Stock Idea - Zee News & Apollo Tyres

Zee News
Recommendation: Buy
CMP = Rs 60 (as of Monday)
Price target: Rs 73
Result highlights:
  • Zee News Ltd's (ZNL) Q2FY2008 results are in line with our expectations. The revenue from operations grew by a robust 46.2% year on year (yoy) to Rs 79.8 crore while the net profit zoomed by 154% to Rs 5.6 crore during the quarter.
  • The advertising revenues soared by 57% yoy to Rs 60.8 crore but the growth in the subscription revenues was a moderate 9.5% to Rs15 crore. A break-up of its channels into the existing and new businesses shows that revenues from the existing businesses grew by a handsome 42% yoy whereas the new businesses recorded an 80% growth in their revenues.
  • The operating profit margin (OPM) for the quarter stood at 13.3% against a dismal 1.5% for Q2FY2007. Thus the operating profit grew to Rs 10.6 crore against Rs0.8 crore in Q2FY2007. The existing businesses continued to maintain a good margin, which stood at 33% for the quarter. The operating loss of the new businesses was almost constant yoy at Rs 13.1 crore.
  • While Zee Marathi and Zee Bangla improved their leadership position during the quarter, the new channels, Zee Telugu, Zee Kannada and Zee 24 Ghanta, achieved commendable improvement in their Gross Rating Points (GRPs) yoy.
  • At the current market price of Rs 60.3 the stock trades at 28.8x its FY2009E earnings per share (EPS) of Rs 2.1 and at FY2009E market cap/sales of 3.3x.
  • I maintain Buy recommendation on the stock with price target of Rs 73 with a time frame of 8-12 months.
Apollo Tyres
Recommendation: Buy
CMP = Rs 40
Price target: Rs 52
Result highlights:
  • Apollo Tyres has rendered a brilliant performance for Q2FY2008 on the back of a strong topline growth. The quarterly performance has been further fuelled by an improvement in the operating profit margin (OPM) due to lower raw material prices.
  • The topline has grown by 10% to Rs 844.3 crore for the quarter, which has been led mainly by a volume growth of 9% and a realisation growth of 1%. The slowdown has continued in the original equipment (OE) business, whereas the replacement market has grown by a high single digit.
  • The OPM has improved substantially to 12.8% as against 7.8% last year on the back of softer raw material prices, improvement in price realisation, and increasing operating efficiencies. Consequently, the operating profit marked a growth of 81% to Rs 108.1 crore. A higher other income has enabled the net profit for the quarter to grow by 164.2% to Rs 51.1 crore.
  • On the consolidated basis, the net revenues have been flat at Rs 1,085 crore, while the profit has improved to Rs 57.6 crore (up 216% year on year [yoy]). The sales of its subsidiary Dunlop has been affected during the quarter due to a shutdown in September 2007, however the profitability has improved.
  • Dunlop is performing very well and the earnings before interest, depreciation, tax, and amortisation (EBIDTA) margin has reached the 12% level during the quarter. 
  • At the current market price of Rs 40, the stock discounts its FY2009E consolidated earnings by 7.6x and quotes at an enterprise value (EV)/EBIDTA of 4.9x.
  • I maintain Buy recommendation on the stock with a revised price target of Rs 52.

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Stock Idea - Wockhardt & Cadila Healthcare


Recommendation: Buy

CMP = Rs 416 (as of Monday)

Price target: Rs 552

Result highlights:

  • Wockhardt's net sales increased by 68.6% to Rs 738.1 crore in Q3CY2007. The growth was achieved on the back of a 6.3% growth in the domestic business and a 121.1% growth in the international business. On a like-to-like basis (excluding the impact of the acquisitions made during the year), the growth stood at an approximate 9.0% during the quarter. The sales growth was above our estimates.
  • Wockhardt's domestic sales grew by a subdued 6.3% to Rs 213.2 crore in the quarter. The growth was subdued due to the high base of Q3CY2006 because of the increased sales of its acute therapy brands on account of the spread of monsoon-related infectious diseases. Wockhardt is confident of accelerating the domestic growth in Q4CY2007 on the back of a steady performance of the power brands, the ramp-up of the oncology portfolio and the growing contribution from the in-licenced products in the dermatology space. We estimate Wockhardt's domestic business would grow by 17.0% in CY2007 and by 12.5% in CY2008. 
  • Wockhardt's European business almost doubled during the quarter to Rs 433.0 crore, driven by a healthy double-digit growth of 14-15% across the existing markets of the UK and Germany, and the consolidation of Pinewood Laboratories and the recently acquired Negma Laboratories. 
  • Wockhardt's reported operating profit margin (OPM) expanded by 230 basis points to 24.5% in Q3CY2007. This was driven by a 300-basis-point reduction in the other expenses and a 230-basis-point dip in the research and development (R&D) expenses. The sharp decline in each of these expenses was due to the deferral of certain R&D and selling/administrative expenses to Q4CY2007. The company reported an operating profit (OP) of Rs 180.9 crore, a growth of 86.3% year on year (yoy).
  • Wockhardt's net profit stood at Rs 108.3 crore in the quarter, growing by 46.4% yoy. The profit growth was ahead of our estimates, despite a 50-fold increase in the interest expense (due to acquisitions), a 39% rise in the depreciation charge and a 360-basis-point increase in the tax incidence.
  • At the current market price of Rs 416, the stock is available at 13.3x its CY2007E and 11.9x its CY2008E earnings, on a fully diluted basis. The valuations seem very attractive at these levels and should be viewed as a strong buying opportunity.
  • I maintain Buy recommendation on the stock with a price target of Rs 552 with a time frame of 12 months.


