Investor's Eye

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs42
Current market price: Rs38.5

Put on Hold

Result highlights

• Ashok Leyland's Q2 results are in line with our expectations. The top line has marked a growth of 13.9% to Rs1,621.1 crore due to a volume growth of 6.6% and a realisation growth of 6.8%, mainly due to higher bus sales.
• The margins marked a 100-basis-point improvement to 9.5%, due to higher contribution of buses during the quarter, which usually enjoy higher margins. Consequently, the operating profits (excluding the foreign exchange [forex] gain) for the quarter grew by 27.4% to Rs154.5 crore.
• The company maintains that the higher interest rates have affected the sales as it caused the prospective customers to defer their buying decisions. The company expects a revival in the second half of the year. For the full year, the company expects the truck industry to register a growth of about 5-6%, while it has set a target of selling 90,000+ vehicles for itself (earlier 100,000). We estimate an overall volume growth of 5% for the current year and a 13.8% growth for the next year.
• Though the company's capacity expansions plans, better product mix, improving operating efficiencies and increasing presence in the overseas markets are some of the positives for the stock, we remain very cautious on industry's prospects considering weak freight rates, lesser availability of freight due to seasonal factors, reduction in auto loan disbursals by financiers and increasing instances of delinquencies. Consequently, we are downgrading our rating on the stock to a Hold.
• A lower other income (due to dividend income received in Q4FY2007, higher interest costs due to additional working capital requirements and higher taxes led to a 5% drop in the net profits for the quarter to Rs71.9 crore. Taking into account the extraordinary items of Rs19.8 crore forex gain and a Rs3.5 crore voluntary retirement scheme expenses write-off, the profits after extraordinary items have marked a growth of 27.5% to Rs88.2 crore.
• At the current market price of Rs38.5, the stock quotes at FY2009E price/earnings ratio of 9.4x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.0x.

ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,210
Current market price: Rs1,117

Price target revised to Rs1,210

Result highlights

• In Q1FY2008 ACC's volumes grew by 14% year on year (yoy) to 5.3 million metric tonne (MMT) on account of the incremental volumes from the Lakheri unit. Its cement realisations grew by 10% yoy to Rs3,390 per tonne. The blended realisations (including those from ready-mix concrete [RMC] and excluding the inter-segmental revenue) grew by 12% yoy to Rs3,524 per tonne. Consequently, the top line grew by a smart 28% yoy to Rs1,867 crore.
• The operating expenditure grew by a sharp 32% yoy to Rs1,323.5 crore on the back of a 22% year-on-year (y-o-y) growth in the raw material (RM) cost and a 38% y-o-y growth in the other operating expenditure on account of higher packing and consultancy expenditure. The employee cost too jumped by 15% yoy to Rs93 crore.
• Consequently, the operating profit growth was lower at 20% yoy to Rs544 crore whereas the operating profit margin contracted by 200 basis points to 29.1%.
• Thanks to a higher interest income earned on surplus cash, the net interest component was positive at Rs2.27 crore. The depreciation provision was higher by 9% on a y-o-y basis at Rs63 crore on account of the expansion work at Lakheri and Kymore.
• Backed by a higher other income component of Rs28 crore the net profit grew by a healthy 36% yoy to Rs351 crore.
• As mentioned in our earlier reports, ACC's expansion programme is progressing as per schedule. An additional capacity of 0.90MMT as well as a 25-megawatt (MW) captive power plant (CPP) at Lakheri got operational in the current quarter. The company also augmented its grinding capacity at Kymore. Work on the 1.18MMT expanded capacity at Bargah and a 30MW power plant is in progress. The company is also setting up a greenfield project at Wadi. Thus at the end of CY2008, the company's capacity will increase to 24MMT.
• Considering the price rise in the south, savings from higher blending as well as the removal of the government's price freeze, we are upgrading our CY2007 earnings per share (EPS) estimate by 16.6% to Rs82.8 and our CY2008 EPS estimate by 20.8% to Rs79.5 (assuming a drop of Rs5 in per bag of cement).
• We believe that the free pricing scenario will augur well for the company on account of the latter's leverage to cement prices. The incremental capacity (achieved partly through higher blending) will not only provide the much needed volume growth but also result in cost savings. These coupled with the increased focus of the cement industry on cost efficiency (with the advent of Holcim) will drive the earnings of the company going forward. At the current market price of Rs1,117, the stock trades at 14x its CY2008 EPS. We are maintaining our Buy recommendation on the stock with an upgraded price target of Rs1,210 per share.

