Dr Reddy's Labs
Research: ABN Amro
Rating: Buy
CMP: Rs 633
ABN Amro maintains its 'buy' rating on Dr Reddy's Laboratories (DRL). DRL reported lower-than-expected sales on lower Ondansetron sales and supply constraints in contract manufacturing. DRL's subsidiary, betapharm, returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities.
The surprise was the 600 bps improvement in betapharm's active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold. The key R&D product, Balaglitazone, is in Phase III trials and can provide news flow that may increase its valuation, given the recent listing of Sun Pharma's R&D business at $500 million.
ABN Amro values DRL's Balaglitazone at $100 million (Rs 24/share) and cut its FY08 earnings forecast to reflect the lower-than-expected Q1 FY08 result. ABN Amro also lowers its profitability assumption for the contract pharma business, but leaves API profitability untouched.
Kalpataru Power
Research: HSBC Global
Rating: Neutral
CMP: Rs 1,548
HSBC Global Research has downgraded Kalpataru Power Transmission from 'overweight' to 'neutral', with a potential total return of 13%. Kalpataru has a presence in the infrastructure sector. In FY07, the company increased investments in its three subsidiaries, which will add value to the stock.
To strengthen its balance sheet, it invested Rs 42.9 crore in JMC Projects, a construction company with an order backlog of Rs 1,200 crore, 2.4x FY07 sales. Further investments were made in Shree Subham Logistics and Energylink, another construction company. Kalpataru's Q1 FY08 sales grew 23% YoY to Rs 370 crore, while net profit was up 28% YoY to Rs 37.1 crore.
EBITDA margin improved to 16.4%, an increase of 40 bps YoY, due to higher margins in infrastructure (transmission and distribution margins were lower). HSBC Global has reduced its EPS forecasts by 5% for FY08E and FY09E to Rs 70 and Rs 96.9, respectively, based on higher depreciation and interest cost.
Patel Engineering
Research: Enam Securities
Rating: Outperformer
CMP: Rs 432
ENAM Securities initiates coverage on Patel Engineering (PEL) with 'outperfomer' rating. PEL's Q1 FY08 results were above expectations, driven by some large transportation projects reaching the threshold revenue booking level. On a consolidated basis, PEL reported revenues of Rs 410 crore (up 43% YoY) and adjusted profit after tax (PAT) of Rs 25.8 crore (up 29% YoY). During the quarter, PEL bagged its first order worth $153 million for a dam project from the high-margin market of Africa.
The order backlog stands at a robust ~Rs 5,300 crore (up 8%YoY). The management has stated a guidance of 25% revenue growth in FY08; it expects operating profit margin (OPM) to sustain at ~13%. PEL has a substantially higher intake capacity and is pre-qualified for new projects worth over Rs 6,000 crore. Going by its historical bid-to-success ratio of ~25%, Enam believes that intake may gain traction, going forward.
Factoring in higher-than-estimated interest cost and a lower tax rate of 25%, compared to 33% factored in earlier, the FY08E and FY09E EPS stand revised at Rs 18 and Rs 21.4, respectively. At current market price, adjusted for value of real estate and build, operate & transfer (BOT) investments of Rs 271 per share, the stock trades at an EV/ EBIDTA of 5x FY09E.
Tata Teleservices
Research: Citigroup
Rating: Sell
CMP: Rs 27
CITIGROUP has downgraded Tata Teleservices (TTML) to 'sell' as the current stock price appears to fully reflect the sustained trend of operational improvement witnessed over the past six quarters. Estimates have changed slightly, incorporating the recent subscriber additions and cost structure trends.
TTML's Q1 FY08 EBITDA growth of 3.8% QoQ at Rs 100.4 crore was 12% below expectations. Even EBITDA margin, at 25.5%, remained flat QoQ. Low tariffs, in addition to a cumulative share of ~8% in Mumbai/Maharashtra, remain sub-optimal and constrained by CDMA network.
