Stock Idea - Ceat

Recommendation: Buy

CMP = Rs 198

Price target: Rs 250

Key points:

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

Stock Idea - Hexaware Technologies

Recommendation: Book Profit

Current market price: Rs 84

Key points:

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

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

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

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

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Stock Idea - Balaji Telefilms

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

Key points:

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

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Stock Idea - ICI India

Recommendation: Buy

CMP = Rs 530

Price target: Rs 581

Result highlights:

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

Stock Idea - Grasim Industries

Recommendation: Buy

CMP = Rs 3,627

Price target: Rs 3,950

Result highlights:

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