earnings of Rs339.2 and Rs355.7 respectively. We maintain our BUY rating with target price of Rs4270. Our target price discounts FY09 earnings by 12.0x and EV/EBIDTA by 7.6x.
Arihant Foundation & Housing Ltd (Q1 F9/07 )
Result Update
Property demand in Chennai remained firm in the Oct-Dec quarter, helping AFHL book a 64% growth in revenues. The company currently has 5 on ongoing projects and has booked total sales of 0.19mn sqft during the quarter as against 0.16mn sq ft in the previous quarter. AFHL is currently carrying a Work-In-Progress inventory of Rs590mn, the sales for which should be converted over the next two quarters.
While the CBD, OMR and GST rd have seen stable to rising prices, other areas like Ambattur have not picked up as well as expected. As a result majority of the company’s projects are earning gross margin in the range of 35-40%. However, the commercial project at Ambatur (approximately 55% of revenues in Q1 F9/07) grossed around 22%, pulling down blended margin to 25.3%, a drop of 114bps over Q1 F9/07. However, we expect margin to look up from third quarter as high margin project contribution increases.
In line with the company’s guidance, it has started foraying outside Chennai. AFHL has added four new projects one each in Madurai (21 acres), Vijaywada (50 acres), Poonamali high rd (5 acres) and Mall + hotel (0.6mn sq ft) on the OMR rd. We have yet to factor in these new projects in our estimates, which are likely to contribute to revenues from F9/09.
We have delayed our project completion phase in some of AFHL’s projects (no guidance from the management). As a result we have revised our revenue growth downwards by 17% each for F9/07 and F9/08, while earnings have been revised downwards only 7% and 1% in the respective years. Lower revision in earnings is on account of lower tax rate.
Usha Martin Ltd
Result Updat
Usha Martin posted strong results for Q3 FY07 with stand-alone earnings rising 19.8% qoq and 72.2% yoy. On consolidated basis, net profit growth was higher at 29.3% on sequential basis. This robust bottomline performance was led by significant operating margin expansion; 170 bps qoq on stand-alone basis and 390 bps qoq on consolidated basis. During the quarter company reaped the benefits of higher iron ore integration, better realizations and improved product mix. We maintain 'BUY' and raise our EPS estimates to Rs27.2 (earlier Rs26) for FY07 and Rs34.1 (earlier Rs32.6) for FY08. Our one-year target price is Rs251 based on 5.2x FY08 EV/EBITDA and implying a multiple of 7.4x on FY08 EPS.
Since our last recommendation at Rs170 in our Q2 FY07 Investment Update in November 2006, the stock has run-up by 24%. Despite this, we still maintain 'BUY' as Q3 FY07 performance was above our expectations and has forced us to raise earnings estimates. At CMP of Rs210, company trades at 7.7x FY07E EPS and 6.2x FY08E EPS. We believe these valuations does not reflect sufficient premium to commodity steel makers with company's character of an alloy/special steel manufacturer producing high value added products like Wires and Wire Ropes in majority. Also company's products are subjected to far less cyclical price fluctuations than that of commodity steel players. With operating margin on improvement path from backward integration (iron ore - started & coal - to start) and stress on value added products, we expect material upgrades to valuations.