Valueline - Feb 2008

Will bears have the last laugh?

The stock market crash of January 2008 is one of the most brutal ones in recent memory. In the bloodbath that it set off, investors lost trillions. As foreign institutional investors (FIIs) went on a selling spree over concerns that a recession in the USA could trigger a global slowdown, the market plummeted to sub-16,000 levels just five trading sessions after having crossed the peak of 21,000 on January 10. The fact that the FII sell-off coincided with the launch of the mega initial public offerings (IPOs) of Reliance Power and Future Capital Holdings (FCH), and the unwinding of stretched leveraged positions did not help matters.

---

Sharekhan top picks

In the January 2008 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on January 31, 2008 the basket of stocks has declined by 9.7% in the steep fall during the month, which is relatively better than the decline of 13% in Sensex and 16.3% in S&P CNX Nifty.

---

STOCK IDEA

Mahindra Lifespace Developers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,096
Current market price: Rs799

Pioneering the SEZ revolution

Key points

• Leveraging on SEZ expertise: Mahindra Lifespace Developers (MLD) is the only private sector player to have an operational SEZ, the Chennai SEZ, in the country. Leveraging on this rich expertise, the company is planning to develop one more SEZ in Jaipur. For this it has already acquired 2,100 acre of land. It expects to acquire the balance land for the project by FY2008 end.
• More upside possible from Karla and Chennai SEZ extensions: MLD also has plans to develop another 3,000-acre multi-product SEZ in Karla and to extend its Chennai SEZ by 1,980 acre. However, it has acquired only 100 acre of land for the Chennai project so far. Hence, we have not considered these two projects in our valuation. Any development on these projects would lead to an upward revision in our valuation.
• Margins to improve: Given the higher revenue contribution from the Chennai SEZ's non-processing area and better realisation for the Jaipur SEZ's processing area, we expect MLD's EBITDA margin to improve to 55.2% by FY2010 from 14.3% in FY2007. Consequently, we expect MLD's earnings to grow at a CAGR of 179.2% over FY2007-10.
• Other initiatives: MLD also plans to develop space aggregating 2.7 mn sq ft over the next few years. These projects contribute Rs83 per share to our valuation. MLD is also implementing the Tirupur Water Supply and Sewerage project through its subsidiary Mahindra Infrastructure Developers. It is a 30-year BOOT project and is expected to generate an annual income of Rs6-8 crore.
• Attractive valuation: We value the stock using the SOTP method. Given MLD's operational expertise in SEZ and premium brand in the other verticals, we value the Chennai and Jaipur SEZs and the other planned developments at 1.0x NAV of Rs1,038 per share. We value the balance land for which its has no development plans in the short to medium term at Rs58 per share, ie at a discount to the current market price. We initiate Buy recommendation on MLD with a price target of Rs1,096.

---

STOCK UPDATE

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs180
Current market price: Rs130

Results ahead of expectations

Result highlights

• For Q3FY2008 3i Infotech has reported a revenue growth of 14.2% quarter on quarter (qoq) and 84.9% year on year (yoy) to Rs317.3 crore. The sequential growth was aided by incremental revenues of around Rs16 crore (or around a 6% sequential growth) from its recent acquisitions with the bulk contribution coming from J&B Software (around Rs15 crore).
• The operating profit margin (OPM) improved by 40 basis points qoq to 24.7%, despite the increase in the selling, general and administration (SG&A) cost as a percentage of the sales to 22.2% as compared with 21.9% in Q2FY2008. The margin improvement was largely driven by the 65-basis-point improvement in the gross margin due to a favourable revenue mix. The higher margin product business contributed 52% of the total revenues as compared with 46.7% in Q2FY2008. Consequently, the operating profit grew by 15.9% qoq and 83.9% yoy to Rs78.5 crore.
• Moreover, the steep sequential decline in the minority interest to Rs1.2 crore also aided the growth in the earnings. The consolidated earnings grew by 20.9% qoq and 75.5% yoy (after adjusting for the one-time items) to Rs48.5 crore, ahead of our expectations of around Rs45.5 crore.
• In terms of operational highlights, the order backlog continued to show a growth of 7.7% qoq to Rs784.5 crore which was largely contributed by a 13% sequential growth in the order backlog in the product business. The company added 150 employees (net of employee addition from acquisitions) in Q3, taking the total strength to around 6,500 employees. The revenues from the top ten clients (excluding ICICI Bank) declined sharply by 20.1% on a sequential basis.
• The company has maintained its revenue guidance at Rs1,150-1,250 crore and the earnings guidance at Rs165-175 crore. In terms of outlook, the company is not witnessing any change in the demand environment and has limited exposure to the US geography (around 30-32% billing in US Dollars) and banking sector. It exposure to the US banking sector is around 20% (largely due to the acquisition of J&B Software) that is largely related to cheque and payment processing, and would not be affected by the current uncertainties.
• At the current market price the stock trades at 13.7x FY2008 and 10.9x FY2009 earnings estimates. The stock has outperformed the tech index and the other tech stocks in the last quarter and we believe that it would continue to do so. That's because of the company's limited billing in US Dollars and exposure to the US banking sector. We maintain our Buy call on the stock with the price target of Rs180 (14x FY2009E earnings).

