Stock Idea - Ceat

Recommendation: Buy

CMP = Rs 198

Price target: Rs 250

Key points:

• The production has been lower in Q3FY2008 due to festive season holidays and capacity expansion undertaken by the company. To offset the production loss, the company is trying to push its replacement sales and exports and is realigning its strategies. The demand from the Original Equipment Manufacturers (OEM) of commercial vehicles is picking up and is expected to improve further from Q4FY2008. For FY2008, the company expects a volume growth of ~10%.
• Rubber prices have started rising from October 2007 onwards after continuously falling for the last ten months. In view of this rise in the cost of rubber (the main raw material) and rising crude oil prices, the company is expected to announce a price increase of 1-1.5% in the first week of December 2007. Prices have been increased in the export markets also.
• Profit margins in Q3FY2008 may get affected to some extent on a quarter-on-quarter basis due to lower production and higher input costs. However the profit margins are expected to improve in Q4FY2008 on the back of increase in prices, higher production and commencement of additional capacities for off-the-road (OTR) tyres at Bhandup and passenger car tyres at Nasik.
• The management is planning to outsource low value-added products such as two-wheeler, jeep and tractor tyres, but will continue in-house manufacture of all value-added tyres such as OTR and those for trucks and cars. This should further improve the profit margins in FY2009. 
• The currently listed entity Ceat is expected to get delisted in December 2007 and the relisting of both the new entities is expected in January 2008.
• I maintain positive outlook on the company, given its smart turnaround and brilliant performance improvement. At current levels, the stock trades at 7.5x its FY2009E and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.3.
• I maintain Buy recommendation with a revised price target of Rs 250.

Stock Idea - Hexaware Technologies

Recommendation: Book Profit

Current market price: Rs 84

Key points:

·         Hexaware Technologies (Hexaware) has reported that it has come to the management's notice that one of the officials from its treasury department has conducted fraudulent foreign exchange (forex) transactions over the past few months. There are a total of 11 such transactions spread across various currencies such as the US Dollar, euro, pound, yen and Swiss Franc.

·         The board of directors has appointed an internal committee to investigate the matter and has suspended the official in question. Hexaware plans provisions of $20-25 million to cover any potential loss as a result of these transactions.

·         Though the scrip has corrected substantially in the recent past and is trading at attractive valuations, it is likely to continue with its underperformance due to lack of any positive triggers.

·         Consequently, it is advisable to exit the stock at its CMP.

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Stock Idea - Balaji Telefilms

Recommendation: Buy
CMP = Rs 358
Price target: Rs 427

Key points:

• Balaji Motion Pictures Ltd (BMPL) delivered two blockbusters in 2007 - "Shootout at Lokhandwala" and "Bhool Bhulaiya". Buoyed by the success of this venture, the management aims to produce and/or distribute at least ten movies a year from FY2009 as against five movies in FY2008.
• While Balaji Telefilms Ltd (BTL) is adequately funded for further ramping up BMPL's movie business and though the management has not affirmed news reports of BTL divesting its stake in BMPL, there remains a strong possibility of BTL unlocking value in BMPL.
• As expected, with the launch of new channels in Hindi entertainment genre, BTL is scaling up its TV content business. "Kahe naa kahe" was launched on 9x in November 2007, "Kuchh is tarah" and "Kya dil mein hai" are to be launched on Sony (from November 26) and 9x (in December 2007) respectively.
• I have revised our estimates for FY2008 and FY2009 to factor the new show launches and the management's aggressive plans for ramping up the movie business.
• Consequently, I am revising price target on the stock to Rs 427 based on the sum-of-the-parts method and maintain Buy recommendation on it.

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Stock Idea - ICI India

Recommendation: Buy

CMP = Rs 530

Price target: Rs 581

Result highlights:

