Angel Broking report on LIC Housing Finance

LIC Housing Finance


 
 
Broking house,  Angel Broking has maintained hold rating on LIC Housing Finance with a target price of Rs 220.

Performance Highlights 

Net Interest Income up 59%: During Q1FY2008, LIC Housing Finance's (LICHF) clocked a 33% yoy growth in Interest Income to Rs442cr (Rs332cr), whereas Interest Expenses moved up 31% to Rs338cr (Rs256cr). Net Interest Income (NII) of the company grew 59% to Rs104cr (Rs76cr). This growth in NII was backed by a strong 18% growth in loans and improved spreads. 

Improved Interest Spreads: LICHF's Interest Spreads improved 7bp sequentially to 1.4% (1.3%). This improvement in spreads was seen on the back of a 40bp improvement in the yield on loans to 10.0%, while cost of funds improved 33bp to 8.6%. The company's interest spreads moved up 43bp from 0.9% in the previous year. However, Net Interest Margins (NIMs) declined sequentially by 10bp to 2.4% (2.5%), while it has improved by 62bp yoy from 1.7%. We maintain our FY2008 estimate for NIM at 2.5%

Net Profit grew 25%: LICHF's Net Profit for Q1FY2008 rose 25% to Rs47cr (Rs38cr). Increase in the effective tax rate and higher provisions restricted the Bottomline growth. Hence, we believe that Bottom-line growth in FY2008 will be muted at Rs288cr (3.2%). Moreover, we can expect positive surprises on the bad loan recovery front.

Increase in Tax rate: During Q1FY2008, the effective tax payout of the company increased to 25% (12%). For FY2008, the company's effective tax rate will stand increased from 20% to 26% on the back of reduction in tax benefit on Special Reserves from 40% to 20%. 

Higher provision on loans: During Q1FY2008, LICHFL created provision on housing loan of Rs35cr (Rs21cr), up 66% yoy on the back of the historical trend of higher NPAs in the first quarter.

 In line growth in Disbursements: Home loan portfolio grew in line with our expectations, moving up 18% yoy to Rs18,185cr (Rs15,393cr). Sanctions and Disbursements grew 16% and 12% to Rs1,156cr (Rs993cr) and Rs1,222cr (Rs1,080cr), respectively. The sluggish growth witnessed in Sanctions and Disbursements was seasonal in nature and would improve going forward.

Fixed Deposit scheme to contain cost of funds: The company has initiated its maiden Fixed Deposit scheme to mobilise funds. This is in line with the company's strategy to contain its cost of funds and maintain margins. During Q1FY2008, the company mobilised close to Rs10cr. 

Asset quality: LICHF's Asset quality was under pressure following an increase in Gross NPAs to Rs 739cr (Rs585cr), i.e., up at 4.1% (3.8%). Sequentially, Gross NPA increased by 144bp from 2.58% in Q4FY2007, which was disappointing. While the Net NPAs ratio improved to 2.6% (3.0%) on the back of improvement in the provision coverage to 36% (21%) during the period. Higher NPAs are more of a historical trend in the first quarter. However, going forward, we believe that LICHF's recovery policy would facilitate an improvement in its asset quality and would be one of the key factors for a re-rating of the stock on the bourses going ahead.

 
Outlook and Valuation
 

Considering seasonality of the housing finance business and historic trends of the first quarter having higher NPAs, the company's performance for the period under review was in line with expectation. Going ahead, the company would focus on improving its asset quality and NIMs. We maintain a positive outlook on the company and expect a 20% growth in its home loan portfolio in FY2008, and around 3.2% growth in Bottomline. At the CMP of Rs214, the stock trades at 5.7x and 1.0x FY2009E EPS of Rs38 and Adjusted Book Value of Rs220. We maintain a Hold on the stock with a target price of Rs 220.
 

Weekly Newsletter

IT results...TCS comes up trumps
After last week's disappointing results from Infosys, the spotlight shifted to the other IT heavyweights. Barring TCS, which managed to spring a positive surprise, the rest of the pack reported a drop in bottomline and announced muted guidance. While TCS and Tech Mahindra did not announce any guidance at all, Satyam cut its rupee EPS outlook for the full year and Wipro has projected a 7% sequential growth in its Global IT Services & Products revenue for the second quarter. Despite the relative underperformance from the IT biggies, the stock market did not punish the stocks the way it greeted Infosys' results and reduction in guidance. That's perhaps has to do with the fact that the market had already discounted a bad quarter for the IT sector already. In fact, some industry analysts advocate buying IT stocks at lower levels as a contrarian bet.

TCS surely was the biggest surprise packet. The company managed to beat street expectations through a mix of forex hedging, operational improvement and some help from the non-operating side. Overall, it was a solid operational performance despite a tough operating environment. Despite rupee appreciation and wage hikes, TCS managed to protect its net margins, with productivity gains and cost management. The picture was not so pretty for Wipro, Satyam and Tech Mahindra, all of whom witnessed a 1-2% decline in their operating profit margins. Looking ahead, the margin pressure will continue to haunt the IT sector, as the rupee is not showing any signs of a correction or moderation. For Wipro and Satyam, the task will be even more tougher as they will go for wage increases in the next two quarters respectively.

PM panel sees 9% GDP growth in FY08

The Indian economy is likely to continue its sterling show this year as well and inflation will remain under control, according to the Prime Minister's Economic Advisory Council. However, the council is worried about the relentless inflow of overseas money has suggested a three-pronged approach to tackle the same. "The economy grew at 9.4% last year (FY07). In the current year, our forecast is that the economy will grow at 9%. Agriculture will grow by 2.5%, industry by 10.6% and the service sector by 10.4%," said C. Rangarajan, head of the council. But, the former RBI Governor warned that sustaining the lower growth would be difficult in the years ahead if the agriculture and power sectors continued to lag. He listed two main risks to the Indian economy - the rising prices of crude oil and power shortage.