Cadila Healthcare

Recommendation: Buy

CMP = Rs 300 (as of Monday)

Price target: Rs 425

Result highlights:

  • Cadila Healthcare's (Cadila) total operating income (consolidated) grew by a healthy 28.4% year on year (yoy) to Rs 609.7 crore in Q2FY2008. The growth was driven by a 12.3% growth in the domestic business and a 64.0% growth in the exports. The sales growth was in line with our estimates. The consolidation of the recently made acquisitions also contributed to the overall growth. Excluding the impact of these acquisitions, the like-to-like growth stood at around 18.1%.
  • Cadila's domestic formulation business grew by a subdued 6.6% to Rs316.3 crore in Q2FY2008. The growth was low during the quarter due to the high base of Q2FY2007, when the company had recorded strong sales due to the outbreak of monsoon-related diseases like malaria and chikungunya. However, as per the secondary sales data complied by ORG-IMS, Cadila's sales have been growing at 15%. The company believes that it is on track to achieve a 14-15% growth in this business in FY2008 and hence expects an acceleration in the growth in H2FY2008.
  • Cadila's operating profit margin (OPM) shrank by 140 basis points to 21.6% in Q2FY2008. The contraction in the margin was largely due to a 49.9% rise in the staff cost due to the consolidation of Nikkho, which has a higher staff cost component. On the other hand, the gross margin improved by 190 basis points to 67.3%, once again due to the consolidation of Nikkho, which enjoys a gross margin of up to 80% as it operates in the branded product space in Brazil. Consequently, Cadila's operating profit grew by 20.8% to Rs 131.7 crore in Q2FY2008. 
  • Despite a doubling of the interest expenses (due to the acquisitions), the pre-exceptional net profit grew by 17.0% to Rs 82.5 crore. The net profit was affected by a foreign exchange (forex) loss of Rs 2.2 crore recorded during the quarter and was marginally above our estimates. The earnings for the quarter stood at Rs 6.6 per share.
  • At the current market price of Rs 300, the company is trading at 13.4x its FY2008 and 11.4x its FY2009 estimated earnings.
  • With all the growth drivers in place, I maintain Buy recommendation on Cadila with a price target of Rs 425 for a time frame of 12 months.

Stock Idea - Union Bank of India

Recommendation: Buy
CMP = Rs 162 (as of Monday)
Price target: Rs 230
Result highlights:
  • Union Bank of India's (UBI) net profit increased by 41.9% year on year (yoy) to Rs 275.5 crore in Q2FY2008. The growth was mainly driven by a 77.4% year-on-year (y-o-y) increase in the non-interest income category, as the net interest income (NII) growth at 7.2% yoy was weak. Lower operating expenses, which grew by 6.2% yoy, also helped to improve the earnings growth at to 41.9%. 
  • During the quarter, the bank's NII increased by 7.2% yoy but declined by 12.8% on a sequential basis. The net interest margin (NIM) of the bank was down by 20 basis points yoy and by 55 basis points sequentially at 2.56%. The sequential decline in the NIM was mainly due to the 61-basis-point increase in the cost of funds. The substantial sequential jump in the bank's cost of funds was mainly due to a higher cost of deposits arising from a decline in the low-cost deposit base and a rise in the high-cost term deposit base. 
  • The positive takeaway for the quarter has been the growth in the non-interest income but that too was driven by higher treasury income and recoveries as the core fee income grew by a moderate 11.3%. 
  • The operating expenses grew by a moderate 6.2% yoy that helped the bank in reporting a better operating profit growth of 35.8% yoy and 0.6% qoq. The core operating profit growth was however much lower at 18.4% yoy and declined by 11.2% sequentially. 
  • The provisions and contingencies dropped 36.9% on a sequential basis mainly due to the absence of investment depreciation on IFCI bonds and a Rs35-crore write-back in excess non-performing asset (NPA) provisions during the current quarter. However, the provisions are up by 18.1% yoy, in line with the business growth. The asset quality has improved on a sequential basis with the net non-performing asset (NNPA) at 0.65% as in September 2007 compared with 0.78% in September 2006. 
  • Currently, the low credit growth seems to be the main concern as the NIM is likely to stabilise as banks have already started to cut deposit rates. UBI has been one of the better performing public sector banks with a 23.6% compounded annual growth rate (CAGR) in earnings for the period FY2007-09E and a high return on equity of 21.5%.
  • At the current market price of Rs162, the stock is quoting at 6.3x its FY2009E earnings per share (EPS), 3.3x pre-provision profit (PPP) and 1.3x book value (BV).
  • I maintain Buy recommendation on the stock with a revised 12-month price target of Rs 230.