• The Q2FY2008 results of ICI India are not comparable on a yoy basis due to divestment of several businesses in FY2007. The net sales for the quarter stood at Rs 239.1crore.
• The paints business revenue grew by 5.6% yoy to Rs 202.2 crore in Q2FY2008. The growth appears subdued due to high base effect as the festive sales on account of Diwali got deferred to Q3 as against most of it being registered in Q2 of FY2007. Thus we expect the paints division to record handsome growth in Q3FY2008.
• The continued chemical business grew by 21.9% yoy to Rs 36.8 crore. Thus the overall revenues of the continued businesses grew 7.8% to Rs 239 crore. The discontinued business (surfactant and advanced refinish) had contributed Rs 22.8 crore to the company's total revenues in Q2FY2007.
• The PBIT in the paint business declined by 3.8% yoy with a 90 basis-point contraction in the margin to 9%. The PBIT in the continued chemical business grew 41.9% yoy with the margin expanding by 234 basis-points to 16.6%. After the sale of the Uniqema business, the chemical business now contributes only 15.4% to the top line as against 21.7% in Q2FY2007.
• Overall, the operating margin stood at 12.5% against 13% in Q2FY2007. With a higher other income at Rs 6.5 crore for the quarter against Rs 3.9 crore in Q2FY2007 the adjusted net profit grew by 3.5% yoy to Rs 21.3 crore. Pursuant to the scheme of buy back, till the end of the quarter the company has bought back 15.87 lakh shares against a target of buying back ~36.7 lakh shares (worth Rs 211.06 crore). 
• The outlook for the business remains positive with the company following a strategy of divesting non-paint businesses and focusing more on growing the paints business. Further a cash pile of ~Rs 700 crore leaves open inorganic growth opportunities for the company. 
• At the current market price of Rs530, the stock trades at 18x its FY2008E adjusted EPS of Rs 29.4 and 16x its FY2009E adjusted EPS of Rs 33.1.
• I maintain Buy recommendation on the stock with a price target of Rs 581.

Stock Idea - Grasim Industries

Recommendation: Buy

CMP = Rs 3,627

Price target: Rs 3,950

Result highlights:

• Grasim reported a 25.3% yoy topline growth to Rs 2,519.2 crore during Q2FY2008 on the back of robust realisations of the VSF division as well as pick up in the sponge iron and chemicals division. The overall EBITDA jumped by 51.3% yoy to Rs 805.5 crore driven by a whopping 81% yoy growth in VSF profits which stood at Rs 316 crore. The cement division’s profits grew by 24.2% yoy to Rs 442 crore whereas the sponge iron and chemicals division’s profits jumped by 292% to Rs 269 crore.
• Overall margins expanded by 550 bps to 32% mainly as the VSF margins expanded by 900 bps to 40%. The cement margins expanded by 110 bps to 32.3%. Interest expenses were up 13% yoy to Rs 27.2 crore due to higher borrowings in the quarter whereas the depreciation increased by 15.8% yoy to Rs 87.5 crore due to part commissioning of VSF expansion in FY2008.
• The other income increased by 14% yoy to Rs 57.3 crore thanks to deployment of surplus cash. Consequently, the PAT was up 48.1% yoy to Rs 500 crore, beating our expectations.
• The VSF division is peaking at the right time for the company in the wake of an expected downturn in the cement cycle in the next one-year. Going ahead the strong volume growth for the VSF business coupled with better realisations and cost control, will drive the cashflows of the company more than offsetting the fall in the cashflows of the cement business. Also, any surprise on the cement prices will only be positive for the company. Consequently, we believe this is one of the most comfortably placed companies in our cement pack.
• At the current valuations, the stock trades at 13.7x its FY2008E EPS and 15.7x its FY2009E EPS. The company's cement business is trading at valuation of USD 125 on the expanded capacity which is cheap considering the fact that benchmark valuations have gone up as mentioned in earlier reports.
• Taking cognizance of the cheap valuations of the cement business coupled with the positive outlook for the VSF business, I maintain Buy call on this stock with price target of Rs 3,950.

Stock Idea - KEI Industries

Recommendation: Buy

CMP = Rs 79

Price target: Rs 125

Result highlights:

• KEI Industries' (KEI) Q2FY2008 results were in line with our expectations. The net sales increased by 45.1% year on year (yoy) to Rs 198.4 crore led by a strong revenue growth in both power cable and stainless steel (SS) wire businesses.
• On segmental basis, the revenues of the power cable business grew by 49% to Rs 176.2 crore. The profit before interest and tax (PBIT) for the business grew by 40.2% to Rs 29.8 crore, while the PBIT margin declined by 110 basis points. The revenues of the SS wire business grew by19.6%, while the business reported a marginal loss due to volatility in nickel prices.
• The operating profit grew by 26.8% to Rs 27.9 crore. The operating profit margin (OPM) declined by 200 basis points to 14.1%. The OPM declined on the back of a marginal loss in the SS wire business. 
• The interest expense rose by 66.2% to Rs 9.7 crore, while the depreciation charge increased by 23.8% to Rs 1.8 core. Consequently the net profit increased by 14.7% to Rs 11.6 crore. 
• The current order backlog of the company (at the end of Q2FY2008) stood at Rs300 crore. Of this, Rs 75-crore worth of orders came for high tension (HT) cables, Rs 200 crore were for low tension (LT) power cables and the balance Rs 25 crore were for SS wires and house wires. 
• The 100% export oriented undertaking (EOU) plant at Chopanki scheduled to be commissioned by October 2007 has been delayed slightly due to the non-availability of power. The plant is now expected to be operational in a month's time. The HT cable capacity expansion at the current plant would be operational by April 2008.
• In the view of all this, I maintain a strong Buy call on this stock at Rs 125, with a time frame of 6-8 months.