The report stated that inflation will continue to ease. For the year, it assessed the inflation level to remain close to 4% and Foreign Direct Investment (FDI) inflows would swell to US$15bn. Identifying the current spurt in foreign capital inflows as a challenge to liquidity management, the council has suggested a judicious mix of three options - to let the rupee appreciate up to a reasonable level; absorb the capital flows and sterilise the excess over what may be regarded as appropriate, and liberalise outflows by removing administrative and procedural impediments while discouraging inflows by putting restrictions on some areas like ECBs. Rangarajan also said that real estate is one sector where the foreign capital inflows can be moderated.

Market up for sixth straight week

It's something unpredictable, but in the end it's right.
I hope you had the time of your life.

It seems like the bulls just cant get enough of the gains. All the talk of a possible correction has gone for a toss, as relentless inflows from FIIs coupled with firm global markets have propelled the key indices to new all-time highs. Notwithstanding worries about overstretched valuations, a strong local currency, steep rise in crude oil prices and below par performance from IT majors, the bulls notched up yet another victorious week.

Just for the record, the main indices managed to close higher for the sixth week in a row. Metals, Cement, Capital Goods, Real Estate, Auto and Oil & Gas stocks led the rally this week. Finally, the benchmark BSE Sensex surged to a record close with Bharti Airtel, RCOM, RIL, Bajaj Auto and Hindalco leading from the front. The BSE index surged by nearly 2% or 302 points to end the week at 15554 and the NSE Nifty added 1.33% or 60 points to shut shop at 4564.

Reliance Industries was in the limelight on news of a new gas discovery in the Cauvery basin. However, other oil marketing companies bore the burnt of rising crude oil prices.

Auto stocks were mixed. The BSE Auto Index was up 1.4% during the week. Bajaj Auto was the top gainer within the Sensex. The stock surged by over 6.5% to Rs2324. The scrip has recovered smartly from its disappointing quarterly results last week. Also, reports that the company may be looking at acquiring UK's Triumph Motorcycles or Italy's Ducati Motor helped the two-wheeler giant. Hero Honda rose 1.2% to Rs683 and Hindustan Motors climbed by 3.3% to Rs32.5. However, Maruti was down by 0.2% to Rs830.

Metal stocks were up, with the BSE Metal index gaining 1.8% led by Tata Steel. The stock added 2.7% to Rs715. Firm metal prices on the LME and continuing M&A activity in the metal industry globally have supported stock prices recently. Jindal Steel advanced nearly by 5% to Rs4000 and JSW Steel added 0.3% to Rs724. On the other hand, SAIL lost 2.1% to Rs156 and Jindal Stainless slipped 3.3% to Rs152.

Oil exploration stocks led gains in the energy space. The BSE Oil & Gas index was up by 1% during the week. Reliance was the star performer of the week. The scrip rose over 6% to Rs1892. However, oil refinery stocks were on the receiving end as Brent crude came within 25 cents of its all-time high of US$78.65 a barrel. HPCL lost 3% to Rs254, BPCL lost 4% to Rs324 and IOC declined 1% to Rs430.

Banking stocks managed to end with some gains. The BSE Banking index rose 1.6% in the week. With interest rates peaking out and inflation concerns ebbing investors are bullish in the sector. SBI rose 1.5% to Rs1584, ICICI Bank w as up 1.3% to Rs985. Kotak Bank rallied by over 9% to Rs728, PNB added 3.4% to Rs572. However, HDFC Bank dropped 2% to Rs1200.

FMCG stocks under performed as the BSE FMCG index fell by 2% in the week. The FMCG index was the top loser among the sectoral indices. Tata Tea lost by over 10% to Rs770. HUL dropped nearly 4% to Rs194 and Nirma fell 5% to Rs170.

F&O expiry may increase volatility

Voices of concern are falling on deaf ears as the bulls continue their march ahead. Foreign Fund flows continue unabated sending the key indices to new highs. Expiry of the Derivatives contract for the month of July coupled with results could cause some choppiness. Buzz on the street is that select heavyweights will soar to new highs by expiry.

For the coming week, we have Century Textile, Jindal Steel, Rolta, Siemens, Sun Pharma, Union Bank, Balrampur Chini, Bharat Forge, DS Kulkarni, GTL, Hero Honda, Indiabulls, Kotak, IDEA, JSW Steel, ONGC, Patni, PNB, Reliance Cap, SAIL, STER, Bharti Airtel, BEL, Titan, Maruti, Tata Power, GAIL and ITC are among the major companies announcing their quarterly numbers. With so much activity on Dalal Street, bulls could feel uncomfortable at the temporary top.

For the week, FIIs have poured in above Rs60bn in the cash market alone (excluding Friday's figures) and in last two weeks, they have pumped in above Rs88bn. As long as this tap doesn't run dry, the bulls can wade through any concerns.

While all seems fell for inflows, RBI may have a 'task' to perform given the appreciating Rupee. Indian Rupee climbed to a nine-year high of 40.32 against the Dollar on Friday. While Indian markets often chart its own course, global concerns like housing slump in US, overheating in China and rising oil prices cannot be completely ignored.

RIL confirms oil & gas find in Cauvery basin

Reliance Industries Ltd. (RIL) confirmed media reports that it had found oil and gas in the Cauvery basin off the Tamil Nadu coast. The company said it met with success in its very first well in the Cauvery basin. This is the first time a hydrocarbon discovery has been made in the Cauvery basin, RIL said. The deep-water block CY-DWN-2001/2 (CY-III-D5) located in the Cauvery basin, with an area of 14,325 square kilometers, was awarded to RIL under the bidding round of NELP III. RIL holds a 100% participating interest in this block after Hardy Oil of UK relinquished its 10% stake. This discovery namely 'Dhirubhai – 35' has been notified to Government of India and Directorate General of Hydrocarbons (DGH). RIL didn't give an estimate on the size of the discovery.

