ViJiT
Vijith Pujari
STOCK UPDATE
Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,550
Current market price: Rs925
Going strong
Result highlights
*
Sundaram Clayton Ltd’s (SCL) Q1FY2007 net sales for the quarter rose by 32% to Rs189.9 crore and the growth is higher than our expectations. Both the brake and die-casting divisions delivered a strong performance during the quarter.
*
The operating profit grew by 41.8% to Rs27.8 crore as the operating profit margin (OPM) improved by 100 basis points year on year (yoy) to 14.6%. A price hike is already due from its original equipment maker (OEM) customers and hence we expect the margins to improve further in the subsequent quarters.
*
The other income for the quarter stood at Rs7.1 crore against Rs11.8 crore last year due to a lower dividend income realisation. However, the same is expected to be realised in the second quarter. Consequently the net profit grew by 5.1% to Rs18 crore.
*
The value of SCL's total investment in group companies works out to Rs1,040 per share. While computing SCL's value, we have assumed a 75% discount to the company's total investment. After adjusting for this, the SCL stock is currently trading at around 8.4x its stand-alone FY2008E earnings and around 6.7x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550.
WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs112
Current market price: Rs45
Q1FY2007 results marred by cost pressures
Result highlights
*
The Q1FY2007 results of WS Industries (WSI) are below our expectations, primarily because of higher-than-expected power and fuel cost, and interest charge. The revenue for the quarter grew by 15.5% to Rs39.41 crore, driven by an order backlog of Rs120 crore.
*
The operating profit rose by 34.3% to Rs4.66 crore as the operating profit margin (OPM) expanded by 170 basis points to 11.8%. The improvement in the OPM could have been more but for the increase in the power and fuel cost, which as a percentage of sales increased by 270 basis points to 18.8%. On an absolute basis, the power and fuel cost went up by 34.3%.
*
The interest charge for the quarter rose by 30% and depreciation also rose by 18.8%. Hence owing to the pressures of higher costs, WSI's the net profit for the quarter grew by only 49.2% to Rs1.6 crore.
*
Going forward, WSI's OPM is expected to improve significantly, given the recently expanded capacity for high-margin hollow core insulators and the implementation of the price variation clause for the low-margin suspension insulators.
*
WSI is currently sitting on a strong order backlog of Rs120 crore. The order backlog should improve further, considering the strong investments that are in the pipeline for the transmission and distribution (T&D) sector.
STOCK UPDATE
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs169
Price target lowered to Rs250
Result highlights
*
Gateway Distriparks Ltd (GDL) reported a consolidated net profit of Rs19.8 crore for Q1FY2007. The net profit is marginally below our expectation primarily because of a lower-than-expected realisation per twenty feet equivalent unit (TEU) during the quarter.
*
The consolidated revenues for the quarter stood flat at Rs34.5 crore as the realisation per TEU dropped by 5.6% to Rs6,012. However the 6% increase in the volume restricted the drop in the revenues.
*
The realisation per TEU fell as the share of the container freight stations (CFSs) at Chennai and Vizag in the total volume increased. Chnennai and Vizag have much lower realisation as compared to that of Rs7,000 per TEU for the Jawaharlal Nehru Port Trust (JNPT) CFS. The realsiation at even the JNPT CFS fell marginally.
*
The operating profit margin (OPM) for the quarter declined by 4.2% points to 56.5%, as the realisation dropped. The fall in the OPM coupled with flat revenues resulted in a 7% drop in the operating profit for the quarter.
*
However an eight-fold increase in the other income (on account of the investment of the proceeds from a global depository receipt [GDR] issue in bank deposits) helped the earnings before interest, depreciation, tax and amortisation (EBIDTA) to jump up by 20% year on year (yoy) to Rs26 crore.
*
The company's interest expenses declined by 39.7% as it repaid a substantial part of its debt. The net profit for the quarter jumped by 15% to Rs19.8 crore.
*
The quarter saw the launch of the rail container freight (RCF) service in May. Further GDL is planning to ramp up the capacity of its first ICD at Garhi and set up a second rail-linked ICD at Faridabad. This will enable GDL to be a significant player in the rail freight container business that offers integrated port based logistic services.
Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs562
Current market price: Rs415
A mixed bag
Result highlights
*
Jaiprakash Associates Ltd's (JAL) Q1FY2007 operating profit at Rs213 crore is ahead of our expectations; however a higher tax charge has muted the net profit to Rs92 crore.
