ViJiT
Vijith Pujari
STOCK UPDATE
Welspun India
Cluster: Emerging star
Recommendation: Buy
Price target: Rs99
Current market price: Rs71
Price target lowered to Rs99
Result highlights
*
Welspun India Ltd (WIL) reported a strong 45% year-on-year (y-o-y) growth in its revenues to Rs199 crore during Q1FY2007. The revenue growth was driven by the robust growth in the volume in the terry towel segment and the incremental revenues from the newly commissioned bed sheet manufacturing capacity. The depreciation of the rupee against the dollar resulted in additional revenues of Rs2.6 crore during the quarter.
*
WIL’s operating profit grew by 104% yoy in Q1FY2007 to Rs41.3 crore from Rs20.2 crore in Q1FY2006. The growth in the operating profit was higher on account of a 600-basis-point expansion in the operating profit margin (OPM) year on year (yoy) led by savings in the raw material cost and other expenditure. The OPM in Q1FY2007 stood at 20.8% as against 14.8% in Q1FY2006.
*
The growth at the operating level was not reflected in the bottom line as a result of a mark-to-market (M-to-M) forex loss of Rs10 crore during the quarter. The higher depreciation and interest cost also dragged down the earnings. Consequently, the profit after tax (PAT) declined by 30% yoy to Rs7.54 crore.
*
The second phase of the expansion (capital expenditure [capex] worth Rs650 crore) at Anjar is expected to go on stream by Q4FY2007. It would lead to an increase in the manufacturing capacity for terry towels to 31,000 tonne per annum (TPA) and for bed sheets to 45 million metre per annum (MMPA). It would also result in the introduction of a new product line of decorative bed sheets with a capacity of 1.44 million pieces per annum. In view of the company’s capacity expansion plans, improving product portfolio and ability to leverage on the existing client relationships of the recently acquired Christy, the management expects a surge in its export volumes which should drive its growth in the future.
*
We are revising our FY2007E estimates downwards by 11% to factor in the forex loss in Q1FY2007. The OPM has been maintained at 18.9% in spite of the better-than-expected performance at the operating level in Q1. Moreover, given the possibility of M-to-M forex losses in the coming quarter also (due to the company's aggressive hedging policy), we are reducing the price target to Rs99 in the line with the higher risk of further downgrade of the earning estimates.
*
At the current price of Rs71, WIL is trading at 9.5x FY2007E (6x FY2008E) earnings and 9.3x FY2007 (6x FY2008E) enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy on WIL with a revised price target of Rs99.
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,040
Current market price: Rs812
Brewing inorganically
Result highlights
*
The adjusted consolidated net profit of Tata Tea Ltd (TTL) grew by 32% year on year (yoy) to Rs81.4 crore, ahead of our expectations.
*
The net consolidated revenues for the quarter grew by 11.5% yoy to Rs799 crore as the domestic operations grew by 8% yoy and the international operations grew by 8-8.5% yoy.
*
The consolidated operating profit grew by 14.1% yoy to Rs157.7 crore as the operating profit margin (OPM) expanded by 40 basis points. Lower employee expenses helped the OPM expansion, albeit the positive impact of the same was partly negated by a higher raw material cost.
*
The strengthening of the British Pound vis-à-vis the Indian Rupee seems to have partially aided the company in offsetting the higher raw material cost.
*
The strong operating performance aided by a higher other income helped TTL to report a 32% growth in the adjusted net profit to Rs81.4 crore.
*
During the quarter TTL's subsidiary, Tata Coffee Ltd (TCL), acquired Eight O'clock Coffee Company (EOC), a US-based coffee company. We expect EOC to add Rs3 per share to TTL's earnings per share (EPS) though we have not factored the same in our estimates for FY2007 and FY2008.