BSNL halves GSM contract: reports

Under pressure from Telecom Minister A. Raja to reconsider the mega GSM tender of 45.5 million lines, state-run telecom titan BSNL trimmed the size by half. The BSNL Board agreed to halve the size of the tender to about 23 million lines. The BSNL Board would let the Department of Telecommunications (DoT) decide on the composition of the tender in terms of 2G and 3G lines. The DoT may limit the contract to only 2G lines as its two representatives on the BSNL Board favoured this option during the meeting. A separate tender for 3G would be floated later on, according to reports. In the earlier order, the short-listed equipment suppliers - Ericsson and Nokia Siemens Networks - had to supply 17 million GSM lines. Of this, the 2G-3G mix was fixed as 75:25. Telecom Minister cleared the revised tender on the grounds that another review will cause further delay. "There is no need for further consideration as it will delay the issue of the order," Raja said in response to a few concerns raised by Department of Telecommunications Secretary D.S. Mathur.

RCOM unit buys Yipes for US$300mn
Reliance Communications Ltd. (RCom) announced that Flag Telecom, its global telecom infrastructure subsidiary, had acquired US-based Yipes Holdings Inc. for US$300mn. Yipes is said to be profitable with an operating margin of 55%. The San Francisco-based company has 22,000 km of optic fibre network and its customers include the likes of Verizon and NTT. Yipes is the leading provider of managed Ethernet and application delivery services for the global enterprises. Infonetics Research forecasts the Ethernet services market will surge by over 30% CAGR from 2006 to 2010 when it will top US$25bn worldwide. Yipes is also present in London, Hong Kong and Tokyo. Northwest Venture Partners is one of the leading investors in Yipes along with JP Morgan and Sprout Group. Promod Haque, General Partner, Northwest Venture is the chairman of Yipes, and the management team is led by CEO John Scanlon.

Tata Motors eyeing Jaguar, Land Rover: Telegraph
Tata Motors and Mahindra & Mahindra (M&M) are reportedly evaluating separate bids for the Jaguar and Land Rover brands that are being put on the block by US auto major Ford as part of the latter's efforts to cut losses. London-based The Telegraph reported that Tata Motors has asked merchant bankers to start evaluating the merits of a joint offer for Jaguar and Land Rover. According to industry analysts, the two luxury brands could fetch around US$1.5bn. The British newspaper said evaluation of bids is at an exploratory stage, and that it may not lead to a formal bid for Jaguar and Land Rover from Tata Motors. Both Tata Motors and M&M have reportedly signed confidentiality agreements with Ford. A Tata Motors spokesman however declined to comment on the news. M&M Vice-Chairman Anand Mahindra too refused to comment.

Hindalco to buy out Alcan in Utkal

Hindalco Industries Ltd. said that it would acquire the 45% stake held by Alcan Inc. in their Indian Joint Venture (JV), Utkal Alumina International Ltd. The Aditya Birla Group company currently owns the other 55% of Utkal, which was established in 1992 to develop a bauxite mine and alumina refinery in Orissa. In April, Alcan had said that it wanted to sell its stake in Utkal. Hindalco had the first right of refusal on the Alcan stake in Utkal. The companies did not disclose terms of the transaction. Utkal, which is proposed to have a capacity of 1-1.5 million tons per annum, has been facing local opposition for quite some time. The JV partners were to invest US$1bn in the Utkal project.

Deal Street remains active

Biocon Ltd. said that it will sell its Enzymes business to Novozymes A/S for US$115mn. This will enable the company to strategically focus on its core bio-pharmaceuticals business. The enzyme business includes a broad range of industrial enzymes, food additives and process aids. This business vertical of Biocon had revenues of Rs950mn in FY07, accounting for 10% of the company's total turnover. Biocon said it will now concentrate its activities on its bio-pharma business verticals that include APIs, biologicals and proprietary molecules both commercialised and under development.

United Phosphorus Ltd. announced its UK subsidiary has acquired of ICONA and ICONA San Luis S.A., a manufacturer and distributor of crop protection products headquartered in Buenos Aires, Argentina. The share purchase includes all stocks, products registrations, manufacturing sites and all other property rights associated with the business of ICONA. ICONA is a debt free Company, having more than 35 registrations in Argentina. For the year ended September 30, 2006 ICONA's consolidated revenues were US$13mn.

Mastek Ltd. announced the acquisition of Vector Insurance Services LLC, a technology solutions provider and third party administrator that focuses on the North American life & annuity insurance industry. Mastek's wholly owned US subsidiary MajescoMastek will hold 90% equity stake in Vector. The consideration for this acquisition will be paid partly in cash and partly by way of future cash earn outs. The company had revenues of US$4.2mn in its financial year ended December 31, 2006. Vector has 26 employees, with significant domain expertise in the insurance space.

HDFC Bank prices ADS issue at US$92.10

HDFC Bank priced its public offering of 6,594,504 American Depositary Shares (ADS), at US $92.10 apiece. Each ADS represents three local equity shares of the bank. The price is equal to the volume weighted average price of the ADS on the NYSE on July 17. The offering price is equivalent to a price of Rs1,235.06 per share, which is a premium of 3% over the July 17 closing price on the National Stock Exchange (NSE). In addition, the underwriters - JP Morgan Chase Bank - to the ADS offering have the right to purchase up to an additional 989,176 ADS at the same price by way of green shoe option. Gross proceeds from the ADS offering are expected to be about US$607mn and will be used to strengthen the bank's capital base to support future growth.

Omaxe IPO receives tremendous response

The IPO of property developer Omaxe received a stupendous response despite the muted show put up by the mega issue of real estate giant DLF not so long ago. As per the latest data available from the NSE, the issue was subscribed 67 times. The company received bids for 1.2bn shares versus the issue size of 17.8mn shares. The QIBs and the Non-institutional Investors contributed a great deal to the success of the issue. Even retail Investors, which shied away from the DLF issue, showed interest in the Omaxe issue. The company had fixed a price band of Rs265 to Rs310 per share. The issue would constitute 11.2% of the fully diluted post-issue capital of the company, if the green shoe option is exercised and 10.30%, if the option is not exercised. The proceeds of the issue would be utilised for payments related to land, repayment of loan and to fund the development and construction costs of some of the company's projects. DSP Merrill Lynch, Citigroup Global Markets India and UBS Securities India are the global coordinators for the Omaxe issue, while JM Morgan Stanley is the book running lead manager.

