Stock Idea - Mahindra & Mahindra

Recommendation: Buy

CMP = Rs 641 (at the time of recommendation)

Price target: Rs 900

Key points:

  • The Q4FY2008 results of Mahindra & Mahindra are a little lower than expectations due to higher than anticipated tax expenses. The net sales grew by 14.6% to Rs 3,148.2 crore, higher than expected growth mainly due to a stronger performance of both the business divisions, automotive and farm equipment.
  • The operating profit margin declined by 50 basis points yoy and by 40 basis points sequentially to 10.9%, as the operating profit grew by 9.2% to Rs 342.4 crore.
  • Looking at the segmentals, the automotive revenues grew by 16% to Rs 2,077.9 crore while the profit before interest and tax (PBIT) margin of this division remained almost flat yoy at 10%. The revenues of the farm equipment division grew by 9% while its margin improved by 270 basis points yoy and by 70 basis points sequentially to 14.5%.
  • I remain bullish on M&M and recommend Buy option on this stock with a price target of Rs 641.

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Stock Idea - ITC

Recommendation: Buy

CMP = Rs 206 (at the time of recommendation)

Price target: Rs 247

Key points:

  • ITC registered a growth of 16.7% year on year (yoy) in its net sales to Rs 3,934.4 crore during Q4FY2008. The sales growth was led by strong growth in non-cigarette FMCG and agri-business revenues and was slightly higher than our expectation of Rs 3,865 crore.
  • The operating profit margin (OPM) for the quarter declined by 104 basis points to 26.6% as against 27.6% in the corresponding quarter of the previous year. This was mainly because of the rise in the raw material cost, as the raw material cost as percentage of sales increased by 274 basis points to 46.9% as compared to 44.1% in the same quarter last year. Thus, the operating profit increased by 12.3% yoy to Rs 1,044.7 crore during the quarter.
  • A jump of 60.0% in other income to Rs 163.7 crore (higher than our expectation), helped the net profit to grow by 13.1% to Rs 735.6 crore during Q4FY2008. Despite a 6% increase in excise duty and imposition of a 12.5% VAT, cigarette volumes declined only by 1% as against our expectation of 2.5% for FY2008.
  • The non-cigarette FMCG business continued its remarkable progress with a 48.1% revenue growth. The segment loss increased to Rs 117.9 crore on account of the increase in the brand building activities on new product launches in the personal care category. Increase in commodity prices such as wheat, vegetable oil, maize and skimmed milk powder are imposing pressure on the margins of branded packaged food business.
  • Agri business regained its growth momentum in the second half of FY2008. Consequently, agri-business revenues increased by 16.1% to Rs 1,078.1 crore and the PBIT margin improved to 3.4% for Q4FY2008.
  • At the current market price of Rs 205.7 the stock trades at 17.9x its FY2010E EPS of Rs 11.5.
  • I continue to maintain a strong bullish stance on the stock and a recommend Buy call on ITC with a price target of Rs 247 over next 3-6 months.

Stock Idea - Balaji Telefilms

Recommendation: Buy

CMP = Rs 181 (at the time of recommendation)

Price target: Rs 299

Key points:

  • Balaji Telefilms Ltd (BTL) operating performance for Q4FY2008 was above our expectation. Programming hours in the commissioned category increased to 289.5 hours from 201 hours in Q4FY2007 with the launch of four new shows in the last two quarters. Much lower realisation on these shows combined with discontinuance of one of the more popular and high-revenue yielding shows Kasauti Zindagi Kay led to an anticipated drop in the blended realisation in the commissioned category to Rs 29.7 lakh per hour.
  • Overall revenues for the quarter increased by 24.7% yoy to Rs 96.5 crore. The operating profit margin (OPM) for the quarter stood at 36% against 39.3% in Q4FY2007. Thus the adjusted net profit for the quarter increased by 14.7% yoy to Rs 24.4 crore.
  • BTL has pounced on the opportunity provided by the increasing demand for content in Hindi general entertainment channel (GEC) space with the launch of new channels and shows. It has launched four new shows during the last two quarters — Kahe Naa Kahe and Kya Dil Main Hai on 9x and Kuchh Is Tara on Sony and Kis Des Mein Hain Mera Dil on Star Plus. In the coming quarters, the company is looking to diversify its business by launching reality shows such as Kaun Jeetega Bollywood Ka Ticket on 9x, Gharwali Baharwali on Sony and a mythological show of Mahabharat. These new launches will ensure growth in the television content business going forward.
  • In the film segment, Balaji Motion Pictures is distributing Ram Gopal Verma's Sarkar Raj and will also release its co-production Woodstock Villa. Thus BTL has ventured film production and distribution in a big way and targets releasing seven to eight movies a year.
  • I am quite positive on the television content and film businesses of BTL. At the current market price of Rs 181.3, the stock trades at 9x its FY10E earnings per share (EPS) of Rs 20.2.
  • I maintain a strong Buy recommendation on BTL with a price target of Rs 299 over next 6 months.

