Stock Idea - SKF India

Recommendation: Buy
CMP = Rs 379 (as of April 27)
Price target: Rs 406

Result highlights
  • SKF India's Q1CY2007 results are ahead of our estimates because of a strong improvement in its margins. The net sales for the quarter have risen by 21.6% to Rs359.8 crore.
  • The margin improvement during the quarter was a positive surprise. I believe that the margin growth is a result of improved product mix, lesser contribution of the direct customer delivery (DCD) business and better utilisation of the new capacities.
  • The operating profit margin (OPM) jumped up by 450 basis points to 16.8% during the quarter. Consequently, the OPM has improved by 450 basis points as the operating profit jumped up by 65.7% to Rs60.5 crore.
  • A higher interest income and stable depreciation helped the company to post a profit growth of 62.8% to Rs36.7 crore.
  • The capacity expansion plans of the company are on schedule. It would also be spending close to Rs150 crore to set up a plant in Uttarakhand.
  • The company would also de-risk its business model going forward, by reducing its dependence on bearings, which currently contribute almost 90% of its sales.
  • In the next three-four years, this proportion is expected to decline to 80%, while the contribution of the other business segments, namely seals, mechanotronics, and services would reach 20%.
  • At the current levels, the stock quotes at 12.2x its CY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x.
  • I maintain our Buy recommendation on the stock with a price target of Rs406.

Stock Idea - Marico Industries

Recommendation: Buy
CMP = Rs 55 (as of April 27)
Price target: Rs 63.4
Result highlights
  • In Q4FY2007 the net revenues of Marico grew by 33% year on year (yoy) to Rs396 crore, as per our estimate. The top line growth was higher in this quarter on account of the full contribution from the acquired brands of Nihar, Manjal, Camelia, Aromatic and Fiancée, and the strong growth of 21% in the focused brand portfolio (organic growth).
  • The operating profit margin (OPM) declined by 210 basis points to 10.1% on account of an increase in the selling and administrative expenses, and the other expenses as a percentage of sales. Consequently, the operating profit grew by 10% yoy to Rs40.1 crore. The same was below our estimate.
  • The interest cost for Q4FY2007 grew to Rs4.68 crore from Rs2.3 crore in Q4FY2006, on account of the debt taken to achieve inorganic growth.
  • The net profit after the extraordinary items grew by 17% yoy to Rs28.1 crore and the earnings per share (EPS) grew to Rs0.47 (share split to Rs1).
  • Marico has acquired two brands (Fiancée and HairCode) in Egypt; these will generate revenues of Rs90-95 crore in FY2008. Significantly, these brands provide 15-18% of the profit after tax (PAT) margin against that of 7-7.5% for Marico.
  • This indeed will help Marico expand its OPM next year. Higher advertising spend for new brands would help the company to fuel future growth.
  • The Kaya business grew by an impressive 52% yoy to Rs22 crore. It managed to achieve a positive profit before tax (PBT) in the current quarter. The Kaya business broke even on a full-year basis.
  • This is a big positive because going forward the business will be contributing to the bottom line and its higher margin profile will contribute to the margin of Marico. For the full year, revenue from the Kaya business stood at Rs75 crore.
  • Marico plans to open roughly 15-20 new Kaya clinics in FY2008 and wants to concentrate on increasing the utilisation and penetration levels of the Kaya products going forward.
  • The stock is trading at attractive valuations of a price/earnings ratio (PER) of 22.8x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 15.8x FY2008E.
  • I continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs 63.4.

Stock Idea - Elder Pharmaceuticals

Recommendation: Buy
CMP = Rs 404 (as of April 25)
Price target: Rs 508

Result highlights
  • Elder Pharmaceuticals (Elder) continued its strong performance during the fourth quarter of FY2007. The company’s net sales rose by 26.6% to Rs118.2 crore in Q4FY2007, on the back of a steady momentum in its core brands, a ramp-up in the sales of the Fairone brand due to the launch of the product in south India and the growing revenues from the in-licenced portfolio. The sales were in line with our estimate.
  • Elder reported a 65-basis-point drop in its operating profit margin (OPM) to 19.6% during the quarter, on account of a 35.8% rise in the other expenditure and a 29.7% increase in the staff cost.
  • The other expenditure was higher on account of the higher selling and promotional expenses incurred for its new launches.
  • Consequently, the company’s operating profit rose by 25.4% to Rs23.7 crore in Q4FY2007.
  • Despite a 26.6% drop in the other income, and an increase in the interest and depreciation costs, Elder’s net profit grew by 17.6% to Rs15.0 crore. The net profit was in line with our estimate.
  • For FY2007, Elder’s revenues grew by 26.1% to Rs447.3 crore. The OPM expanded by 190 basis points to 19%, led by an improvement in the raw material cost, causing the operating profit to rise by 40% to Rs84.8 crore.
  • Despite the increases in the depreciation and interest costs, the net profit showed a robust growth of 54.8% to Rs56.8 crore in FY2007. The net profit growth was aided by the sharp drop in the tax incidence (due to the shift of manufacturing to tax-free zones).
  • In view of its strong growth potential, we remain positive on Elder’s future growth prospects. At the current market price of Rs404, the stock is quoting at 10.0x its estimated FY2008 earnings.
  • I maintain our Buy recommendation on the stock with a price target of Rs 508.