Spice Comm makes strong debut

Spice Communications Ltd., the wireless telecom service provider with presence in two circles of Punjab and Karnataka, made a strong debut on the Bombay Stock Exchange (BSE) on July 19. The stock opened at Rs55.75 as against the issue price of Rs46 per share. The scrip ended its maiden trading day at Rs60.65 after touching a peak of Rs67.05 and a low of Rs48.50. It lost 1.8% the next day to close the week at Rs59.55. The company raised Rs5.20bn through its IPO of 113mn shares of Rs10 each. The IPO was subscribed more than 37 times. The QIB portion of the issue was subscribed 57 times. Retail and Non-institutional part of the issue were subscribed 3 times and 19 times, respectively. Proceeds from the IPO will be mainly utilized towards repayment of debt, payment of license fee for national long distance and international long distance services and related capital expenditures. Telekom Malaysia holds 49% in Spice Communications.

IVR Prime sets price band of Rs510-600

IVRCL Infrastructures & Projects Ltd. announced that its urban infrastructure subsidiary, IVR Prime Urban Developers Ltd., is making an Initial Public Offering (IPO) of 14,150,000 equity shares of Rs10 each for cash with a price band of Rs510 to Rs600. IVR Prime is expected to raise Rs7.21bn at the lower end of the price band and Rs8.49bn at the upper end of the price band. The issue will open on July 23 and close on July 26. IVRCL Infrastructures holds 40mn shares or 80% of the pre-IPO share capital of IVR Prime. This will gets diluted to 62.35% post IPO. As per the Red Herring Prospectus, IVR Prime holds close to 2,500 acres of land, which can be valued at Rs32-35bn.

Glenmark buys two biological entities from Chromos

Glenmark Pharmaceuticals Ltd. announced its wholly-owned Swiss subsidiary Glenmark Pharmaceuticals SA has bought two New Biological Entities (NBEs) CHR-1103 and CHR-1201 from Chromos Molecular Systems Inc. of British Columbia, Canada. The two NBEs are humanized monoclonal therapeutic antibodies. Glenmark plans to initiate Phase I clinical trials in 2008 and complete Phase I on CHR-1103 by March 2009. CHR-1201 is an anti-thrombolytic humanized monocional antibody, which Glenmark plans to develop initially to treat acute stroke. The company plans to start Phase I on CHR-1201 by March 2009. "This is a very important addition to our pipeline of Novel Biological Entitles. These two NBEs would help accelerate our pipeline in the biologics space," said Glenn Saldanha, Managing Director & CEO of Glenmark.

L&T consortium wins Rs10.7bn orders from Tata Steel

A Larsen & Toubro (L&T) led consortium bagged orders worth Rs10.70bn from Tata Steel for supply and installation of Sinter Plant and other packages. Tata Steel is setting up six million tones per annum (MTPA) integrated steel plant in Kalinganagar Industrial Complex at Duburi in Jajpur district of Orissa, to be completed in two phases of 3 MTPA each. The orders are for the first phase of this Greenfield project. L&T in consortium with Outotec GmbH, Germany bagged EPC (Engineering - Procurement - Construction) contract for 5.75 MTPA Sinter Plant valued at Rs8.36bn. The company's share of this order is Rs6.23bn. This would be the single largest Sinter Plant to be built in India. This is scheduled for completion in 30 months.

Brent crude backs off from near record
Oil prices stabilised at around US$78 per barrel, amid nagging concerns that rising demand will strain supplies already hurt by US refinery glitches and output disruptions in Africa. The price this week rallied to within sight of its all-time peak, spurred by a surprise fall in US gasoline inventories, accelerating economic growth in China and a brief supply outage in OPEC member Angola. London Brent crude for September was last quoted at US$77.88 a barrel. Earlier this week, Brent came within 25 cents of a record high of US$78.65, struck last August. US crude for August, which expires later on Friday, was at US$76.11. US gasoline stocks, which were expected to rise, instead fell by 2.3 million barrels in the week ended July 13, a government report said on July 18. Prices rose on July 19 after French oil major Total cut output by half at its 220,000-barrel-per-day Dalia field in Angola. The outage added to supply losses from Africa. In Nigeria, almost 550,000 bpd, or 18% of the country's oil capacity, remains shut because of sabotage attacks on the country's oil industry. In spite of the disruptions, OPEC has yet to relax supply curbs in place since last November and analysts do not expect the group to do so any time soon.

China's economy accelerates further; rates upped

Notwithstanding the series of steps taken by the government to cool down relentless investment in factories and properties, the Chinese economy continues to surge ahead. The GDP of the world's fourth-largest economy grew by 11.9% in the second quarter, the fastest pace in 12 years. The reading exceeded all optimistic estimates by economists and was much higher than the 11.1% growth registered in the first quarter ended March. It is also far ahead of the Government's 8% growth estimate and above levels that some economists consider sustainable. The yuan to the highest level against the dollar since China abandoned a decade-old peg to the greenback in July 2005. A key measure of inflation too flared up and investments in fixed assets surged, prompting speculation that the Government will announce further steps to prevent an overheating. The conjecture turned out to be true, as the People's Bank of China lifted the benchmark one-year lending rate by 27 basis points to 6.84%, the highest in more than eight years. The one-year deposit rate will rise to 3.33% from 3.06%. The People's Bank of China said that move was designed to guide credit and investment growth as well as to stabilize inflation expectations.