Stock Idea - Sun Pharmaceutical Industries

Recommendation: Buy
CMP = Rs 1,042
Price target: Rs 1,287
Result highlights:
  • Sun Pharma reported a strong top line growth of 24.6% year on year (yoy) in Q2FY2008 to Rs 667.9 crore. The top line was significantly higher than our estimate of Rs 632 crore. The strong growth was driven by an increase of 26.3% in its domestic business and a 19.2% growth in its exports.
  • The domestic formulation business grew by 31.2% to Rs 372.0 crore. This quarter was phenomenal for this business, which saw the highest ever revenues and growth rates. Going forward, the company expects the growth to moderate to more sustainable levels.
  • I believe Sun Pharma's domestic formulation business will continue to outpace the industry and grow at a compounded annual growth rate (CAGR) of 20% over FY2007-09.
  • Caraco Pharma, Sun Pharma's US subsidiary, continued with its impressive performance by registering a 46% growth in the revenue to $41.4 million (against our estimate of $37 million) and a 100% jump in the net profit to $4.6 million in the quarter. 
  • Sun Pharma demonstrated excellent cost control during the quarter, with margins expanding by 420 basis points to 36.1%, the highest operating profit margin (OPM) reported by the company so far. The margin expansion caused the operating profit (OP) to grow by a robust 41.0% to Rs 240.9 crore in Q2FY2008. 
  • Despite a robust operating performance, Sun Pharma's net profit growth was restricted to just 17.2% at Rs 218.6 crore during the quarter. The profit was in line with our estimate of Rs 213 crore. The profit growth slowed down due to the sharp 72% reduction yoy in the other income. 
  • Sun Pharma's recent wins in the Para IV patent challenges indicate the future potential of its US business. The company has recently announced favourable outcomes on four Para IV challenges, generic Protonix, generic Trileptal, generic Effexor XR and generic Exelon, thus winning a 180-day exclusivity (in certain cases, the same is shared with a few other players) for supplying these products in the USA.
  • While the company is still evaluating its launch options for generic Protonix and generic Exelon, it has already launched generic Trileptal and is awaiting the US Food and Drug Administration's (US FDA) approval for generic Effexor XR. Upon receiving the approval it will evaluate the latter's launch and/or settlement options.
  • Taro has further pushed its shareholders' meet until after the announcement of its audited results for 2006 and H1CY2007. There is no clarity on the timeline of the result announcements. With a 25% stake in Taro, Sun Pharma's management remains confident of closing the transaction after the shareholders' meeting.
  • At the current market price of Rs 1,042, Sun Pharma is valued at 23.3x FY2008E and 19.6x FY2009E fully diluted earnings.
  • I maintain Buy recommendation on the stock with a price target of Rs 1,287 over a time frame of 12 months.

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Stock Idea - Marico

Recommendation: Buy
CMP = Rs 63
Price target: Rs 70
Result highlights:
  • The Q2FY2008 results of Marico were as per our expectations. In Q2FY2008, the net revenues of the company grew by 22.7% year on year (yoy) to Rs 463.8 crore. The growth was driven by a 16% organic growth and a 7% inorganic growth.
  • The operating profit margin (OPM) declined by 81 basis points to 13.95% on account of a higher raw material cost, which as a percentage of sales increased by 210 basis points to 51.6%. Consequently, the operating profit grew by 16% yoy to Rs 64.7 crore.
  • A substantial decline of 49.3% in the depreciation charge due to a write-off of intangibles in FY2007 along with a tax incidence of just 19.3% (compared with 30.9% in Q2FY2007) led to a 63% jump in net profit to Rs 42.2 crore.
  • The quarter witnessed a good volume growth across products with Parachute coconut oil growing by 8%, focus segment products growing by 15% and Saffola growing by 21% yoy. The international consumer product business grew by a strong 73% aided by the Egyptian business.
  • Also, the chain of Kaya clinics expanded to 51 as the company added three new clinics during the quarter.
  • I maintain a positive outlook on the company and expect its turnover to grow by 21% in the current financial year. The stock is trading at valuations of 18.8x FY2009E earnings per share (EPS) and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.4x FY2009E.
  • I maintain Buy recommendation on the stock with a price target of Rs 70.

