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Stock Idea - Bharat Heavy Electricals & Ashok Leyland

Bharat Heavy Electricals

Recommendation: Buy

CMP = Rs 2,092

Price target: Rs 2,845

Result highlights:

• For Q3FY2008, Bharat Heavy Electricals Ltd (BHEL) reported a 14.4% growth in its net sales to Rs 4,964.2 crore, whereas the net profit reported a 15.6% rise to Rs 771.9 crore. The results were below are expectations.
• The operating profit margin (OPM) for the quarter declined by 130 basis points year on year (yoy) to 20.1% mainly on account of the higher staff cost. The staff cost as percentage of sales increased by 330 basis points due to the provisions made by the company in anticipation of the wage hike to be recommended by the sixth Pay Commission. The company also made provision for productivity-linked incentives during the quarter.
• The order book continued to be robust with a 91% year-on-year (y-o-y) increase in the order inflow. Orders worth Rs 10,929 crore were booked during the quarter taking the unexecuted order book to Rs 78,000 crore, which represented a growth of 67% yoy and 7.4% qoq.
• BHEL has recently increased its capacity to 10,000 mega watt (MW) per annum. The company is now looking to increase it further to 15,000MW by 2009 and 20,000MW by 2012. BHEL has won its first order for a 600MW unit from the Tamil Nadu Electricity Board (TNEB) for Rs 2,475 crore. The company had earlier denied bidding for 600MW units, as the company's product was not approved by the Central Electricity Authority (CEA). 
• BHEL has lately won an order from Reliance Industries Ltd (RIL) for setting up a 345MW captive power plant in Maharashtra on EPC basis. The order is valued at Rs 866 crore.
• In view of these events, I would maintain Buy call on BHEL with a price target of Rs 2,845 over next 6 months.

 

Ashok Leyland

Recommendation: Hold

CMP = Rs 37

Price target: Rs 43

Result highlights:

• The Q3FY2008 results of Ashok Leyland Ltd (ALL) were lower than our expectations, mainly on the profitability front. The net sales for the quarter grew by 1.3% y-o-y to Rs 1,800.1 crore. The quarterly net sales were ahead of our estimates and were driven by a 7.1% growth in the average realisation. The realisation increased due to the change in the product mix in favour of fully-built vehicles. The sales volume for the quarter however declined by 5.4% y-o-y.
• Adjusting for the forex gain of Rs 3.29 crore, the operating profit declined by 12% y-o-y to Rs 162.2 crore. The OPM contracted by 140 basis points to 9% in the quarter as compared with 10.4% in the corresponding quarter of the last year. The profitability was affected due to the increase in the employee costs and the other expenditure. 
• The commercial vehicle segment is expected to recover only in FY2009. The company has revised its sales guidance for FY2008 to 86,000 from the earlier 90,000 vehicles. The sales in Q4FY2008 are expected to be driven by both the domestic sales and the export orders on hand.
• ALL has huge capex plan over the next two-year period. It has planned capex to expand its existing capacity and to set up a new manufacturing facility at Uttarkhand. Further investment will be required for its light commercial vehicle (LCV) joint venture (JV) plan with Nissan. All these are expected to exert pressure on its financials and restrict its profit growth. 
• At the current market price of Rs 37, the stock quotes at 10.3x its FY2009E earnings and 6.8x its FY2009E earnings before interest, depreciation, tax and amortisation (EBIDTA).
• I would recommend a Hold call on ALL with a price target of Rs 43, as I expect it to rise even further.

Stock Idea - Aban Offshore

Recommendation: Buy (again!!!)

CMP = Rs 3,780

Price target: Rs 5,420

Key points:

• Aban Offshore has received a letter of intent from Oil and Natural Gas Corporation for the deployment of drillship, Aban Ice, on a three-year contract worth Rs 657 crore. As per the new contract, the day rate works out to around $154,000, which is much higher than our estimate of $110,000 per day. The ongoing contract, which was at a rate of $43,000 per day, is set to expire in March 2008. As can be noticed, the new rates are almost 258% higher than the previous contract, clearly indicating the strong uptrend in the day rates. 
• Also, it is important to note that the contract has been struck in rupee terms, protecting the company against any fluctuations on the foreign exchange front. I would also factor in the impact of this contract at higher day rates for Aban Ice in our next update, along with the impact of the recent acquisition of an offshore rig, Bulford, for a consideration of $211 million. All this would add to the company's growth from the next year onwards.
• Furthermore, the company might also announce its contract for the newly-built jack-up rig, Aban VIII, in February 2008, which may provide further upside to our numbers. It should be noted that the current correction in its stock price should be used as an opportunity to buy the stock.
• At the current market price of Rs 3,780, the stock is discounting its FY2009E earnings by 9.7x and FY2010E earnings by 7.5x.
• I believe that its valuations are extremely attractive at the current levels. Also, the listing of its Singapore subsidiary would act as an important trigger for the stock going ahead. I maintain Buy recommendation on the stock with a price target of Rs 5,420 with a time frame of 9-12 months.

