Stock Idea - Cadila Healthcare

Recommendation: Buy
CMP = Rs 395 (as of Tuesday)
Price target: Rs 425

Key points
  • Cadila Healthcare (Cadila) has signed an agreement to acquire 100% stake in Quimica e Farmaceutica Nikkho do Brasil Ltda. (Nikkho) for a consideration of around $26 million (ie about 1x of Cadila's annual sales).
  • Nikkho had posted sales of US$ 26 million for CY2006. It currently markets 22 products under 13 different brands. It also has nearly 50 registered brands that are yet to be launched.
  • The acquisition is a strategic one for Cadila, as it would help the company to foray into the high-margin branded generic market of Brazil.
  • Anticipating 18% and 15% growth for Nikkho in FY2008 and FY2009 respectively, we estimate the latest acquisition would contribute about 5-6% of our estimated revenue in FY2009.
  • At the current market price of Rs 395, Cadila is trading at 17.9x its estimated FY2008 earnings and 14.8x its estimated FY2009 earnings.
  • Considering the strong growth momentum of the company, I maintain Buy recommendation on the stock with a price target of Rs 425.

Stock Idea - Tourism Finance Corporation of India

Recommendation: Buy
CMP = Rs 16.8 (as of Tuesday)
Price target: Rs 30

Key points - Riding on improved prospects for tourism sector
  • To benefit from the positive outlook on tourism sector: Tourism Finance Corporation of India’s (TFCI) deteriorating financial performance and increasing NPAs were a direct consequence of the downturn in the tourism sector in the late 1990s.
  • However, the positive outlook for the tourism sector going forward would significantly benefit TFCI in terms of higher loan growth.
  • Substantial improvement in asset quality: TFCI has significantly improved its asset quality. Its net NPAs, which were high at 11% in FY2004, were at 2.6% in FY2006 and are expected to fall further in FY2007. Higher recoveries and lower incremental NPAs have helped reduce the level of its NPAs.
  • Possible foray into private equity space to boost future earnings: TFCI is also reported to be in talks with major private hotel chains, real estate funds and private equity players to raise private equity to finance large hotel projects.
  • This will enable TFCI to generate a fee income, and increase its ability to co-invest and lend.
  • Dividend payment now possible: Due to its high NPAs, TFCI was not permitted by the RBI to pay dividends in FY2005 and FY2006. TFCI had paid a dividend of Rs 0.7 per share in FY2004. If it resumes dividend payment at the earlier historical rate, the dividend yield would work out to 4%, which could provide a margin of safety for the stock.
  • Stock could trade at Rs30: TFCI had a reported book value of Rs27 per share in FY2006. The stock is trading at 0.6x trailing book and is cheaper than most other financial stocks. At target price/book value of 0.8x for FY2009, the price target for the stock works out to Rs 30 per share.
  • I believe that the valuation at 0.8x is reasonable given that the company has never made losses, its NPAs have turned around and its loan growth is expected to be strong with the improving prospects of the hotel and tourism industry.
  • I therefore recommend a Buy on TFCI with a price target of Rs 30.

Stock Idea - Ratnamani Metals & Tubes

Recommendation: Buy
CMP = Rs 880 (as of Friday)
Price target: Under review

Result highlights:
  • The Q4FY2007 results of Ratnamani Metals & Tubes are above our expectations.
    The company reported strong quarterly results. The revenues for the quarter grew by 95.3% to Rs 172.6 crore.
  • The operating profit for the quarter grew by 77.6% to Rs 34 crore and the operating profit margin (OPM) for the same period declined by 240 basis points to 22.3% from 24.8% in Q4FY2006.
  • The OPM declined due to a higher raw material cost as a percentage of sales. The raw material cost went up by almost 310 basis points to 62.9% from 59.8% in Q4FY2006. Other expenses as a percentage of sales also went up by 110 basis points during the quarter.
  • The interest expense for the quarter increased by 111.4% to Rs 4.9 crore while the depreciation cost for the quarter increased by 310.1% to Rs 6.2 crore.
  • The profit before tax grew by 80% to Rs 27.6 crore. The net profit for the quarter grew by 38.4% to Rs 17.5 crore due to a higher tax rate of 36.7% in this quarter compared with 17.8% in Q4FY2006.
  • For the full year, the net sales grew by 79% to Rs 571 crore and the net profit grew by 91% to Rs64.2 crore.
  • The order book at the end of this quarter stood at Rs 500 crore. Driven by a strong order book and the increasing demand for its products from its key user industries, which are in capital expansion phase, I believe there is strong visibility of its earnings.
  • At the current market price, the stock is trading at 12.4x its FY2007 earnings per share and 6.9x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation.
  • I would upgrade my earnings estimate for FY2008 as well as the price target and would be coming out shortly with a detailed update on the company.

