Thursday 31 January 2008

Short Term Recomendations

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs68
Current market price: Rs50.55

Margins maintained

Result highlights

  • The Q3FY2008 results of Subros are slightly ahead of our expectations.
  • The top line of the company grew by 2.2% year on year (yoy) to Rs160.2 crore led by a growth of 15% in the volume and a decline of 11% in the realisation. The realisation dropped because Subros supplied only components for newer models of passenger cars during the quarter instead of full kits comprising compressors as well as components.
  • Despite this the operating profit margin (OPM) was maintained at 12.9% which led the operating profits to grow by 1.4% to Rs20.6 crore. The raw material cost as a percentage of sales reduced by 140 basis points to 68% while the staff cost and other expenditures increased.
  • A lower other income, and higher interest and depreciation costs led the profit after tax (PAT) to decline by 11.7% to Rs7.2 crore. However, the majority of the capital expenditure (capex) has already been incurred and the company has recently raised low-cost debt. Hence, we expect the interest cost to rationalise going forward.
  • Good sales volume growth should lead to a substantial improvement in the OPM going forward. The company has already bagged an order from Suzuki to supply compressors for the latter's new export vehicle. This would boost Subros' FY2009 volumes.
  • We are altering our estimates marginally to account for the lower than expected sales due to a substantial decline in the realisations and a higher than expected OPM. The PAT estimates remain unchanged.
  • At the current market price of Rs50 the stock is trading at compelling valuations of 6.1x FY2009E earnings per share (EPS) and 3.1x FY2009E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). The stock's valuations are at a huge discount to that commanded by its peers. We maintain our Buy recommendation on the stock with a price target of Rs68.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,528
Current market price: Rs1,148.80

All round growth

Result highlights

  • ICICI Bank reported a profit after tax (PAT) of Rs1,230 crore for Q3FY2008, an increase of 35% year on year (yoy) and 22.7% quarter on quarter (qoq) on the back of an all round growth. The Q3FY2008 PAT was however marginally below our estimate of Rs1,257 crore.
  • During the quarter, the net interest income grew by a strong 32% yoy and 9.7% qoq to Rs1,960 crore primarily driven by an improvement in the net interest margin (NIM) and a strong credit growth.
  • The calculated NIM improved by 13 basis points qoq and by six basis points yoy to 2.11%. The NII improved on the back of improved yield on investments, coupled with the cost of funds remaining under control.
  • The reported non-interest income (including treasury gains) registered a strong growth of 22.5% yoy on account of a significant growth in the fee income (up 32.7% yoy). Notably, the treasury income declined by 9% yoy to Rs282 crore in Q3FY2008 owing to a provision of Rs150 crore for the mark-to-market provision arising from the credit derivative portfolio.
  • Total advances increased by 24.7% to Rs215,517 crore on the back of continued whopping growth in international advances (up 117.6% yoy), while the retail advances growth remained moderate at 12.2%.
  • Total deposits reached Rs229,779 crore, up 16.7% yoy, mainly due to a strong 33% growth in the current account and saving account (CASA) balance. A higher CASA balance coupled with a sequential decline in the term deposits, helped improve the CASA ratio by ~2% sequentially and by ~3% yoy to 27.2%.
  • Provisioning for the quarter was up 14% yoy in line with the uptick in the non-performing assets (NPA) and the focus on unsecured advances, which offer higher yields.
  • The Bank's capital adequacy ratio (CAR) at the end of Q3FY2008 stood at a healthy 15.8% with Tier-1 capital ratio of 12.1% due to the capital raised through the follow-on-public offering in June 2007.
  • ICICI bank has received board's approval for the proposed capital raising through stake dilution of upto 15% in ICICI Securities through an initial public offering (IPO) and private placement in three to six months time. ICICI Bank's other subsidiaries also continued to do well gaining market share in their respective spaces.
  • At the current market price of Rs1,185, the stock is quoting at 25.6x its FY2009E earnings per share (EPS), 12.5x its pre-provision profit (PPP) and 2.6x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs1,528. ICICI Bank remains one of our top picks in the private sector banking space.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs396