*
At the current market price of Rs812, the stock is quoting at 12.2x its FY2008E EPS and 7.3x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). TTL also has investments worth Rs124.5 per share on book. We maintain our Buy recommendation on the stock with the price target of Rs1,040.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs3,250
Current market price: Rs2,640
Sharply ahead of expectations
Result highlights
*
At Rs78.85 crore the Q1FY2007 net profit of Madras Cement Ltd (MCL) is sharply higher than our expectations, primarily because of higher-than-expected cement realisation.
*
The revenues for the quarter grew by 55% to Rs341 crore and the net earnings for the quarter grew by 336.6% to Rs78.85 crore. The growth in the net revenues was driven by a 24% growth in the cement volumes and a 25% growth in the cement realisation.
*
As the cement realisation improved sharply, MCL's operating leverage came into play and consequently the operating profit for the quarter grew by a whopping 170.3% to Rs136.37 crore. The operating profit margin (OPM) for the quarter improved by a huge 17.1% to 40%.
*
On the cost front, MCL implemented strict cost-control measures as the total cost declined by 2.5%. Hence the entire Rs600-per-tonne increase in the realisation per tonne flowed into the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne which stood at Rs1,155, one of the highest in the entire industry.
*
With a 205% growth in the other income and a 40% decline in the interest cost along with almost stable depreciation, the net profit for the quarter grew by a staggering 336% to Rs78.85 crore.
Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs237
On an expansion mode
Result highlights
*
Unichem Laboratories recorded net sales of Rs136.9 crore in Q1FY2007 as against Rs115.67 crore in the same quarter last year achieving a growth of 18%. The growth was achieved on the back of a whopping 76% growth year on year (yoy) in exports to Rs30.32 crore from Rs17.26 crore.
*
The operating profit increased by 15.14% yoy from Rs25.7 crore in Q1FY2006 to Rs29.6 crore in the quarter under review whereas the operating profit margins (OPMs) declined by a marginal 61 basis points from 22.21% to 21.60% on account of an increase in the costs of the purchase of finished goods.
*
The profit after tax (PAT) increased by a massive 26% to Rs23.98 crore from Rs18.92 crore in Q1FY2006. This was due to the other income component of Rs2.3 crore as well as a lower interest outgo.
*
The company is making efforts to increase its exports of active pharmaceutical ingredients (APIs) and formulations to the regulated markets, especially to the USA by setting up two more plants at Baddi, Himachal Pradesh as well as by upgrading its API facilities at Pithampur. These initiatives hold a positive future for the company.
*
At the current market price of Rs237, the stock discounts its FY2007E earnings per share (EPS) of Rs24.9 by 9.51x and FY2008E EPS of Rs28.4 by 8.31x. Looking at the positive outlook for the company, we maintain our Buy recommendation on the stock with a target price of Rs360.
Marico Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs488
Momentum continues
Result highlights
*
Marico's Q1FY2007 net revenues grew by 37.7% year on year (yoy) to Rs372.8 crore, ahead of our estimates. The strong top line growth was driven by a 23% growth in Marico's focused brands portfolio and aided by the contribution of brands Nihar, Manjal, Camelia & Aromatic acquired last year.
*
The operating profit margin (OPM) expanded by 420 basis points to 15.1% on account of the material costs and employee expenses as a percentage of sales being lower. Consequently the operating profit grew by 90.1% yoy to Rs56.3 crore, ahead of our estimates.
*
The interest cost for Q1FY2007 grew by a whopping 472.6% yoy to Rs4.8 crore, on account of the debt taken to acquire Nihar. Even the depreciation cost jumped by 174.2% yoy to Rs11.2 crore on account of the write-off of the intangible assets. This coupled with a higher tax outgo slowed down the net profit growth, which grew at 39.4% yoy to Rs30.3 crore, but still ahead of our expectation.
*
Copra is a key raw material for Marico and any fundamental change in this commodity's market will result in a huge swing in earnings. The cumulative rainfall from June 1 to July 19 was 14% below normal. If this trend continues it might impact the output of copra, and in turn translate into higher raw material prices for Marico and thereby impact the margins.