Stock Idea - Transport Corporation of India

Recommendation: Buy
CMP = Rs 88 (as of June 8)
Price target: Rs 100

Result highlights
  • In Q4FY2007 the overall revenues of Transport Corporation of India (TCI) grew by 18.9% year on year (yoy) to Rs292.6 crore on the back of the better performance of both the XPS and the SCM division.
  • The earnings before interest and tax (EBIT) of the company grew by 61% to Rs15.7 crore yoy whereas the margin improved by 300 basis points to 10% in the quarter, driven by the SCM division's margin of 12%.
  • The interest cost doubled to Rs3.12 crore from Rs1.7 crore last year whereas the depreciation provision stood flat on a sequential basis at Rs5.45 crore but increased by 41% yoy, as the company added assets in the form of warehouses and trucks.
  • On the back of a better performance at the operating level, the net profit more than doubled to Rs9.42 crore.
  • TCI has drawn up a capital expenditure (capex) plan of Rs440 crore for the next two to three years. The funds would be utilised for buying ships, expanding the warehouses and augmenting its truck fleet.
  • The company is also in the process of forming a 50:50 joint venture with Scan Trans Holding, Denmark to conduct shipping business. It is in the initial stages of forming the joint venture and we will update you on the same once we get more information.
  • The company has identified four properties covering a total area of 12.5 acre for development. The value of these properties taken together translates into Rs26 per share on diluted equity. We believe this provides significant cushion to the company's stock price.
  • At the current price of Rs 88 per share, the stock is trading at 14.7x its FY2009 earnings estimate.
  • Considering the bullish outlook for the company, I am upgrading its target price to Rs 100 per share.

Stock Idea - ORG Informatics

Recommendation: Buy
CMP = Rs 105 (as of June 8)
Price target: Rs 184

Result highlights
  • ORG Informatics' performance was below expectations in Q4FY2007. Its revenues grew by 17% to Rs 70.4 crore, below our expectations. The revenue growth was dented partly by the slippage of some revenues to Q1FY2008.
  • The operating profit margin (OPM) declined sharply to 1.3% (as against 9.5% in the nine months ended December 2006) due to the cumulative impact of the higher contribution from low-margin hardware supply part of the MTNL order, expenses related to integration and restructuring of the recently acquired entities (United Technologies and DGIT) and a one-time write-off (around Rs 1.3 crore related to provision for bad debts and stock adjustments).
  • However, the steep jump in the other income and the write-back of tax provisions enabled the company to post a relatively higher growth of 24.7% in its consolidated earnings to Rs 5.3 crore.
  • On the full year basis, the consolidated revenues and earnings grew by 97.6% to Rs306.6 crore and 113.7% to Rs 17.3 crore. The OPM declined by 110 basis points to 7.6% in FY2007.
  • In terms of the outlook, the management expects to maintain the growth momentum on the back of a healthy order pipeline and the expected improvement in its margins as the high-margin maintenance revenues kick in from the MTNL contract.
  • Moreover, the company would continue to actively scout for inorganic opportunities and has got the board approval to raise up to $30 million for the same.
  • I maintain Buy call on the stock with a price target of Rs 184.

Stock Idea - Nicholas Piramal India

Recommendation: Buy
CMP = Rs 265
Price target: Rs 393
  • From being a formulation player in the domestic market, NIPL has emerged as a leader in the custom manufacturing space. Through strategic acquisitions and expansions, the company has achieved a good growth.
  • Simultaneously, it has also maintained its focus on building its innovative pipeline of molecules. The company's strength in the R&D field is vindicated through its recent drug development deal with global pharma major, Eli Lilly.
  • Through steady growth in the branded formulation segment, ramp-up in the custom manufacturing contracts, the expansion of the path lab business and a ramp-up in the capacity utilisation at Morpeth and NPIL UK, NIPL is well-positioned to exhibit strong growth both in the domestic market and internationally.
  • Further, with the operations of Avecia, turning profitable and the Rhodia business having been shifted to India, the margins of the company should show improvement.
  • Considering the strong revenue flows and enhanced profitability picture for the coming years, we remain positive on the company. At the current market price of Rs 265, NIPL is quoting at 15.7x estimated FY2008 earnings.
  • I maintain Buy recommendation on the stock with a price target of Rs 393.

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