Result Updates

Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs355

Results beat expectations

Result highlights

• The total operating income of Cadila Healthcare (Cadila) increased by 28.4% year on year (yoy) to Rs572.2 crore in Q1FY2008, driven by a 19.7% growth in the domestic business and a 49.9% rise in the exports. The sales growth was ahead of our expectations.
• The domestic business was driven by an 18.2% increase in the sales of branded formulations, a 44% rise in the sales of active pharmaceutical ingredients (APIs) and a 52.4% jump in the consumer business. The improved performance of the French business (a growth of 49.8% yoy) and the US business (a growth of 122.6% yoy) contributed largely to the robust growth in the exports.
• The operating profit margin (OPM) shrank by 70 basis points to 19.4%, largely due to a 245-basis-point decline in the gross margin due to lower realisation on exports and a changing product mix. Consequently, the operating profit grew by 23.8% to Rs111.2 crore.
• Despite a jump in the interest expense, the depreciation charge and the tax provision, the net profit rose by an impressive 38.1% to Rs73.9 crore. The profit growth was aided by a foreign exchange (forex) gain of Rs9.1 crore (on translation of outstanding foreign currency loans) recorded during the quarter as compared with a forex loss of Rs1.3 crore in the corresponding quarter of the previous year. The net profit surpassed our expectations.
• In order to incorporate the impact of the recent acquisitions and the appreciation of the rupee against all the other major currencies (on account of which the realisations on exports have reduced), we are revising our estimates for Cadila. We have upgraded our revenue estimates by 5.2% and 5.1% to Rs2,241.0 crore and Rs2,600.8 crore for FY2008E and FY2009E respectively. Further, we have reduced our FY2008 and FY2009 earnings per share (EPS) estimates by 2.1% each to Rs21.6 and Rs26.1 respectively.
• At the current market price of Rs355, the company is trading at 16.4x its FY2008 and at 13.6x 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.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,975
Current market price: Rs1,650

Price target revised to Rs1,975

Result highlights

• In Q1FY2008, Bharat Electronics Ltd (BEL) reported a decline of 16.3% in its net sales to Rs404.4 crore. Given the fact that the company had a record order backlog of Rs9,100 crore at the beginning of the fiscal, the revenues in Q1 were much below street expectations.
• The performance at the operating level was even more disappointing with an operating loss of Rs4.6 crore during the quarter. In addition to the lower than expected execution in Q1, the operating profit was dented by the provision of Rs25.7 crore made for wage hikes and additional increments to its employees (of which Rs6.4 core pertains to the previous year).
• However, the other income component for the quarter jumped by 71% to Rs65.6 crore (as against Rs38.4 crore in Q1FY2007) which enabled the company to report a profit after tax (PAT) of Rs26.3 crore. The PAT for the quarter was, however, down by 56.4% as compared with Rs60.3 crore reported in Q1FY2007.
• Though the performance has been disappointing in Q1, the management expects the growth to pick up in the coming quarters on the back of a robust order book executable in the current year. Consequently, we are not revising our estimates and would review the same depending on the performance in Q2FY2008.
• Along with the results, the company announced a final dividend of 140% (or Rs14 per share) for the year 2006-07. Including the interim dividend of 40%, the total dividend for the year stands at 180% (or Rs18 per share).
• At the current market price the stock trades at 11.8x FY2008 and 9.3x FY2009 estimated earnings (multiple adjusted for estimated free cash on its books). We maintain Buy recommendation on the stock with a revised price target of Rs1,975 (12x FY2009E earnings plus estimated free cash of Rs545 per share on its books).

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs900
Current market price: Rs694

Price target revised to Rs900

Result highlights

• The Q1FY2008 results of Mahindra & Mahindra (M&M) were below our expectations. The stand-alone net sales of the company grew by 16.8% to Rs2,612.8 crore in the quarter led by an overall volume growth of 13.6%. The estimated impact on sales due to strengthening of the rupee is at Rs18-20 crore.
• On segmental basis, the automotive revenues rose by 21% to Rs1,504.5 crore, whereas the FE division's revenues grew by 9.7%. The profit before interest and tax (PBIT) margin in the automotive segment declined by 110 basis points due to the strengthening of the rupee. The appreciation in rupee led to lower export realisation and lower profitability during the quarter. The FE division maintained the PBIT margin at 13.4%. Consequently, the overall operating profit margin (OPM) declined by 150 basis points to 10.6%, causing the operating profit to grow by only 2.5%.
• On account of an increase in the interest expenditure and higher depreciation, the adjusted net profit grew by 6.8% to Rs192.75 crore. After taking into account the extraordinary items (voluntary retirement scheme expenses, special dividend income) the profit after tax (PAT) declined by 6.4% to Rs191.16 crore.
• On consolidated basis, the gross revenues grew by 40.7% to Rs5,879.2 crore in Q1FY2008 while the profit before tax (PBT) and exceptional items grew by 11.7% to Rs535.7 crore.
• We expect FY2008 to be the year of consolidation for the company as new product launches would take place only in FY2009. We are downgrading our consolidated earnings per share (EPS) for FY2008 by 13% to Rs61.8 and for FY2009 by 15% to Rs69.7.
• We have a sum-of-parts price target for M&M. In view of the downgrade in earnings we lower our price target to Rs900, where the core business is valued at Rs490 and 50% of the value is derived from its subsidiaries.