Stock Idea - Crompton Greaves

Recommendation: Buy
CMP = Rs 232 (at the time of recommendation)
Price target: Rs 367

Key points:

  • Crompton Greaves Ltd (CGL) has reported a 17.1% growth in its stand-alone revenues to Rs 1,159.5 crore for Q4FY2008. The revenues of the power system business grew by 8.3% to Rs 606.4 crore during the quarter. The revenues of the consumer products division increased by a strong 27.3% to Rs 352.2 crore. The profit before interest and tax (PBIT) margin improved across businesses save the consumer products business whose margin declined by 90 basis points to 10.5%.
  • The operating profit of the company as a whole grew by 36.9% to Rs 156.6 crore. The sharp increase in the operating profit margin (OPM; up 200 basis points) came in as a positive surprise. The OPM improved mainly on account of a reduction in the raw material cost as a percentage of sales which declined by 230 basis points to 69.1%.
  • The interest charge declined by 26.5% to Rs 7.4 crore and the depreciation charge dropped by 34.7% to Rs 7.4 crore. Consequently, the net profit grew by 47.4% to Rs 103.1 crore. On a consolidated basis, the group's turnover was Rs 2,020.7 crore during the quarter. The OPM stood at 13.6% whereas the net profit was at Rs 145.9 crore.
  • In my view, CGL is well poised to benefit from the investment in the power transmission and distribution (T&D) space. Its international subsidiaries provide it access to international markets and also help it emerge as an integrated supplier for the products and services in the T&D space.
  • I am maintaining a strong positive view on the company with a Buy recommendation and price target of Rs 367 over next 6 months.

Stock Idea - Bajaj Holdings & Investment

Recommendation: Buy
CMP = Rs 674 (at the time of recommendation)
Price target: Rs 941

Key points:

  • Bajaj Holdings & Investment Ltd (BHIL) holds a 30% stake each in the new Bajaj Auto and Bajaj Finserve. BHIL also holds cash and investments held by the erstwhile Bajaj Auto. Since the company was formed after the de-merger of the erstwhile Bajaj Auto, the previous comparable figures are not available.
  • BHIL has reported a consolidated top line of Rs 62.6 crore for Q4FY2008 and that of Rs 3.63 crore for FY2008. The PAT stands at Rs 79.3 crore for Q4FY2008 and at Rs 525.7 crore for FY2008.
  • BHIL holds cash and investments in various companies, such as ICICI Bank, Bajaj Auto Finance and Maharashtra Scooters. It will continue to hold the cash and investments in liquid form for the next two years to be able to lend to the newly formed Bajaj Auto and Bajaj Fin Serv if and when the need arises. Only when these two companies begin to generate sufficient cash flows on their own to fund their businesses will BHIL invest the cash and investments for the long term. For instance, BHIL also has a 260-acre special economic zone in Aurangabad and part of the cash could be used to expand this business in future.
  • I have valued the stakes of Bajaj Auto and Bajaj Finserve in BHIL at a 50% holding company discount and it works out to Rs 234 per share. Further, as on date the value of BHIL's investment portfolio is Rs 692 per share.
  • I recommend a Buy option on the stock with a price target of Rs 941.

