Investor's Eye - July 13 2007

NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs510

Annual report review

Key points

• NIIT Technologies had an outstanding FY2007. It reported an exponential growth of 94.9% in its consolidated earnings, driven by a healthy growth of 45.8% in its revenues and an improvement of 140 basis points in its operating profit margin (OPM).
• The impressive performance is a reflection of the benefits of the efforts taken to restructure the business model to focus on key industry verticals. Moreover, the inorganic initiatives in terms of the acquisition of Room Solutions further aided the company's overall growth during the year.
• The outlook for FY2008 appears to be encouraging, given the healthy fresh order intake of $209 million in the last fiscal and the commencement of its joint venture with Adecco SA in FY2008.
• At the current price the stock trades at 12x FY2008 and 9.9x its FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs720.

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs55.5

Price target revised to Rs70

Key points

• In the domestic fast moving consumer goods (FMCG) business, the flagship brand Parachute, which constitutes 35% of the total turnover, is expected to do well in FY2008. Parachute commands a market share of 48% in the hair oil market. The brand showed a volume growth of 12% in FY2007 and is expected to grow by 8% in this year.
• With growing health consciousness, the Saffola brand registered a volume growth of 18% in FY2007 despite the price hike taken during the year. The strong brand equity that Saffola enjoys helps it to maintain its leadership position. With the growing consciousness for a healthy lifestyle, we expect the brand to grow by 13-15% in FY2008.
• The company is adding new products to its pipeline every year which would fuel further growth. The new prototypes and roll-outs are primarily high-margin products that would boost its margins and drive its growth in the coming years.
• Kaya Skin Clinic, which has 48 outlets, reported a turnover of Rs75 crore in FY2007. This business broke even during FY2007 with a profit before tax (PBT) of Rs0.04 crore. With the addition of few clinics in FY2007 and better utilisation in the existing clinics, the company was able to turn PBT positive in FY2007. We believe that with better operational efficiency this venture would provide fillip to the bottom line of Marico.
• We maintain our positive outlook on the company and expect its turnover to grow by 21% in the current financial year. The company has done acquisitions worth around Rs500 crore ( Nihar, Manjal, Fiancée and Hair Code) which have been funded through debt and internal accruals. What's more, the company has been able to successfully integrate all these businesses. With a debt/equity ratio of 1.3 and the cash flow coming from its existing businesses, the company's appetite for further acquisitions remains unsatisfied which would fuel further growth. We are introducing our FY2009 estimates. The stock is trading at attractive valuations of a price/earnings ratio of 16.8x FY2009E and enterprise value /earnings before interest, depreciation, tax and amortisation of 11x FY2009E. We maintain our Buy recommendation on the stock with a revised price target of Rs70.

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MUTUAL FUND: INDUSTRY UPDATE

Rally in equity AUMs continues

The AUM for equity funds rose by 3.8% to Rs162,553 crore in June 2007. The rise in the AUM was above the market movement of 0.9%