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792
Current market price: Rs699

Results below expectations

Result highlights

• Tata Motors' Q1FY2008 results were below our expectations due to lower than expected margins. However, the bottom line was buttressed by a higher foreign exchange (forex) gain on account of strengthening of the rupee during the quarter.
• The net sales of the company grew by 5.3% to Rs6,056.8 crore during the quarter on the back of a 1.3% growth in volumes and a 3.9% growth in realisations.
• However a high raw material cost and lower volumes particularly in the commercial vehicle (CV) segment adversely affected the margins (excluding the forex gain/loss), which declined to 9% from 11.9% in the same quarter last year. Hence, the operating profit declined by 19.9% to Rs546.3 crore.
• A little higher interest and depreciation charges caused the adjusted net profit for the quarter to drop by 39.4% to Rs259 crore. After accounting for the forex gain of Rs205.9 crore, the net profit for the quarter grew by 22.4% to Rs466.76 crore.
• Looking at the consolidated performance, the company's sales grew by 13.3% to Rs7,631.3 crore while the profit excluding the forex gain declined by 27.7% to Rs308.2 crore. The profit after tax, extraordinaries and forex adjustments grew by 35.7% to Rs516.1 crore.
• We continue to take a cautious outlook on the CV industry, considering the high interest rates and lower availability of finance. We expect the lacklustre trend to continue for another quarter at least. Things are, however, expected to improve somewhat in the third quarter as freight demand may receive a boost with the advent of the festive season.
• In view of the lower than expected profit margins, we are downgrading our consolidated FY2008 earnings by 10% to Rs54.5 for FY2008 and by 5% to Rs62.9 for FY2008. At the current levels, the stock trades at 11x its FY2009E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.9x. We maintain our Buy recommendation on the stock with a price target of Rs792.

Hindustan Unilever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs201

Results above expectations

Result highlights

• The Q2CY2007 results of Hindustan Unilever Ltd (HUL) were above our expectations. The net revenues of the company grew by 12.9% year on year (yoy) on the back of an 11.5% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses.
• The soap and detergent business grew by 14.6% whereas the personal care product business grew at a lower rate of 6%. The growth in this segment was lower due to the pipeline clean-up in the skin care segment prior to the relaunch of Fair & Lovely. The beverage business grew by 20.8% yoy whereas the processed food business grew by 37.4% yoy.
• The profit before interest and tax (PBIT) margin showed an expansion of ten basis points to 16.2%. The expansion in the PBIT margin is attributable to the improved margins in the HPC segment, which showed an increase by 118 basis points. The PBIT margin was slightly depressed by the losses in the nascent water business excluding which the PBIT margin stood at around 17%.
• The operating profit margin (OPM) of HUL expanded by 126 basis points to 14.7% on a y-o-y basis due to a lower advertising spend and a stable raw material cost. The selling and administrative expenses as a percentage of sales decreased by 155 basis points which improved the margin. Moreover HUL has been able to maintain its market share in such a competitive market which is quite commendable.
• The operating profit grew by 23.5% to Rs512 crore in Q2CY2007 from Rs414.7 crore in Q2CY2006. Excluding the losses from the water business, the growth in the earnings before interest, tax, depreciation and amortisation (EBIDTA) had been at 30%, which is quite commendable. The net profit grew by 29.5% to Rs493.1 crore in Q2CY2007.
• HUL has announced buy-back of shares from the market at a price of Rs230 per share for a total amount of Rs630 crore, which will reduce its equity capital upto 1.2%. This is likely to begin in September 2007 and we expect the impact of this buy-back to be neutral on the earnings but to positively affect the sentiment of the stock.
• At the current market price of Rs201, the stock is quoting at 23.5x its CY2007E earnings per share (EPS) of Rs8.5 and 21x its CY2008E EPS of Rs9.6. We maintain our Buy recommendation on the stock with a price target of Rs280.

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VIEWPOINT

Tata Steel

Subdued volume

Results highlights

• In Q1FY2008, the revenues of Tata Steel grew by 7.6% year on year (yoy) due to a 15% year-on-year (y-o-y) increase in realisations to Rs40,324 per tonne. However the sales volume dropped by 7% yoy to 1.04 million tonne. Sequentially, the realisations grew by 2%, whereas the volumes declined by 17%. The reduction in volume was mainly due to the shut down of LD2 furnance for upgradation and the delay in the cold rolled shipment of 27,000 tonne.
• The operating profit per tonne improved by 15% yoy and 8% quarter on quarter (qoq) to Rs16,323 per tonne mainly due to increased realisations and improving efficiency. The operating margins during the quarter were stable at 40.5%. The other income included sale of a cold rolling mill for a consideration of 67 crore.
• The profit after tax (PAT) grew by 28% yoy to Rs1,222 crores largely driven by the forex gain of Rs553 crore due to exchange gain from foreign currency borrowing. The adjusted PAT declined by 10% yoy to Rs669 crore on account of a sharp increase in the interest cost (due to increased borrowing for Corus acquisition) and the increase in one time wage expense.