ABN Amro bid...RBS consortium ups cash portion

A consortium led by the Royal Bank of Scotland (RBS) boosted the cash element of its €71.1bn (US$98bn) offer for ABN Amro. RBS is bidding along with Banco Santander of Spain and Fortis of Belgium. The RBS consortium offered €38.40 a share for ABN Amro and raised the level of cash to 93% from 79%, the banks said. Barclays' all-stock offer of €34.49 a share is 11% lower. The offer will comprise €35.60 in cash plus 0.296 new RBS shares for every ABN Amro share. The banks said they had received assurance from ABN AMRO that their proposed offer will be dealt with on a "level playing field" with the Barclays offer. Both have until July 23 to submit formal offers for ABN. The increase in cash on offer follows a Dutch court ruling on Friday which allowed ABN to move ahead with the sale of its US-based LaSalle to Bank of America for US $21bn. Meanwhile, Barclays said it might sweeten its all-share bid by adding cash, which is generally more attractive to shareholders than stock. ABN Amro will meet with the team led by RBS about a revised offer. ABN Amro also will meet with London-based Barclays to discuss implications of the consortium's revised proposed offer, the Amsterdam-based bank said.

Dow Jones board recommends sale to Murdoch

Media baron Rupert Murdoch cleared another hurdle on his way to owning The Wall Street Journal as the board of Dow Jones & Co., the Journal's parent company, said it would sign off on a sale to Murdoch's News Corp. for US $5bn. The proposed still has to be ratified by the Bancroft family, Dow Jones' controlling shareholders. The Bancroft family will hold a historic meeting on July 23 in Boston to debate whether to sell. About 40 family trusts hold most of the shares that have extra voting power, so a clear majority decision among the trustees would determine whether the News Corp. bid succeeds. Meanwhile, Dow Jones director Dieter von Holtzbrinck resigned on July 19, citing fears that the publisher's journalistic values would strongly suffer after a sale to Rupert Murdoch's News Corp. Separately, The Wall Street Journal reported that David Li, another Dow Jones board member may face civil charges in a federal insider trading investigation linked to the company's proposed sale to Murdoch.

Basell to buy Lyondell Chemical

Having failed in its efforts to buy Huntsman Corp., Dutch chemical firm Basell said it would acquire another US-based rival Lyondell Chemical Co. for about US$19bn, including assumed debt. The price consideration works out to a premium of nearly 19% over Houston-based Lyondell's closing price of US$40.12 a share yesterday. Both companies' boards have approved the deal. Lyondell operates in three business segments - ethylene, propylene oxide, and refining - and these will complement and Basell's polyolefins business, the companies said. Just last week, Basell walked away from a US$5.6bn deal to buy Huntsman after being outbid at the last minute by private equity firm Apollo Management LP. The combined Lyondell-Basell would have annual revenues of more than US$34bn and more than 15,000 employees around the world.

Sensex garners 293 points

The market settled at all time high, as buying momentum continued at higher level. Strong global markets, fresh buying at higher levels, healthy inflow from foreign funds, easing fears of interest rate hike, and anticipation of robust Q1 June 2007 results and triggered a solid rally on the bourses in the week ended 20 July 2007.

The BSE Sensex gained 292.83 points in the week ended 20 July 2007 to 15,565.55, while the NSE Nifty advanced 61.50 points to 4,566.05. Both the indices logged gains in 4 out of 5 trading sessions.

The week started on an upbeat note with the BSE Sensex rising 38.50 points to 15,311.22, on Monday 16 July 2007. Shares from the banking, real estate, and cement sectors advanced, while IT, FMCG and pharma stocks declined.

Sensex lost 21.40 points at 15,289.82, on Tuesday, 17 July 2007. Weakness in European stocks weighed on the domestic bourses.

On Wednesday, 18 July 2007, the BSE 30-share Sensex gained 11.35 points to 15,301.17. A sharp intra-day fall triggered by profit booking after the recent rally was reversed by short covering and value buying. Asian and European markets were subdued.

The Barometer index galloped 248.96 points, to 15,550.13 on Thursday, 19 July 2007 on strong buying in index pivotals.

On Friday, 20 July 2007, the Sensex gained a marginal 15.42 points to 15,565.55, an all time closing high. It also hit an all time high of 15,683.03.

Index heavyweight Reliance Industries (RIL) posted gains, after rallying to an all-time high of Rs 1,925 on Thursday, 19 July 2007. It found gas in the first well in the Cauvery deep-water basin off the east coast of India. RIL holds a 100% participating interest in this block.

IT stocks settled on mixed note. TCS gained after it posted a 36% surge in net profit to Rs 1,202.93 crore in the first quarter ended June 2007 compared to Rs 882.66 crore in Q1 June 2006. Total income advanced 27% at Rs 5,364.67 crore (Rs 4,225.62 crore).

Infosys Technologies gained on market talks that it is close to acquiring the finance and accounting BPO arm of Philips Global. The BPO arm is said to have assured revenues of $200 million spread over five year.

Satyam Computer Services declined after it posted 2.1% fall in net profit to Rs 389.14 crore in Q1 June 2007 over March 2007. Total income rose 6.5% to Rs 1820.93 crore over Q4 March 2007.

Wipro slipped after it posted a lower-than-expected 16% rise in net profit to Rs 710 crore in Q1 June 2007 over Q1 June 2006. Wipro's net profit declined 18% and net sales dipped 2.86% over the March 2007 quarter.

Reliance Energy gained after the Anil Ambani-controlled Reliance Energy (REL) set a target to bag at least two ultra mega power projects (UMPPs) of 4,000 MW each with an investment outlay of nearly Rs 40,000 crore.

Auto stocks ended the week on a strong note. Bajaj Auto jumped on reports the two-wheeler maker is looking for an acquisition in the European motorcycle market. As per reports, ace bike makers Ducati Motor Holding of Italy and Triumph Motorcycles of the UK are among the possible targets for acquisition.

Tata Motors settled flat on reports that it was evaluating a bid to buy luxury British car brands Jaguar and Land Rover from struggling US car maker Ford.

Telecom stocks gained on robust developments. Reliance Communication signed an agreement to acquire US-based Yipes for $300 million. The company also sold a 5% stake in its telecom tower business, valued at Rs 27000 crore.

Bharti Airtel galloped after one of its group companies bought a 4.99% in the telecom firm from Vodafone. The purchase took Bharti group's voting interest in Bharti Airtel to more than 50%.

Engineering & construction major Larsen & Toubro (L&T) secured contracts worth $177.75 million for different projects in the hydrocarbon sector in the Gulf region. L&T-led consortium also bagged orders worth Rs 1,070 crore for supply and installation of sinter plant and other packages from Tata Steel.