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The scheme endeavors to protect the capital invested through focused investments in debt and money market instruments as well as equity while at the same time also seeking to provide investors with opportunities for longterm growth in capital.

 

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• Fund Class: Debt fund with Equity Exposure 
• Fund Type: 5 years, close-ended
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Stock Idea - Ahmednagar Forgings

Recommendation: Buy

CMP = Rs 225

Price target: Rs 300

Result highlights:

• The Q1FY2008 results of Ahmednagar Forgings Ltd (AFL) are in line with our estimates.
• The company's sales for the quarter grew by 30.5% to Rs 159.2 crore. The growth was led by a 16% increase in the domestic sales and a 62.5% surge in exports.
• The operating profit margin (OPM) increased by 100 basis points to 20.3%. As a result, the operating profit grew by 37.3%. Higher interest and depreciation costs led the profit after tax (PAT) to grow by 26.8% to Rs 17.1 crore.
• The company continues to have a strong order book. The plan to expand its capacity to 165,000 tonne is expected to be operational by Q2FY2008.
• At the current market price of Rs 225, the stock trades at attractive valuations of 7x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x.
• I maintain Buy recommendation on this stock with a price target of Rs 300.

Stock Idea - Ahmednagar Forgings

Recommendation: Buy

CMP = Rs 225

Price target: Rs 300

Result highlights:

• The Q1FY2008 results of Ahmednagar Forgings Ltd (AFL) are in line with our estimates.
• The company's sales for the quarter grew by 30.5% to Rs 159.2 crore. The growth was led by a 16% increase in the domestic sales and a 62.5% surge in exports.
• The operating profit margin (OPM) increased by 100 basis points to 20.3%. As a result, the operating profit grew by 37.3%. Higher interest and depreciation costs led the profit after tax (PAT) to grow by 26.8% to Rs 17.1 crore.
• The company continues to have a strong order book. The plan to expand its capacity to 165,000 tonne is expected to be operational by Q2FY2008.
• At the current market price of Rs 225, the stock trades at attractive valuations of 7x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.5x.
• I maintain Buy recommendation on this stock with a price target of Rs 300.

Stock Idea - Jaiprakash Associates

Recommendation: Buy

 

CMP = Rs 1,655

 

Price target: Rs 2,000

 

Key points:

• Jaiprakash Associates (JP Associates) has started bookings for the residential complex that is being developed on the first parcel of its land at Noida. The initial response to the bookings appears to be very strong, as the average rate stands at Rs 6,000 per square foot.
• According to media reports, ICICI Venture Funds Management is planning to invest about USD800 million (Rs 3,148 crore) to pick up a stake in Jaypee Infratech, which is a unit of the Jaypee group's listed entity, JP Associates.
• Last week, Formula One Chief Executive Bernie Ecclestone confirmed that it would be holding the first ever Formula One grand prix in the National Capital Region, India in 2010. He struck an agreement to that effect with JSPK Sports Pvt Ltd, a unit of JP Associates. 
• JP Associates has approved a stock split of its Rs 10 share into five shares of Rs 2 each. In Q2FY2008, JP Associates reported a net profit of Rs 104 crore, registering a growth of 16% year on year (yoy).
• The company's overall revenue grew by 11.9% yoy to Rs 860 crore on the back of a 13% year-on-year (y-o-y) growth in the construction revenues and a 7% y-o-y growth in the cement revenues.
• Considering the increase in the benchmark cement valuations from USD80 to USD100-110 per tonne, we had revised our price target to Rs 1,350 per share. At that time, we had not factored the value of the coal mines, the power project and the remaining 5,000 acre of land the government would be allocating to the company over the next couple of years. Thus, JP Associates makes a strong case for value unlocking for the investors.
• I believe that as and when the investors get more clarity on the development of the company's land, the stock will get re-rated, as has happened in the past six months. Also, the Formula One deal will be a major trigger for the company in the future.
• I recommend buy option for JP Associates at Rs 2,000 per share.

