Thermax, Union Bank of India, Mahindra and Mahindra, Sun Pharma, Madras Cement, ACC,

Thermax
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs850
Current market price: Rs620

Price target revised to Rs850

Result highlights

• The net sales of Thermax for Q3FY2008 grew by 57% year on year (yoy) to Rs933.5 crore on the back of robust growth of both the energy and the environment businesses.
• The energy business during the quarter grew by a robust 62.2% to Rs773.6 crore, while the energy business was up 30.4% to Rs167.6 crore.
• The operating profit for the quarter grew by 52.4% to Rs109.5 crore, but the operating profit margin (OPM) fell by 40 basis points. The OPM plunged mainly on account of an increase in the raw material cost. The raw material cost as a percentage of sales increased by 340 basis points yoy.
• The other income increased by 12.1% to Rs9.1 crore. The interest cost fell by 33.3% yoy, while the depreciation charge rose by 12.7% yoy to Rs5.6 crore.
• Consequently, the net profit was up 57.1% to Rs79.7 crore in Q3FY2008 as against Rs50.7 crore in Q3FY2007. The net profit growth was above our expectation.
• The order book witnessed a slow down during the quarter with only Rs680.2 crore worth of orders being booked during the quarter. At the end of Q3FY2008, the pending order book of the group stood at Rs2,923 crore.

Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs230
Current market price: Rs191

Spike in treasury income boosts the PAT

Result highlights

• Union Bank of India (UBI) reported a profit after tax (PAT) of Rs365 crore for Q3FY2008, beating our estimate of Rs298.8 crore. The Q3FY2008 PAT indicates a growth of 42.6% year on year (yoy) and 32.4% quarter on quarter (qoq), primarily driven by a healthy growth in the interest income, a jump in the treasury income and relatively lower provisions.
• The reported net interest income (NII) for the quarter stood at Rs788 crore, reflecting a growth of 14.9% yoy and 17.1% qoq. Meanwhile, the reported non-interest income witnessed a whopping growth of 109% yoy to Rs 347.5 crore on the back of a five-fold jump in the treasury income.
• During Q3FY2008, the operating expenses jumped by 29.5% yoy to Rs499.7 crore. The growth can be traced to a 55.1% year-on-year (y-o-y) increase in the other operating expenses, while the staff expenses grew by 14.5% yoy. Despite the significant increase in the operating expenses, the cost-income ratio was marginally up by 1% to 44%.
• Notably, the provisions during the quarter declined by 22.2% yoy on reported basis, which helped push the growth in PAT.
• Asset quality remained robust during the quarter with gross non-performing assets (GNPA) witnessing an 18.1% y-o-y decline to Rs1,524.8 crore. Meanwhile, the net non-performing assets (NNPA) were down significantly by 60% to Rs873.2 crore.
• Capital adequacy ratio (CAR) remained healthy at 13% at the end of December 2007 compared with 13.2% at the end of December 2006 and 11.6% at the end of September 2007.
• At the current market price of Rs191.5, the stock is quoting at 7.2x FY2009E earnings per share (EPS), 3.6x its 2009E pre-provisioning profit (PPP) and 1.5x FY2009E book value (BV). We believe at the current valuations, UBI looks attractive. We maintain our Buy recommendation with a price target of Rs230.

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs900
Current market price: Rs670