*
JAL registered a growth of 10% in its revenues and the same stood at Rs895 crore for the quarter, mainly driven by a 32% growth in the cement division.
*
The operating profit grew by an impressive 37.4% to Rs213 crore, as the operating profit margins (OPMs) expanded by 480 basis points to 23.8%.
*
The earnings before interest and tax (EBIT) margins of the cement division jumped by 900 basis points to 25.7% during the quarter whereas the EBIT margins of the construction business fell by 370 basis points to 20%.
*
Overall the profit before tax (PBT) grew by 47% year on year (yoy) to Rs141 crore. However the net profit registered only a meagre growth of 10% to Rs92 crore on account of a jump in the tax rate from 13% to 34.5%.
Alphageo India
Cluster: Emerging Star
Price target: Book Profit
Current market price: Rs155
Book profits
We had initiated coverage on Alphageo India on December 27, 2005 at a price of Rs81 with a price target of Rs135. The stock has reached our price target and we recommend investors to book profit at these levels.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs807
Price target revised to Rs1,000
Result highlights
*
Sun Pharmaceuticals’ consolidated net sales grew by 31.1% year on year (yoy) to Rs511.6 crore in Q1FY2007. The strong growth was driven by an increase of 59.3% in formulation exports and a 15.5% growth in the domestic formulation business.
*
Caraco Pharma’s performance was impressive in view of the fierce competition in the US market. It recorded sales of $24.8 million and a net profit of $5.1 million.
*
Lower raw material costs boosted the company’s operating profit margin (OPM), which expanded by 260 basis points to 35.4% in Q1FY2007, causing the operating profit (OP) to increase by 41.4% to Rs181.1 crore.
*
The company’s profit after tax (PAT) increased by a strong 29.9% yoy to Rs176.7 crore in the quarter, despite a lower other income, a higher depreciation and a higher share of minority interest.
*
At the current market price of Rs807, Sun Pharma is valued at 23.6x FY2007 and 20.0x FY2008 fully diluted earnings. The valuations, we believe, do not fully capture the value that Sun Pharma could command with a ramp-up in its overseas business, continued momentum in the domestic formulation space, a de-risked business model and the positive contributions of its acquisitions. In view of the consistent growth and sustainable margins, we remain positive on the company’s future prospects and maintain our Buy recommendation with a revised price target of Rs1,000.
Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,550
Current market price: Rs925
Going strong
Result highlights
*
Sundaram Clayton Ltd’s (SCL) Q1FY2007 net sales for the quarter rose by 32% to Rs189.9 crore and the growth is higher than our expectations. Both the brake and die-casting divisions delivered a strong performance during the quarter.
*
The operating profit grew by 41.8% to Rs27.8 crore as the operating profit margin (OPM) improved by 100 basis points year on year (yoy) to 14.6%. A price hike is already due from its original equipment maker (OEM) customers and hence we expect the margins to improve further in the subsequent quarters.
*
The other income for the quarter stood at Rs7.1 crore against Rs11.8 crore last year due to a lower dividend income realisation. However, the same is expected to be realised in the second quarter. Consequently the net profit grew by 5.1% to Rs18 crore.
*
The value of SCL's total investment in group companies works out to Rs1,040 per share. While computing SCL's value, we have assumed a 75% discount to the company's total investment. After adjusting for this, the SCL stock is currently trading at around 8.4x its stand-alone FY2008E earnings and around 6.7x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550.
WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs112
Current market price: Rs45
Q1FY2007 results marred by cost pressures
Result highlights
*
The Q1FY2007 results of WS Industries (WSI) are below our expectations, primarily because of higher-than-expected power and fuel cost, and interest charge. The revenue for the quarter grew by 15.5% to Rs39.41 crore, driven by an order backlog of Rs120 crore.
*
The operating profit rose by 34.3% to Rs4.66 crore as the operating profit margin (OPM) expanded by 170 basis points to 11.8%. The improvement in the OPM could have been more but for the increase in the power and fuel cost, which as a percentage of sales increased by 270 basis points to 18.8%. On an absolute basis, the power and fuel cost went up by 34.3%.
*
The interest charge for the quarter rose by 30% and depreciation also rose by 18.8%. Hence owing to the pressures of higher costs, WSI's the net profit for the quarter grew by only 49.2% to Rs1.6 crore.
*
Going forward, WSI's OPM is expected to improve significantly, given the recently expanded capacity for high-margin hollow core insulators and the implementation of the price variation clause for the low-margin suspension insulators.
