Sharekhan Investor's Eye dated June 22, 2007

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792
Current market price: Rs685

Annual report review

We have analysed the recently released annual report of Tata Motors (TAMO) and present the highlights below.

Key points

• TAMO had a good FY2007, registering a 32.3% growth in its top line and a 37.5% growth in its bottom line. The medium and heavy commercial vehicle (M&HCV) sales volumes picked up splendidly during the year, led by a strong growth in the freight availability and the Supreme Court's ban on the overloading of trucks. The light commercial vehicle (LCV) volumes sustained their growth momentum as Ace continued to do well while passenger car volumes remained strong on the back of good Indica sales.
• The company continued to make progress towards improving its operational efficiencies as its turnover per employee rose to Rs73 lakh against Rs68 lakh in FY2006. The return ratios remained stable with the return on capital employed (RoCE) at 29.9% and return on net worth (RoNW) at 27.1%. The debtor days reduced to 10.5 days while the inventory days too reduced to 33.7 days from 35.8 days.
• The company has a capital expenditure (capex) plan of Rs12,000 crore for the next four years. The funds shall be spent towards new product development and capacity expansion. To part finance the activities, the company has recently announced the issue of five-year foreign currency convertible alternative reference securities (CARS) aggregating to $490 million, including a green-shoe option of $40 million. The same will be convertible at the option of the company into depository receipts or ordinary shares at a price of Rs960.96 per share. At that price, it would lead to a dilution of 5% over its current diluted equity.
• The company maintains its optimism towards the automobile sector, considering the strong macro factors. However the growth during the current year is expected to be lower in comparison to that in the previous year as the same shall be affected due to the higher interest rates and tightening liquidity. As a strategy going forward, the company plans to focus on new product launches and has lined up a number of launches in the next couple of years.
• We maintain our cautious view on the commercial vehicle (CV) industry and believe that the lacklustre trend in sales would continue in the coming months. We expect a revival at the end of the monsoons and with the commencement of the festive season. At the current market price of Rs685, the stock quotes at 10.4x its consolidated FY2009E earnings and at 5.2x its earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation with a price target of Rs792.

Ratnamani Metals & Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Under review
Current market price: Rs880

Q4FY2007 results: First-cut analysis

Result highlights

• The Q4FY2007 results of Ratnamani Metals & Tubes are above our expectations.
• The company reported strong quarterly results. The revenues for the quarter grew by 95.3% to Rs172.6 crore.
• The operating profit for the quarter grew by 77.6% to Rs34 crore and the operating profit margin (OPM) for the same period declined by 240 basis points to 22.3% from 24.8% in Q4FY2006. The OPM declined due to a higher raw material cost as a percentage of sales. The raw material cost went up by almost 310 basis points to 62.9% from 59.8% in Q4FY2006. Other expenses as a percentage of sales also went up by 110 basis points during the quarter.
• The interest expense for the quarter increased by 111.4% to Rs4.9 crore while the depreciation cost for the quarter increased by 310.1% to Rs6.2 crore.
• The profit before tax grew by 80% to Rs27.6 crore. The net profit for the quarter grew by 38.4% to Rs17.5 crore due to a higher tax rate of 36.7% in this quarter compared with 17.8% in Q4FY2006.
• For the full year, the net sales grew by 79% to Rs571 crore and the net profit grew by 91% to Rs64.2 crore.
• The order book at the end of this quarter stood at Rs500 crore.
• Driven by a strong order book and the increasing demand for its products from its key user industries, which are in capital expansion phase, we believe there is strong visibility of its earnings. At the current market price, the stock is trading at 12.4x its FY2007 earnings per share and 6.9x its FY2007 enterprise value/earnings before interest, depreciation, tax and amortisation. We shall be upgrading our earnings estimates for FY2008 as well as the price target and would be coming out shortly with a detailed update on the company.