In line with expectations

Result highlights

• The Q3FY2008 results of Mahindra & Mahindra (M&M) were in line with our expectations. The stand-alone net sales of the company reported a growth of 14.1% to Rs2,940.1 crore in the quarter. This growth was led by an overall volume growth of 7.6%. The automotive segment recorded a volume growth of 16.3%. The sales volume of the farm equipment (FE) segment declined by 6.4%.
• On a segmental basis, the automotive revenues rose by 18.8% to Rs1,794.9 crore, whereas the FE division reported a revenue growth of 4.6%. The profit before interest and tax (PBIT) margin in the automotive segment declined by 60 basis points to 9.4% during the quarter. The PBIT margin of the FE division witnessed a higher drop of 120 basis points to 13.8%. The overall operating profit margin (OPM) declined by 70 basis points to 11.3%, leading to a growth of 7% in the operating profit to Rs331.4 crore.
• Higher interest and depreciation costs, and low tax led the adjusted net profit to grow only by 3% to Rs249.5 crore. After taking into account the extraordinary items (profit on merger of subsidiaries, voluntary retirement scheme [VRS] expenses), the reported profit after tax (PAT) grew by 68% to Rs405.1 crore.
• On a consolidated basis, the total income (including the other income) grew by 42.4% yoy to Rs6,774 crore led by the strong performance of the company's key subsidiaries. The consolidated PAT (before exceptional items and after minority interest) grew by 24.4% yoy to Rs400 crore.
• The new utility vehicle (UV) platform code named Ingenio is slated for launch in the second half of FY2009. The joint venture (JV) with International Truck for manufacturing medium and heavy commercial vehicles (M&HCV) is expected to start by CY2009.
• We have revised our estimates to account for the lower tax rate and have upgraded our consolidated earnings for FY2008 and FY2009 both by 6.5% to Rs65.8 and Rs74.3 respectively. Segments other than automotive and FE contribute ~43% to the consolidated revenues and ~53% to the operating profits of the company. Thus, we believe M&M is more a play on its value accretive subsidiaries than on its core business.
• At the current market price of Rs670, the stock quotes at 9x its FY2009E consolidated earnings. We continue to value M&M on a sum-of-the-parts basis and maintain our Buy recommendation with a price target of Rs900.

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,475
Current market price: Rs1,138

Price target revised to Rs1,475

Result highlights

• Sun Pharmaceuticals (Sun Pharma) reported a strong top line growth of 48.9% year on year (yoy) in Q3FY2008 to Rs804.0 crore. The top line was significantly higher than our estimate of Rs682 crore. The strong growth was driven by an increase of 24.3% in its domestic business and a 75.6% growth in its exports.
• The exports were primarily driven by the significant increase in the US business due to incremental revenues of approximately $35 million from the supply of generic oxcarbazepine under exclusivity. Excluding the impact of this non-recurring stream of revenues, the sales would have been approximately Rs668 crore, an increase of 23.6% yoy.
• The domestic formulation business grew by 28.0% to Rs375.8 crore. We believe Sun Pharma's domestic formulation business will continue to outpace the industry and grow at a compounded annual growth rate (CAGR) of 20% over FY2007-09.
• Caraco Pharma, Sun Pharma's US subsidiary, continued with its impressive performance by registering a 162.3% growth in the revenues to $82.0 million (against our estimate of $56 million). A large part of the growth came from the sales of generic oxcarbazepine tablets under exclusivity.
• Sun Pharma's operating profit margin (OPM) expanding by 1,200 basis points to 44.1% is the highest OPM reported by the company so far. The sharp margin improvement was driven by a broad-based cost reduction, powered mainly due to the high-margin revenues of generic oxcarbazepine under exclusivity. The margin expansion caused the operating profit (OP) to more than double to Rs354.7 crore in Q3FY2008.
• Led by a robust operating performance, Sun Pharma's net profit grew by an impressive 60.1% to Rs318.4 crore. The profit was way above our estimate of Rs223.8 crore. The profit growth was restricted due to the sharp 72% year-on-year (y-o-y) reduction in the other income and an increase in the tax provision.
• Sun Pharma has commercially launched its generic version of Wyeth/Altana's Protonix in the US market. The company shares a 180-day exclusivity on this product along with Teva (which had launched the product on December 22, 2007, thus triggering off the 180-day exclusivity period). Though this is an 'at-risk' launch by Sun Pharma, we believe it will be able to garner revenues and profits of $91 million and $36.4 million respectively during the remaining period of exclusivity from January 30, 2008 to June 22, 2007. This will yield incremental earnings of Rs6.9 per share for Sun Pharma.
• Taro is expected to hold its board meeting in Q1CY2007 to discuss Sun Pharma's merger proposal. With a 25% stake in Taro, Sun Pharma's management remains confident of closing the transaction after the shareholders' meeting.
• To account for the better than expected performance in M9FY2008 and to incorporate the impact of the Protonix and Trileptal exclusivities, we are upgrading our estimates for Sun Pharma. While the revenue estimates have been upgraded by 6% and 12.7% respectively for FY2008E and FY2009E, the earnings have been revised upwards by 17.2% and 26.3% to Rs52.5 and Rs67.1 per share respectively for FY2008E and FY2009E respectively.
• At the current market price of Rs1,138, Sun Pharma is valued at 21.7x FY2008E and 17.0x FY2009E fully diluted earnings. We reiterate our Buy recommendation on the stock with a revised price target of Rs1,475 (22x FY2009E diluted earnings).