*
We are modifying our estimates for FY2007E and FY2008E to factor in the continuance of debt on the balance sheet for the medium term against our earlier assumed equity dilution. However, the entire exercise will have negligible impact on the net profit and will be revised upwards by 1% in FY2008E.
*
The stock is trading at attractive valuations of a price/earning ratio (PER) of 19.6x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.8x FY2008E, which is attractive in the wake of the growing risk appetite and the ongoing transformation (reducing dependence on Parachute/Saffola) of the company. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs634.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,193
Stayed checked in
Result highlights
*
The revenues of Indian Hotels Company Ltd (IHCL) increased by 27.2% year on year (yoy) to Rs257.3 crore in Q1FY2007 on the back of a 31.6% rise in room revenues, marginally ahead of our estimates. The food and beverages income (F&B) rose by 17.9% yoy, the other operating income increased by 24.3% yoy and the management fee saw a rise of 34.0% yoy.
*
The occupancy rates (ORs) in Q1FY2007 increased by 100 basis points yoy at 66%, whereas the average room rate (ARR) grew by a robust 31.6% to Rs7,337, in line with our estimates.
*
The operating profit margins (OPMs) expanded by 530 basis points to 25.6% on account of the healthy revenue growth and a continuous operating leverage that the company enjoys. Consequently the operating profits grew by a robust 60.7% yoy to Rs65.9 crore, marginally ahead of our estimates.
*
The expansion in the OPM, higher other income (up 126.9% yoy) and a reduction in the net interest costs (down 30.8% yoy) saw the net profit grow by a whopping 127.7% yoy to Rs38.5 crore, marginally ahead of our estimates.
*
The board of directors along with the Q1FY2007 results has announced a stock split of the shares. The directors have recommended the sub-division of each share with a face value of Rs10 into ten shares with a face value of Re1 each subject to the required approvals.
*
Considering the attractive valuations with a price/earnings ratio (PER) of 19.5x its FY2008E consolidated earnings, the bright business prospects for the company and the stock trading at a discount of 15% to its replacement cost of Rs1,400.0 per share, we maintain a BUY on the stock with a price target of Rs1,474.0 (target multiple at 25x—the stock typically trades at 25-27x its one-year forward earnings), an upside of 23.7%.
State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,037
Current market price: Rs797
Price target lowered to Rs1,037
Result highlights
*
State Bank of India (SBI) reported unexciting results with a net profit of Rs799.5 crore for Q1FY2007. The net profit was below our expectations due to a higher provisioning on the amortisation on investments and taxes.
*
The adjusted net interest income (NII) has grown by 9.7% year on year (yoy) on the back of a 21% year-on-year (y-o-y) growth in the advances and a 23-basis-point expansion in the net interest margins (NIMs).
*
The fee income grew by just 3.4% due to a lower income from the government business. However, the total other income grew by 12% due to higher treasury gains.
*
The adjusted operating profit grew by 12.3% yoy to Rs2,837.4 crore backed by a growth in the NII and treasury gains.
*
The deposits (adjusted for India Millennium Deposits) grew by just 7.8% yoy and declined by 0.6% sequentially as the term deposits remained flat. However, the demand deposits grew by 20% yoy and by 3.5% sequentially.
*
The adjusted net profit grew by 13.7% yoy.. During the same quarter last year, the company had provided for one-time amortisation expenses. On a sequential basis, the net profit declined by 6.3%.
*
We have reduced our earnings estimates for the bank by around 17% and 14% for FY2007 and FY2008 respectively to take into account the increased amortisation and mark-to-market losses.
*
At the current market price of Rs797, the stock is trading at 6.9x its FY2008E earnings and 1.1x its FY2008E book value. On a consolidated basis, the stock looks all the more appealing, as it is trading at 0.9x FY2008E book value. We maintain our Buy recommendation on the stock. We have revised our price target downwards to Rs1,037 in line with the revision in the estimates.
