SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs450
Price target revised to Rs500
Result highlights
- SKF India's Q2CY2007 results are way ahead of our estimates, on the back of a very strong top line growth and healthy margin improvement. The strong growth is attributed mainly to the strong growth in the industrial bearing segment. The net sales for the quarter rose by 22.4% to Rs401.5 crore.
- The margin improvement during the quarter was a positive surprise. We believe the margins improved mainly as a result of a higher contribution from the industrial bearing business, where the margins are higher, to the overall sales and better utilisation of the new capacities.
- The operating profit margin (OPM) jumped up by 320 basis points to 16.2% during the quarter. Consequently, the operating profit grew by 52.2% to Rs64.8 crore.
- A higher interest income, a slightly higher other income and a stable depreciation charge helped the company to grow its profit by 60.8% to Rs40.7 crore.
- The company is consistently supported by its parent SKF AG in terms of new technology. A number of new products including the Conment bearings and power transmission products were launched by SKF India in the last few months. We believe that the company would continue to develop new and innovative products to maintain its leadership position in the domestic market.
- In view of the very strong performance of the company in the first two quarters, a buoyant outlook on its prospects (considering the strong growth forecast in both industrial and automotive bearing segments) and its capacity expansion plans, we are upgrading our earnings estimates for SKF India by 14% for CY2007 to Rs27.6 and by 7.4% for CY2008 to Rs33.4.
- At the current market price of Rs450 the stock is discounting its CY2008 earnings estimate by 13.5x and its earnings before interest, depreciation, tax and amortisation estimate by 7.5x. We maintain our Buy recommendation on the stock with a revised price target of Rs500.
Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs422
Current market price: Rs382
Price target revised to Rs422
Result highlights
- Corporation Bank's net profit increased by 22.8% year on year (yoy) and 49.5% quarter on quarter (qoq) to Rs177.1 crore in Q1FY2008. The growth was driven mainly by lower provisions as the bank reported a decline of 16% year-on-year (y-o-y) and 22.6% quarter-on-quarter (q-o-q) in the operating profit.
- During the quarter the bank's net interest income (NII) increased by 7.8% yoy but declined by 9.6% on a sequential basis. Our numbers are adjusted for a one-time prior period item of Rs22 crore (for the claim receivable from the government in respect of relief measures provided for debt-stressed farmers) included in the interest income for Q1FY2008 and around Rs16 crore of one-time cash reserve ratio (CRR) interest income received in Q4FY2007.
- The reported net interest margin (NIM) of the bank at 3.01% (2.82% adjusted) was down 59 basis points on a y-o-y basis and lower by 28 basis points on a sequential basis after adjusting for the one-time items. The bank's NIM has been under pressure as it funded its asset growth largely through high cost term deposits. The bank's low cost deposit base of current and saving account (CASA) decreased by almost 400 basis points on a y-o-y basis and by 500 basis points on a sequential basis to 29% as in June 2007.
- The non-interest income declined by 28.1% yoy and 26.7% qoq mainly due to a lower treasury income; the fee income growth was in single digits at 8.2% yoy.
- The operating performance was dismal due to a 4% y-o-y decline in the net income and a 14.4% y-o-y increase in the operating expenses, which resulted in a 16% y-o-y decline in the operating profit. The staff expenses were higher on a y-o-y basis because the bank provided for Rs27 crore as AS-15 related expenses in Q1FY2008 which was absent in Q1FY2007 and excluding which the operating profit declined by 7% yoy.
- Some positive news on the core operating profit performance front where we witnessed a 5.3% y-o-y growth. Adjusting for the AS-15 related expenses the growth improves to 17.5% yoy.
- The profit after tax (PAT) increased by 22.8% yoy mainly due to the fall in the provisions and contingencies. Provisions declined by 76.2% yoy on account of a write-back of Rs18 crore in Q1FY2008 compared with an investment depreciation of Rs48 crore in Q1FY2007 as bond yields have receded sequentially.