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs5,420
Current market price: Rs5,050

Revenue growth of 34% in line with expectations

Result highlights

• For Q3FY2008, Aban Offshore Ltd (AOL) has reported a growth of 34% quarter on quarter (qoq) and of 2.3% year on year (yoy) in its stand-alone revenues to Rs169.1 crore. On an annual basis, the growth is largely driven by the higher day rates for its floating production units Tahara and Aban VI. Moreover, the incremental revenues from Aban II have also aided the overall growth in revenues.
• The operating profit margin has declined by 80 basis points yoy to 54% largely due to the jump in the rental charges as a percentage of the sales (7.4% of sales as compared with 2.2% in Q3FY2007 and 6.1% in Q2FY2008). This was partially mitigated by the savings in the consumables and insurance cost. The operating profit grew by 8.7% qoq and 32.2% yoy to Rs84 crore.
• The other income jumped by 342.8% to Rs24.8 crore, enabling the company to report a 129.8% increase yoy in its stand-alone earnings to Rs47.8 crore. Sequentially, the earnings grew marginally by 1.1% largely due to a higher other income and better margins.
• It should be noted that the stand-alone results do not provide the complete picture as the valuations are based on the consolidated earnings estimate of FY2010.
• In terms of key events, the company extended the existing contract for Aban VI for three years (with an option to further extend for three more years) with Oriental Oil, Dubai. The contract is estimated to generate $95 million (amounting to a day rate of $88,500, which is much higher than $39,000 earlier) over the firm contract period of three years. Through its Singapore subsidiary, the company has entered into a contract with Chevron Offshore (Thailand) to deploy jack-up drilling rig, Deep Driller 2, for an estimated duration between five and seven months for drilling operations offshore Thailand. This contract will commence this month at a day rate of around $186,650. Apart from this, AOL (through a subsidiary company, Aban Pearl Pte) completed the purchase of the semi-submersible Rig "Bulford Dolphin" (being renamed "Aban Pearl") on November 21, 2007. All the three vessels would add to the company's overall growth in the fourth quarter ended March 2007.
• At the current market price the stock trades at 12.9x FY2009 and 10x FY2010 estimated earnings. In addition to the attractive valuations and favourable macro environment, the impending listing of its Singapore subsidiary continues to be an important trigger for the stock going ahead. We maintain the Buy call on the stock with a price target of Rs5,420 (10x FY2010E consolidated earnings discounted backwards by one year).

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.