Given that TTML is likely to break-even only in FY09, the financial milestones which could drive the next round of re-rating may not be achieved immediately. EBITDA margin improvement of 10% during FY07-09E will be critical for earnings. Citigroup expects Tata group to eventually consolidate its telecom holdings, i.e. VSNL, TTSL and TTML. However, the Tatas lost out on the opportunity to hike their stake in VSNL by forgoing the call option in the latter.
Unitech
Research: JP Morgan
Rating: Overweight
CMP: Rs 512
JP MORGAN initiates coverage on Unitech with an 'overweight' rating. The company focuses on developing mixed-use townships in city suburbs. This helps it to acquire land at relatively lower cost and generate better realisations/margins as price increases occur due to occupancy and land price inflation.
Unitech's key area of operations has been the suburbs of the National Capital Region (NCR), but the company has recently entered Kolkata. Unitech has also acquired large chunks of land in South India, which are likely to come under development soon. The FY08E and FY09E P/E of 31.9x and 15.7x, respectively, are supported by 103% earnings CAGR over FY08-09E.
Mastek
Research: Edelweiss
Rating: Accumulate
CMP: Rs 267
MASTEK has been downgraded by Edelweiss from 'buy' to 'accumulate', due to the absence of near-term triggers that signal an uptick in growth rates. Mastek's Q4 FY07 revenues were slightly lower than expected, though net profit was above expectation. Revenues, at Rs 180 crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on a like-on-like basis.
However, higher other income of Rs 6.5 crore reduced this impact at the net profit level. Mastek continues to suffer from several issues that limit its expansion. Its sales and marketing engine is investment-heavy, direct client relationships are few, slowdown in the government sector drags down growth, and the new client acquisition pace is lethargic. The company seems to be highly dependant on acquisitions to meet its stated revenue growth guidance of 35% (in USD) for FY08.
Edelweiss believes the company may come up short of its guidance. Also, its efforts to rationalise its high-cost sales and marketing cost model are unlikely to bear fruit in the near term, due to its investments in expanding solutions footprint in the US insurance segment. At current market price, the stock trades at a P/E of 7.4x and 6.5x its FY08E and FY09E earnings, respectively.
Research: ABN Amro
Rating: Buy
CMP: Rs 633
ABN Amro maintains its 'buy' rating on Dr Reddy's Laboratories (DRL). DRL reported lower-than-expected sales on lower Ondansetron sales and supply constraints in contract manufacturing. DRL's subsidiary, betapharm, returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities.
The surprise was the 600 bps improvement in betapharm's active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold. The key R&D product, Balaglitazone, is in Phase III trials and can provide news flow that may increase its valuation, given the recent listing of Sun Pharma's R&D business at $500 million.
ABN Amro values DRL's Balaglitazone at $100 million (Rs 24/share) and cut its FY08 earnings forecast to reflect the lower-than-expected Q1 FY08 result. ABN Amro also lowers its profitability assumption for the contract pharma business, but leaves API profitability untouched.
Kalpataru Power
Research: HSBC Global
Rating: Neutral
CMP: Rs 1,548
HSBC Global Research has downgraded Kalpataru Power Transmission from 'overweight' to 'neutral', with a potential total return of 13%. Kalpataru has a presence in the infrastructure sector. In FY07, the company increased investments in its three subsidiaries, which will add value to the stock.
To strengthen its balance sheet, it invested Rs 42.9 crore in JMC Projects, a construction company with an order backlog of Rs 1,200 crore, 2.4x FY07 sales. Further investments were made in Shree Subham Logistics and Energylink, another construction company. Kalpataru's Q1 FY08 sales grew 23% YoY to Rs 370 crore, while net profit was up 28% YoY to Rs 37.1 crore.
EBITDA margin improved to 16.4%, an increase of 40 bps YoY, due to higher margins in infrastructure (transmission and distribution margins were lower). HSBC Global has reduced its EPS forecasts by 5% for FY08E and FY09E to Rs 70 and Rs 96.9, respectively, based on higher depreciation and interest cost.
