Saturday 26 January 2008

Broker's Recomendations

Bharat Heavy Electricals

Cluster: Apple Green

Recommendation: Buy

Price target: Rs3,289

Current market price: Rs2,165

Q3FY2008 results: First-cut analysis

Result highlights

  • For Q3FY2008, Bharat Heavy Electricals Ltd (BHEL) has reported a growth of 14.4% yoy in its net sales to Rs4,964.2 crore. The growth is below expectations.
  • On segmental basis, the power business of the company has reported a growth of 18.8% in revenues to Rs4,204.6 crore. The revenues of the industry business have grown by 12.7% to Rs1,435.4 crore. A slowdown in the revenue growth was witnessed in both the businesses. The profit before interest and tax margin for the power business has declined by 340 basis points year on year (yoy) to 20.5% while that of the Industry business has expanded by 490 basis points yoy to 17.2%.
  • The operating profit has grown by a meagre 7.4% to Rs997.6 crore as against Rs929.4 crore in Q3FY2007. The operating profit margin has declined by 130 basis points yoy to 20.1% mainly on account of a higher staff cost. The staff cost has been high due to the provisioning made by the company in anticipation of a wage hike in the Sixth Pay Commission. The operating performance has been largely in line with our expectation.
  • The other income has grown by 42.8% to Rs264.9 crore vs Rs185.5 crore in the corresponding quarter of the last year.
  • The interest cost has declined by 18.3% to Rs9.8 crore while, the depreciation charge has risen by 15.1% to Rs76.2 crore.
  • The net profit has grown by 15.6% to Rs771.9 crore against our expectation of Rs859.2 crore. The lower than expected revenue growth has led to a lower profit growth.
  • At the end of Q3FY2008 the unexecuted orders book of the company stood at Rs78,000 crore, that is a growth of a whopping 67% yoy. The order flows continue to be robust for the company.
  • We shall bring to you a detailed analysis of the results and discuss the reasons for the dismal performance of the company subsequent to its analyst conference. However the growth outlook for the company is robust and we remain bullish on the stock.

Shiv-Vani Oil & Gas Exploration Services

Cluster: Ugly Duckling

Recommendation: Buy

Price target: Rs670

Current market price: Rs611

Price target revised to Rs670

Result highlights

  • Shiv-vani Oil & Gas Exploration Ltd (SOGEL) reported a healthy growth of 73.6% in its consolidated revenues to Rs126.7 crore in the quarter ended December 2007. In addition to an increased fleet base and higher realisations, the growth was partially contributed by incremental revenues of around Rs20 crore from the coal bed methane project.
  • The operating profit margin (OPM) improved by 560 basis points to 41.5% primarily driven by the improvement in realisations and better utilisation of its fleet. The positive impact of the higher realisations is clearly reflected in the 390-basis-point decline in the drilling expenses (and other operational expenses) as a percentage of the sales. The operating profit grew by 100.8% to Rs52.6 crore.
  • The decline in the depreciation charges as a percentage of the sales and the lower effective tax rate enabled the company to report a relatively higher growth of 178.7% in its earnings to Rs26.7 crore in Q3FY2008.
  • In the first four quarters, the consolidated revenues and earnings have grown by 42.8% and 104% respectively. The OPM has improved by 350 basis points to 38.5% during the same period. The company was able to more than make up for the steep increase of 50% in the staff cost by scale benefits (savings of 120 basis points in the overheads cost as a percentage of the sales) and higher realisations (saving of 290 basis points in drilling expenses as a percentage of the sales).
  • In term of operational highlights, the company bagged an order worth Rs261 crore to deploy four onshore rigs with Oil India for a period of two years. The average day rate works out to around $22,600, which is around 10-15% higher than the recent contracts with day rates in the range of $18,000-20,000. The contract has further boosted the company's existing order backlog of over Rs3,000 crore, thereby improving its revenue growth visibility.
  • To factor in the higher than expected margins, we are revising upwards the earnings estimates for FY2009 and FY2010 by 5.4% and 8.6% respectively. At the current market price the stock trades at 16.9x FY2009 and 12.8x FY2010 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs670 (14x FY2010E earnings).