Stock Idea - Ranbaxy Laboratories

Recommendation: Buy
CMP = Rs 369 (as of April 25)
Price target: Rs 558

Key points
  • Ranbaxy Laboratories (Ranbaxy) has received the US Food and Drug Administration’s (USFDA) approval to manufacture and market Pravastatin sodium tablets (Pravastatin) of strengths 10mg, 20mg, 40mg and 80mg, with 180-day market exclusivity in the US healthcare system for the 80mg strength.
  • Pravastatin is the generic version of Bristol Myer Squibb’s Pravachol. The product lost patent protection in April 2006. The total annual market sales for all strengths of Pravastatin were $1.19 billion. The annual sales for the 80mg strength alone stood at $209 million.
  • I believe the launch of Pravastatin will generate $45.6 million in revenues and $17.2 million in profits in CY2007E, yielding incremental earnings of Rs1.8 per share for Ranbaxy. This implies a potential price upside of approximately Rs40 from the current levels.
  • I maintain our Buy recommendation on Ranbaxy with a price target of Rs558.

Sun TV seeks nod for stock split

Chennai, April 25: The board of directors of Sun TV Network Ltd is seeking permission from the shareholders for a stock-split. The company wants to split each share of face value of Rs 10 into two shares of Rs 5 each.

A resolution to this effect is being placed before the shareholders, who will vote on it through a postal ballot.

Sun TV wants to raise its authorised capital from the present level of Rs 100 crore to Rs 225 crore.

The board, apart from seeking its shareholders approval raise its borrowing powers from Rs 500 crore to Rs 2,000 crore, wants their approval to raise the powers to mortgage/hypothecate assets from Rs 1,000 crore to Rs 2,000 crore.

Stock Idea - Aban Offshore

Recommendation: Buy
CMP = Rs 2,280 (as of April 19)
Price target: Rs 2,528

Result highlights
  • Aban Offshore (AOL) reported a marginal decline in its stand-alone revenues to Rs118.7 crore during Q4FY2007. This is in line with expectations as there was no re-pricing of any asset in the parent company. In fact, one of its assets Aban II was not operational for part of the quarter.
  • The operating profit margin (OPM) slipped sharply to 40.2% (down from 57.1% in Q4FY2006) due to lower revenues from Aban II, increase in the staff cost (380 basis points) and insurance charges (430 basis points) as a percentage of sales, and extraordinary expenses of Rs7.5 crore (incurred towards the issue of foreign currency convertible bonds [FCCB] and preferential shares).
  • However, the jump in the other income component to Rs34.9 crore (up from Rs3.7 crore) enabled the company to report a 34.5% growth in its earnings to Rs29.6 crore. The other income was boosted by the foreign exchange (forex) gains (on the forward hedges and FCCB proceeds) of around Rs17 crore.
  • Moreover, the company would also have benefited from the interest on loans given to its Singapore subsidiary, Aban Singapore Pte (ASPL).
  • On the full year basis also, the stand-alone revenue growth was largely flat at Rs497.5 crore as compared to Rs490.2 crore in FY2006. The OPM declined by 740 basis points to 49.8%. However, the huge jump in the other income to Rs59.2 crore (up from Rs15.3 crore) enabled the company to post a 9.2% growth in the stand-alone earnings to Rs91.5 crore.
  • It should be noted that the stand-alone results do not reflect the complete picture, as the company has been valued at its FY2009 estimated earnings on a consolidated basis.
  • Along with the results the company has announced the conversion of the $100 million FCCB at a price of Rs2,789 per share. Thus, the dilution in equity would be around 1.5 million equity shares (as against our base case estimate of the conversion at Rs1,400 per share.)
  • Consequently, even though the estimates for FY2008 and FY2009 remain unchanged, the target price is revised upwards to Rs2,528 to factor in the lower than anticipated dilution in equity.
  • I maintain our Buy call on the stock.