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Stock Idea - Zensar Technologies

Recommendation: Hold
CMP = Rs 188 (as of Tuesday)
Price target: Rs 380
Result highlights:
  • Zensar Technologies (Zensar) reported a disappointing growth of 2.1% quarter on quarter (qoq) and of 29% year on year (yoy) in its consolidated revenues to Rs 191.8 crore during the second quarter ended September 2007. The sequential growth in its revenues was lower than expectations and driven by a volume growth of around 4% on a sequential basis. 
  • However, the operating profit margin (OPM) improved by 79 basis points to 10.5%, which is ahead of our expectations. That's because the annual salary hikes given in Q2 had an adverse impact of 230 basis points (or Rs4.5 crore) on the margin. This was more than mitigated by the leverage in the overheads cost.
  • The earnings grew at a relatively higher rate of 5.4% qoq (17% yoy) to Rs 14.2 crore, which is again lower than our expectations of Rs 15 crore.
  • The company has guided for revenues of Rs 800 crore and earnings of Rs70 crore (down from Rs80 crore given earlier) in FY2008. Even the downgraded earnings guidance implies a sequential growth of around 30% compounded quarterly growth rate (CQGR) over the next two quarters.
  • However, the management is confident of achieving the same on the back of a considerable growth in volumes (the company signed some significant contracts recently; it expects a smart uptick in the enterprise application services [EAS] segment due to a revival in the performance of ThoughtDigital) and margin expansion (driven by a rate hike of 4-6% from some of its top accounts, leverage in the overheads cost and operational efficiencies). 
  • At the current market price the stock trades at 6.7x FY2008 and 5.6x FY2009 earnings estimates. Though the valuations are compelling, I still maintain Hold recommendation on the stock and would review recommendation based on the performance in the coming quarters.

Stock Idea - Surya Pharmaceuticals

Recommendation: Buy
CMP = Rs 106
Price target: Rs 205
Result highlights:
  • Surya Pharmaceutical (Surya) reported a massive 90.1% increase in its top line to Rs 118.1 crore in Q2FY2008. The growth was driven by the increase in the company's existing active pharmaceutical ingredient (API) business and a 6-7% contribution from the new business of menthol and its derivatives. The sales growth was in line with our estimates. 
  • Surya's operating profit margin (OPM) shrank by 280 basis points to 17.8% in the quarter, primarily due to a 100.4% increase in the raw material cost. The increase in the material cost was due to the rising Penicillin-G (Pen-G) prices worldwide. However, going forward, the management has indicated that Pen-G prices have now stabilised and the raw material cost should show a marginal improvement in the coming quarters. Consequently, the company's operating profit grew by 64.0% to Rs 21.0 crore in the quarter.
  • Surya's net profit grew by an impressive 83.7% to Rs 11.7 crore in Q2FY2008 and was in line with our estimate. The net profit growth was strong despite a 48.1% increase in the interest expense and an 11.3% rise in the depreciation charge. The earnings for the quarter stood at Rs 8.1 per share.
  • Surya began exporting menthol and its derivatives only in mid-August 2007 and hence the Q2FY2008 results do not reflect the full quarter impact of the menthol business. I expect Surya to deliver a stronger performance in H2FY2008 on the back of steady revenues from the existing API business and growing revenues from the menthol business. 
  • At the current market price of Rs 106, Surya is trading at 4.6x its FY2008E diluted earnings of Rs 23.2 and 3.3x its FY2009E diluted earnings of Rs 32.1.
  • At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations. I view this as a strong buying opportunity and hence maintain Buy call on the stock with a price target of Rs 205.

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Stock Idea - Wipro

Recommendation: Buy
CMP = Rs 495 (as of Thursday)
Price target: Rs 590
Key points
  • The Q2FY2008 performance of Wipro has been boosted by the incremental revenues from the recent acquisitions: Infocrossing in the global information technology (IT) service business and Unza in the consumer care business.
  • The margin improvement of 150 basis points in the global IT service business is higher than expected and largely driven by the leverage in the overheads cost.
  • The Q3 revenue guidance of around 6.9% sequential growth after adjusting for the inorganic revenues is healthy, given the lower number of working days in the quarter.
  • I maintain Buy call on the stock with a revised price target of Rs 590.

Stock Idea - Infosys Technologies

Recommendation: Buy

CMP = Rs 1,956 (as of Monday)

Price target = Rs 2,317

Key points:

·         Infosys Technologies’ Q2FY08 results were in line with market expectations. The company posted a top line of Rs 4,106 crore (8.8% q-o-q growth), and a bottom line of Rs 1,100 crore (2% q-o-q growth). The guidance was muted with EPS growth hiked from 14.1% to 15.6% for the year. However, we believe there could be surprises as the possibility of large deals fructifying and pricing increases (Infosys is currently chasing 12-13 US$100 million deals and a large deal from British Telecom) have not been factored in. The company also hiked guidance for manpower additions from 28,000 to 30,000.

·         Margins surprise: Infosys posted a robust 250bps (100bps = 1%) increase in margins aided by a 2.9% and 2.6% increase in onsite and offshore billing rates respectively, coupled with a 4% increase in utilisation (EBIDTA margins at 31.3% vs ICICIdirect estimates of 30%). However, margins for the year are likely to be in a range of 30%-31% considering the employee ramp up over the next two quarters.