*
WSI is currently sitting on a strong order backlog of Rs120 crore. The order backlog should improve further, considering the strong investments that are in the pipeline for the transmission and distribution (T&D) sector.
STOCK UPDATE
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs169
Price target lowered to Rs250
Result highlights
*
Gateway Distriparks Ltd (GDL) reported a consolidated net profit of Rs19.8 crore for Q1FY2007. The net profit is marginally below our expectation primarily because of a lower-than-expected realisation per twenty feet equivalent unit (TEU) during the quarter.
*
The consolidated revenues for the quarter stood flat at Rs34.5 crore as the realisation per TEU dropped by 5.6% to Rs6,012. However the 6% increase in the volume restricted the drop in the revenues.
*
The realisation per TEU fell as the share of the container freight stations (CFSs) at Chennai and Vizag in the total volume increased. Chnennai and Vizag have much lower realisation as compared to that of Rs7,000 per TEU for the Jawaharlal Nehru Port Trust (JNPT) CFS. The realsiation at even the JNPT CFS fell marginally.
*
The operating profit margin (OPM) for the quarter declined by 4.2% points to 56.5%, as the realisation dropped. The fall in the OPM coupled with flat revenues resulted in a 7% drop in the operating profit for the quarter.
*
However an eight-fold increase in the other income (on account of the investment of the proceeds from a global depository receipt [GDR] issue in bank deposits) helped the earnings before interest, depreciation, tax and amortisation (EBIDTA) to jump up by 20% year on year (yoy) to Rs26 crore.
*
The company's interest expenses declined by 39.7% as it repaid a substantial part of its debt. The net profit for the quarter jumped by 15% to Rs19.8 crore.
*
The quarter saw the launch of the rail container freight (RCF) service in May. Further GDL is planning to ramp up the capacity of its first ICD at Garhi and set up a second rail-linked ICD at Faridabad. This will enable GDL to be a significant player in the rail freight container business that offers integrated port based logistic services.
Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs562
Current market price: Rs415
A mixed bag
Result highlights
*
Jaiprakash Associates Ltd's (JAL) Q1FY2007 operating profit at Rs213 crore is ahead of our expectations; however a higher tax charge has muted the net profit to Rs92 crore.
*
JAL registered a growth of 10% in its revenues and the same stood at Rs895 crore for the quarter, mainly driven by a 32% growth in the cement division.
*
The operating profit grew by an impressive 37.4% to Rs213 crore, as the operating profit margins (OPMs) expanded by 480 basis points to 23.8%.
*
The earnings before interest and tax (EBIT) margins of the cement division jumped by 900 basis points to 25.7% during the quarter whereas the EBIT margins of the construction business fell by 370 basis points to 20%.
*
Overall the profit before tax (PBT) grew by 47% year on year (yoy) to Rs141 crore. However the net profit registered only a meagre growth of 10% to Rs92 crore on account of a jump in the tax rate from 13% to 34.5%.
Alphageo India
Cluster: Emerging Star
Price target: Book Profit
Current market price: Rs155
Book profits
We had initiated coverage on Alphageo India on December 27, 2005 at a price of Rs81 with a price target of Rs135. The stock has reached our price target and we recommend investors to book profit at these levels.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs807
Price target revised to Rs1,000
Result highlights
*
Sun Pharmaceuticals’ consolidated net sales grew by 31.1% year on year (yoy) to Rs511.6 crore in Q1FY2007. The strong growth was driven by an increase of 59.3% in formulation exports and a 15.5% growth in the domestic formulation business.
*
Caraco Pharma’s performance was impressive in view of the fierce competition in the US market. It recorded sales of $24.8 million and a net profit of $5.1 million.
*
Lower raw material costs boosted the company’s operating profit margin (OPM), which expanded by 260 basis points to 35.4% in Q1FY2007, causing the operating profit (OP) to increase by 41.4% to Rs181.1 crore.
*
The company’s profit after tax (PAT) increased by a strong 29.9% yoy to Rs176.7 crore in the quarter, despite a lower other income, a higher depreciation and a higher share of minority interest.
*
At the current market price of Rs807, Sun Pharma is valued at 23.6x FY2007 and 20.0x FY2008 fully diluted earnings. The valuations, we believe, do not fully capture the value that Sun Pharma could command with a ramp-up in its overseas business, continued momentum in the domestic formulation space, a de-risked business model and the positive contributions of its acquisitions. In view of the consistent growth and sustainable margins, we remain positive on the company’s future prospects and maintain our Buy recommendation with a revised price target of Rs1,000.