- We feel with interest rates peaking out and bulk deposit rates falling by 200 basis points already, the going would be easier for the bank in the coming quarters. The worst on the margin front looks to be over and with its high capital adequacy and superior asset quality, we expect the bank to report improved performance going forward. The valuation of the bank is not expensive considering its return on equity of around 17%. We have introduced our FY2009 estimates. At the current market price of Rs382, the stock is quoting at 7.3x its FY2009E earnings per share (EPS), 3.8x pre-provision profits (PPP) and 1.2x book value (BV). We maintain a Buy on the stock with a revised price target of Rs422.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs347
Annual report review
Key points
- FY2007 has been a landmark year for Cadila. In 2004, Cadila had set out a new vision for itself—of reaching $400 million in sales in FY2007. Having posted an impressive 23.2% growth in sales in FY2007, Cadila has successfully achieved this landmark.
- Cadila's US generic and French businesses delivered an astounding performance in FY2007, surpassing the targeted revenue growth. Even though the French business is making losses, the magnitude of its losses has reduced considerably—from Rs23.8 crore in FY2006 the losses have trimmed down by 35% to Rs15.5 crore in FY2007. By shifting manufacturing to India, it also aims to achieve substantial cost reductions, leading to a break-even in operations during FY2008.
- Cadila's active pharmaceutical ingredient (API) business had declined by almost 10% in FY2006 due to a slowdown in both the domestic sales and the exports. Through focused new product introductions, cost improvements and better account management, Cadila successfully turned around its API business in FY2007. Its API sales grew by 21.3% to Rs266 crore in FY2007, largely driven by a healthy 33% growth in the exports.
- Cadila's domestic formulation business suffered in FY2007 on account of the newly imposed value-added tax (VAT) in Tamil Nadu as well as the restructuring undertaken in the field force and product portfolios. The business grew by a meagre 8.3% in FY2007—way below the industry growth rate of around 12-13%. Through an enhanced focus on rural areas, a stream of new launches, an entry into the lucrative dermatology segment, and maintenance of leadership in the cardiovascular, gastrointestinal and women's healthcare segments, Cadila hopes to improve the performance of this business in the coming years.
- Cadila's return ratios, namely the return on capital employed (RoCE) and the return on net worth (RoNW), showed a substantial jump in FY2007. The company's RoCE improved by 340 basis points to 20.4% whereas the RoNW increased by 400 basis points to 27.6% during FY2007. The improvement in the return ratios is attributed to the reduction in the losses of the French business, the turn-around of the API business and the increase in the contribution from the high-margin US business.
- At the current market price of Rs347 the company is trading at 15.7x its FY2008 and at 13.0x its FY2009 estimated earnings. With all the growth drivers in place and on track, we reiterate our Buy recommendation on Cadila with a price target of Rs425.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs581
Current market price: Rs488
Continued business grows by 15.3%
Result highlights
- The net revenues of ICI India declined by 1.5% year on year (yoy) to Rs226.7 crore in Q1FY2008 due to the discontinuation of its surfactant business (Uniqema).
- The paint business grew by 15% yoy to Rs191 crore in the same quarter. The continued chemical business grew by 16% yoy to Rs35.4 crore. The discontinued business had contributed Rs34 crore to the company's total revenues in Q1FY2007.
- The profit before interest and tax (PBIT) in the paint business grew by 24.8% yoy with a 58-basis-point expansion in the margin. The PBIT in the residual chemical business grew 43% yoy with a 250-basis-point expansion in the margin. After the sale of the Uniqema business, the continuing chemical business now contributes 15.6% to the top line as against 13.3% in Q1FY2007.
- The PBIT from the continued businesses for the quarter under review grew by 29% on the back of an 88-basis-point expansion in the PBIT margin to 8.4% from 7.5% in Q1FY2007.
- The other income for this quarter was Rs13.1 crore as against Rs6.6 crore in Q1FY2007. With a higher other income and lower tax provisioning, the net profit grew by 26% yoy to Rs22.8 crore.
- On July 12, 2007 through postal ballot the shareholders approved a proposal of the company to buy back its own shares from the minority shareholders through market operations, in accordance with the applicable regulations, at a price not exceeding Rs575 per share.
- The outlook for the full year seems to be positive with the company's increased focus on the premium products (the Dulux portfolio). Further with cash pile of Rs877 crore growth through the inorganic route would be another big opportunity for the company. At the current market price of Rs488, the stock trades at 16.7x its FY2008E earnings per share (EPS) of Rs29 and 14.8x FY2009E EPS of Rs33. We maintain our Buy recommendation on the stock with a price target of Rs581.
Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs648
Current market price: Rs505
Price target revised to Rs648
Result highlights
- Wipro's global information technology (IT) service business reported a decline in revenues of 1.1% quarter on quarter (qoq) and a growth of 22.5% year on year (yoy) to Rs3,003 crore (under US GAAP) for Q1FY2008. The numbers are largely in line with our expectations. In dollar terms, the revenues grew at a reasonably healthy rate of 5.1% sequentially to $726 million (ahead of its guidance of $711 million). The revenue growth was achieved on the back of a 4.9% growth in the IT service business and a 7% growth in the business process outsourcing (BPO) business. The sequential growth in the IT service business was driven by a volume growth of 6.5%, despite a 1.5% sequential decline in the average realisations. On the other hand, the sequential growth in the BPO business was driven by a 3.9% growth in the volumes and a 3.1% improvement in the average realisations.
- The operating profit margin (OPM) declined by 280 basis points sequentially to 20.7%. The decline can be attributed to the wage hike effected by the company in the first quarter (the company usually does not provide annual wage hikes in Q1) and a steep appreciation in the rupee (a negative impact of 240 basis points). It was partially mitigated by a steep improvement of 400 basis points in its employee utilisation rate (a positive impact of 150 basis points), which limited the decline in the gross margins to 90 basis points. However, the higher sales & marketing spend added to the pressure on the margins at the operating level. During the quarter, the overhead cost of the global IT services business jumped to 12.9% from 11% in Q4FY2007.
- In terms of outlook, the company has given a healthy revenue guidance of $777 million for the global IT service business in Q2, which amounts to a growth of 7% sequentially. It has also considerably increased the foreign exchange (forex) forward cover to $400 million (up from around $195 million as in March 2007). However, the annual wage hike of 12-13% given to its offshore employees with effect from August (as against the general practice of giving a hike in September) is likely to have an adverse impact of 140-150 basis points on its OPM in Q2. The management expects to mitigate the same through better operational efficiencies and possibly show some improvement in the margins on a sequential basis.
- In addition to the lacklustre performance of the global IT service business, the Indian IT service business reported a sequential decline of 15.7% in revenues to Rs657.4 crore due to the seasonal weakness. Consequently, Wipro's consolidated revenues declined by 3.5% qoq to Rs4,183.2 crore (as per the US GAAP). The OPM declined by 250 basis points to 16.4% largely due to higher sales, general and administrative (SG&A) expenses and a forex loss of Rs85.2 crore. This resulted in a higher than expected decline of 17.5% qoq in its consolidated earnings, bringing the same down to Rs710.5 crore. After adjusting the tax write-back of Rs70 crore in Q4FY2007, the decline in the consolidated earnings stood at 10.2% on a sequential basis.
- We have revised down the FY2008 and FY2009 earnings estimates by a marginal 4.5% to factor in the lower exchange rate (assumption of Rs40/USD factored in the revised estimates) and the company's inability to show any uptick in average blended realisations in the IT service business. We have also factored in the recent acquisition of the Singapore-based Unza in the consumer care business. At the current market price the scrip trades at 21.6x FY2008 and 17.7x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs648 (23x FY2009E earnings).
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs352
Q2CY2007 results: First-cut analysis
Result highlights
- Ranbaxy Laboratories' (Ranbaxy) revenue grew by 12.4% to Rs1,611 crore in Q2CY2007 against our expectation of Rs1,586.6 crore. The revenue growth was moderated due the declining realisation from the international sales. The company's average rupee realisation against the dollar declined by 10% year on year (yoy) during the quarter. However the global sales in dollar terms grew by 25% in Q2CY2007.
- The core operating profit margin (OPM) of the company (without considering the other operating income) remained under pressure during the quarter and declined by 750 basis points yoy and by 100 basis points sequentially to 9.4% (against our estimate of 12.8%). The margin declined partly because of the higher base of Q2CY2006, when Ranbaxy had earned a higher margin from the launch of Simvastatin under 180-day exclusivity. Further, the appreciation in the value of the rupee against the US Dollar also took its toll on the OPM.
- Considering the other operating income, the earnings before interest, tax, depreciation and amortisation (EBITDA) margin stood at 14% during the quarter. However, the company estimates the EBITDA margin for the quarter to be 16.4% after excluding the impact of foreign exchange (forex) fluctuation.