·         Robust client additions: Client additions at 48 were the highest over the last six quarters. They include 3 Fortune 500 clients. I believe this is a positive trend as new clients are acquired at higher billing rates and augurs well to offset the losses incurred on account of a strengthening rupee.

·         Valuation: We believe the answer to an appreciating currency environment is growth and the ability to derive higher pricing from customers (see IT sector update: IT IT bang bang …). Infosys seems to have this antidote in ample amounts.

·         I reiterate a performer rating on this stock with a price target of Rs 2,317, with a time frame of 6-8 months.

Stock Idea - Tata Consultancy Services (TCS)

Recommendation: Buy

CMP = Rs 1,073 (as of Monday)

Price target: Rs 1,425

Result highlights:

·         TCS has reported a growth of 8.4% quarter on quarter (qoq) and of 25.8% year on year (yoy) in its consolidated revenues to Rs 5,639.8 crore during Q2FY2008. The sequential growth in the revenues was contributed by an 8.2% overall growth in the volume, an 85-basis-point improvement in the billing rates (including productivity gains) and a hedging profit of 86 basis points (around Rs 45 crore). On the other hand, the appreciation in the rupee and offshore shift adversely affected the revenue growth by 51 basis points and 99 basis points respectively, on a sequential basis. 

·         The earnings before interest and tax (EBIT) margin improved by 77 basis points to 23.8% sequentially during the quarter. This was contributed by the cumulative impact of the overall productivity gains (of 109 basis points), offshore shift (of 36 basis points) and hedging gains (of 79 basis points). On the flip side, in addition to the rupee appreciation (a negative impact of 30 basis points), the incremental wage cost of 117 basis points resulting from the promotions affected the margin during the quarter. The operating profit grew by 12% qoq and 18.5% yoy to Rs 1,343.9 crore.

·         The other income declined by 27.2% qoq to Rs 110.5 crore, largely due to a lower foreign exchange (forex) fluctuation gain of Rs 57.7 crore (compared with Rs 107 crore in Q1). However, despite the higher tax rate (14% as against 11.3% in Q1FY2008) and a lower other income component, the company showed a sequential growth of 7.8% to Rs 1,246.9 crore (after adjusting the Q1 earnings for the one-time write-back of Rs 29.3 crore of provision made earlier). On an annual basis, the consolidated earnings have grown by 25.9%.

·         In terms of the outlook, the company doesn't give any specific growth guidance. However, it has re-iterated that the demand environment continues to be robust with no signs of any slowdown in banking, financial services and insurance (BFSI) space and the US geography. The company signed three large sized deals of over $50 million (including one in the BFSI vertical) during the quarter. It also entered into master service agreements with three other clients (a couple of them from the banking space) that can potentially generate revenues equivalent to any other large deal. The pipeline of the large orders is also healthy with around 20 deals of over $50 million each. In terms of margins, the company expects to maintain the EBIT margin at around 25% in FY2008 (in line with the same as reported in FY2007). 

·         In terms of key operational highlights, the net addition of 9,268 employees is higher than expectations. This coupled with the campus offers of 22,295 fresh graduates this season (up from around 11,500 in the last fiscal) clearly reflects the management's confidence in the growth outlook of the company. Another noticeable point is the healthy double-digit sequential growth in all the relatively new service lines (such as consulting, engineering, assurance, business process outsourcing [BPO] and enterprise solutions). Moreover, the BFSI vertical showed an 11.3% sequential growth during the quarter.

·         At the current market price, the stock trades at 20.9x FY2008 and 17.3x FY2009 estimated earnings. I maintain Buy call on the stock with a price target of Rs 1,425.

Stock Idea - Axis Bank (formerly UTI Bank)

Recommendation: Buy

CMP = Rs 815 (as of Monday)

Price target: Rs 1,054

Result highlights:

·         Axis Bank's Q2FY2008 numbers are much above the market's and profit after tax (PAT) reporting a growth of 60.4% to Rs 227.8 crore compared to an estimated Rs 199 crore. The high growth was driven by a robust increase in both interest and non-interest income segments. Due to the excellent set of numbers reported during Q2FY2008, the earnings estimates are upgraded to 15.7% and 16.7% for FY2008 and FY2009 respectively.

·         The net interest income (NII) was up by 72.9% year on year (yoy) and 39.9% quarter on quarter (qoq) to Rs 588.7 crore. However the bank had raised capital of Rs 4,534 crore during the quarter and excluding the possible interest income earned on such float funds, the quarter-on-quarter (q-o-q) NII growth would moderate to 15.7%.