Stock Idea - Housing Development Finance Corporation (HDFC)

Recommendation: Buy

CMP = Rs 2,700

Price target: Rs 3,362

Key points:

• Subsidiaries hold significant value: HDFC has created significant value in its subsidiaries. Three of these — HDFC Bank, HDFC Life Insurance and HDFC Mutual Fund—are valued at Rs883 per share. These subsidiaries are growing faster than HDFC, the value contributed by them would be significantly higher going forward.
• Gaining market share, CRR hikes also helping the cause: HDFC has gained significant market share in the past couple of quarters. Also, continuous CRR hikes by the RBI have benefited HDFC the most, as banks are unable to bring down their lending rates to protect their margins. HDFC doesn't need to maintain CRR, hence its incremental spreads have widened as incremental borrowing costs have declined while lending rates have remained stable.
• Strong earnings visibility: Its core mortgage business is expected to grow at 25-30% over the next couple of years. In Q2FY2008, HDFC's margins expanded and the core operating performance was very strong (up 56% yoy). I expect the earnings before exceptionals to grow at 26% CAGR over FY2007-10E. 
• Excellent asset quality despite strong asset growth: Despite the strong business growth the net NPA is almost negligible and the gross NPA is below 1%. Strong credit appraisal and risk monitoring techniques have helped HDFC to maintain a very healthy asset quality.
• Valuations look attractive: I have valued the core mortgage business at 22x FY2010E EPS and if we adjust Rs 954 for the value assigned by us to its subsidiaries from the CMP of Rs 2,700, HDFC is quoting at 15.9x its FY2010E earnings and 3x FY2010E book value. I feel the valuations look attractive considering HDFC's consistent above 20% earnings growth record, the potential value unlocking from its various subsidiaries and investments, and the superior track record of its management.
• I recommend a Buy call on the stock with a 12-month price target of Rs 3,362.

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IPO Analysis - Kolte-Patil Developers

Objective of the issue

The fresh issue of 190 lakh equity shares is aimed at raising Rs 237 to Rs 275 crore (depending on the price band of Rs 125-145 per share) to fund the acquisition of development rights and the development and construction of the existing as well as forthcoming real estate projects. The remaining expenses including general expenses and general corporate expenses will be funded through internal accruals and debt.

 

After the issue, the total number of shares for the company will increase from 562.5 lakh shares to 752.5 lakh shares. This will bring down the promoters' stake to 74.8% of the diluted equity.

 

Company background

Incorporated in 1991, Kolte-Patil Developers Limited (KPDL) develops and constructs properties mainly in Pune city. The company has developed and constructed 25 projects spanning 4.0 million square feet (mn sq ft) as on September 30, 2007. Out of these 25 projects, 22 projects aggregating 3.6mn sq ft are in Pune city, whereas the remaining three projects spanning 0.4mn sq ft are in Bangalore. The company is in the process of developing 28 projects. Out of these 28 projects, 24 projects aggregating 16.5mn sq ft are to be developed in and around Pune city and the remaining four projects spanning 1.3mn sq ft are to be developed in Bangalore. These 28 projects are expected to be completed over the next five years. Moreover, the company is planning to acquire 32.9mn sq ft land through development rights

and Memorandum of Understanding (MoU) from initial public offer (IPO) proceeds. The 32.9mn sq ft of acquired land would be used to develop 21.6mn sq ft saleable area over the next ten years.

 

Key positives

• Extensive land bank in and around Pune

o        KPDL plans to develop almost all of its land bank in or around Pune city, the sixth largest metropolitan city in India. Out of the total 39.38mn sq ft, KPDL plans to develop 38.02mn sq ft (or 96.6%) of its land bank in or around Pune, which also happens to be the second largest city of Maharashtra.

• Joint venture with private equity fund to develop large projects

o        KPDL has entered into a joint venture (JV) with ICICI Venture, a real estate private equity fund in India to develop three large projects. These three projects include one residential project (Wagholi Lush County) spanning 2.8mn sq ft in Pune, one IT park (Teraspace IT Park at Kharadi) aggregating 1.1mn sq ft and one integrated township project (Jambhe township) spanning 7.5mn sq ft.

• Entering hospitality business

o        KPDL plans to enter the hospitality business. In line with this, the company is planning to develop Hinjewadi Service Apartment to cater to the needs of IT/ITES professionals. This project is to be developed under the entity Green Olive, a 60:40 JV between KPDL and Arista Developers Private Limited.