Stock Idea - Ceat

Recommendation: Buy

CMP = Rs 119 (at the time of recommendation)

Price target: Rs 196

Key points:

  • The net sales of Ceat grew by 14.8% to Rs 646.2 crore in the quarter. The original equipment sales continued to decline whereas the replacement sales grew strongly by 28.2% in Q4FY2008. The operating profit margin (OPM) declined by 180 basis points to 6.0% as a result of a higher raw material cost. Consequently, the operating profit declined by 12.3% to Rs 38.5 crore.
  • For FY2008, the sales grew by 9.2% to Rs 2,329 crore and the adjusted PAT increased by 80.7% to Rs 67.7 crore. Ceat sold a small part of its Bhandup plant and realised a value of Rs 130 crore during the year. So, the reported PAT grew by 294% to Rs 147.6 crore.
  • The company increased prices of tyres by 5% in April 2008 due to the rising raw material prices. It has also announced a capex of Rs 1,000 crore for setting up a radial plant and relocating the Bhandup plant. Further details of this capex including the time period and the funding pattern are yet to be finalised.
  • I maintain positive view on Ceat, as the stock is trading at very cheap valuations. At the current market price of Rs 119 the stock is trading at 5.2x its FY2010 earnings of Rs 24.5 and enterprise value (EV/earnings before interest, tax, depreciation and amortisation (EBITDA) of 2.8x.
  • I maintain a strong Buy recommendation on Ceat with a revised price target of Rs 196.

Stock Idea - Canara Bank

Recommendation: Buy
CMP = Rs 237
Price target: Rs 315
Key points:
  • Canara Bank has reported a profit after tax (PAT) of Rs 464.1 crore for Q4FY2008, reflecting a decline of 8.1% yoy. The reported PAT is marginally above our expectation of Rs 451.1 crore. The top line performance is disappointing with the net interest income (NII) declining by 12.9% yoy to Rs 922.5 crore owing to pressure on the margins and a muted advances growth.
  • The non-interest income provided some relief with a 14.1% growth yoy. The operating expenses grew by 10.1% to Rs 697.6 crore during the quarter. The growth in the operating expenses can be traced to a 30.9% jump in the other operating expenses. Meanwhile, the staff expenses declined by 4.3% yoy. Despite the other income growth coupled with lower operating expenses, the pre-provisioning profit was down 10.7% yoy.
  • Notably, the provisions continued their declining trend. The provisions and contingencies stood at Rs 375.1 crore, down 24.5% yoy. The lower provisions coupled with a positive growth in the non-interest income helped the bank check the decline in the profitability.
  • The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) percentage came in at 1.31%, down 20 basis points yoy, while the net non-performing asset (NNPA) percentage was down 10 basis points to 0.84%.
  • The capital adequacy ratio was healthy at 13.25% as at end of March 2008, largely in line with the year-ago level of 13.50%. Growth in advances was muted at 8.9% as the bank focused on rebalancing its advances book. In line, the deposit growth was muted at 8.2% yoy.
  • At the current market price of Rs 237, Canara Bank trades at 5.4x 2009E earnings per share, 2.9x 2009E pre-provisioning profit and 1.0x 2009E book value.
  • I maintain Buy recommendation and price target of Rs 315 on the stock.

Stock Idea - Opto Circuits India

Recommendation: Buy

CMP = Rs 338

Price target: Rs 460

Key points:

  • Opto Circuits India’s (Opto) non-invasive business is expected to grow at a compounded annual growth rate (CAGR) of 39.5% over FY2007-10E to Rs 550.7 crore on the back of rising demand for its sensors and patient monitoring systems, coupled with an increasing market penetration and innovative new launches.
  • The invasive business would be driven by the increasing acceptance of the company's stents due to superior technology and better pricing. Further, the growing revenues from DIOR in Europe and the semi-regulated markets due to limited competition would also fuel the growth of the invasive segment. We expect the invasive segment (EuroCor) to contribute ~43% to the company's total revenues by 2010.
  • Opto has recently completed its $70 million acquisition of Criticre Systems (Criticare), a US-based publicly listed company specialising in vital signs and gas monitoring instruments. We estimate the Criticare acquisition to generate incremental earnings of Rs 0.60 per share in FY2009E and Rs1.80 per share in FY2010E. We will incorporate the impact of the acquisition after the announcement of Opto's FY2008 results.
  • Opto's fully diluted earnings (without Critcare) would grow at a CAGR of 35% over FY2007-10E on the back of a 57% CAGR in revenues. Opto is trading at attractive valuations of 16.9x FY2009E fully diluted earnings and 11.3x FY2010E fully diluted earnings.
  • I maintain Buy recommendation on Opto with a price target of Rs 460 over next 6-7 months.