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs240

Asset buyout lined up

Key points

• Ahmednagar Forgings Ltd (AFL) is making a preferential allotment of 17 lakh shares and 38 lakh warrants to its promoters at a price of Rs240 to raise Rs132 crore.
• The management expects to use the raised fund to buy assets such as forging lines. Some of the assets have already been identified and an announcement in this respect is expected in the next two-three months.
• This preferential allotment will lead to an equity dilution of 16%. The group has a history of frequent and large equity dilutions for acquisitions and expansions. However, the current dilution is aimed at enabling AFL acquire capacities at cheaper valuations and reach its planned capacity of two-three lakh tonne with no major future dilutions.
• The company continues to have a strong order book. The expanded capacity of 165,000 tonne has become operational from December 2007 onwards.
• We have not incorporated the revenue and profit additions expected due to this dilution in our estimates. The acquisition would be positively accretive to the earnings. Consequently, we maintain our positive outlook on the company considering its strong order book position, capacity expansion plans and margin improvement due to a better product mix.
• At the current market price of Rs240, the stock trades at attractive valuations of 8.7x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.5x. We maintain our Buy recommendation on the stock with a price target of Rs300.

Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs166
Current market price: Rs118

Price target revised to Rs166

Result highlights

• Allahabad Bank has reported a profit after tax (PAT) of Rs365.1 crore for Q3FY2008. The PAT has grown by a strong 27.6% year on year (yoy) and by 52.2% quarter on quarter (qoq). Notably, the strong bottom line growth was primarily driven by a jump in the non-interest income. The net interest income (NII) growth was disappointing.
• The reported NII was down 8.1% to Rs445.3 crore from Rs484.7 crore for Q3FY2007. Meanwhile, the adjusted NII (adjusted for a one-time income of Rs62 crore for the year ago period) was up by a moderate 5.8% yoy but largely flat qoq.
• The net interest margin (NIM) of the bank witnessed a decline of 65 basis points yoy to 2.8% due to a significant increase in the cost of deposits (up 82 basis points yoy) that outweighed the moderate improvement (of 17 basis points yoy) in the average yield on funds.
• The reported non-interest income spiked up significantly (up 281% yoy and 190% qoq) to Rs372.9 crore on the back of a whopping 605% growth yoy in the treasury income coupled with a healthy growth of 36.8% yoy in the fee income. The higher treasury gains were utilised by the bank to shore up its provisions.
• The gross advances on a year-on-year basis grew by 18.3% to Rs45,791 crore while the deposits increased by 20.4% yoy to Rs68,044 crore. On the advances front, small and medium enterprise (SME) and agricultural segments drove the growth, while the retail advance growth continued to lag.
• The capital adequacy ratio (CAR) of the bank stood at 12.8% as on December 31, 2007. The same was in line with a CAR of 12.8% as on December 31, 2006 but marginally down from 13% as on September 30, 2007.
• The asset quality continued to remain healthy with the gross non-performing assets (GNPA) declining by 20.2% yoy to Rs944.3 crore owing to increased focus on improving recoveries from the non-performing assets (NPAs).
• At the current market price of Rs118, the stock is trading at 4.5x its FY2009E earnings, 2.9x FY2009E pre-provisioning profit (PPP) and 1.0x FY2009E book value. We believe that at the current valuations the stock is attractive considering the healthy return on equity and quality of its assets. We maintain our Buy rating on the stock with a revised price target of Rs166 (1.5x the average estimated adjusted book value for FY2009 and FY2010).

Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs66
Current market price: Rs54

Price target revised to Rs66

Result highlights

• Apollo Tyres' Q3FY2008 results have been ahead of our expectations on account of a higher than expected top line and strong margins.
• The revenues for the quarter have grown by 13.6% to Rs974.1 crore, driven mainly by a strong volume growth. Despite a slower offtake from original equipment manufacturers (OEMs), the replacement demand remained strong during the quarter with its contribution to overall sales rising to 70% against 65% same quarter last year.
• In spite of a rise in the raw material prices, the operating profit margin (OPM) has further improved by about 260 basis points on a year-on-year (y-o-y) basis and by 60 basis points sequentially to 13.4%. The margin improvement was led by greater operating efficiencies and a better product mix.
• The consolidated results were even better as the net sales have grown by 14% to Rs1,240 crore whereas the consolidated profits have grown by a stupendous 165% to Rs82 crore on the back of a strong improvement in its subsidiary Dunlop South Africa's performance. Dunlop's EBIDTA margins for the quarter reached 17%.
• The company has outlined its capital expenditure (capex) plans and is also planning to invest Rs220 crore towards setting up a greenfield radial facility in the Oragadam Industrial Park, near Chennai. This investment is towards the first phase of the project, which is likely to be completed in the next 18 months. Another Rs100 crore would be spent to set up a 10-tonne-a-day off-the-road (OTR) tyre facility at the company's plant at Limda. The company would also spend about Euro 200 million towards setting up a plant at Hungary to cater to the demand from European and North American markets.
• On back of consistent performance by the company, and sharp improvement in Dunlop's performance, we are raising our consolidated earnings estimates by 16% to Rs6.1. At the current market price of Rs54, the stock is discounting its consolidated FY2009E earnings by 9x. We maintain our Buy recommendation on the stock with a revised price target of Rs66.

Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs43
Current market price: Rs37

Profits hit by high costs

Result highlights

• The Q3FY2008 results of Ashok Leyland Ltd (ALL) were lower than our expectations, mainly on the profitability front.
• The net sales for the quarter grew by 1.3% year on year (yoy) to Rs1,800.1 crore. The quarterly net sales were ahead of our estimates and were driven by a 7.1% growth in the average realisation. The realisation increased due to the change in the product mix in favour of fully-built vehicles. The sales volume for the quarter however declined by 5.4% yoy.
• Adjusting for the foreign exchange (forex) gain of Rs3.29 crore, the operating profit declined by 12% yoy to Rs162.2 crore. The operating profit margin (OPM) contracted by 140 basis points to 9% in the quarter as compared with 10.4% in the corresponding quarter of the last year. The profitability was affected due to the increase in the employee costs and the other expenditure.
• Excluding Rs33 crore booked as profit on the sale of 1% stake in Indus Ind Bank, the adjusted profit after tax (PAT) declined by 21.4% to Rs85.2 crore in Q3FY2008.
• The commercial vehicle (CV) segment is expected to recover only in FY2009. The company has revised its sales guidance for FY2008 to 86,000 from the earlier 90,000 vehicles. The sales in Q4FY2008 are expected to be driven by both the domestic sales and the export orders on hand. We maintain our sales volume estimates for FY2008 at 83,200 vehicles.
• ALL has huge capital expenditure (capex) plan over the next two-year period. It has planned capex to expand its existing capacity and to set up a new manufacturing facility at Uttarkhand. Further investment will be required for its light commercial vehicle (LCV) joint venture (JV) plan with Nissan. All these are expected to exert pressure on its financials and restrict its profit growth.
• At the current market price of Rs37, the stock quotes at 10.3x its FY2009E earnings and 6.8x its FY2009E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Hold call on ALL with a price target of Rs43.

Axis Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,302
Current market price: Rs1,087

Price target revised to Rs1,302

Result highlights

• The Q3FY2008 result reported by Axis Bank is above our and street expectations. The bank reported a profit after tax (PAT) of Rs306.8 crore reflecting a year-on-year (y-o-y) growth of 66.2% and a quarter-on-quarter(q-o-q) growth of 34.7%. The jump in PAT was driven by continued strong growth in the interest income and the non-interest income.
• The net interest income (NII) was up 91.2% year on year (yoy) to Rs747.3 crore. The strong growth in NII was primarily driven by expansion in net interest margin (NIM) and continued robust growth in advances.
• The adjusted NIM expanded by 111 basis points yoy and 63 basis points quarter on quarter (qoq) mainly due to lower cost of funds, as the bank repaid high-cost deposits raised earlier. Besides, our calculation suggests that the expansion of approximately three basis points on a q-o-q basis was due to income earned from the balance float from the capital raised during the previous quarter.
• The asset growth remained strong at 39.4% yoy driven by continued robust credit growth (50.4% yoy) and deposit growth (34.6% yoy). The share of term deposits to total deposits declined to 54.7% during the quarter from 67.8% in the previous quarter. This helped the bank reduce the cost of deposits.
• The non-interest income spiked 74.4% yoy to Rs487.9 crore owing to strong growth in fee income (up 80.9% yoy) and treasury gains (up 65.2% yoy).
• The operating profit was up 101.5% yoy to Rs672.3 crore, while the core operating profit was up by a robust 96.2% yoy at Rs532.8 crore. Provisions and contingencies witnessed a significant increase and reached Rs200.1 crore (up 162.3% yoy). Despite rapid growth in advances in recent years, the credit quality has improved on both in terms of percentage (% GNPA, % NNPA) and absolute numbers(GNPA, NNPA).
• Meanwhile, the capital adequacy ratio (CAR) at Q3FY2008 end was at a comfortable 16.9% with Tier I CAR at 12.6%, owing to the capital raised (Rs4,534 crore) in the previous quarter through a combination of global depositary receipt (GDR), qualified institutional placement (QIP) and preferential allotment.