3i Infotech

Cluster: Emerging Star

Recommendation: Buy

Price target: Rs180

Current market price: Rs130

Results ahead of expectations

Result highlightsJustify Full

  • For Q3FY2008 3i Infotech has reported a revenue growth of 14.2% quarter on quarter (qoq) and 84.9% year on year (yoy) to Rs317.3 crore. The sequential growth was aided by incremental revenues of around Rs16 crore (or around a 6% sequential growth) from its recent acquisitions with the bulk contribution coming from J&B Software (around Rs15 crore).
  • The operating profit margin (OPM) improved by 40 basis points qoq to 24.7%, despite the increase in the selling, general and administration (SG&A) cost as a percentage of the sales to 22.2% as compared with 21.9% in Q2FY2008. The margin improvement was largely driven by the 65-basis-point improvement in the gross margin due to a favourable revenue mix. The higher margin product business contributed 52% of the total revenues as compared with 46.7% in Q2FY2008. Consequently, the operating profit grew by 15.9% qoq and 83.9% yoy to Rs78.5 crore.
  • Moreover, the steep sequential decline in the minority interest to Rs1.2 crore also aided the growth in the earnings. The consolidated earnings grew by 20.9% qoq and 75.5% yoy (after adjusting for the one-time items) to Rs48.5 crore, ahead of our expectations of around Rs45.5 crore.
  • In terms of operational highlights, the order backlog continued to show a growth of 7.7% qoq to Rs784.5 crore which was largely contributed by a 13% sequential growth in the order backlog in the product business. The company added 150 employees (net of employee addition from acquisitions) in Q3, taking the total strength to around 6,500 employees. The revenues from the top ten clients (excluding ICICI Bank) declined sharply by 20.1% on a sequential basis.
  • The company has maintained its revenue guidance at Rs1,150-1,250 crore and the earnings guidance at Rs165-175 crore. In terms of outlook, the company is not witnessing any change in the demand environment and has limited exposure to the US geography (around 30-32% billing in US Dollars) and banking sector. It exposure to the US banking sector is around 20% (largely due to the acquisition of J&B Software) that is largely related to cheque and payment processing, and would not be affected by the current uncertainties.
  • At the current market price the stock trades at 13.7x FY2008 and 10.9x FY2009 earnings estimates. The stock has outperformed the tech index and the other tech stocks in the last quarter and we believe that it would continue to do so. That's because of the company's limited billing in US Dollars and exposure to the US banking sector. We maintain our Buy call on the stock with the price target of Rs180 (14x FY2009E earnings).