- With the decline in the revenue realisation and the consequent fall in the OPM, the operating profit stood at Rs152.2 crore, down 37.2%.
- Due to a substantial forex gain of Rs201.40 crore during Q2CY2007 (against a forex loss of Rs50.6 crore in Q2CY2006), the net profit jumped up by 117.6% yoy to Rs263.50 crore, which was ahead of our expectation of Rs189.6 crore.
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- In view of the management's optimism with regard to the revenue and profitability growth in the coming quarters, we maintain our Buy recommendation on the stock with a price target of Rs558. At current market price of Rs352 stocks trades at 16.9x of its CY2007E earnings.
Hexaware Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs184
Current market price: Rs139
Price target revised to Rs184
Result highlights
- For Q2CY2007 Hexaware Technologies has reported lower than expected consolidated revenues of Rs261.6 crore, which marks a marginal decline of 1% quarter on quarter (qoq) but a growth of 26.5% year on year (yoy). The revenues in dollar terms grew by 6.6% qoq but the appreciation in the rupee by 7.1% resulted in a sequential decline in rupee terms.
- The operating profit margin (OPM) declined 280 basis points qoq to 12.2%, in line with our estimates. The company witnessed an adverse impact of 700 basis points on its margins due to the rupee appreciation (an impact of 320 basis points) and aggressive salary hikes (a 17.5% salary hike for the offshore employees and a 5% increase for the onsite employees resulted in a negative impact of 380 basis points). The effect of the stronger rupee and aggressive salary hikes was partially mitigated by the improvement in the utilisation rate (a positive impact of 1.1%), an increase in the billing rates (up 0.6%) and efficiency gains of 2.5% on a sequential basis.
- The effective tax rate also increased from 13.5% to 16.6%, resulting in a 25.8% quarter-on-quarter (q-o-q) and 12.2% year-on-year (y-o-y) decline in the company's consolidated earnings to Rs26.1 crore. The same is below our and the market's expectations.
- In terms of outlook, the company has temporarily suspended the practice of providing growth guidance for the coming quarter due to the growing uncertainty related to the exchange rate. However, the management reiterated that the demand environment is quite robust and it would be able to make up for the slowdown in the ramp-up from two of its clients (Citibank NA and Hewitt) from the list of its top ten customers.
- In operational highlights, the second consecutive quarter of a decline in the employee headcount is quite worrying and was possibly done to shore up the employee utilisation rate. The company has guided for gross addition of 650 employees in Q2CY2007. The fresh order intake of $40.5 million (as against $61 million in Q1) was also lower than expected and implies that the pending order backlog would have declined to around $240 million as on June 2007 (down from $260 in March 2007).
- To factor in the lower appreciation in the rupee (CY2007 exchange rate assumption changed to Rs41.2/USD based on assumption of Rs40 in Q3 and Rs40 in Q4) and the higher than expected pressure on the margins (due to aggressive wage hikes and higher overhead cost), we have revised the FY2008 and FY2009 earnings estimates downward by 16.8% and 15.8% respectively. At the current market price the stock trades at 14.3x FY2008 and 11.4x FY2009 earnings estimates. We maintain our Buy call on the stock with a price target of Rs184.
ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs1,150
Q2CY2007 results: First-cut analysis
Result highlights
- In Q2CY2007 the volumes of ACC grew by 14% year on year (yoy) to 5.3 million metric tonne (MMT), thanks to the incremental volumes from the Lakheri unit; the cement realisations of the company grew by 10% yoy to Rs3,390 per tonne in the same period. The blended realisations (including the readymade cement revenue 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 sharply by 32% yoy to Rs1,323.5 crore on the back of a 22% year-on-year (y-o-y) growth in the raw material cost and a 38% y-o-y growth in the other operating expenditure comprising higher packing and consultancy fees. 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 stood higher by 9% on a y-o-y basis at Rs63 crore.
- Backed by a higher other income component of Rs28 crore and a lower tax provision, the net profit grew by a healthy 36% yoy to Rs351 crore. But as we had expected the company's tax provision to be lower at 27% as against the company's provision of 31%, the profit after tax stood marginally lower than our expectations.
- Taking view of the change in the pricing scenario after the removal of the price freeze, we will be revising our estimate and will be back with another update soon.
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