Cement stocks gained following strong infrastructure boom. ACC, Ambuja Cement, Grasim and UltraTech Cement Company, all logged gains.

Shares from the real-estate sector surged on momentum buying after KV Kamath, Managing Director and CEO of ICICI Bank, said that interest rates seem to have peaked and should come down soon. Orbit Corporation, Indiabulls Real Estate and DLF posted gains.

Zee News jumped 62.94% to Rs 72.10 after reporting a net profit of Rs 6.38 crore on sales of Rs 74.46 crore in Q1 June 2007. Figures for the corresponding period in the previous quarter were not available. Its operating profit stood at Rs. 11.91 crore. During this period, advertisement revenue was Rs 59.24 crore and the subscription revenue was at Rs 13.64 crore.

Celestial Labs settled at Rs 67.20 on BSE, a premium of 12% over the IPO price of Rs 60, on Tuesday, 17 July 2007. The scrip debuted at Rs 70, touched a high of Rs 75 and a low of Rs 66.15 during the day.

Sun Pharma Advanced Research Company (SPARC) settled at Rs 87.15 over the base price of Rs 72.65 on BSE on 18 July 2007. The listing of the company followed a scheme of arrangement at Sun Pharmaceutical Industries (SPIL). The research division of SPIL was demerged and vested with SPARC on a going-concern basis.

The Prime Minister's Economic Advisory Council, on Monday, 16 July 2007 projected India's GDP growth at 9% in 2007-08. It has warned that the constraints posed by farm and power sectors may make sustaining this level difficult in the years ahead. In its report, the Council expected inflation to remain close to 4%

India's wholesale price index was unchanged at the previous week's level of 4.27% in the 12 months to 7 July 2007, despite a fall in some food prices, government data showed on Friday, 20 July 2007.

Uptrend may continue on strong FII inflow

The ongoing liquidity driven rally is likely to continue in the week ahead. The results announced so far have been good, with the exception of IT sector. Key Q1 results next week are Bharti Airtel, ONGC, Maruti Udyog. Reliance Industries (RIL) announces results at the weekend i.e. on Saturday, 28 July 2007.

ONGC unveils Q1 results on Wednesday, 25 July 2007, to be followed by Bharti Airtel and Maruti Udyog on Thursday, 26 July 2007.

The 30-share BSE index has hit 12 all-time highs in 15 sessions so far in July 2007, including one on Friday, 20 July 2007.

Besides good corporate earnings in a fast growing economy, the rise in the value of the Indian rupee against the dollar has attracted foreign funds. FII inflow in the first half of July 2007 reached Rs 21451 crore (till 19 July 2007). The large inflows this month are also due to FII subscription to IPOs of DLF and ICICI Bank.

Receding fears of rising interest rates have aided the surge on the domestic bourses over the past few days. Inflation is hovering at a little above 4%. Inflation has remained below the RBI's targeted level of 5% in recent weeks. It fell to a 14-month low of 4.03% in mid-June 2007. Annual inflation hit 6.69% on 27 January 2007, the highest in more than two years.

The trend in other Asian markets will continue to have a bearing on domestic bourses. Asian markets may open on a subdued note early next week after China raised interest rates on Friday, 20 July 2007, in the latest of a series of tightening steps aimed at keeping inflation in check and preventing the world's fourth-largest economy from overheating.

The announcement came after trading hours in key Asian markets including the Chinese markets on Friday, 20 July 2007. The People's Bank of China ordered an increase of 0.27% in commercial banks' benchmark one-year deposit and lending rates.

Ahead of the rate hike by China, the MSCI's measure of Asia Pacific stocks excluding Japan hit a record on Friday, 20 July 2007, on the back of strong earnings including South Korean mobile phone maker LG Electronics.

Market ends flat

The market appeared to be heading towards a negative close as the strong bout of selling saw the Sensex enter into the negative territory, though for a while. The Sensex had a roaring start and the index continued its record rally for the third consecutive session today. Taking cues from the strong Asian markets the Sensex rallied sharply in the morning trades and touched the all-time high of 15,683. The index also received major support from L&T, Tata Steel and Bharti Airtel which gained around 3-4% today. Capital goods and metal stocks rallied sharply but cement and IT stocks remained subdued as traders booked profits. On the result front, Satyam Computer reported disappointing numbers, while Exide Industries showed a solid jump in its quarterly profits. The market remained stable in the afternoon as a string of results kept the momentum going. However, the Sensex saw profit booking towards the close and entered into the negative territory to touch the day's low of 15,525. It, however, recovered on buying in few pivotal stocks and closed the session at 15,566, up 15 points. The Nifty ended the session at 4,566, up four points.

The market breadth was negative, with the losers outpacing the gainers in the ratio of 1.85:1. Of the 2,660 stocks that traded on the BSE, 1,693 stocks declined, 912 stocks advanced and 55 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE CD index dropped 1.44% at 4,210 followed by the BSE IT index (down 0.71% at 4,921) and the BSE Bankex index (down 0.70% at 8,395). However, the BSE Realty index gained 1.60% at 8,183, the BSE CG index (up 1.51% at 13,070) and the BSE Metal index (up 1.48% at 12,211).

Among the Sensex stocks, steel major Tata Steel was the leading gainer and its stock price soared 4.84% at Rs715. Among the other stocks L&T advanced 4.15% at Rs2,475, Bharti Airtel jumped 3.03% at Rs923, while M&M, Reliance Communication, HDFC, Dr Reddy's Lab, Reliance Energy, Ranbaxy and Grasim closed with marginal gains. Among the laggards, ACC slipped 3.75% at Rs1,107, Bajaj Auto shed 2.30% at Rs2,327, Cipla declined by 2.21% at Rs201, Ambuja Cement fell by 2.09% at Rs136 and Hindalco lost 1.88% at Rs182.