Stock Idea - South East Asia Marine Engineering & Construction

Recommendation: Buy
CMP = Rs 205 (as of April 18)
Price target: Rs 300

Result highlights
  • South East Asia Marine Engineering & Construction (SEAMEC) has reported a 107.9% growth in its revenues to Rs56.1 crore for the first quarter ended March 2007.
  • The growth was higher than expectation due to the two-month extension of the contract from Oil & Natural Gas Corporation (ONGC; with relatively high day rates) for one of its vessels.
  • The operating profit margin (OPM) slipped from 61.3% to 48.2% primarily due to the incremental cost related to SEAMEC Princess (the fourth vessel that is undergoing modification and that didn't contribute to revenues in Q1).
  • This coupled with the general wage inflation resulted in a four-fold jump in the staff cost to Rs20.2 crore as compared with Rs5.2 crore in Q1CY2006. Consequently, the earnings grew at a relatively lower rate of 61.2% to Rs24.4 crore.
  • In terms of the outlook on charter rates, the company expects the day rates to remain firm on the back of the favourable demand environment.
  • Even after the anticipated addition of multi-support vessels (MSVs) by some of the Indian companies (like Great Offshore) there would be a shortage of MSVs in the coming years due to the huge requirement to set up the required infrastructure to transport hydrocarbons produced from the large offshore fields discovered in India over the past few years.
  • To factor in the robust performance of Q1 and the higher than expected dry docking expenses indicated by the management, we are revising downwards the CY2007 earnings estimates by 4.9% but maintaining the CY2008 earnings estimates.
  • At the current market price the stock trades at 8.8x CY2007 and 5.8x CY2008 estimated earnings.
  • I maintain our Buy call on the stock with a price target of Rs 300.

IPO - Fortis Healthcare - SUBSCRIBE

Issue objective
Fortis Healthcare (FHL) has already raised around Rs 153.69 crore through the pre-initial public offer (IPO) placements and further plans to raise around Rs 420-503 crore, depending on the price band. The company intends to use the issue proceeds:
  1. to part finance (ie Rs 100 crore) the construction and development of a new hospital by its subsidiary OBP Ltd in New Delhi;
  2. to refinance Rs 560 crore availed for the acquisition of Escorts Heart Institute and Research Centre Limited (EHIRCL);
  3. to prepay Rs 70 crore of short-term loans; and
  4. for the general corporate and issue expenses.
Company background
Fortis Healthcare (FHL), incorporated in 1996 by the Ranbaxy Laboratories group, is one of the largest private healthcare companies in India. The company commissioned its first hospital at Mohali in 2001. Since then, FHL has expanded its operations by opening multi-specialty hospitals (including some with super-specialty centres of excellence), a boutique style hospital and various satellite and heart command centres.
The company currently has a network of 11 hospitals primarily in north India, 15 satellite and heart command centres in hospitals across the country and one heart command centre in Afghanistan. Out of the network of 11 hospitals, six are owned by the company, one hospital is in collaboration with the government of Chattisgarh and four hospitals are under operation and maintenance (O&M) contract.

In September 2005, the company acquired 90% interest in Escorts Heart Institute & Research Centre (with three majority-owned hospitals in north India, a fourth hospital in collaboration with the government of Chhattisgarh and 10 satellite and heart command centres) for Rs 585 crore. The acquisition has more than doubled FHL's gross income and increased its expertise and prominence, especially in the cardiac care specialty area.

FHL's hospital network consists of multi specialty "spoke" hospitals, which provide comprehensive general healthcare to patients in their local communities, and super specialty
"hub" hospitals, which provide more advanced care to patients, including patients from its own "spoke" hospitals as well as other hospitals in the surrounding areas.

Most of FHL's hospitals are multi-specialty hospitals (covering secondary and tertiary healthcare), while some are superspecialty "centres of excellence" providing quaternary
healthcare. The key specialty areas of the company include cardiac care, orthopedics, neuro-sciences, oncology, renal care, gastroenterology and mother and child care.

FHL has approximately 1,490 inpatient beds in use across the network of 11 hospitals, with capacity to increase the inpatient beds to approximately 1,790. In the nine months ended December 2006, the hospitals performed over 4,500 heart surgeries, 4,000 angioplasties and 12,500 angiographies. During fiscal 2006, the hospitals performed over 5,000 heart surgeries, 5,000 angioplasties and 15,000 angiographies.

Issue details
Isuue open: 16-Apr-2007
Issue close: 20-Apr-2007
Offer size: Rs 420-503 cr
Issue size: 4.57 cr
Price band: Rs 92-110
Net issue:

  • QIBs* 60% of net issue size
  • Non-institutionls 10% of net issue size
  • Retail individuals 30% of net issue size
  • Note: *5% allocation for mutual funds

Investment positives

  • Brand equity to support growth
  • Well placed to exploit strong industry growth
Investment concerns
  • Pending litigation weighs
  • Operating losses despite higher occupancy
Valuation and view
Fortis Healthcare offers its shares at a price band of Rs 92-110, which leads to the market capitalisation of the company to Rs 2,085-2,493 crore. The valuation of the company seems high, as FHL acquired 90% in EHIRC in September 2005 for Rs 585 crore (valuing EHIRC at Rs 650 crore). EHIRC presently contributes around 60% of the consolidated revenue. Thus, the total value of the company would be around Rs 1,083 crore (ie Rs 650 crore x 100/60).