Welspun India
Cluster: Emerging star
Recommendation: Buy
Price target: Rs99
Current market price: Rs71
Price target lowered to Rs99
Result highlights
*
Welspun India Ltd (WIL) reported a strong 45% year-on-year (y-o-y) growth in its revenues to Rs199 crore during Q1FY2007. The revenue growth was driven by the robust growth in the volume in the terry towel segment and the incremental revenues from the newly commissioned bed sheet manufacturing capacity. The depreciation of the rupee against the dollar resulted in additional revenues of Rs2.6 crore during the quarter.
*
WIL’s operating profit grew by 104% yoy in Q1FY2007 to Rs41.3 crore from Rs20.2 crore in Q1FY2006. The growth in the operating profit was higher on account of a 600-basis-point expansion in the operating profit margin (OPM) year on year (yoy) led by savings in the raw material cost and other expenditure. The OPM in Q1FY2007 stood at 20.8% as against 14.8% in Q1FY2006.
*
The growth at the operating level was not reflected in the bottom line as a result of a mark-to-market (M-to-M) forex loss of Rs10 crore during the quarter. The higher depreciation and interest cost also dragged down the earnings. Consequently, the profit after tax (PAT) declined by 30% yoy to Rs7.54 crore.
*
The second phase of the expansion (capital expenditure [capex] worth Rs650 crore) at Anjar is expected to go on stream by Q4FY2007. It would lead to an increase in the manufacturing capacity for terry towels to 31,000 tonne per annum (TPA) and for bed sheets to 45 million metre per annum (MMPA). It would also result in the introduction of a new product line of decorative bed sheets with a capacity of 1.44 million pieces per annum. In view of the company’s capacity expansion plans, improving product portfolio and ability to leverage on the existing client relationships of the recently acquired Christy, the management expects a surge in its export volumes which should drive its growth in the future.
*
We are revising our FY2007E estimates downwards by 11% to factor in the forex loss in Q1FY2007. The OPM has been maintained at 18.9% in spite of the better-than-expected performance at the operating level in Q1. Moreover, given the possibility of M-to-M forex losses in the coming quarter also (due to the company's aggressive hedging policy), we are reducing the price target to Rs99 in the line with the higher risk of further downgrade of the earning estimates.
*
At the current price of Rs71, WIL is trading at 9.5x FY2007E (6x FY2008E) earnings and 9.3x FY2007 (6x FY2008E) enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy on WIL with a revised price target of Rs99.
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,040
Current market price: Rs812
Brewing inorganically
Result highlights
*
The adjusted consolidated net profit of Tata Tea Ltd (TTL) grew by 32% year on year (yoy) to Rs81.4 crore, ahead of our expectations.
*
The net consolidated revenues for the quarter grew by 11.5% yoy to Rs799 crore as the domestic operations grew by 8% yoy and the international operations grew by 8-8.5% yoy.
*
The consolidated operating profit grew by 14.1% yoy to Rs157.7 crore as the operating profit margin (OPM) expanded by 40 basis points. Lower employee expenses helped the OPM expansion, albeit the positive impact of the same was partly negated by a higher raw material cost.
*
The strengthening of the British Pound vis-à-vis the Indian Rupee seems to have partially aided the company in offsetting the higher raw material cost.
*
The strong operating performance aided by a higher other income helped TTL to report a 32% growth in the adjusted net profit to Rs81.4 crore.
*
During the quarter TTL's subsidiary, Tata Coffee Ltd (TCL), acquired Eight O'clock Coffee Company (EOC), a US-based coffee company. We expect EOC to add Rs3 per share to TTL's earnings per share (EPS) though we have not factored the same in our estimates for FY2007 and FY2008.
*
At the current market price of Rs812, the stock is quoting at 12.2x its FY2008E EPS and 7.3x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). TTL also has investments worth Rs124.5 per share on book. We maintain our Buy recommendation on the stock with the price target of Rs1,040.
Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs3,250
Current market price: Rs2,640
Sharply ahead of expectations
Result highlights
*
At Rs78.85 crore the Q1FY2007 net profit of Madras Cement Ltd (MCL) is sharply higher than our expectations, primarily because of higher-than-expected cement realisation.
*
The revenues for the quarter grew by 55% to Rs341 crore and the net earnings for the quarter grew by 336.6% to Rs78.85 crore. The growth in the net revenues was driven by a 24% growth in the cement volumes and a 25% growth in the cement realisation.
*
As the cement realisation improved sharply, MCL's operating leverage came into play and consequently the operating profit for the quarter grew by a whopping 170.3% to Rs136.37 crore. The operating profit margin (OPM) for the quarter improved by a huge 17.1% to 40%.
*
On the cost front, MCL implemented strict cost-control measures as the total cost declined by 2.5%. Hence the entire Rs600-per-tonne increase in the realisation per tonne flowed into the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne which stood at Rs1,155, one of the highest in the entire industry.
*
With a 205% growth in the other income and a 40% decline in the interest cost along with almost stable depreciation, the net profit for the quarter grew by a staggering 336% to Rs78.85 crore.
Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs237
On an expansion mode
Result highlights
*
Unichem Laboratories recorded net sales of Rs136.9 crore in Q1FY2007 as against Rs115.67 crore in the same quarter last year achieving a growth of 18%. The growth was achieved on the back of a whopping 76% growth year on year (yoy) in exports to Rs30.32 crore from Rs17.26 crore.
*
The operating profit increased by 15.14% yoy from Rs25.7 crore in Q1FY2006 to Rs29.6 crore in the quarter under review whereas the operating profit margins (OPMs) declined by a marginal 61 basis points from 22.21% to 21.60% on account of an increase in the costs of the purchase of finished goods.
*
The profit after tax (PAT) increased by a massive 26% to Rs23.98 crore from Rs18.92 crore in Q1FY2006. This was due to the other income component of Rs2.3 crore as well as a lower interest outgo.
*
The company is making efforts to increase its exports of active pharmaceutical ingredients (APIs) and formulations to the regulated markets, especially to the USA by setting up two more plants at Baddi, Himachal Pradesh as well as by upgrading its API facilities at Pithampur. These initiatives hold a positive future for the company.
*
At the current market price of Rs237, the stock discounts its FY2007E earnings per share (EPS) of Rs24.9 by 9.51x and FY2008E EPS of Rs28.4 by 8.31x. Looking at the positive outlook for the company, we maintain our Buy recommendation on the stock with a target price of Rs360.
Marico Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs488
Momentum continues
Result highlights
*
Marico's Q1FY2007 net revenues grew by 37.7% year on year (yoy) to Rs372.8 crore, ahead of our estimates. The strong top line growth was driven by a 23% growth in Marico's focused brands portfolio and aided by the contribution of brands Nihar, Manjal, Camelia & Aromatic acquired last year.
*
The operating profit margin (OPM) expanded by 420 basis points to 15.1% on account of the material costs and employee expenses as a percentage of sales being lower. Consequently the operating profit grew by 90.1% yoy to Rs56.3 crore, ahead of our estimates.
*
The interest cost for Q1FY2007 grew by a whopping 472.6% yoy to Rs4.8 crore, on account of the debt taken to acquire Nihar. Even the depreciation cost jumped by 174.2% yoy to Rs11.2 crore on account of the write-off of the intangible assets. This coupled with a higher tax outgo slowed down the net profit growth, which grew at 39.4% yoy to Rs30.3 crore, but still ahead of our expectation.
*
Copra is a key raw material for Marico and any fundamental change in this commodity's market will result in a huge swing in earnings. The cumulative rainfall from June 1 to July 19 was 14% below normal. If this trend continues it might impact the output of copra, and in turn translate into higher raw material prices for Marico and thereby impact the margins.