Stock Idea - Surya Pharmaceuticals

Recommendation: Buy
CMP = Rs 107
Price target: Rs 205
Key points:
  • Surya Pharmaceuticals (Surya) reported an impressive 89.5% increase in revenues to Rs 156.5 crore in Q4FY2008. The revenue growth in FY2008 was equally robust with a jump of 63.2% to Rs 496.7 crore. An escalation in the raw material cost caused Surya's operating profit margin (OPM) to shrink by 420 basis points to 14.8% during Q4FY2008 and by 40 basis points to 17.0% in FY2008. Consequently, the operating profit grew by 46.8% to Rs23.1 crore in Q4FY2008 and by 59.0% to Rs 84.4 crore in FY2008.
  • Despite higher interest and depreciation charges, Surya's net profit grew by an impressive 56.6% to Rs 12.8 crore in Q4FY2008 and by 95.4% to Rs 46.7 crore in FY2008. In addition to its investment in the sterile facility in Jammu, Surya has announced a capex of Rs 100 crore for further de-bottlenecking of the existing capacities and expansion of menthol capacities. This would lead to a substantial jump in the company's interest and depreciation costs in FY2009, thereby straining its profitability.
  • At the current market price of Rs 107, Surya is trading at 3.6x its FY2009E diluted earnings of Rs 29.7 and 2.7x its FY2010E diluted earnings of Rs 39.9. At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations.
  • I maintain strong Buy call on this stock with a price target of Rs 205 over next 6 months.

Stock Idea - Aditya Birla Nuvo

Recommendation: Buy
CMP = Rs 1,507
Price target: Rs 2,035
Key points:
      The consolidated revenues of Aditya Birla Nuvo (ABN) grew by 43.4% yoy to Rs 3,804.4 crore in Q4FY2008. The growth was driven by the solid performance of the insurance business, which grew by 78.3% yoy to Rs 1,477 crore, contributing 39% to the overall revenues. The garment, insulator, financial service, carbon black and telecom businesses also contributed well to the overall growth. The share of the high-growth businesses (garments, life insurance, BPO, software and telecom) in the total sales in Q4FY2008 improved to 76% as compared with 73% in the same period last year.
      However, the operating profit margin (OPM) declined by 560 basis points to 5.2% on account of margin pressure in the key business segments and increased contribution of the insurance division. Consequently, the operating profit declined by 31% to Rs 197 crore. The telecom, insulator, rayon, textile and financial service businesses witnessed improvement in the profit before interest and tax (PBIT) margin while the margin declined sharply in the garment, carbon black, BPO, fertiliser and life insurance businesses, thereby reducing the overall margin by 430 basis points to 2.1%.
      The company registered a net loss of Rs 21.8 crore as against a net profit of Rs 82.8 crore during the corresponding quarter last year due to higher depreciation and interest costs. The company continued to invest the cash generated from the value businesses into the growth businesses like life insurance and telecom. The company is also planning for aggressive retail expansion and joint venture for value-added fabrics. 
      At the current market price, the stock trades at a price/earnings ratio of 40.2x FY2009E consolidated earnings and enterprise value (EV) / earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.0x FY2009E.
      I maintain a Buy recommendation on ABN with a price target of Rs 2,035 over next 8-10 months.

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Stock Idea - Bank of India

Recommendation: Buy
CMP = Rs 361
Price target: Rs 458
Key points:
  • Q4FY2008 results of Bank of India were above our expectations. The profit after tax (PAT) was Rs 757 crore, indicating an impressive growth of 69.2% yoy. The net interest income for the quarter came in at Rs 1,216.8 crore, up 25.7% yoy on the back of continued robust growth in advances and expansion in net interest margin (NIM).
  • The reported NIM for the quarter stood at 3.24%, indicating an expansion of 10 basis points yoy. The improvement in NIM was largely driven by margin expansion in international business, while the margin for the domestic business was flat at 3.71%. The non-interest income was up 13.3% yoy to Rs 653.3 crore. Importantly, the year-ago non-interest income included a one-time gain of Rs 52 crore from Nigerian oil bonds and a Rs 14 crore gain from sale of fixed assets.
  • The operating expenses during the quarter were up marginally by 1.3% yoy to Rs 657.9 crore. The operating expenses growth was contained due to a 7.6% y-o-y decline in staff expenses, which helped to partly offset the 20.9% y-o-y increase in the other operating expenses. Consequently, the cost-income ratio improved significantly to 41.7% from 52.1% a year ago. Provisions and contingencies were down by 6.5% yoy, which in turn boosted the bottom line.
  • The asset quality of the bank improved during the quarter as evidenced by a 8.1% yoy decline in the gross non-performing assets and a 27.1% yoy drop in the net non-performing assets. In line, the provisioning coverage ratio improved to 69.3% from 61.3% a year ago. The capital adequacy ratio (CAR) moved up to 12.95% from 11.58% a year ago, helped by qualified institutional placements (QIPs).
  • At the current market price of Rs 360.7, Bank of India trades at 7.4x 2009E earnings per share (EPS), 4.1x 2009E pre-provisioning profit (PPP) per share and 1.8x 2009E book value (BV) per share.
  • I maintain Buy recommendation on the stock with price target of Rs 458.

