Stock Idea - Corporation Bank

Recommendation: Buy

CMP = Rs 471 (as of Monday)

Price target: Rs 542

Result highlights:

• Corporation Bank's (CORP) Q2FY2008 profit after tax (PAT) grew by 27% year on year (yoy) to Rs 161.3 crore. The growth was primarily driven by a higher non-interest income component. However, the net interest income (NII) growth was better than that of most peers. A surge in the operating expenses due to higher provisioning on account of AS-15 related staff expenses restricted the overall profit growth.
• CORP's total assets grew by 18% yoy and 5% quarter on quarter (qoq) while the reported NII grew by 17.5% yoy and 7.3% qoq. The NII (adjusted for amortisation) grew by 15.3% yoy and 7% qoq. Its adjusted net interest margin (NIM) showed a sequential improvement unlike many of its peers as it was the only bank that aggressively reduced deposit rates after its dismal NII performance in Q1FY2008 (when NII had seen a growth of 7.8% yoy). 
• The non-interest income grew by 62% yoy and by 32.3% qoq to Rs 183.2 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth was the trend for all public sector banks during Q2FY2008.
• CORP's operating expenses jumped up by 25.3% yoy to Rs 243.2 crore mainly due to a 39.2% jump yoy in the staff expenses brought about by a Rs47-crore AS-15 related expense charged during the quarter. Despite such a sharp jump in the operating expenses, the operating profit growth was robust at 33.4% yoy brought about by a higher non-interest income growth. However, the core operating profit growth was moderate at 8.7% yoy. 
• The bank's business growth moderated with advances up by 17% yoy from a 25% growth yoy reported during March 2007. The deposit growth also moderated from 28.8% to 20% for the same period. Its total assets grew by 18% yoy compared with a growth of 30% yoy reported in March 2007.
• The bank's asset quality continues to remain one of the best in the industry with the gross non-performing asset (NPA) down by 21 basis points to 1.9% and the net NPA lower by 11 basis points to 0.35% sequentially. 
• CORP has been the first bank to cut deposit rates and show some sequential improvement in its NIM in Q2FY2008. The non-interest income growth is expected to be much better in future. It will be driven by higher treasury gains that would help in improving the bank's return on equity (RoE) by 230 basis points to 17.3% in FY2009 from 15% reported in FY2007.
• The bank's earnings are expected to grow at a compounded annual growth rate (CAGR) of 20.1% between FY2007 and FY2009, which is much better than its past performance. At the current market price of Rs471 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.5x pre-provisioning profit (PPP) and 1.4x FY2009E book value (BV).
• I maintain Buy recommendation on the stock with a 12-month price target of Rs 542.

Stock Idea - Ipca Laboratories

Recommendation: Buy

CMP = Rs 660 (as of Monday)

Price target: Rs 875

Key points :

• Domestic formulation business to outpace industry growth: Driven by steady new launches, a strong therapy-focused field force and good brand building abilities, Ipca Laboratories' (Ipca) domestic formulation business has been growing at above industry growth rates. With an enhanced focus towards chronic therapies and aggressive new launches, Ipca's domestic formulation business would continue to grow at 16-18% during FY2007-09.
• Strong thrust on exports: With steady performance on the domestic front, Ipca is increasingly focusing on its export business, which generates 30% of its total revenues. Driven by aggressive brand promotion in the emerging economies, a revival in the European business and a scale-up in the US business, the formulation exports are projected to grow at a CAGR of 14.5% over FY2007-09.
• API business to benefit from outsourcing contracts: A leader in several API products, Ipca's API business constitutes 33% of its total revenues. With its low-cost advantage, Ipca is set to capture a substantial chunk of the outsourcing business of global pharmaceutical companies. We believe Ipca's API business will grow at a 13.5% CAGR over FY2007-09, driven by a 9% CAGR in the domestic API business and a 15% CAGR in API exports.
• Earnings to gallop at a 23% CAGR: We estimate Ipca's earnings to grow at a CAGR of 23% over FY2007-09E on the back of a 20% CAGR in revenues. The revenues will be driven by a 15.3% CAGR in the domestic business and a 24.4% CAGR in exports. We estimate earnings of Rs 59.9 per share in FY2008 and of Rs 73.0 per share in FY2009.
• Compelling valuations: At the current market price of Rs660, Ipca is trading at attractive valuations of 11.0x FY2008E earnings and 9.0x FY2009E earnings. It has traditionally been getting PE multiple in low teens. But with the enhanced visibility of growth from the US and European markets, the sustained growth in the domestic business and the healthy return ratios, we believe that the stock should command higher valuations.
• I therefore recommend a Buy on Ipca with a one-year price target of Rs 875.