• KPDL may expand to other local markets

 

Key concerns

• Large portion of land acquisition through sole development rights and MoU
• Outstanding litigation

o        KPDL along with its promoter and directors is involved in various litigations aggregating around Rs50 crore. Any unfavourable court ruling against the company could affect its profitability.

• Execution risk

o        KPDL has developed 4mn sq ft since its foundation in 1991. However, the company plans to develop 17.8mn sq ft over the next five years and 39.4mn sq ft over the next ten years. This implies execution of around 4.0mn sq ft on an annual basis.

• High concentration of land bank in Pune city

 

Valuation

Using net asset value (NAV) methodology, I have estimated one year forward NAV per share of Rs 194 implying a 33.9% discount at the upper band of Rs 145 per share.

 

Peer comparison

I have done peer group comparison for KPDL with other real estate players who have considerable presence and land bank in Pune city. At Rs 145 per share, KPDL is broadly in line with its peer's valuation.

 

• Kolte-Patil @Rs145 / 1 year forward NAV = 194 / Discount to NAV (%) = -33.9
• Kolte-Patil @Rs125 / forward NAV = 189 / Discount (%) = -33.9
• DS Kulkarni Developers / forward NAV = 459 / Discount (%) = -36.8
• Sobha Developers / forward NAV = 1001 / Discount (%) = -13.0

 

Issue details

• Issue opens: November 19, 2007
• Issue closes: November 22, 2007
• Issue size: 190 lakh-equity shares
• Reservation for employees: 1.9 lakh shares
• Fresh issue to public: 188 lakh shares
• Face value: Rs 10 each
• Price band: Rs 125-145
• Recommendation: SUBSCRIBE

Stock Idea - Deepak Fertilisers & Petrochemicals Corporation

Recommendation: Buy

CMP = Rs 149 (as of Wednesday)

Price target: Rs 188

Result highlights:

• Net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) grew by 2% year on year (yoy) to Rs 216.9 crore. The chemical division and the fertiliser division contributed 69% and 31% respectively to the net sales.
• The revenue from the chemical division increased by 29% yoy to Rs 155.8 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division dropped by 32% yoy to Rs 70.7 crore due to reduced availability of phosphoric acid in the international market and lower availability of material for trading.
• Operating profit during the quarter grew by 26% yoy to Rs 32.2 crore. A strong contribution from the chemical division expanded the overall operating profit margin (OPM) by 290 basis points to 14.9%. The increased raw material cost including that of the outsourced ammonia and propylene decreased the segmental PBIT margin for the chemical division, while the higher price realisation reduced the segmental loss for fertiliser division.
• The completion of Dahej-Uran pipeline would improve the natural gas supply to Taloja plant from December 2007, which would help in replacing naphtha with natural gas for steam generation, depending upon its supply. Natural gas at around $8.5 per Million British Thermal Units (MMBTU) would cost almost half the price of naphtha.
• The company is expected to complete land acquisition process for its ammonium nitrate project in Orissa by November 2007. The plant with a 300,000TPA capacity is expected to be operational by November 2009.
• The company's specialty mall Ishanya, for interiors and exteriors, is expected to commence operations from the third quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs 46 per square foot.
• At the current market price of Rs 149, the stock is trading at 8.7x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x.
• I maintain Buy recommendation on the stock with a price target of Rs 188 with 6 months time frame.

Stock Idea - Hindustan Unilever

Recommendation: Buy

CMP = Rs 200

Price target: Rs 280

Result highlights:

• Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs 3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
• The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
• The operating profit grew by 11.1% to Rs 447.6 crore. However, the net profit rose by only 6.9% to Rs 409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
• Sales of soaps and detergents grew by a robust 12.8% yoy to Rs 1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%. 
• Sales of processed food segment grew by 32.5% yoy to Rs 128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs 23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
• The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh thereby expanding the water purifier business to eight states. Pureit, HUL’s in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
• At the current market price of Rs 200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs 8.1 and 21.9x its CY2008E EPS of Rs 9.2.
• I maintain Buy recommendation on the stock with a price target of Rs 280.