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs192
Current market price: Rs154

Price target revised to Rs192

Result highlights

• Union Bank of India (UBI) recorded a 34.9% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs225.1 crore in Q1FY2008. The growth was driven by an improvement in the overall operating performance.
• The net interest income (NII) was up by 21.6% year on year (yoy) to Rs771.3 crore in the same quarter. The net interest margin (NIM) of the bank improved by 17 basis points on a y-o-y basis to 3.11% and remained stable on a sequential basis, as the bank did not raise any significant high-cost bulk deposits and shifted its portfolio towards high-yielding assets during the quarter.
• The non-interest income increased by 40.2% yoy to Rs178 crore with the core fee income up 13.3% yoy and treasury income higher by 17.9% yoy.
• Due to the revised AS-15 guidelines the bank had to provide Rs25 crore as provisions during Q1FY2008 and intends to provide Rs100 crore of the same for FY2008. The shortfall in provisions due to the new AS-15 guidelines is estimated at Rs350 crore which the bank intends to write off over the next five years.
• The operating profit grew by 35.7% yoy and the core operating profit increased by 34.6% yoy, driven by a good net income growth and controlled operating expenses.
• Provisions and contingencies rose by 31% yoy mainly due to higher non-performing asset (NPA) provisions and investment depreciation on IFCI bonds, which needed to be shifted from the "held to maturity" category to the "available for sale" category by June 2007, as per the directives of the Reserve Bank of India.
• As a result of the higher provisioning and write-offs, the bank's NPA level improved to 0.78% from 0.98% in Q4FY2007 and the provision coverage rose to 72% from 68% in Q4FY2007. The management is confident of maintaining the improved asset quality going forward.
• The bank intends to focus on high-yielding loans funded primarily by core deposits, unlike in the past when the bulk deposits funded a major part of its loan portfolio. This strategy should augur well for the bank's margins going forward. UBI's asset quality improved in Q1FY2008 and the management is confident of maintaining the same. We have introduced our FY2009 estimates and expect a 24.2% compounded annual growth in the bank's profits for the period FY2006-09. At the current market price of Rs154, the stock is quoting at 6x its FY2009E earnings per share (EPS), 2.9x pre-provision profits (PPP) and 1.2x book value (BV). We maintain a Buy on the stock with a revised price target of Rs192.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs422

Growth momentum continues

Result highlights

• Elder Pharmaceuticals (Elder) maintained its growth momentum in Q1FY2008. The company's net sales rose by 20.0% to Rs125.3 crore in Q1FY2008. The sales growth was in line with our expectations and was driven by the continued momentum in the company's star brands, the new products and line extensions launched over the past one year, and an increased offtake of antibiotics.
• Elder reported a marginal drop of 30 basis points in its operating profit margin (OPM), which stood at 18.5% during the quarter. The contraction in the margin was largely on account of a 32.1% rise in the other expenditure incurred by the company. The increase in the other expenditure was mainly due to an increase in the marketing spend for the launch and ramp-up of the newly launched osteoporosis drug called Bonviva, which was in-licenced from Swiss drug maker, Roche.
• Consequently, the company's operating profit rose by 17.6% to Rs23.1 crore in Q1FY2008.
• Elder's net profit rose by 15.4% to Rs15.1 crore in Q1FY2008. The growth in the profit was marginally ahead of our estimate of Rs13 crore, despite an increase of 32% in the interest cost and a rise of 43% in the depreciation charge during the quarter. The net profit growth was aided by the substantially lower tax provision made during the quarter.
• Elder's performance has been consistent quarter after quarter. With strong brand building capability, a continuous spate of new in-licencing deals, launch of new products, and scale-up of business in the lifestyle, skin-care and paediatric areas, Elder's growth prospects continue to remain bright for the years to come. The company has been aggressive in striking in-licencing deals and as the products from the deals signed over the past few quarters get launched, the growth momentum will accelerate.
• At the current market price of Rs422, the stock is quoting at 10.5x its estimated FY2008 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.

Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs517
Current market price: Rs386

Price target revised to Rs517

Result highlights

• Alphageo India's (Alphageo) Q1FY2008 results are in line with expectations. The company reported a healthy growth of 84.7% in its revenues to Rs20.7 crore during the quarter.
• The operating profit margin (OPM) declined from 51.6% in Q1FY2007 to 38.5% in Q1FY2008. The steep decline in the OPM was disappointing and below expectations. The margin contracted because of the under utilisation of the company's resources and unfavourable business mix (a higher contribution from the low-margin 2D work). The operating profit grew by 37.6% to Rs7.9 crore.
• The savings in the interest expenses (lower by 14% to Rs0.9 crore compared with that in Q1FY2007) and a lower depreciation charge as a percentage of the sales (down to 1.6% as compared with 2.2% of the sales in Q1FY2007) enabled the company to report a 48.5% growth in its earnings to Rs2.4 crore. The same was in line with our estimate of Rs2.3 crore.
• Generally, the second quarter is a lean season for the company. Especially since most of its contracts are concentrated in the tough terrains of the north east region where it is difficult to do any work during the monsoons. However, the situation is likely to be much better this fiscal. Work is expected to commence on the recently bagged contract from Oil & Natural Gas Corporation (ONGC) in the Cauvery Basin (in south India) in August this year and the project would contribute to the company's revenues from Q2FY2008.
• To factor in the higher than expected pressure on the margins in Q1, the earnings estimate for FY2008 has been revised downwards by 7%. We are also introducing our FY2009 estimates for the company in this note. We maintain our Buy call on the stock and are rolling over the price target to Rs517 (which is 10x FY2009E earnings).