Stock Idea - Bharat Electronics

Recommendation: Buy

CMP = Rs 1,701

Price target: Rs 1,850

Result highlights:

• Bharat Electronics Ltd (BEL) has reported another quarter of disappointing results. Its revenues declined by 23.3% to Rs 662.2 crore in Q3FY2008 as compared with Rs 863.8 crore in Q3FY2007. The management has indicated that the delay in obtaining the approval for some of its products and the bottlenecks in the supply chain have been the key reasons for the lower than expected revenues in the third quarter of FY2008.
• The operating profit margin (OPM) declined by 370 basis points to 19.2% largely due to an increase in the staff cost as a percentage of the sales (which jumped to 24.2% as compared with 12.8% in Q3FY2007). The staff cost jumped by 44.3% on the back of Rs 12 crore of provisions made (pertaining to FY2007 as per the guidance given by the Sixth Pay Commission).
• The net profit declined by 23.8% to Rs 113 crore. The company has disappointed for three quarters in a row. 
• For the first nine months, the revenues and earnings of BEL declined by 18.6% and 26.4% respectively. The OPM plummeted by 540 basis points to 15.5% during the period. In addition to a possible negative growth in the earnings in FY2008, for the first time in ten years the management might not be able to achieve the revenue targets set as per the memorandum of understanding (MoU) signed with the defence ministry.
• At the current market price the stock trades at 20.9x FY2008 and 15.2x FY2009 earnings estimates.
• I still maintain Buy recommendation with a price target of Rs 1,850.

Stock Idea - Marico

Recommendation: Buy

CMP = Rs 62

Price target: Rs 70

Result highlights:

• Marico Industries Ltd's (Marico) sales growth in Q3FY2008 was in line with our expectations. The company posted a strong top line growth of 23.7% year on year (yoy) to Rs 506.2 crore aided by an impressive performance across the businesses. The stirring top line growth was a result of a 19% organic growth and a 5% inorganic growth. 
• Affected by a hefty 34% year-on-year (y-o-y) increase in the staff cost and a higher-than-expected increase in the other expenses (up 32.9% yoy to Rs 81.2 crore) the operating profit margin (OPM) declined by 79 basis points to 12.68%. The operating profit thereby grew by 16.4% yoy to Rs 64.2 crore.
• The raw material cost was under check as copra prices during the quarter were lower by about 10-12% yoy. However, the input cost for edible oils continued to rise and was up by 20-30% across categories. Thereby the adjusted net profit grew by 57.1% to Rs 43.53 crore.
• The company changed its method of charging the depreciation on the factory building that led to a one-time charge of Rs4.29 crore. There was a one-time exchange rate gain of Rs 7.8 crore. After this the reported net profit stood at Rs45.9 crore, which was up 61.5% yoy. 
• Marico continued to implement its three-pronged growth strategy of enhancing the existing products, introducing new products and achieving inorganic growth through acquisitions. During the quarter it entered the South African ethnic hair care and health care markets by acquiring the consumer division of Enaleni Pharmaceuticals, which has an annual turnover of ~Rs 53 crore.
• At the current market price of Rs62, the stock trades at 18.5x our FY2009E earnings per share (EPS) of Rs 3.30.
• I remain positive on Marico's businesses and maintain Buy recommendation on the stock with a price target of Rs 70.