*
We are modifying our estimates for FY2007E and FY2008E to factor in the continuance of debt on the balance sheet for the medium term against our earlier assumed equity dilution. However, the entire exercise will have negligible impact on the net profit and will be revised upwards by 1% in FY2008E.
*
The stock is trading at attractive valuations of a price/earning ratio (PER) of 19.6x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.8x FY2008E, which is attractive in the wake of the growing risk appetite and the ongoing transformation (reducing dependence on Parachute/Saffola) of the company. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs634.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,193
Stayed checked in
Result highlights
*
The revenues of Indian Hotels Company Ltd (IHCL) increased by 27.2% year on year (yoy) to Rs257.3 crore in Q1FY2007 on the back of a 31.6% rise in room revenues, marginally ahead of our estimates. The food and beverages income (F&B) rose by 17.9% yoy, the other operating income increased by 24.3% yoy and the management fee saw a rise of 34.0% yoy.
*
The occupancy rates (ORs) in Q1FY2007 increased by 100 basis points yoy at 66%, whereas the average room rate (ARR) grew by a robust 31.6% to Rs7,337, in line with our estimates.
*
The operating profit margins (OPMs) expanded by 530 basis points to 25.6% on account of the healthy revenue growth and a continuous operating leverage that the company enjoys. Consequently the operating profits grew by a robust 60.7% yoy to Rs65.9 crore, marginally ahead of our estimates.
*
The expansion in the OPM, higher other income (up 126.9% yoy) and a reduction in the net interest costs (down 30.8% yoy) saw the net profit grow by a whopping 127.7% yoy to Rs38.5 crore, marginally ahead of our estimates.
*
The board of directors along with the Q1FY2007 results has announced a stock split of the shares. The directors have recommended the sub-division of each share with a face value of Rs10 into ten shares with a face value of Re1 each subject to the required approvals.
*
Considering the attractive valuations with a price/earnings ratio (PER) of 19.5x its FY2008E consolidated earnings, the bright business prospects for the company and the stock trading at a discount of 15% to its replacement cost of Rs1,400.0 per share, we maintain a BUY on the stock with a price target of Rs1,474.0 (target multiple at 25x—the stock typically trades at 25-27x its one-year forward earnings), an upside of 23.7%.
State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,037
Current market price: Rs797
Price target lowered to Rs1,037
Result highlights
*
State Bank of India (SBI) reported unexciting results with a net profit of Rs799.5 crore for Q1FY2007. The net profit was below our expectations due to a higher provisioning on the amortisation on investments and taxes.
*
The adjusted net interest income (NII) has grown by 9.7% year on year (yoy) on the back of a 21% year-on-year (y-o-y) growth in the advances and a 23-basis-point expansion in the net interest margins (NIMs).
*
The fee income grew by just 3.4% due to a lower income from the government business. However, the total other income grew by 12% due to higher treasury gains.
*
The adjusted operating profit grew by 12.3% yoy to Rs2,837.4 crore backed by a growth in the NII and treasury gains.
*
The deposits (adjusted for India Millennium Deposits) grew by just 7.8% yoy and declined by 0.6% sequentially as the term deposits remained flat. However, the demand deposits grew by 20% yoy and by 3.5% sequentially.
*
The adjusted net profit grew by 13.7% yoy.. During the same quarter last year, the company had provided for one-time amortisation expenses. On a sequential basis, the net profit declined by 6.3%.
*
We have reduced our earnings estimates for the bank by around 17% and 14% for FY2007 and FY2008 respectively to take into account the increased amortisation and mark-to-market losses.
*
At the current market price of Rs797, the stock is trading at 6.9x its FY2008E earnings and 1.1x its FY2008E book value. On a consolidated basis, the stock looks all the more appealing, as it is trading at 0.9x FY2008E book value. We maintain our Buy recommendation on the stock. We have revised our price target downwards to Rs1,037 in line with the revision in the estimates.
