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Tuesday, May 08, 2007

Sharekhan Investor's Eye dated May 07, 2007


Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs256
Current market price: Rs215

Price target revised to Rs256

Result highlights

  • Cipla reported lower than expected results for Q4FY2007 with a net profit of Rs125.7 crore against the expectation of Rs199.6 crore. The earnings have been lower due to the disappointing exports of active pharmaceutical ingredients (APIs) and significant contraction in the operating profit margin (OPM).
  • The revenues were marginally higher by 6.3% to Rs938.5 crore. The sales growth was lower due to a 27% decline in the API exports to Rs141.46 crore.
  • The OPM witnessed a 590-basis-point decline to 15.7% in the quarter due to the higher contribution of low-margin anti-retrovirals and lower API sales to the regulated markets. Consequently, the operating profit stood at Rs147.0 crore, down by 22.8%. With the 40% fall in other income and the higher tax incidence (up from 4.0% to 11.3%), the net profit declined by 40.3% in the net profit to Rs125.7 crore.
  • The FY2007 numbers saw a 19% growth in the top line at Rs3,438.1 crore, the margins remained almost flat at 20% and resulted in a mere 9% rise in the net profit to Rs660.8 crore.
  • Cipla reported disappointing numbers for both Q4FY2007 and FY2007, largely due to the lower than expected performance of the export business and the decline in the OPM. Hence, we are revising down our FY2008 earning estimate by 17.4%; we are also introducing our FY2009 estimate. As per our revised estimate, the earnings per share (EPS) estimates for FY2008 and FY2009 stand at Rs10.9 and Rs12.8 respectively.
  • At the current price of Rs215, the stock trades at 19.7x and 16.7x of its FY2008 and FY2009 earnings respectively. Though, we have toned down our estimate, positive earnings surprises for the company at frequent intervals from exports are not ruled out. We maintain our Buy recommendation on the stock with a revised price target of Rs256 (ie 20x of FY2009E EPS of Rs12.8).

WS Industries India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs87
Current market price: Rs43

No surprises

Result highlights

  • WS Industries' (WSI) Q4FY2007 results are in line with our expectations.
  • The revenues for the quarter grew by 16% to Rs44.8 crore while the net profit grew by 113% to Rs2.2 crore on the back of its high operating leverage and lower depreciation expense.
  • The operating profit for the quarter grew by 37% yoy to Rs5.3 crore as the operating profit margin (OPM) expanded by 180 basis points to 11.9%. The OPM expanded because of lower power & fuel cost and other operational efficiencies. The power & fuel cost as a percentage of sales declined to 15.5% from 18.4% in Q4FY2006 and the other expenses, as a percentage of sales, dropped to 17.4% from 19.4% in Q4FY2006.
  • The interest cost increased by 25.7% while the depreciation cost decreased by 10.6%.
  • The order book at the end of March 2007 stood at a healthy Rs200 crore.
  • The Q4FY2007 results of WSI are in line with our estimates; the company is having a good order book of Rs200 crore, which is around 1.2x its FY2007 sales and provides good earnings visibility. We have valued WSI using the sum-of-the part (SOTP) valuation method, wherein we have valued WSI's core insulators business at 10x its FY2008E earnings per share (EPS). This gives the fair value Rs58 per share. Further, we have valued WSI's realty subsidiary at the current realisable value of Rs3,500 per square feet. Taking WSI's current 59% stake in the realty venture, we arrive at a value of Rs29 per share. This gives us a fair value of Rs87 per share of WSI.

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs374
Current market price: Rs317