Stock Idea - State Bank of India

Recommendation: Buy

CMP = Rs 2,405

Price target: Rs 2,680

Result highlights:

• The public sector behemoth State Bank of India (SBI) reported a profit after tax (PAT) of Rs 1,808.6 crore for Q3FY2008, beating our estimate of Rs 1,413 crore. The PAT was up 69.8% year on year (yoy) and 12.3% quarter on quarter (qoq) on the back of a strong all-round growth. On a consolidated basis, the Q3FY2008 PAT stood at Rs 2,442.3 crore, up 55.1% yoy and 10.8% qoq.
• The net interest income for the quarter stood at Rs 4,256 crore, registering a robust growth of 23.8% yoy on the back of a strong growth in the advances and an improvement in the net interest margin (NIM).
• The NIM during the quarter improved by eight basis points sequentially on the back of an improvement in the yield on assets, which was partially offset by the higher cost of funds. On the year-on-year (y-o-y) basis, the NIM continued to remain under pressure. However, we expect the NIM to improve going forward as the high-cost bulk deposits raised earlier get repriced at lower rates.
• The non-interest income witnessed a whooping growth of 48% yoy to Rs 2,697 crore on the back of jump in treasury income and foreign exchange (forex) income. The treasury income was up 107% yoy to Rs 644 crore while, the forex income tripled yoy to Rs 431 crore. Meanwhile, the core fee income growth was robust at 19% yoy. 
• The operating expenses during the quarter grew by 13.2% yoy to Rs 3,294 crore. The growth was mainly due to a 25.2% y-o-y increase in the other operating expenses as the bank expanded the coverage of its core-banking solution (CBS) platform aggressively. Asset quality continued to improve further during the quarter as evidenced by a sequential reduction of Rs 220 crore in the net non-performing assets (NNPA), while the gross non-performing assets (GNPA) were largely stable at Rs 10,641.
• The capital adequacy ratio at the end of December 2007 stood at a comfortable 12.3% compared with 12.8% for the previous quarter and 11.9% for the year-ago period. Besides the strong stand alone performance, SBI's various subsidiaries and associate banks continued to clock a healthy growth. Notably, SBI Life, the life insurance arm of the bank, reported a PAT of Rs 37.7 crore compared with a loss of Rs 33.5 crore for the year-ago period.
• Following the bank's announcement of its plans to merge the associate banks in itself, the labour unions for the public sector banks have declared their strong opposition against the merger plan. A recent meeting between the Indian Bankers Association and the labour unions on their demands has not yielded any results. Meanwhile, the proposed merger of the State Bank of Saurashtra has received a nod from the boards of both the banks.
• At current market price of Rs 2,405, SBI trades at 22.5x its 2009E earnings per share, 8.9x its 2009E pre-provisioning profit and 2.6x its 2009E book value.
• I would recommend Buy option on this stock with price target of Rs 2,680 in the next 6 months time frame.

Stock Idea - Shiv-Vani Oil & Gas Exploration Services

Recommendation: Buy

CMP = Rs 611

Price target: Rs 670

Result highlights:

• Shiv-vani Oil & Gas Exploration Ltd (SOGEL) reported a healthy growth of 73.6% in its consolidated revenues to Rs 126.7 crore in the quarter ended December 2007. In addition to an increased fleet base and higher realisations, the growth was partially contributed by incremental revenues of around Rs20 crore from the coal bed methane project.
• The operating profit margin (OPM) improved by 560 basis points to 41.5% primarily driven by the improvement in realisations and better utilisation of its fleet. The positive impact of the higher realisations is clearly reflected in the 390-basis-point decline in the drilling expenses (and other operational expenses) as a percentage of the sales. The operating profit grew by 100.8% to Rs 52.6 crore.
• The decline in the depreciation charges as a percentage of the sales and the lower effective tax rate enabled the company to report a relatively higher growth of 178.7% in its earnings to Rs 26.7 crore in Q3FY2008. 
• In the first four quarters, the consolidated revenues and earnings have grown by 42.8% and 104% respectively. The OPM has improved by 350 basis points to 38.5% during the same period. The company was able to more than make up for the steep increase of 50% in the staff cost by scale benefits (savings of 120 basis points in the overheads cost as a percentage of the sales) and higher realisations (saving of 290 basis points in drilling expenses as a percentage of the sales).
• In term of operational highlights, the company bagged an order worth Rs 261 crore to deploy four onshore rigs with Oil India for a period of two years. The average day rate works out to around $22,600, which is around 10-15% higher than the recent contracts with day rates in the range of $18,000-20,000. The contract has further boosted the company's existing order backlog of over Rs 3,000 crore, thereby improving its revenue growth visibility.
• At the current market price the stock trades at 16.9x FY2009 and 12.8x FY2010 estimated earnings.
• I maintain Buy call on the stock with a revised price target of Rs 670.