Steady performance continues

Result highlights

  • Net sales of Elder Pharmaceuticals (Elder) grew by a strong 19.9% to Rs138.8 crore in Q3FY2008, thereby maintaining the growth momentum seen in the previous quarters. The sales growth was marginally ahead of our estimate of Rs136 crore and was driven by the continued momentum in the company's star brands as well as the new products and line extensions launched by the company over the past one year.
  • Elder reported an expansion of 370 basis points in its operating profit margin (OPM), which stood at 21.8% during the quarter. The expansion in the OPM was led by a 230-basis-point reduction in the raw material cost, a 100-basis-point drop in the other expenses and a 50-basis-point decline in the staff cost incurred by the company.
  • Consequently, the company's operating profit rose by 44.7% to Rs30.2 crore in Q3FY2008.
  • Elder's net profit rose by 30.7% to Rs19.0 crore in Q3FY2008. The growth in the profit was ahead of our estimate of Rs17.5 crore and was robust despite an increase of 63.6% in the interest cost and a rise of 33.4% in the depreciation charge during the quarter.
  • Elder is exploring new contract research and manufacturing service (CRAMS) opportunities through its 29 alliance partners. Having executed one such project with its Italian partner, Angelini, the company hopes to get three to four more such manufacturing contracts from Angelini, which will enable it to scale up its CRAMS business.
  • At the current market price of Rs395, the stock is quoting at 9.8x FY2008 estimated earnings and 8.7x FY2009 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs391

Q3FY2008 results: First-cut analysis

Result highlights

  • For Q3FY2008, Bank of Baroda (BoB) reported a profit after tax (PAT) of Rs501 crore, beating our estimate of Rs402.6 crore and the consensus estimate of Rs378.3 crore. The PAT indicates a growth of 52.3% year on year (yoy) and 53.1% quarter on quarter (qoq) primarily driven by a strong growth in the treasury income.
  • The net interest income growth was muted at 3.8% yoy to Rs997.5 crore largely due to the continued pressure on the net interest margin (NIM) coupled with a relatively slower credit growth of 23% compared to 27.1% during H1FY2008.
  • During the quarter, the deposits grew by 22% yoy to Rs136,900 crore, while the advances rose by 23% yoy to Rs 95,518 crore. With the advances growth outpacing the deposit growth, the CD ratio improved to 69.8% for the quarter from 68.7% for the previous quarter and 69.2% for the year ago period.
  • The non-interest income spiked up 85.3% yoy to Rs618 crore on the back of strong treasury gains, thereby supporting the bottom line. The treasury gains for the quarter came in around Rs194 crore, nearly five times the gain in the year ago period.
  • The operating expenses growth was contained at 7.1% yoy to Rs683 crore, while on quarter-on-quarter (q-o-q) basis it declined by 14.4%. This was largely due to a 8.5% year-on-year (y-o-y) decline in the staff expenses, offset by a 40% y-o-y jump in the other operating expenses.
  • The asset quality remained healthy with the gross non-performing assets (GNPA) declining by to Rs2,040.3 crore, while the net non-performing assets (NNPA) were largely flat at Rs517.2 crore. However, the provisioning coverage declined to 75% for the quarter from 77% for the previous quarter and 78% for the year ago period.
  • The bank remains well capitalised with a capital adequacy ratio of 13.5% at the end of December 2007 compared with 12.9% at the end of September 2007 and 12.2% at the end of December 2006.
  • In short term, the proposed initial public offering (IPO) of the UTI Mutual Fund should act as a trigger for BoB, as the latter holds 25% stake in the fund. Recent media reports suggest a valuation of about Rs6,500 crore for the UTI Mutual Fund compared with our valuation of Rs4,000 crore.
  • At the current market price of Rs391 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.3x its pre-provision profit (PPP) and 1.3x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs500.