Numbers in line with expectations

Result highlights

  • Corporation Bank's results are in line with our expectations; the profit after tax (PAT) grew by 18.2% year on year (yoy) but declined 19.1% quarter on quarter (qoq) to Rs118.5 crore compared with our estimate of Rs116.1crore.
  • Adjusted net interest income (NII) was up by 31.2% yoy and 16.1% qoq to Rs387 crore. A moderate loan growth and significant increase in float balances helped the bank to improve its margins by 25 basis points to 3.06% on a sequential basis.
  • The non-interest income increased by 14.4% yoy and 13% qoq to Rs180 crore. The core fee income was up 15.9% yoy and 5% qoq.
  • With the net income up 25.4% yoy and the operating expenses up only 11.3% yoy, the operating profit was up by 36.4% yoy to Rs345.3 crore. The core operating profit (operating profit less treasury and recovery income) showed a good growth of 36.2% yoy and 29.2% qoq.
  • Provisions and contingencies grew by 55.5% yoy and 103.7% qoq due to higher non-performing assets (NPA) and standard asset provisioning during the quarter. The significant increase in the provisions on a sequential basis resulted in a 19.1% sequential decline in the PAT although the operating profit grew by 17.8% qoq.
  • The asset quality of the bank continues to be healthy with stable gross NPA at Rs624 crore and the net NPA at 0.47% in percentage terms. The capital adequacy ratio (CAR) remains at a comfortable 12.7% with Tier-I CAR at 11.3%.
  • At the current market price of Rs317, the stock is quoting at 7.4x its FY2008E earnings per share (EPS), 3.4x pre-provision profit (PPP) and 1.1x book value. We maintain our Buy call on the stock with a price target of Rs374.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs44
Current market price: Rs39.5

Good show

Result highlights

  • Ashok Leyland Ltd (ALL) has delivered strong results for Q4FY2007 and the same are ahead of our expectations on the margin front. The top line has grown by 32.1% for the quarter, driven by a volume growth of 28.4% and a realisation growth of 2.9%.
  • We are positively surprised by the operating profit margin (OPM), which stood at 11.6% for the current quarter against our expectations of 10.7%. In comparison with last year, the OPM has declined by 100 basis points, mainly due to a higher raw material cost. Consequently, the operating profits for the quarter have grown by 21.1% to Rs264.9 crore.
  • Lower interest cost and taxes helped the company to post a net profit growth of 28.8% to Rs174.6 crore.
  • For FY2007 the net sales for the company have grown by 36.5% led by a volume growth of 35%. The OPM has come down slightly by 30 basis points to 9.9% while the profit for the year has grown by 46% to Rs436.3 crore.
  • For FY2008 the company has earmarked a capital expenditure of Rs1,000 crore for capacity expansions and new product developments; another Rs400 crore may be spent on acquisitions.
  • We would take a cautious outlook on the industry considering the rising interest rates and tightening liquidity in the country, which would affect the sales volumes. Consequently, after a dream run in FY2007, we expect the growth rates to moderate and expect a volume growth of 11.9% for FY2008. The company expects the industry to grow at 10-12% in FY2008 and has set a target of reaching the 100,000-vehicle mark during the current fiscal.
  • At the current market price of Rs39.5, the stock discounts its revised FY2008E earnings by 11x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs44.

Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,350
Current market price: Rs847

Beating expectations with strong margins

Result highlights

  • Sundaram Clayton Ltd's (SCL) Q4 results are ahead of our estimates because of a positive surprise on the operating profit margin (OPM) front.
  • The net sales for the quarter grew by 25.3% to Rs218.4 crore, with both the die-casting and the air-brake division rendering a strong performance.
  • The OPM improved by 160 basis points year on year (yoy) to 18.2% because of strong improvement in the operating performance of the company. The company was able to achieve better operating efficiencies due to higher volumes that led to considerable savings in the employee cost and other expenses.
  • Both interest cost and depreciation charge rose due to high capital expenditure (capex) incurred by the company last year. Consequently, the adjusted net profit grew at 21% to Rs27.8 crore.
  • The company has increased its capex for the next year to Rs175 crore, which shall be spent on both the divisions for capacity expansions and new product development.
  • SCL has a huge investment portfolio, as it holds 56.8% in TVS Motors and also has holdings in other companies like TVS Electronics and TVS Finance & Services. In valuing the company we have assumed a 75% discount to the total investment value per share. After adjusting for the investments, the stock is currently trading at around 11.3x its stand-alone FY2008E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs1,350.

SECTOR UPDATE

Pharmaceuticals

Omnicef loses patent protection
The patent for Omnicef, the antibiotic used to treat various infections, expired on May 6, 2007, paving the way for generic companies to enter the cefdinir market in the USA. In this regard, Lupin and Sandoz (the generic arm of Swiss drug maker Novartis) have received the final approval from the US Food and Drug Administration (USFDA) for manufacturing and marketing cefdinir in both capsule and solution forms. On the other hand, Orchid Chemicals (Orchid), Ranbaxy Laboratories (Ranbaxy) and Teva—the world's largest generic companies—are awaiting approval from the USFDA .

Sharekhan Investor's Eye dated May 07, 2007