Bank of Baroda, Shree Cement

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs375

Price target revised to Rs500

Result highlights

• Bank of Baroda's (BOB) Q2FY2008 profit after tax (PAT) grew by 13.5% year on year (yoy) to Rs327.2 crore. The PAT of Rs327.2 crore was in line with our expectation of Rs321 crore. The PAT growth was primarily driven by a higher non-interest income. The net interest income (NII) growth was better than most of its peers. The operating expenses surged due to a higher provisioning on account of transitional liability of revised AS-15 guidelines and restricted the overall profit growth.
• We have revised our FY2008 and FY2009 earnings estimates upwards by 5% and 4% to Rs1,372.7 crore and Rs1,640.9 crore respectively. The upward revision in the earnings is to factor in the higher non-interest income growth and higher AS-15 related expenses likely to be reported by the bank going forward, which were not envisaged at the beginning of the year.
• BOB's total assets grew by 19.5% yoy and 4.9% quarter on quarter (qoq), while the reported NII grew by 17.1% yoy and 85% qoq and the NII (adjusted for amortisation and AFS redemption loss) grew by 15.7% yoy, but remained stable on a quarter-on-quarter (q-o-q) basis. Its adjusted net interest margin (NIM) remained under slight pressure and declined by 11 basis points yoy and 9 basis points qoq.
• The non-interest income grew by 41.1% yoy and by 35.8% qoq to Rs454.1 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth has been an industry trend for all public sector undertaking (PSU) banks during Q2FY2008.
• The operating expenses jumped up by 33.8% yoy to Rs798.3 crore mainly due to a 38.6% year-on-year (y-o-y) jump in staff expenses. The surge in staff expenses was led by Rs90 crore of AS-15 related expenses charged during the quarter. Spreading the cost equally between the two quarters (Q1FY2008 and Q2FY2008) the operating profit should improve to 21.1% yoy from 13.2% yoy. However, the core operating profit growth was moderate at 6.9% yoy.
• Provisions and contingencies declined by 8.2% yoy and 30.7% qoq mainly on account of a decline in investment depreciation.
• The bank's business growth has moderated with global advances up by 27.1% yoy from a 40% y-o-y growth reported during March 2007. The deposit growth has also moderated from 33% to 22% for the same period. This moderation is welcome and should help in avoiding undue stress on the NIM and maintaining a healthy asset quality. The bank's asset quality has improved with gross non performing assets (NPAs) down by 45 basis points to 2.33%, while net NPAs declined by 12 basis points to 0.55% sequentially.
• We feel BOB is one of the public sector banks, which have exhibited maximum improvement in its earnings growth and return on equity (RoE). We expect BOB to deliver a compounded annual growth rate (CAGR) of 26.4% in earnings and almost a 400-basis-point improvement in its RoE to 16.1% between FY2007-09E. At the current market price of Rs375, the stock is quoting at 8.4x its FY2009E earnings per share (EPS), 4.2x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV). If we exclude the value of Rs40 per share of which Rs22 is from its 25% holding in the Unit Trust of India (UTI) mutual fund (which is likely to come out with an IPO [initial public offering] in CY2008) and the rest Rs18 is for its other holdings such as NSE and Reliance Petroleum etc, the stock is available at 1.1x FY2009E BV. The valuations are extremely attractive when we consider the strong earnings growth and the improvement in RoE. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs500.

Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,625
Current market price: Rs1,417