·         The operating profit was up 85.3% yoy and 25.8% qoq to Rs 368 crore while the core operating profit was up 70.8% yoy and 37% qoq to Rs 368 crore. Provisions and contingencies grew by 236.3% yoy and 13.4% qoq to Rs 114.5 crore. Despite the strong asset growth, the asset quality improved with the net non-performing assets (NPAs) at 0.55% of customer assets, down four basis points sequentially. 

·         Axis Bank raised capital to the tune of Rs 4,534 crore through a combination of GDR, qualified institutional placement (QIP) and preferential allotment during the quarter. This helped to improve its capital adequacy ratio (CAR) to 17.6% (from 11.5% in June 2007) with the Tier-I CAR at 13%. This substantial capital-raising programme (almost 25% of the pre-issue equity) has depressed its return on equity (RoE) to 13.6% from 19%, which is along the expected lines. 

·         The bank has also recently decided to foray into the mutual fund business. It has already set up its wealth management business and planned a private equity fund to invest in the infrastructure segment. We feel these are the building blocks that the bank management is putting in place and that would adequately complement its banking business. This strategy would also open up a new channel of steady fee income.

·         Thus, its robust fee income growth could help in restoring the fall in its RoE much sooner than in the past occasions when it had raised capital. It has been registering a phenomenal asset growth without compromising on its margin and asset quality. All these developments make Axis Bank one of the best growth stories available in the private banking space.

·         At the current market price of Rs 815, the stock is quoting at 21.6x its FY2009E earnings per share (EPS), 10.1x its FY2009E pre-provisioning profit (PPP) and 3x its FY2009E book value (BV). I maintain Buy recommendation on the stock with a revised 12-month forward price target of Rs 1,054.

Stock Idea - Aban Offshore

Recommendation: Buy

CMP = Rs 4,010 (as of Friday)

Price target: Rs 4,400

Result highlights:

·         For Q2FY2008, Aban Offshore has reported a growth of 28.3% quarter on quarter (qoq) and of 29.6% year on year (yoy) in its stand-alone revenues to Rs 165.3 crore. The growth is higher than expectations even after factoring in the revised day rates for its floating production unit Tahara (day rates of $87,500 effective from July 2007, up from around $27,000 earlier) and incremental revenues from Aban II.

·         The operating profit margin has declined by 410 basis points yoy to 50.8% largely due to the jump in the staff cost as a percentage of the sales (10.4% of sales as compared with 6.9% in Q2FY2007 and 9.2% in Q1FY2008). The operating profit grew by 23.4% qoq and 18.7% yoy to Rs 82.4 crore.

·         The other income jumped by 241% to Rs 22 crore, enabling the company to report a 122.6% increase yoy in its stand-alone earnings to Rs 47.2 crore. Sequentially, the earnings grew by 66.5% due to a 42.9% jump in the other income component.

·         It should be noted that the stand-alone results do not provide the complete picture as the valuations are based on the consolidated earnings estimate of FY2010. 

·         In terms of key events, the company has announced a contract for three of its jack-up rigs (Aban III, Aban IV and Aban V) with Oil & Natural Gas Corporation for a period of three years. At the renewed day rate of US$156,600 the total value of the contract works out to around Rs 2,000 crore. The three rigs are being redeployed at an effective day rate of US$156,600, which is ahead of our earlier assumption of US$145,000.

·         In addition to this, the company has recently announced contracts for two assets: Deep Driller 4 (a newly built jack-up offshore rig under Sinvest) and Aban VI (a 250-feet jack-up rig built in 1975). The contract for Deep Driller 4 would generate $80 million over the one-year period, translating into a day rate of $220,000, higher than $201,000 reported for DD5 in the last quarter.

·         On the other hand, the existing contract for Aban VI is extended for three years (with an option to further extend for three more years) with Oriental Oil, Dubai and is estimated to generate $95 million (amounting to a day rate of $88,500) over the firm contract period of three years. The company's ability to negotiate long-term contracts at higher than expected day rates is quite encouraging and has led to significant re-rating of the stock over the last quarter.

·         At the current market price the stock trades at 10.2x FY2009 and 7.9x FY2010 estimated earnings. The impending listing of its Singapore subsidiary is an important trigger for the stock going ahead.

·         I maintain Buy call on the stock with a revised price target of Rs 4,400.

Stock Idea - HDFC Bank

Recommendation: Buy

CMP = Rs 1,433

Price target: Rs 1,694

Result highlights:

·         HDFC Bank's Q2FY2008 results have been better than the expectations. The profit after tax (PAT) grew by 40.1% to Rs 368.5 crore compared with our estimate of Rs 345.8 crore. The PAT growth, of 40.1%, for the quarter was also much higher than the steady 31% growth in the PAT the bank has been delivering quarter after quarter. 

·         The net interest income (NII) grew by 47.6% year on year (yoy) and 18% quarter on quarter (qoq) to Rs 1,162.7 crore. However excluding the income on float funds the quarter-on-quarter (q-o-q) growth would be at 14%. The year-on-year (y-o-y) growth in NII was due to an average asset growth of 39.4% yoy and a 20 basis points improvement in the core net interest margin (NIM) (adjusted for HTM amortisation expenses) to 4%. However, the core NIM was down sequentially by 20 basis points. 

