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Saturday, February 03, 2007

Sharekhan Investor's Eye dated February 02, 2007


Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs230
Current market price: Rs209

Price target revised to Rs230

Result highlights

  • Crompton Greaves' revenues grew by 25.5% year on year (yoy) in Q3FY2007 to Rs813.0 crore, slightly below our expectations. The top line of the power system division grew by 27.9% to Rs426.2 crore and of the consumer product division rose by 21.0% to Rs226.3 crore. The industrial system division saw a growth of 32.9% in its top line to Rs231.1 crore.
  • The operating profit margin (OPM) reduced by only by 90 basis points yoy to 11.9%. Sequentially though the material pricing eased and this resulted in an expansion of 120 basis points in the margin.
  • Crompton Greaves provided for full tax rate in Q3FY2007 as against the MAT rate in Q3FY2006. The increased tax provisioning led to a negative growth of 17.0% yoy in the PAT to Rs45.4 crore in spite of an 18.3% rise in the PBT. However the PAT after extraordinary items grew by 5.1%.
  • Pauwels' top line grew by 86.4% yoy to Rs520.0 crore in Q3FY2007, way ahead of our estimates; its PBT stood at Rs21.3 crore.
  • The stand-alone order book grew at 41% yoy and 17.5% sequentially to Rs2,115 crore. Pauwels' order book grew by an impressive 50.3% yoy and 12.5% sequentially to Rs1,939 crore.
  • The Ganz acquisition, which has been concluded, will further accelerate the growth of the consolidated numbers. Though currently loss-making it is expected to contribute 70 million euros in FY2008 and turn profitable by then.
  • We are revising our FY2007 and FY2008 estimates. The FY2007 earnings per share (EPS) estimate adjusted for bonus has been downgraded by 7.6% to Rs6. However considering the stabilisation of the margins in FY2008, the robust top line growth, the strong performance of Pauwels and the contribution from Ganz, we are revising upwards our FY2008 earnings estimate by 9.9% to Rs10.7.
  • At the current market price of Rs209, Crompton Greaves is trading at 19.6x its FY2008E consolidated earnings and 11.8x its FY2008 EV/EBIDTA. We believe that these valuations are fair, given the robust operating performance of the stand-alone company; the higher geographical width and product depth of the subsidiaries; and the management's expertise in turning around operations. We are revising our price target to Rs230.

Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs573

A quarter of robust performance

Result highlights

  • Orient Paper and Industries' net revenues grew by a robust 31.9% year on year (yoy) to Rs274 crore in Q3FY2007. This was driven by the cement division, whose revenues grew by 46.8% to Rs142 crore on the back of a 47.3% year-on-year (y-o-y) jump in the realisations to Rs2,591 per tonne.
  • The fan business continued to grow at a healthy rate of 30% yoy and recorded a top line of Rs54.1 crore. After the previous quarter's lacklustre performance the paper business recovered with an 8.3% y-o-y growth in the top line to Rs73 crore.
  • The earnings before interest and tax (EBIT) of the cement division grew by a whopping 343.9% yoy to Rs51.5 crore on account of the higher realisations and the company's strong leverage to cement prices. The other two divisions too contributed positively to the EBIT, thereby boosting the overall EBIT by 190.1% to Rs62.1 crore yoy.
  • The interest cost continued to decline in the quarter. On a sequential basis the interest cost reduced by Rs3 crore to Rs5.67 crore. On the other hand, with the company not adding any assets in the quarter, the depreciation provision stood flat at Rs7 crore.
  • These two factors coupled with the stellar performance at the operating level led to a 543% y-o-y growth in the net profit to Rs36.55 crore, which was higher than expectations.
  • The company will be adding close to one million tonne of capacity in FY2009 through de-bottlenecking. Of this 0.27 million tonne of capacity will be set up by March 2007. To meet its power requirements, the company is also putting up a captive power plant of 30 megawatt (MW).
  • To finance the capital expenditure (capex) as well as to reduce its long-term debt, the company has decided to raise Rs175 crore through a rights issue. We have factored the same in our estimates, assuming a price of Rs400 per share.
  • Considering the better than expected performance for M9FY2007, we are upgrading our FY2007 profit after tax (PAT) estimate by 18.7% to Rs122.7 crore. We are also upgrading our FY2008 PAT estimate by 29% to Rs182.4 crore, taking cognisance of the higher than expected rise in cement prices in Andhra Pradesh and Maharashtra. After factoring in the equity dilution on account of the rights issue at a price of Rs400 per share, the diluted earnings per share (EPS) estimates stand at Rs63.9 and Rs94.9 for FY2007 and FY2008 respectively.
  • At the current market price of Rs580 the stock is trading at 9.1x its FY2007E EPS and 6.1x FY2008E EPS. On an enterprise value (EV)/tonne basis, the stock is trading at $62 per tonne of cement (without considering the value of the investments in Century Textiles and Hyderabad Industries), which is less than the replacement cost of $80 per tonne. With cash and cash equivalent of Rs160 per share on its books, Orient Paper and Industries offers adequate margin for safety. We maintain our positive view on the stock with a price target of Rs800.



Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs700
Current market price: Rs595

Price target revised to Rs700

Result highlights

  • The Q3FY2007 results of Ratnamani Metals & Tubes Ltd (RMTL) are above our expectations.
  • The company reported strong quarterly results; its revenues for the quarter grew by 63% to Rs193.6 crore and net profit grew by 119% to Rs21.7 crore.
  • The operating profit for the quarter grew by 111% to Rs42.3 crore, as the operating profit margin (OPM) improved by 450 basis points to 22.5% from 18% in Q3FY2006. The improvement in the OPM was on account of controlled other expenses and lower power cost due to windmill operations. The other expenses as a percentage of sales declined by 915 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 418 basis points as a percentage of sales.
  • The interest expense for the quarter increased by 29% to Rs3.5 crore, while the depreciation cost for the quarter increased by 38.9% to Rs3.3 crore.
  • The order book at the end of the quarter stood at Rs451 crore, registering a strong growth of 125% on a year-on-year (y-o-y) basis.
  • The strong order book and increasing demand for its products from its key user industries, which are in a capital expansion phase, impart strong visibility to the future earnings of RMTL. We maintain our Buy recommendation on the stock with a revised price target of Rs700.

Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs781

Price target revised to Rs1,050

Result highlights

  • The Q3FY2007 results of Sanghvi Movers Ltd (SML) are slightly below our expectations, the company's revenues declined by 12.7% year on year (yoy) to Rs38.9 crore.
  • In addition to the regular orders from Reliance Industries Ltd (RIL), SML had secured an additional order worth Rs20 crore from the company in Q3FY2006 due to a shutdown in the RIL refinery during that quarter. Adjusting for this one-time order, we believe the company has done easonably well.
  • Also the business flow from windmill customers remains low during the third quarter as most of these customers install windmills by September to avail of tax benefits. SML had got a Rs9-crore order from Suzlon alone in Q2FY2007 but in the third quarter it received orders of only Rs1 crore from the same company.
  • The operating profit for the quarter declined by 5.6% to Rs28.3 crore due to lower top line growth. However the operating profit margin (OPM) improved by 520 basis points to 72.2% from 67% in Q3FY2006.
  • The interest expense for the quarter increased by 74% to Rs6.7 crore whereas the depreciation cost for the quarter increased by 13.7% to Rs8.8 crore.
  • Consequently the net profit for the quarter declined by 30.7% to Rs11.7 crore.

SECTOR UPDATE

Automobiles

Four-wheelers outpace two-wheelers

  • Bajaj Auto: Bajaj's January sales are lower than expectations.
  • Hero Honda: Hero Honda sales bounced back posting a 19.3% sales growth in January, with better sales of its new models like Glamour and CBZ X-treme increased.
    TVS Motors: TVS Motors’ motorcycle sales were disappointing in January, remaining almost flat at 69634 units.
  • Maruti Udyog: Maruti rendered a stellar sales performance in January, with a strong growth across all the segments.
  • Tata Motors: Tata Motors' January sales were quite good with an overall growth of 19% with sales of 55440 units.
  • Mahindra and Mahindra: M&M rendered a good performance for the month of January registering a 25.6% growth in the automotive segment and a 13.2% growth in the tractors segment
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