Bajaj Auto
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,635
Current market price: Rs2,269

Price target revised to Rs2,635

Result highlights

  • Bajaj Auto Ltd's (BAL) Q3FY2008 results were below our expectations, mainly on the profitability front.
  • The company reported a decline of 2.6% in its net sales during the quarter to Rs2,501.7 crore. The overall volumes declined by 3.4%, whereas the average realisation remained flat on a year-on-year (y-o-y) basis and declined by 8.3% on a quarter-on-quarter (q-o-q) basis. This was mainly due to a significant discount offered on Platina.
  • The operating profit margin (OPM) for the quarter at 14.5% improved marginally by 30 basis points year on year (yoy), but was down 100 basis points quarter on quarter (qoq). The margin declined in line with the fall in realisation. Consequently, the operating profit for the quarter was flat at Rs363.7 crore.
  • Lower taxes, and stable interest and depreciation costs aided a 6% growth in the company's net profit to Rs378.56 crore. Considering the decline in the OPM in Q3FY2008, we downgrade our earnings estimates for FY2008 by 9% and for FY2009 by 12% to Rs114 and Rs127 respectively.
  • At the current market price of Rs2,269, the stock trades at 18.5x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.6x. We continue to value BAL on the sum-of-the-parts basis and maintain a Hold call with a revised price target of Rs2,635.

Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs464
Current market price: Rs343

Q3FY2008 results: First-cut analysis

Result highlights

  • For Q3FY2008, Crompton Greaves Ltd's (CGL) standalone sales reported a growth of 12.6% year on year (yoy) to Rs915.2 crore. The sales growth was below our expectation.
  • The power system business continued to display sluggish growth with revenues growing at 13.1% to Rs473.1 crore. For the nine-month period the power system business grew by 14% against our full year estimate of 22%.
  • The consumer product business and the industrial system business continued to grow steadily with a 15% and a 14% growth in the their revenues respectively.
  • The operating profit grew by 41.8% to Rs116 crore and the operating profit margin (OPM) improved by 260 basis points yoy to 12.7% as against 10.1% in corresponding quarter last year. The OPM improved due to a decline in the raw material cost. The raw material cost as a percentage of sales declined by 300 basis points yoy to 69.9%.
  • The other income during the quarter increased by 99.7% to Rs14.4 crore as against 7.2 crore in Q3FY2008.
  • The interest cost was down by 8% to Rs7.2 crore, while depreciation charge was up 15.2% to Rs11.5 crore.
  • The net profit grew by 49.5% to Rs67.9 crore mainly on account of high other income. The growth in the net profit was lower than our estimates.
  • On a consolidated basis the company reported net sales at Rs1,713.5 crore, while the net profit increased to 82.7crore. The consolidated OPM increased by 80 basis points quarter on quarter to 10.9%. An year-on-year comparison could not be made, as the quarterly consolidated numbers were not reported earlier.
  • We would bring to reason the sluggish sales growth especially that of the power system business and revisit our estimates post the analyst conference call on the company. However we maintain our Buy call on the stock.

Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,100
Current market price: Rs858