Result marginally below expectations

Result highlights

• Fuelled by fresh capacities, Shree Cement's Q2FY2008 volumes grew by 34% year on year (yoy) driving its net sales by 48% yoy to Rs466 crore.
• The overall operating expenditure increased by 53% yoy to Rs264.8 crore on the back of rise in power & fuel costs and freight costs.
• On account of cost-push, the company's operating profit grew slower by 41% yoy to Rs201 crore. The margins fell marginally to 43.2%. The earnings before interest, tax, depreciation, and amortisation (EBITDA) per tonne expanded by Rs84 yoy and Rs55 quarter on quarter (qoq) to Rs1,348.
• The other income jumped from Rs4.3 crore in the last quarter to Rs29.1 crore this quarter, as the company booked Rs16 crore as revenues from the sale of certified emission reductions (CERs) accrued to the company under the Clean Development Mechanism (CDM).
• Interest costs jumped by 214% yoy to Rs8.1 crore, whereas the depreciation provision more than doubled to Rs68.7 crore due to incremental capacities commissioned by the company at Ras. Consequently, the profit after tax (PAT) growth slowed down to 37% at Rs106.6 crore.
• The company commissioned a 1.5-million-metric-tonne (MMT) line V clinker unit at Ras and a 2MMT grinding unit at Kushkhera in the first week of September. This will make available 2MMT of cement for the second half of the current fiscal.
• Taking cognisance of the commissioning of capacities ahead of schedule, we are upgrading our FY2008 volume estimate marginally by 2% and FY2009 estimate by 12%.
• Considering the higher volume assumption for FY2009, we are upgrading our FY2009 earnings per share (EPS) by 7% to Rs145.2. Also taking notice of the higher depreciation provision for the current year, we are downgrading our FY2008 estimates by 4% to Rs117.7 per share.
• Shree Cement has shown excellent project management skills by commissioning its capacities ahead of schedule. This has enabled the company to grow its volumes ahead of the industry With the ongoing capital expenditure (capex), the company will be ramping up its capacity from 5 .6MMT to 9MMT by the end of FY2009. This will enable the company to sustain the momentum in the much needed volume growth. In the next couple of years, the company will become totally captive in its power consumption enabling it to exercise control over its power costs. Shree Cement's robust cash flows will aid the company in becoming debt free at the end of FY2009. At the current market price of Rs1,417, the stock trades at 12.0x its FY2008 EPS and 9.8x its FY2009 EPS. We continue to maintain our positive outlook on the stock with a price target of Rs1,625.

Balaji Telefilms
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs339
Current market price: Rs287

Price target revised to Rs339

Result highlights

Q2FY2008 results of Balaji Telefilms Ltd (BTL) have outperformed our expectations. Despite substantially lower content hours, BTL's operating revenues were marginally down by 4.4% year on year (yoy) to Rs77.9 crore against our estimate of Rs72 crore.

BTL hiked the rates of some of its shows under the commissioned content category that led to a jump in realisations. The commissioned programming realisations were up by 47.3% yoy and a strong 13.1% quarter on quarter (qoq) to Rs37.9 lakh per hour. Even in the sponsored category that contributes about 7-8% to the total revenues from the television content, realisations improved by 71% yoy and by 7.1% qoq to Rs4.5 lakh.

Aided by the rise in realisations, the operating profit margin (OPM) was up by 680 basis points to 42.4% and the operating profit rose by 13.9% yoy to Rs33 crore.

BTL possesses a huge pile of cash and cash equivalents of Rs224 crore that led to a 182% year-on-year (y-o-y) increase in the other income to Rs6.4 crore. Further, a lower tax rate led to a strong 36.2% growth in net profits to Rs26.3 crore.

BTL has tied up for two shows on INX Media's forthcoming Hindi general entertainment channel and for another show on Sony to go on air in Q4FY2008. The company is also in talks with other players like NDTV and Viacom-18 for its content on their forthcoming channels. We expect BTL to scale up its programming hours in FY2009 aided by the buoyant scenario for its content and pursuant to its foray into broadcasting from Q1FY2009.

BTL bagged distribution rights for Ram Gopal Verma's Sarkar Raaj for ~Rs37 crore. The movie is scheduled for release in January 2008. BTL distributed Darling and Bhool Bhulaiya, while the former did not fare well at the box office the latter is running successfully and is seen as a big hit. BTL's co-production Woodstock Villa is expected to be in cinema halls by February 2008. We estimate BTL's movie business to have made a profit of ~Rs5-6 crore in H1FY2008.

BTL remains one of our preferred picks in the media and entertainment space. We revise our price target on the stock to Rs339, valuing the content business at 15x FY2009E earnings and BTL's interest in the broadcasting joint venture (JV) at 2x investment. We maintain our buy recommendation on the stock.