State Bank of India

Cluster: Apple Green

Recommendation: Buy

Price target: Rs2,680

Current market price: Rs2,405

Q3FY2008 results: First-cut analysis

Result highlights

  • The public sector behemoth State Bank of India (SBI) reported a profit after tax (PAT) of Rs1,808.6 crore for Q3FY2008, beating our estimate of Rs1,413 crore. The PAT was up 69.8% year on year (yoy) and 12.3% quarter on quarter (qoq) on the back of a strong all-round growth. On a consolidated basis, the Q3FY2008 PAT stood at Rs2,442.3 crore, up 55.1% yoy and 10.8% qoq.
  • The net interest income for the quarter stood at Rs4,256 crore, registering a robust growth of 23.8% yoy on the back of a strong growth in the advances and an improvement in the net interest margin (NIM).
  • The NIM during the quarter improved by eight basis points sequentially on the back of an improvement in the yield on assets, which was partially offset by the higher cost of funds. On the year-on-year (y-o-y) basis, the NIM continued to remain under pressure. However, we expect the NIM to improve going forward as the high-cost bulk deposits raised earlier get repriced at lower rates.
  • The non-interest income witnessed a whooping growth of 48% yoy to Rs2,697 crore on the back of jump in treasury income and foreign exchange (forex) income. The treasury income was up 107% yoy to Rs644 crore while, the forex income tripled yoy to Rs431 crore. Meanwhile, the core fee income growth was robust at 19% yoy.
  • The operating expenses during the quarter grew by 13.2% yoy to Rs3,294 crore. The growth was mainly due to a 25.2% y-o-y increase in the other operating expenses as the bank expanded the coverage of its core-banking solution (CBS) platform aggressively. Meanwhile, the staff expenses grew by a moderate 8% yoy. Going forward, we expect the other operating expenses to taper down as the bank has been able to bring ~95% of its branches under the CBS. The core operating profit for the quarter stood at Rs3,016 crore, up a strong 48% yoy and 32.4% qoq.
  • During the quarter, the provisions increased significantly to Rs804 crore compared with Rs85 crore for the previous quarter. While the non-performing asset (NPA) provisions increased in line with the strong credit growth, the provisions on investments declined to Rs57.5 crore compared with Rs166.6 crore for the year-ago period.
  • Net advances at the end of the quarter reached Rs390,312 crore indicating a growth of 26% yoy and 8.8% qoq. In line with the industry trend, the advances experienced an uptick during the quarter after a moderate growth in the previous quarter (6% qoq for SBI). The uptick in advances was mainly driven by a strong growth in corporate segment, while retail and other advances continued to clock a moderate growth. Meanwhile, the deposits at the end of the quarter stood at Rs510,132 crore, up 26.2% yoy primarily due to the high-cost deposits. The low-cost deposits (current & savings) reached Rs202,642 crore. Owing to a lower current account and saving account (CASA) growth relative to high-cost deposits, the CASA ratio declined to 39.7% from 42.3% a year ago.
  • Asset quality continued to improve further during the quarter as evidenced by a sequential reduction of Rs220 crore in the net non-performing assets (NNPA), while the gross non-performing assets (GNPA) were largely stable at Rs10,641. In percentage terms, the GNPA as percentage of advances reached 2.7% compared with 3.3% for the year-ago period, while the NNPA as percentage of advances reached 1.4% compared with 1.6% for the year-ago period.
  • The capital adequacy ratio at the end of December 2007 stood at a comfortable 12.3% compared with 12.8% for the previous quarter and 11.9% for the year-ago period. During the quarter, the bank raised Rs916 crore by issuing perpetual bonds to boost its Tier- I capital. In addition, the bank has lined up a mega rights issue to raise Rs16,730 crore, which would further boost the capital adequacy for the bank.
  • Besides the strong stand alone performance, SBI's various subsidiaries and associate banks continued to clock a healthy growth. Notably, SBI Life, the life insurance arm of the bank, reported a PAT of Rs37.7 crore compared with a loss of Rs 33.5 crore for the year-ago period.
  • Following the bank's announcement of its plans to merge the associate banks in itself, the labour unions for the public sector banks have declared their strong opposition against the merger plan. A recent meeting between the Indian Bankers Association and the labour unions on their demands has not yielded any results. Meanwhile, the proposed merger of the State Bank of Saurashtra has received a nod from the boards of both the banks.
  • At current market price of Rs2,405, SBI trades at 22.5x its 2009E earnings per share, 8.9x its 2009E pre-provisioning profit and 2.6x its 2009E book value. Currently we are reviewing our earnings model following the significantly higher than expected results.

Marico

Cluster: Apple Green

Recommendation: Buy

Price target: Rs70

Current market price: Rs62

Momentum continues

Result highlights

  • Marico Industries Ltd's (Marico) sales growth in Q3FY2008 was in line with our expectations. The company posted a strong top line growth of 23.7% year on year (yoy) to Rs506.2 crore aided by an impressive performance across the businesses. The stirring top line growth was a result of a 19% organic growth and a 5% inorganic growth.
  • Affected by a hefty 34% year-on-year (y-o-y) increase in the staff cost and a higher-than-expected increase in the other expenses (up 32.9% yoy to Rs81.2 crore) the operating profit margin (OPM) declined by 79 basis points to 12.68%. The operating profit thereby grew by 16.4% yoy to Rs64.2 crore.
  • The raw material cost was under check as copra prices during the quarter were lower by about 10-12% yoy. However, the input cost for edible oils continued to rise and was up by 20-30% across categories. Thereby the adjusted net profit grew by 57.1% to Rs 43.53 crore.
  • The company changed its method of charging the depreciation on the factory building that led to a one-time charge of Rs4.29 crore. There was a one-time exchange rate gain of Rs 7.8 crore. After this the reported net profit stood at Rs45.9 crore, which was up 61.5% yoy.
  • Marico continued to implement its three-pronged growth strategy of enhancing the existing products, introducing new products and achieving inorganic growth through acquisitions. During the quarter it entered the South African ethnic hair care and health care markets by acquiring the consumer division of Enaleni Pharmaceuticals, which has an annual turnover of ~Rs53 crore.
  • We remain positive on Marico's businesses and maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price of Rs62, the stock trades at 18.5x our FY2009E earnings per share (EPS) of Rs3.30.