Stock Idea - Ceat

Recommendation: Buy

CMP = Rs 170 (as of Thursday)

Price target: Rs 216

Result highlights:

• Ceat's Q2 results were ahead of our expectations on the back of a higher than expected margin. The top line grew by 8.5% led by a volume growth of 7.3% year on year (yoy). Despite a slowdown in the original equipment manufacturer (OEM) sales, which declined by about 30% yoy, the replacement sales and exports did well. 
• The operating profit margin (OPM) for the quarter grew by 430 basis points to 9.4%, which is the highest in the recent times. Consequently, the operating profit jumped by 102% to Rs 54.6 crore. A lower interest cost and a higher other income led to a whopping 494% growth in the profit to Rs 25.5 crore.
• Rising rubber and crude prices are a cause for concern. Because of the import threat, the price increase could be minimal, which may lead to some sort of softness in the margins.
• At the current market price of Rs 170, the stock is trading at 8.3x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.7x.
• I maintain Buy recommendation on the stock with a price target of Rs 216 with a time frame of 6 months.

Stock Idea - Elder Pharmaceuticals

Recommendation: Buy

CMP = Rs 376 (as of Thursday)

Price target: Rs 508

Result highlights:

• Elder Pharmaceutical's (Elder) net sales for Q2FY2008 grew by a strong 21.3% to Rs 132.3 crore, thus maintaining the growth momentum seen in the previous quarters. The sales growth was marginally ahead of our estimates of Rs 128 crore and was driven by the continued momentum in the company's star brands and new products and line extensions launched by the company over the past one year. 
• Elder reported an expansion of 50 basis points in its OPM, which stood at 19.4% during the quarter. The expansion in the OPM was led by a 230-basis-point reduction in the other expenses incurred by the company. The decline in the other expenses was mainly due to the effect of increased productivity of the marketing spend incurred by the company. 
• Consequently, the company's operating profit rose by 24.5% to Rs 25.6 crore in Q2FY2008.
• Elder's net profit rose by 21.7% to Rs 17.7 crore in Q2FY2008. The growth in the profit was marginally ahead of our estimate of Rs 15.5 crore and was robust despite an increase of 50.8% in the interest cost and a rise of 53.2% in the depreciation charge during the quarter. The net profit growth was aided by a substantially lower tax provision made during the quarter.
• Elder is exploring new contract research and manufacturing (CRAMS) opportunities through its 29 alliance partners. Having executed one such project with its Italian partner, Angelini, the company hopes to get 3-4 more such manufacturing contracts from Angelini, which will enable it to scale up its CRAMS business.
• Elder has recently announced two acquisitions in Europe: a 20% stake in the UK-based Neutra Health PLC and a 51% stake in the Bulgaria-based Biomeda. These two acquisitions will provide Elder an entry into the European markets. Elder plans to complete the Biomeda acquisition by the end of FY2008 and also increase its stake in Neutra Health from 20% currently to 26% by December 2007.
• At the current market price of Rs 376, the stock is quoting at 9.3x its estimated FY2008 earnings and at 8.3x its estimated FY2009 earnings.
• I maintain Buy recommendation on the stock with a price target of Rs 508 with time frame of 8-9 months.

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

Wockhardt

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.