Over 1.62 crore Tata Teleservices shares changed hands on the BSE followed by Spice Communication (1.58 crore shares), IFCI (1.11 crore lakh shares), Petronet LNG (94.93 lakh shares) and IKF Technologies (69.68 lakh shares).

Reliance Industries registered a turnover of Rs158 crore on the BSE followed by DLF (Rs157 crore), Indiabulls Real Estate (Rs152 crore), Tata Steel (Rs128 crore) and ACC (Rs124 crore).

Sensex settles a tad higher

The market which was trading strong till late afternoon trade, saw trend reversal and slipped in the red at one point of time in last one hour of trade on profit booking. It had opened firm as strong buying interest continued following a 249-point rally on Thursday, 19 July 2007. Also strong Asian and US markets boosted sentiment in early trade. The latest data showed that the inflation growth remained unchanged for the week ended 7 July 2007.

The BSE 30-share Sensex gained 3.76 points to 15,553.89, as per provisional close. It opened higher at 15,625.63 and surged to an all time high of 15,683.03 in initial trade. It slipped to a low of 15,524.68 at 15:16 IST.

The NSE Nifty crossed the 4,600 mark to strike an all time high of 4600.80. It settled with a gain of 1.55 point to 4,563.65, as per provisional close.

The market witnessed high volatility today, and it is expected to stay choppy in the near term ahead of expiry of July 2007 derivatives contracts on Thursday, 26 July 2007. The total open interest in NSE's F&O segment increased to an all time record of Rs 94,041.37 crore, from Rs 89,173.11 crore on previous day.

India's wholesale price index was unchanged at the previous week's level of 4.27% in the 12 months to 7 July 2007, despite a fall in some food prices, government data showed on Friday. The annual inflation rate was 4.83% during the corresponding week of the previous year. Annual inflation for the week ended 12 May 2007 was revised to 5.62% from 5.27%.

The market breadth was negative on BSE with 1729 shares declining as compared to 964 that advanced. 70 remained unchanged

The total turnover on BSE amounted to Rs 5761 crore compared to Rs 4251 crore by 14:30 IST

Among the Sensex pack, 17 advanced while the rest declined

Cement stocks saw unwinding after the recent rally. Second largest cement producer ACC, slumped 3.68% to Rs 1108 on 11.05 lakh shares. It was the top loser from Sensex pack. Ambuja Cement lost 2.31% to Rs 135.60 while India Cements lost 1.30% to Rs 224.50

India's largest engineering and construction firm Larsen and Toubro surged 4.20% to Rs 2476 on launch of an IT SEZ, a first of its kind integrated project. It also struck an all time high of Rs 2499 today. The project coming up at Vallancheri, Tamil Nadu will have a total built up area of 2.70 million squre feet (sq. ft.), would be completed in two phases. Construction of the first phase is expected to begin in August end this year and would constitute 1.5 million sq. ft.

Steel stocks gained on fresh buying in hopes on firm global metal prices. Leading private sector steel major Tata Steel vaulted 4.93% to Rs 715.90 on 18.11 lakh shares. It was the top gainer from the Sensex pack

Other steel stocks - Sail (up 0.68% to Rs 156.40) and JSW Steel (up 2.68% to Rs 722) also gained.

India's largest cellular services provider Bharti Airtel galloped 2.86% to Rs 921.50, after hitting an all time high of Rs 943. Bharti Enterprises, the parent of Bharti Airtel said on Wednesday, 18 July 2007, one of its group companies had bought a 4.99% in the telecom firm from Vodafone. The purchase took Bharti's voting interest in Bharti Airtel to more than 50%.

India's second-largest mobile services firm Reliance Communications (RCom) rose 1.29% to Rs 586.80. The company has sold a 5% stake in its telecom tower business, valued at Rs 27000 crore, Chairman Anil Ambani said on Thursday, 19 July 2007. It has placed the 5% stake with a handful of leading investors in the United States, Europe and Asia, for Rs 1400 crore. It also struck an all time high of Rs 592

RCom is also evaluating a possible initial public offering or strategic equity placements for the tower business, Ambani said.

Mahinndra & Mahindra (up 1.05% to Rs 824), and Dr Reddy's (up 0.74% to Rs 670), were the other gainers from the Sensex pack.

India's largest private sector company Reliance Industries (RIL) slipped 0.50% to Rs 1,887. The Bombay High Court on Wednesday, 18 July 2007, refused to stay an interim order barring RIL from selling gas from its KG basin field to any other firm except Anil Ambani's Reliance Natural Resources (RNRL) and state-run NTPC. A division bench of Justices J N Patel and Ahmed Sayed also adjourned by eight weeks the hearing on RIL's appeal against the previous interim order.

The court, however, said the government can go ahead with the process of fixing of gas price as per the contract for the field, without any prejudice to either party.

Fourth largest IT company Satyam Computer Services lost 2.27% to Rs 475.60, after it posted 2.1% fall in net profit to Rs 389.14 crore in Q1 June 2007 over March 2007. Total income rose 6.5% to Rs 1820.93 crore over Q4 March 2007. Satyam Computer has cut FY 2008 EPS guidance in rupee terms. It has now projected a between 12.5% to 14% growth in EPS to between Rs 24.14 and Rs 24.46. It had earlier guided of 18% to 20% EPS growth in rupee terms for FY 2008.

It has, however, raised FY 2008 revenue guidance in rupee terms. It now expects 21.1% and 22.5% growth in revenue in rupee terms compared to earlier guidance of 20% to 22%. The results hit markets before trading hours today.

Cipla (down 2.41% to Rs 200.50) and Bajaj Auto (down 2% to Rs 2335) were the other losers.

All the Asian indices were trading higher, boosted by a record close on Wall Street, with Japanese rising on strong earnings reports from LG Electronics and Korea Zinc Inc. Nikkei gained 0.23% at 18,157.93.

Hong Kong's Hang Seng (up 1.20% at 23,291.90), Taiwan's Taiwan Weighted (up 1.19% at 9,585.90), Singapore's Straits Times (up 1.30% at 3,651.38) and South Korea's Seoul Composite (up 2.36% at 1,983.54), posted gains in early trade.