So far as the peer group comparison is concerned, Apollo Hospital Enterprises is the only listed company. The market capitalisation of Apollo, which is an established player with
20 hospital, years of track record, 2,553 number of beds and huge expansion plan, is Rs 2,570 crore. At this valuation Apollo commands a high TTM P/E of 37x. The premium valuation is because Apollo Hospitals is the only available stock in the growing domestic healtcare industry.


Stock Reco - Infosys Technologies - BUY

Recommendation: Buy

CMP = Rs 2,088 (as of Friday, April 13)

Price target: Rs 2,520

Result highlight

  • For the fourth quarter of FY2007, the consolidated revenue of Infosys Technologies (Infosys) grew at a tepid rate of 3.2% quarter on quarter (qoq) and 43.8% year on year (yoy) to Rs3,772 crore. The company has not been able to meet the consensus estimate of a 5-6% sequential growth in the revenue and, for the first time, it could not achieve even the lower end of its own guidance.
  • This essentially means that the company, known for its conservatism, couldn't manage even an unexpected 0.8% higher appreciation in the rupee (an average realisation of Rs43.75 against an assumption of Rs 44.11).
  • The sequential decline of 100 basis points in its operating profit margin (OPM) to 31.7% has been largely contributed by the adverse impact of the appreciation in the rupee, higher selling, general and administration (SG&A) expenses and the sequential decline in the utilisation rate. On the other hand, the 1.7% sequential improvement in the billing rates positively affected the margins.
  • The other income more than doubled to Rs119 core (up from Rs59 crore in Q3FY2007) due to significantly higher yield on investments during the quarter. The translation loss was also limited to just Rs5 crore which is quite commendable given the 1.8% appreciation in the rupee and sundry debtors in excess of $500 million.
  • Consequently, the consolidated earnings grew at a relatively higher rate of 3.8% to Rs1,020 crore (excluding the tax write-back of Rs124 crore related to overseas locations in earlier years). This is again lower than street expectation of around Rs1,040 crore.
  • On the full year basis, the revenue and earnings grew by 45.9% and 51.6% respectively. The OPM declined by 90 basis points to 31.6% in FY2007. However, the jump of 167.6% in the other income component boosted the overall growth in the earnings and resulted in a 100-basis-point improvement in the net margin to 26.8% (excluding one-time items).
  • In terms of the FY2008 guidance, the company has been able to meet the street expectations for the growth in dollar terms. It has guided for consolidated revenue of $3.95-4.02 billion (a growth of 28-30%) and an earnings per share (EPS) growth in the range of 25.7-27.7%.
  • However, given the rupee appreciation, the consolidated revenue in rupee terms is guided to grow at a relatively much lower rate of 22.6-24.6% (Rs17,038-17,308 crore). The EPS growth in rupee terms is guided in the range of 20-22% (Rs80.3-81.6) which factors in the adverse impact of the exchange rate fluctuations and around 3% dilution in the equity base during the fourth quarter.
  • The EPS growth guidance is lower than the street expectations.
  • The guidance for Q1FY2008 is all the more muted with the earnings guided to remain flat and EPS guided to decline by 1.4% (due to dilution of equity). The consolidated revenues are guided to grow in the range of 3.3-3.7% sequentially.
  • I have revised downwards the earnings estimate for FY2008 by around 7% to factor in the dilution of the equity capital and appreciation of the rupee.
  • I maintain the Buy call on the stock with a revised price target of Rs 2,520 (24x its FY2009 earnings estimate of Rs 105 per share).

Stock Reco - Sun Pharmaceuticals

Current Price: Rs 1057
Target Price: Rs 1163
Potential Upside: 10%
Time Frame: 12 months
Key Highlights:

  • Sun Pharma is a leading domestic pharma company with a strong presence in chronic segments such as cardiology, neurology and diabetology. The company's turnover has doubled and net profit tripled in the last 4 years.
  • Its net margins have been consistently higher than its peers (the top 10 Indian pharma companies) and it boasts one of the highest operating margins in the sector. The company plans to demerge areas related to new molecular entities and drug delivery systems into SPARC and list the company.
  • The fair value of the newly formed company works out to US$620 million (around 13% of the current market price). We believe the de-merger and listing of the newly formed subsidiary will unlock value both for the company and its shareholders.
  • The stock is currently trading at Rs 1,057, 18.51x FY09E EPS of Rs 57.11 and 23.16x FY08E EPS of Rs 45.63. Given the superior fundamentals in terms of RoNW, ROCE, margins, product mix (95% chronic space) and almost debt free status, we believe that the stock should trade at a premium to its peers.
  • I rate the stock as PERFORMER with price target of Rs 1163 in 12 months.

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