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Stock Idea - Punjab National Bank

Recommendation: Buy

CMP = Rs 550

Price target: Rs 675

Result highlights:

• Punjab National Bank's (PNB) Q2FY2008 profit after tax (PAT) grew by 6.6% year on year (yoy) to Rs 538.5 crore. The PAT was higher than our expectations of Rs 510.5 crore and was mainly driven by the higher non-interest income.
• The net interest income (NII) adjusted for amortisation expenses was stagnant at Rs 1,368.5 crore as higher deposit costs put a significant pressure on the net interest margin (NIM). The NIM declined by 11 basis points (bps) on a year-on-year (y-o-y) basis to 3.75%.
• The non-interest income grew by 26.1% yoy to Rs 467.8 crore mainly driven by the higher treasury income that grew by 67.2% yoy to Rs 107 crore and a fee income that rose by 20.7% yoy to Rs 262 crore.
• The operating expenses grew by 19.3% yoy to Rs 855 crore mainly on the back of a 25.6% y-o-y increase in the staff expenses to Rs 641.8 crore. The sharp increase in the staff expenses was on account of Rs 200-crore additional provisions made by the bank to meet its shortfall in pension liabilities.
• The management has stated that the shortfall is likely to be around Rs 900 crore and is to be written over the next five years. Thus, the operating profit declined by 5% yoy, whereas the core operating profit was down by 10.3% yoy.
• Despite the dismal performance on the core operating side, PNB continues to enjoy a high level of current account and savings account (CASA) at 44% and margins at around 3.8%. The bank owns a 25% stake in the Unit Trust of India (UTI) mutual fund. UTI is likely to come out with an initial public offer (IPO) in early CY2008. The stake in the UTI mutual fund contributes around Rs 32 to each share of PNB.
• With its high return on equity (RoE) of around 17.8%, I feel the valuations are attractive at current levels. At the current market price of Rs 550, the stock is quoting at 7.8x its FY2009E earnings per share (EPS), 4x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV).
• I maintain Buy recommendation on the stock with a 12-month price target of Rs 675.

Stock Idea - Subros

Recommendation: Buy

CMP = Rs 200 (as of Monday)

Price target: Rs 340

Result highlights:

• Subros' Q2FY2008 results were slightly below our expectations due to a lower than expected topline. The net sales for the quarter declined by 5.3% to Rs 157.1 crore on the back of a 4.1% decline in the volumes due to a slower offtake by Tata Motors. 
• The operating profit margin (OPM) improved by 130 basis points to 12.3% in Q2FY2008 from 11% in Q2FY2007 due to higher efficiencies, savings in logistics costs and localisation benefits.
• Higher interest and depreciation charges led to a 17.4% decline in the net profits to Rs 6.4 crore. However, with majority of the capital expenditure (capex) incurred and with the low-cost debt recently raised by the company, we expect the interest costs to rationalise going forward.
• The sharp improvement in the OPM has been a positive surprise and we believe that the company would be able to maintain the OPM at these levels going forward. The company has already bagged an order from Suzuki to supply compressors for its new export vehicle, which would boost Subros' FY2009 volumes.
• At the current market price of Rs 200, the stock is available at very attractive valuations, discounting its FY2009E earnings by 4.9x and is available at enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 2.6x.
• Hence, I maintain extremely positive stance on Subros with a price target of Rs 340.

Stock Idea - State Bank of India & ICICI Bank

State Bank of India

Recommendation: Buy

CMP = Rs 2, 209

Price target: Rs 2,625

Key Points:

• I have been mentioning that the banking sector would continue to remain an outperformer in the current market scenario and so it has, with the Sensex reporting a gain of 10% in the last one month and Bankex reporting a growth of 17% in the same period. 
• The public sector behemoth State Bank of India (SBI) remains one of the top picks in the banking space and I have stated below five reasons why I feel SBI should be a Buy at the current levels:

1. Upcoming rights issue—at a price far higher than envisaged earlier 
2. Guidelines on holding companies by the Reserve Bank of India (RBI) expected in November 2007
3. New business initiatives—general insurance, private equity
4. Launch of PSU Bank Benchmark Exchange Traded Scheme (Bank BEES)
5. Other positive news flows and developments that are expected going forward. 

 

ICICI Bank

Recommendation: Buy

CMP = Rs 1,241

Price target: Rs 1,528

Key points:

• During Q2FY2008, the core earnings of ICICI bank remained under pressure as retail loans grew at a slower rate and the pressure on spreads continued due to higher deposit costs. However, a large portion of corporate bulk deposits would get repriced in Q1FY2009, which would ease the pressure on spreads going forward.
• The branch network of the bank increased to 950 branches from 755 in the first six months of FY2008 (post Sangli bank's merger with ICICI bank). The bank also received licences for opening 425 new branches over the next 12 months.
• The bank reported a 317-basis-point improvement in its current and savings account (CASA) ratio to 25.3% driven by higher current account balances during Q2FY2008. The bank is doing all the right things by building more branches and increasing its CASA base to reduce its reliance on high-cost bulk deposits.
• The improvement in the cost of funds resulting from the higher CASA ratio is expected only in medium to long term with the increase in branch network. A large portion of high-cost bulk deposits are expected to get repriced in Q1FY2009, which along with the improvement in the CASA ratio should help in improving the spreads going forward. Till then the spreads are likely to remain at current levels.
• The bank's return on equity (RoE) is likely to remain depressed at 10.5% for FY2008E and FY2009E after the massive capital raising (Rs 20,000 crore raised from primary markets) undertaken by the bank. The low RoE has remained a concern for ICICI Bank, but I expect things to change going forward.
• With new preference share guidelines in place (more capital raising options available to banks in future resulting in lower equity dilution), a positive outcome on the holding company guidelines from the Reserve Bank of India (that would allow the subsidiaries to take care of their capital needs) and a change in its business model (more branch building expected going forward which should improve its spreads) will help ICICI bank in restoring RoE much faster and then improving the same.
• I maintain Buy call on this stock with a price target of Rs. 1,528 and time frame of 6-8 months.

Stock Idea - Corporation Bank

Recommendation: Buy

CMP = Rs 471 (as of Monday)

Price target: Rs 542

Result highlights:

• Corporation Bank's (CORP) Q2FY2008 profit after tax (PAT) grew by 27% year on year (yoy) to Rs 161.3 crore. The growth was primarily driven by a higher non-interest income component. However, the net interest income (NII) growth was better than that of most peers. A surge in the operating expenses due to higher provisioning on account of AS-15 related staff expenses restricted the overall profit growth.
• CORP's total assets grew by 18% yoy and 5% quarter on quarter (qoq) while the reported NII grew by 17.5% yoy and 7.3% qoq. The NII (adjusted for amortisation) grew by 15.3% yoy and 7% qoq. Its adjusted net interest margin (NIM) showed a sequential improvement unlike many of its peers as it was the only bank that aggressively reduced deposit rates after its dismal NII performance in Q1FY2008 (when NII had seen a growth of 7.8% yoy). 
• The non-interest income grew by 62% yoy and by 32.3% qoq to Rs 183.2 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth was the trend for all public sector banks during Q2FY2008.
• CORP's operating expenses jumped up by 25.3% yoy to Rs 243.2 crore mainly due to a 39.2% jump yoy in the staff expenses brought about by a Rs47-crore AS-15 related expense charged during the quarter. Despite such a sharp jump in the operating expenses, the operating profit growth was robust at 33.4% yoy brought about by a higher non-interest income growth. However, the core operating profit growth was moderate at 8.7% yoy. 
• The bank's business growth moderated with advances up by 17% yoy from a 25% growth yoy reported during March 2007. The deposit growth also moderated from 28.8% to 20% for the same period. Its total assets grew by 18% yoy compared with a growth of 30% yoy reported in March 2007.
• The bank's asset quality continues to remain one of the best in the industry with the gross non-performing asset (NPA) down by 21 basis points to 1.9% and the net NPA lower by 11 basis points to 0.35% sequentially. 
• CORP has been the first bank to cut deposit rates and show some sequential improvement in its NIM in Q2FY2008. The non-interest income growth is expected to be much better in future. It will be driven by higher treasury gains that would help in improving the bank's return on equity (RoE) by 230 basis points to 17.3% in FY2009 from 15% reported in FY2007.
• The bank's earnings are expected to grow at a compounded annual growth rate (CAGR) of 20.1% between FY2007 and FY2009, which is much better than its past performance. At the current market price of Rs471 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.5x pre-provisioning profit (PPP) and 1.4x FY2009E book value (BV).
• I maintain Buy recommendation on the stock with a 12-month price target of Rs 542.

Stock Idea - Ipca Laboratories

Recommendation: Buy

CMP = Rs 660 (as of Monday)

Price target: Rs 875

Key points :