Patel Engineering
Research: Enam Securities
Rating: Outperformer
CMP: Rs 432
ENAM Securities initiates coverage on Patel Engineering (PEL) with 'outperfomer' rating. PEL's Q1 FY08 results were above expectations, driven by some large transportation projects reaching the threshold revenue booking level. On a consolidated basis, PEL reported revenues of Rs 410 crore (up 43% YoY) and adjusted profit after tax (PAT) of Rs 25.8 crore (up 29% YoY). During the quarter, PEL bagged its first order worth $153 million for a dam project from the high-margin market of Africa.
The order backlog stands at a robust ~Rs 5,300 crore (up 8%YoY). The management has stated a guidance of 25% revenue growth in FY08; it expects operating profit margin (OPM) to sustain at ~13%. PEL has a substantially higher intake capacity and is pre-qualified for new projects worth over Rs 6,000 crore. Going by its historical bid-to-success ratio of ~25%, Enam believes that intake may gain traction, going forward.
Factoring in higher-than-estimated interest cost and a lower tax rate of 25%, compared to 33% factored in earlier, the FY08E and FY09E EPS stand revised at Rs 18 and Rs 21.4, respectively. At current market price, adjusted for value of real estate and build, operate & transfer (BOT) investments of Rs 271 per share, the stock trades at an EV/ EBIDTA of 5x FY09E.
Tata Teleservices
Research: Citigroup
Rating: Sell
CMP: Rs 27
CITIGROUP has downgraded Tata Teleservices (TTML) to 'sell' as the current stock price appears to fully reflect the sustained trend of operational improvement witnessed over the past six quarters. Estimates have changed slightly, incorporating the recent subscriber additions and cost structure trends.
TTML's Q1 FY08 EBITDA growth of 3.8% QoQ at Rs 100.4 crore was 12% below expectations. Even EBITDA margin, at 25.5%, remained flat QoQ. Low tariffs, in addition to a cumulative share of ~8% in Mumbai/Maharashtra, remain sub-optimal and constrained by CDMA network.
Given that TTML is likely to break-even only in FY09, the financial milestones which could drive the next round of re-rating may not be achieved immediately. EBITDA margin improvement of 10% during FY07-09E will be critical for earnings. Citigroup expects Tata group to eventually consolidate its telecom holdings, i.e. VSNL, TTSL and TTML. However, the Tatas lost out on the opportunity to hike their stake in VSNL by forgoing the call option in the latter.
Unitech
Research: JP Morgan
Rating: Overweight
CMP: Rs 512
JP MORGAN initiates coverage on Unitech with an 'overweight' rating. The company focuses on developing mixed-use townships in city suburbs. This helps it to acquire land at relatively lower cost and generate better realisations/margins as price increases occur due to occupancy and land price inflation.
Unitech's key area of operations has been the suburbs of the National Capital Region (NCR), but the company has recently entered Kolkata. Unitech has also acquired large chunks of land in South India, which are likely to come under development soon. The FY08E and FY09E P/E of 31.9x and 15.7x, respectively, are supported by 103% earnings CAGR over FY08-09E.
Mastek
Research: Edelweiss
Rating: Accumulate
CMP: Rs 267
MASTEK has been downgraded by Edelweiss from 'buy' to 'accumulate', due to the absence of near-term triggers that signal an uptick in growth rates. Mastek's Q4 FY07 revenues were slightly lower than expected, though net profit was above expectation. Revenues, at Rs 180 crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on a like-on-like basis.
However, higher other income of Rs 6.5 crore reduced this impact at the net profit level. Mastek continues to suffer from several issues that limit its expansion. Its sales and marketing engine is investment-heavy, direct client relationships are few, slowdown in the government sector drags down growth, and the new client acquisition pace is lethargic. The company seems to be highly dependant on acquisitions to meet its stated revenue growth guidance of 35% (in USD) for FY08.
Edelweiss believes the company may come up short of its guidance. Also, its efforts to rationalise its high-cost sales and marketing cost model are unlikely to bear fruit in the near term, due to its investments in expanding solutions footprint in the US insurance segment. At current market price, the stock trades at a P/E of 7.4x and 6.5x its FY08E and FY09E earnings, respectively.
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