Madras Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,800
Current market price: Rs3,900

Q3FY2008 results: First-cut analysis

Result highlights

• For Q3FY2008, the net sales of Madras Cement Ltd (Madras Cement) were up 31% year on year (yoy) at Rs512.38 crore, which was above our estimate of Rs491 crore. The net sales were high mainly on account of higher realisations, which grew by 35% yoy to Rs3,660 per tonne.
• The company's operating profit margin (OPM) was higher by 450 basis points yoy at 37.2%. Consequently the operating profit was higher by 49% yoy at Rs190.63 crore. The company enjoyed higher OPM mainly because the increase in realisations more than offset the rise in the cost.
• The earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne was up 53% yoy at Rs1,362. The EBIDTA per tonne was however down by 11.8% sequentially mainly because of a 11.6% jump in the total expenditure per tonne on a sequential basis.
• The variable cost per tonne saw an increase in the raw material prices, which went up by 19% sequentially. Power and fuel cost per tonne also saw an increase of 38% yoy and 18% sequentially.
• On the fixed cost front, the employee cost almost doubled yoy to Rs23.7 crore and was higher by 40% sequentially.
• The reported profit after tax (PAT) was up 61% yoy at Rs110.65 crore, mainly because of higher realisations. The PAT was however below our expectation of Rs118 crore on the back of unexpected higher increase in the total cost per tonne.
• We maintain our Buy recommendation on the stock with a price target of Rs4,800 per share. At the current market price of Rs3,900 the stock is trading at an enterprise value (EV)/tonne of USD 134 on expanded capacities, a price to earnings multiple of 10x discounting our FY2008 earnings estimate and at 7.8x discounting our FY2009 earnings estimate.

ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,210
Current market price: Rs783

Q4CY2007 results: First-cut analysis

Result highlights

• In Q4CY2007, the reported net sales of ACC grew by 10% year on year (yoy) to Rs1,785.5 crore. The net sales were lower than our estimate of Rs1,898 crore. The net sales were higher yoy mainly on account of higher realisations. The blended realisations (including the readymade cement revenue and excluding the inter-segmental revenue) improved by 8% yoy to Rs3,637 per tonne.
• The company's operating profit margin (OPM) was lower by 580 basis points yoy at 23.1%. However on an annual basis, the OPM for the year ended stood at 27.4% against 28% in the previous year. The OPM in the quarter ended Q4CY2007 was lower mainly on account of rising raw material prices, which were not supported by higher realisations.
• The total expenditure during the quarter increased by 19% yoy at Rs1,372 crore. As a result the cost of production per tonne was up at Rs2,794, which resulted in a 13.5% drop in the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne to Rs843. Consequently the operating profit was also down 11.7% yoy at Rs413.2 crore.
• The company's interest cost was substantially up to Rs21.4 crore in Q4CY2007 from Rs4.1 crore in Q4CY2006.
• The reported profit after tax (PAT) was up 20% yoy at Rs428 crore. This was mainly on the back of higher extraordinary income, which stood at Rs189 crore against a meagre of Rs29 crore in the corresponding period last year.