Shanghai Composite jumped 3.73% to 4,058.83

Most of the European indices were trading higher

Wall Street edged higher yesterday, 19 July 2007, taking the Dow Jones Industrial Average (DJIA) to its first close above 14,000 as investors kept jitters about the economy at bay and focused on a string of upbeat earnings reports. The Standard & Poor's 500 index also had a record close.

The Dow advanced 82.19 points, or 0.59%, to 14,000.41. Broader stock indicators also gained Thursday. The S&P 500 index gained 6.91 points, or 0.45%, to 1,553.08. The technology-focused Nasdaq Composite index rose 20.55 points, or 0.76%, to 2,720.04, following the upbeat tech earnings.

As per provisional data, foreign institutional investors (FIIs) bought shares worth a net Rs 652.08 crore, while domestic institutional investors (DIIs) were net sellers of shares worth Rs 149.01 crore on Thursday, 19 July 2007

Meanwhile the Reserve Bank of India (RBI) has cleared the operational hurdles for FIIs to pledge foreign sovereign securities like US treasury bills for taking positions in futures and options. Till now, FIIs were mandatorily required to give cash as margin for investing in derivatives. From now on, foreign portfolio managers can dip into their idle holdings of bonds issued by overseas governments to give margins against F&O trades in Indian stock exchanges.

Rakesh Jhunjhunwala Portfolio Holdings

Rakesh Jhunjhunwala Portfolio Holdings

(CLICK on the IMAGE to view FULL Size)

Ranbaxy, ACC, Welspun Gujarat, Aban Offshore

SSKI on Welspun Gujarat

Welspun Gujarat (WGSR) reported a spectacular 163.5% yoy rise in net profit for Q1FY08—while revenues were in-line with our estimates, a sharp expansion in margins led to profits significantly better than our estimates. Operating margins for the quarter expanded to 16.6% (US$237/tonne) representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. WGSR has added orders worth US$634m during the quarter, taking the total outstanding order book position to US$1.1bn (1.6x FY07 revenues). Management confirmed that the plate mill project is on track with likely commissioning in Dec'07. We have upgraded our EPS estimates for FY08 and FY09 by 18% and 37% respectively, to factor in higher margins. Maintain Outperformer.

SSKI on Aban Offshore

Aban Offshore (Aban) has reported standalone numbers of Q1FY08 results – net profit up 48.5%yoy to Rs284m, which is lower compared to our expectation of Rs 321m. Operating profits were lower as the new contract for Aban II got delayed by a month to May end. However, net profit growth was driven by higher other income (up 375%yoy) and lower tax rates (32.8% in Q1FY08 vis-à-vis 46.5% in Q1FY07). Aban's remaining assets in the standalone account will get re negotiated during the course of the year. Continued strength in rig rates that are expected to remain strong over the next 2 years and timely addition of new rigs provide earnings visibility over FY07-09 (consolidated earnings growth estimated at 129% CAGR). While Aban trades close to the higher end of peer group range, we believe, with a relatively young fleet Aban is in a better position to leverage the strong rig rates. Maintain Outperformer with a target price of Rs3393/share (P/E of 9xFY09E).

SSKI on ACC

ACC's pre-exceptional PAT at Rs3.47bn was marginally ahead of our estimates, mainly due to lower interest costs and higher other income. Q2CY07 revenues were at Rs18.7bn (up 27.8% yoy), driven by a 13.2% yoy increase in cement realizations and a 15.3% yoy growth in volumes. However, operating margin declined by 200bps yoy due to high raw material and other costs. Interest costs declined by 75% yoy and other income jumped 38% yoy as strong operating cash flows were used in repaying debt and making short term investments. Consequently, pre-exceptional PAT grew by 16.7% yoy to Rs3.47bn. We are upgrading our CY07 and CY08 earnings estimates by 4.9% and 2% to Rs63.1/share and Rs49.9/share respectively, considering the higher than expected other income and lower interest costs, as also a ~3% increase in our volume estimates. We continue to remain negative on the cement sector on oversupply concerns by FY09. ACC currently trades at 23.1x CY08E earnings, 13.1x on CY08E EV/EBITDA and US$240 on EV/ton basis, which we believe, are expensive considering the negative outlook on cement prices and profitability over the next two years. We maintain our Underperformer rating on the stock.

SSKI on Ranbaxy

Ranbaxy's Q2CY07 profits have been ahead of expectations driven by significantly higher forex gains on dollar denominated loans. While the rupee appreciation has sharply impacted operating margins and clouded the "actual operating performance", we believe that there multiple positives which indicate that Ranbaxy's business model has finally starting to deliver. The key positive is 24% yoy and 11% qoq growth in revenues on the back of strong growth across all geographies including US, EU and emerging markets despite the absence of any exclusivity opportunities. Further operating margins have slipped by only 100 bps qoq despite 7% appreciation in rupee over the quarter. This indicates considerably improved underlying profitability. There has been a steady improvement in Ranbaxy's business health over the last few quarters and we believe this quarter will may well prove to be the inflexion point for Ranbaxy's prospects. To account for the lower $/Re exchange rate for CY07 and CY08 and higher forex gains in CY07, we have adjusted our CY07 and CY08 earnings by 3% and (6%) respectively. Management has guided to a much stronger 2HCY07 performance as well as indicated possibility of significant FTF opportunities in US markets for CY08 and CY09 along with the imminent Lipitor exclusivity in CY10. We believe a combination of continued revenue growth momentum and improving margins will drive sustained profitability growth from hereon. We are upgrading the stock to Outperformer with a SOTP price target of Rs435 (23.1xCY07E and 21xCY08E earnings and Rs35 of Lipitor exclusivity in US). Clarity on Lipitor launch in Canada and the potential FTF opportunity for CY08 will be upsides to our estimates. Key risk to our call remains an escalation in rupee appreciation and any negative development related to the raid on US facilities.

SKF India, Corporation Bank, Cadila Healthcare, ICI India, Wipro, Ranbaxy Labs, Hexaware Tech, ACC

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.