·         The non-interest income grew by 21.3% year on year (yoy) but declined significantly by 15.7% qoq mainly due to a 73.6% q-o-q fall in the foreign exchange (forex) and derivatives income. The core fee income grew by 24.8% yoy and 5.3% qoq. 

·         The operating profit grew by 36.3% yoy and 5.5% qoq to Rs826.7 crore, while the core operating profit (operating profit excluding treasury) was up 33.3% yoy and by 6.2% qoq to Rs 774.9 crore. 

·         Provisions and contingencies were up 16.6% yoy but declined by 5.8% qoq to Rs 289.4 crore mainly due to a lower general and specific loan loss provisions on a sequential basis. HDFC bank had a higher component of general provisions during Q1FY2008 as a spillover effect of increased provisioning norms stated by Reserve Bank of India on certain category of standard assets which was to be maintained by Q4FY2007.

·         The bank’s advances grew by 45.6% yoy and 15.7% qoq to Rs 62,278 crore and the deposits (adjusted for IPO [initial public offerings] float funds) grew by 38.8% yoy and 7.9% qoq. The bank's business growth remained robust in a difficult environment where the industry has shown a slowdown. The bank's retail loan exposure stood at 55% from 57% in September 2007, which could be a deliberate strategy to slightly rebalance the loan portfolio, as asset quality remains a key concern on the retail loan book. 

·         The bank reported a 40.1% PAT growth for the quarter, which is much higher than the steady 31% growth in the PAT the bank has been delivering quarter after quarter. The business growth continues to remain robust with superior asset quality and margins compared with that of the industry. The bank has delivered a strong set of numbers and maintained or improved on most parameters in a difficult environment where the industry loan growth has slowed down, the asset quality has become an issue and the margins have been under pressure.

·         Due to the reasons stated above we continue to like HDFC Bank a true evergreen stock under most circumstances. At the current market price of Rs 1,433 the stock is quoting at 26x FY2009E earnings per share (EPS), 10x FY2009E pre-provision profits (PPP), and 3.8x FY2009E book value (BV).

·         I maintain Buy recommendation on the stock with a 12-month price target of Rs 1,694.

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Stock Idea - Transport Corporation of India

Recommendation: Buy

CMP = Rs 115 (as of Thursday)

Price target = Rs 155

Key points:

·         Transport Corporation of India (TCI), one of the largest players in the domestic logistics industry, has transformed itself from a transportation company to an integrated logistics solution provider. The company has a presence across the entire logistics value chain and is enhancing its role in the high-value supply chain solution (SCS) business. We initiate coverage on the company with an OUTPERFORMER rating.

·         Domestic logistics industry on a high growth trajectory The Indian logistics sector has grown at a robust CAGR of 11.5% during FY02-06. According to a Datamonitor study, it is further expected to grow at a CAGR of over 16% over 2007-10. The huge growth in the manufacturing sector, coupled with an increase in domestic spending will be the key growth drivers for the domestic logistics sector.

·         Integrated role gives it an edge TCI is the largest integrated player having a 15% market share of the organised logistics industry. The company is capable of providing end-to-end logistics solutions through its various divisions. Apart from transportation, it operates one of the largest  warehousing facilities of about 6.5 million sq. ft.

·         Rs 340 crore capex to move up the logistics chain The company has lined up an aggressive Rs 340 crore capex to scale up its business in order to meet increased demand. It plans to increase its warehousing space, buy new trucks, invest in cold chains, and boost its ship fleet strength over the next three years.

·         At the current price of Rs 115, the stock discounts its FY09E EPS of Rs 7.11 by 16.1x. Given TCI’s leadership position in the organised logistics sector, and transformation to an integrated player, we value the stock at 22x its FY09E earnings. We rate the stock an OUTPERFORMER with a target price of Rs 155, an upside potential of 35% from current levels.

·         I am very upbeat about TCIL and recommend Buy option with a price target of Rs 155 and time frame of 12 – 15 months.

Stock Idea - Indo Rama Synthetics

Recommendation: Buy

CMP = Rs 60

Price target = Rs 73

Key points:

·         Indo Rama Synthetics Ltd (IRSL), the country's largest dedicated polyester manufacturer, is well placed to capitalise on the upturn in the polyester sector due to its timely capacity expansions. Benign raw material scenario and reduction in power costs would further catalyse margins and profitability. We initiate coverage on the company with an OUTPERFORMER rating.

·         Polyester sector headed for good times Polyester is becoming the preferred fibre the world over. In India, government initiatives have reduced the price differential with cotton fibres and we expect this to trigger increasing demand for polyester.

·         Timely expansion to help increase market share IRSL has doubled its capacity from 300,000 tpa to 600,000 tpa. The expanded capacity would enable it capture higher market share across various product categories.