• Domestic formulation business to outpace industry growth: Driven by steady new launches, a strong therapy-focused field force and good brand building abilities, Ipca Laboratories' (Ipca) domestic formulation business has been growing at above industry growth rates. With an enhanced focus towards chronic therapies and aggressive new launches, Ipca's domestic formulation business would continue to grow at 16-18% during FY2007-09.
• Strong thrust on exports: With steady performance on the domestic front, Ipca is increasingly focusing on its export business, which generates 30% of its total revenues. Driven by aggressive brand promotion in the emerging economies, a revival in the European business and a scale-up in the US business, the formulation exports are projected to grow at a CAGR of 14.5% over FY2007-09.
• API business to benefit from outsourcing contracts: A leader in several API products, Ipca's API business constitutes 33% of its total revenues. With its low-cost advantage, Ipca is set to capture a substantial chunk of the outsourcing business of global pharmaceutical companies. We believe Ipca's API business will grow at a 13.5% CAGR over FY2007-09, driven by a 9% CAGR in the domestic API business and a 15% CAGR in API exports.
• Earnings to gallop at a 23% CAGR: We estimate Ipca's earnings to grow at a CAGR of 23% over FY2007-09E on the back of a 20% CAGR in revenues. The revenues will be driven by a 15.3% CAGR in the domestic business and a 24.4% CAGR in exports. We estimate earnings of Rs 59.9 per share in FY2008 and of Rs 73.0 per share in FY2009.
• Compelling valuations: At the current market price of Rs660, Ipca is trading at attractive valuations of 11.0x FY2008E earnings and 9.0x FY2009E earnings. It has traditionally been getting PE multiple in low teens. But with the enhanced visibility of growth from the US and European markets, the sustained growth in the domestic business and the healthy return ratios, we believe that the stock should command higher valuations.
• I therefore recommend a Buy on Ipca with a one-year price target of Rs 875.

Stock Idea - Ceat

Recommendation: Buy

CMP = Rs 170 (as of Thursday)

Price target: Rs 216

Result highlights:

• Ceat's Q2 results were ahead of our expectations on the back of a higher than expected margin. The top line grew by 8.5% led by a volume growth of 7.3% year on year (yoy). Despite a slowdown in the original equipment manufacturer (OEM) sales, which declined by about 30% yoy, the replacement sales and exports did well. 
• The operating profit margin (OPM) for the quarter grew by 430 basis points to 9.4%, which is the highest in the recent times. Consequently, the operating profit jumped by 102% to Rs 54.6 crore. A lower interest cost and a higher other income led to a whopping 494% growth in the profit to Rs 25.5 crore.
• Rising rubber and crude prices are a cause for concern. Because of the import threat, the price increase could be minimal, which may lead to some sort of softness in the margins.
• At the current market price of Rs 170, the stock is trading at 8.3x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.7x.
• I maintain Buy recommendation on the stock with a price target of Rs 216 with a time frame of 6 months.

Stock Idea - Elder Pharmaceuticals

Recommendation: Buy

CMP = Rs 376 (as of Thursday)

Price target: Rs 508

Result highlights:

• Elder Pharmaceutical's (Elder) net sales for Q2FY2008 grew by a strong 21.3% to Rs 132.3 crore, thus maintaining the growth momentum seen in the previous quarters. The sales growth was marginally ahead of our estimates of Rs 128 crore and was driven by the continued momentum in the company's star brands and new products and line extensions launched by the company over the past one year. 
• Elder reported an expansion of 50 basis points in its OPM, which stood at 19.4% during the quarter. The expansion in the OPM was led by a 230-basis-point reduction in the other expenses incurred by the company. The decline in the other expenses was mainly due to the effect of increased productivity of the marketing spend incurred by the company. 
• Consequently, the company's operating profit rose by 24.5% to Rs 25.6 crore in Q2FY2008.
• Elder's net profit rose by 21.7% to Rs 17.7 crore in Q2FY2008. The growth in the profit was marginally ahead of our estimate of Rs 15.5 crore and was robust despite an increase of 50.8% in the interest cost and a rise of 53.2% in the depreciation charge during the quarter. The net profit growth was aided by a substantially lower tax provision made during the quarter.
• Elder is exploring new contract research and manufacturing (CRAMS) opportunities through its 29 alliance partners. Having executed one such project with its Italian partner, Angelini, the company hopes to get 3-4 more such manufacturing contracts from Angelini, which will enable it to scale up its CRAMS business.
• Elder has recently announced two acquisitions in Europe: a 20% stake in the UK-based Neutra Health PLC and a 51% stake in the Bulgaria-based Biomeda. These two acquisitions will provide Elder an entry into the European markets. Elder plans to complete the Biomeda acquisition by the end of FY2008 and also increase its stake in Neutra Health from 20% currently to 26% by December 2007.
• At the current market price of Rs 376, the stock is quoting at 9.3x its estimated FY2008 earnings and at 8.3x its estimated FY2009 earnings.
• I maintain Buy recommendation on the stock with a price target of Rs 508 with time frame of 8-9 months.