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Stock Idea - Genus Power Infrastructure

Recommendation: Buy
CMP = Rs 563
Price target: Rs 673

Key points:
  • Genus Power Infrastructures Ltd (GPIL) reported a 27.4% growth in the revenues. The meters sales continue to be robust, however the project sales were deferred due to rising input costs.
  • The operating profit grew by 75.9% yoy to Rs 35.1 crore. The operating profit margin (OPM) reported a sharp 500-basis-point improvement to 18.1% on the back of a steep decline in the other expenses. The other expenses as percentage of sales decreased to 2.5% from 11.7% in Q4FY2007.
  • The interest cost was up 12.4% to Rs 4.4 crore, while the depreciation charge rose by 107.5% to Rs 1.4 crore. Aided by better-than-expected operating performance the net profit of the company reported a growth of 102.1% to Rs 25.5 crore.
  • The current order book of the company stood at Rs 417 crore with close to 60% coming from the meters business. The company was also the lowest bidder for orders worth Rs 450 crore. GPIL is a leading manufacturer of electronic energy meters. The company is well poised to benefit from the government's plan to spend on the country's power transmission and distribution sector.
  • At the current market price, the stock trades at 11.6x its FY2009E and 8.9x its FY2010E earnings.
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Stock Idea - Hindustan Unilever

Recommendation: Buy
CMP = Rs 251
Price target: Rs 280
Key points:
  • Net sales of Hindustan Unilever Ltd's (HUL) grew by 19.1% yoy to Rs 3,793.9 crore. The sales growth was driven by a stupendous performance of the home and personal care (HPC) segment, which grew by 21.2% yoy. The foods segment that contributed 16.1% to the revenues grew by 15.6% yoy, pulling down the overall sales growth.
  • The soaps and detergent business put up a strong show with sales growth of 19.9% yoy to Rs 1,738.2 crore and the profit before interest and tax (PBIT) margin of 13.4% (up by 144 basis points yoy). Personal care product business outperformed our expectations with a handsome growth of 23.5% yoy. I believe extended winter, contribution from new launches under the brands Dove and Ponds, and price hikes contributed to the strong growth in the revenues of the segment. The PBIT margin for the segment stood at 24.7% (up by 25 basis points yoy).
  • The operating profit margin (OPM) as a whole declined by 70 basis points to 10.75% yoy, mainly due to the increase in the other expenses by 28.3% yoy to Rs 663.5 crore. The raw material cost as a percentage to sales showed a decline of 78 basis points to 54.7%. Hence the operating profit increased by 11.9% yoy to Rs 407.8 crore.
  • The other income increased by 126.2% yoy to Rs 77.3 crore leading the earnings before interest, depreciation, tax and amortisation (EBIDTA) to increase by 21.7% to Rs 485.1 crore. As the interest income (net of interest expenses) was lower by 44.1% at Rs 20.1 crore, the increase in adjusted net profit was lesser and stood at 16.7% to Rs 378.4 crore.
  • I am optimistic about the performance of HUL's HPC business and pleased by the fact that the company is exploring ways to maintain the growth in the segment by expanding its presence in premium personal care products. At the current market price of Rs 251 the stock trades at 26.8x and 22.9x its CY2008E and CY2009E earnings per share (EPS) of Rs 9.4 and Rs 10.9 respectively.
  • I maintain Buy recommendation on the stock with target price of Rs 280.

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