Results ahead of expectations

Result highlights

  • Bharti Airtel (Bharti) reported a revenue growth of 9.9% quarter on quarter (qoq) and 41.7% year on year (yoy) to Rs6,963.4 crore during Q3FY2008. The sequential revenue growth was driven by a strong growth of 10.9% in the mobile business, whereas the non-mobile revenues grew by 7.1% qoq to Rs2,194 crore.
  • The operating profit margin (OPM) declined by 20 basis points to 42.6% during the quarter. In terms of segments, the margins of mobile and non-mobile businesses declined by 20 basis points and 10 basis points respectively. The operating profit grew by 9.4% qoq and 47.8% yoy to Rs2,963.4 crore.
  • The consolidated earnings grew by 6.7% qoq and 41.7% yoy to Rs1,721.4 crore, which is ahead of our and street expectations. The earnings growth was aided by the foreign exchange (forex) fluctuation gains of Rs2.4 crore (compared with a loss of Rs35.9 crore in Q2FY2008). On the other hand, the jump in the effective tax rate to 8.2% (up from 6.5% in Q2) limited the sequential growth in earnings.
  • In terms of operational metrics for the mobile business, Bharti reported a record net addition of 6.3 million subscribers during the quarter, taking its subscriber base to 55.2 million as on December 31, 2007. The average revenue per unit (ARPU) declined by 2.2% qoq to Rs358 and the total minutes of usage increased at a lower-than-expected rate of 14.7% qoq to 73.8 billion minutes. Consequently, the average revenue per minute declined by 3.3% to Rs0.76 (down from Rs0.79 in Q2FY2008) and the spread per minute declined by 3.7% to Rs0.31 (compared with Rs0.32 in Q2FY2008). The company's overall market share stood at 23.6%, a 20-basis-points improvement over 23.4% reported in Q2FY2008.
  • In terms of key highlights, the company has joined hands with Vodafone and Idea to pool in their passive infrastructure in 16 circles under a new entity Indus Towers. Bharti Infratel Ltd (BIL), subsidiary of Bharti, would hold a 40% stake in Indus Towers. This is a positive development in terms of limiting the incremental capital expenditure of the joint venture partners. Apart from this, Bharti Infratel (with 22,000 towers in circles other than 16 covered by Indus Towers) has raised $1 billion through placement to the leading foreign institutions. BIL has been valued in the range of $10-12.5 billion depending on the actual performance in FY2009.
  • The company is entitled for additional spectrum in 10 circles under the new Telecom Regulatory Authority of India (TRAI) norms and has already received formal intimation for five circles. It expects to launch DTH and IPTV services in the first half of FY2009.
  • To factor in the better-than-expected performance in Q3, we are upgrading our earning estimates by 4.1% and 2.7% for FY2008 and FY2009 respectively. At the current market price the stock trades at 24.3x FY2008 and 19.6x FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs1,100.

  • Indian Hotels Company
    Cluster: Apple Green
    Recommendation: Buy
    Price target: Rs180
    Current market price: Rs137

    Cost controls bring a positive surprise

    Result highlights

    • Indian Hotels Company Ltd's (IHCL) Q3FY2008 numbers were ahead of our expectations. The company posted a revenue growth of 14.6% year on year (yoy) at Rs520.6 crore. For 9MFY2008, the revenues showed a strong traction, growing by 16.3%yoy to Rs1,206.9 crore on account of a 17.1% and a 13.5% increase in the room sales and the food and beverages (F&B) sales respectively. The growth in average room rates (ARRs) by 15.4% yoy continues to be healthy.
    • The operating profit margin (OPM) improved by 511 basis points to 47.0% mainly due to stringent cost controls and increase in ARRs. The total operating expense increased by a minimal 4% yoy. The operating profit thereby grew by 28.5% yoy to Rs244.7 crore.
    • The expenditure on interest for the quarter (and nine months) increased by 53.1% to Rs23.9 crore on account of full use of foreign currency convertible bond (FCCB) proceeds for international acquisitions coupled with incremental debt raised.
    • Consequently, profit after tax (PAT) for the quarter grew by 31.2% to Rs134.6 crore and that for nine months rose by 29.1% to Rs 242.6 crore.
    • IHCL has shown better performance on the revenue front on account of a healthy improvement in ARRs and a steady growth in F&B revenues. We expect consistent growth in foreign tourist inflow, continuous rollout of properties and better economic conditions to drive IHCL's growth. At the current market price of Rs137, IHCL trades at 18.5X its FY2009E earnings per share (EPS) of Rs7.4 (post-dilution on account of the rights issue) for FY2009E. We maintain our Buy recommendation on the stock with a price target of Rs180.


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