·         Favourable raw material scenario Prices of key inputs like purified terephthalic acid (PTA) and mono ethylene glycol (MEG) have stabilized due to new capacities. This move is expected to ease the pressure on raw material costs.

·         Lower power costs to expand margin IRSL is merging a group company, Indo Rama Petrochemicals Ltd (IRPL), with itself. The merger will enable it to access power at substantially lower rates and reduce its power costs by Rs 26.43 crore in FY09E, thereby improving EBIDTA margins in FY09E.

·         I would recommend Buy call on this scrip with a time frame of 12 months.

Stock Idea - Bharat Heavy Electricals

Recommendation: Buy

CMP = Rs 2,236

Price target: Rs 2,450

Key points:

·         During the past few days we have seen positive news flowing in for Bharat Heavy Electricals Ltd (BHEL). Hereby we bring to you the highlights and the implications for the company in the future.

·         BHEL is close to winning its first order for super-critical boilers for National Thermal Power Corporation's (NTPC) Barh-II project. This could well be a break through for the company in the super-critical boiler space.

·         The company is in talks with global power equipment firms Siemens, Areva, and General Electric (GE) to set up a joint venture (JV) in the country to manufacture nuclear power plant equipment. The proposed JV will give BHEL a head start in the competition after the nuclear power market in India opens up with the operationalization of the Indo-US nuclear deal.

·         The company plans to scale up its manufacturing capacity to 20,000 megawatt (MW) per annum by 2012 at an investment cost of Rs 6,500 crore.

·         BHEL is considering taking equity in the Koradi Thermal Power Station near Nagpur, Maharashtra. The plant would undergo a 1,600MW expansion in the generation capacity based on super-critical technology and would involve a capital outlay of Rs 8,000 crore.

·         The future of the stock looks very promising and hence I am maintaining Buy call on this scrip.

Stock Idea - ICICI Bank

Recommendation: Buy

CMP = Rs 1,045

Price target: Rs 1,173

Key points:

·         ICICI Bank has received the Reserve Bank of India's (RBI) approval for establishing new branches and additional off-site automated teller machines (ATMs), broadly in line with its application made to the regulator.

·         The management has not divulged the number of approvals but the same is expected to be in the range of 400-425 branches and 2,500 offsite ATMs.

·         This prompts me to revise the price target for ICICI Bank to Rs 1,173 with a time frame of 3 months

Stock Idea - Sundaram Clayton

Recommendation: Book Profit

CMP: Rs 751 (as of Friday)

Key points

·         The performance of Sundaram Clayton is largely dependent on the commercial vehicle (CV) sector performance. The CV sector has been witnessing a slowdown, and any substantial recovery in the second half of FY2008 appears difficult.

·         As per the annual report of FY2007, the company has tripled its capital expenditure (capex) plans for FY2008. It proposes to make additional investment of Rs 96 crore in the brakes business and Rs 95 crore in the die-casting business.

·         The company has announced the demerger of its air brakes division into a subsidiary. The new entity will be called WABCO-TVS and will be listed on stock exchanges. The demerger would help both the companies to focus on their core areas, and a significant growth is expected in both the businesses in the long term.

·         For Q1FY2008 sales grew by 6.1% to Rs 201.4 crore and the profit after tax (PAT) was flat at Rs 18.2 crore.

·         The performance in FY2008 could be affected due to the slowdown in the auto sector and due to the higher interest and depreciation costs because of high capex. I advise to book profits on this stock.

Stock Idea - HCL Technologies

Recommendation: Buy

CMP: Rs 305

Price target: Rs 365

Key points:

·          HCL Technologies has transformed itself from a marginal IT player to a well differentiated, full services player focused on large deals. This would sustain dollar based revenue growth at a CAGR of 32% over the next few years. However, with the twin challenges of an appreciating rupee and the phasing out of the STP tax holiday under sections 10A and 10B in FY10, earnings growth would decline.

·          In the third phase of its transformation, the company plans to re-define its business model to reduce the linearity between manpower expansion and revenue growth and this should dampen the decline in EPS. I initiate coverage on the company with a Performer rating.

·          Aggressive strategy to de-link manpower expansion and revenue growth: Business models in the IT services industry have predominantly borne a direct correlation between manpower growth and revenue growth. HCL plans to reduce this correlation by using innovative pricing models (device based pricing, outcome-based pricing, pricing per user, etc).

·          The company already has a number of engagements based on these models. While peers also plan to de-link man power growth and revenue growth, I believe HCL with a smaller base and a well outlined strategy is at the forefront of this change.

·          Impact of appreciating rupee to be minimal: HCL has forward covers for the next eight quarters to the tune of $1.73 billion at an average rate of Rs 43.15 to a dollar. The hedges cover 90% of the net forex inflows for around six quarters. We believe this is among the most well hedged companies in the IT space.

·          I maintain Buy recommendation on this stock with a time frame of 12 months.


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