Bajaj Auto
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,635
Current market price: Rs2,269

Price target revised to Rs2,635

Result highlights

• Bajaj Auto Ltd's (BAL) Q3FY2008 results were below our expectations, mainly on the profitability front.
• The company reported a decline of 2.6% in its net sales during the quarter to Rs2,501.7 crore. The overall volumes declined by 3.4%, whereas the average realisation remained flat on a year-on-year (y-o-y) basis and declined by 8.3% on a quarter-on-quarter (q-o-q) basis. This was mainly due to a significant discount offered on Platina.
• The operating profit margin (OPM) for the quarter at 14.5% improved marginally by 30 basis points year on year (yoy), but was down 100 basis points quarter on quarter (qoq). The margin declined in line with the fall in realisation. Consequently, the operating profit for the quarter was flat at Rs363.7 crore.
• Lower taxes, and stable interest and depreciation costs aided a 6% growth in the company's net profit to Rs378.56 crore. Considering the decline in the OPM in Q3FY2008, we downgrade our earnings estimates for FY2008 by 9% and for FY2009 by 12% to Rs114 and Rs127 respectively.
• At the current market price of Rs2,269, the stock trades at 18.5x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.6x. We continue to value BAL on the sum-of-the-parts basis and maintain a Hold call with a revised price target of Rs2,635.

Balaji Telefilms
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs427
Current market price: Rs262

Raring to go

Result highlights

• Balaji Telefilms Ltd's (BTL) operating performance for Q3FY2008 was below our expectations. The programming hours in the commissioned category increased to 233.5 hours during the quarter from 190.5 hours in Q2 with the launch of three new shows during the quarter. However, much lower realisations on these shows led to a more-than-expected decline in the blended realisations in the commissioned category to 31.7 lakh per hour.
• The revenues for the quarter increased by 2.6% quarter on quarter (qoq) to Rs80 crore. The operating profit margin (OPM) declined to 33.2% in Q3FY2008 against a hefty 42.4% in Q2FY2008 due to lower blended realistions during the quarter. However, we believe this is a normal feature of the television content business wherein realisations pick up as the show stabilises over a period of time. The net profit for the quarter thereby declined by 28.4% qoq and 13.6% year on year (yoy) to Rs18.8 crore.
• BTL has pounced on the opportunity provided by the increasing content demand in the Hindi general entertainment channel (GEC) space due to new channel launches. It has launched three new shows during the quarter—Kahe Naa Kahe and Kya Dil Main Hai on 9x and Kuchh Is Tarah on Sony. In the coming quarters, the company is looking at diversifying into reality shows. The management has hinted at launching two more shows (one of which will be on NDTV Imagine), a reality show and a soap in the coming quarter.
• The launch of its Tamil and Telugu channels through its joint venture (JV) with Star has been delayed due to procedural issues, and we expect these channels to be launched only by Q1FY2009 end. We believe that the JV presents immense potential for value creation for BTL and consequently for its shareholders.
• We remain positive on the television content and film businesses of BTL and its foray into regional entertainment that would enable it to grow from a TV content provider to a broadcaster. We maintain our sum-of-the-parts (S-O-T-P) price target at Rs427.

Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs391

Q3FY2008 results: First-cut analysis

Result highlights

• For Q3FY2008, Bank of Baroda (BoB) reported a profit after tax (PAT) of Rs501 crore, beating our estimate of Rs402.6 crore and the consensus estimate of Rs378.3 crore. The PAT indicates a growth of 52.3% year on year (yoy) and 53.1% quarter on quarter (qoq) primarily driven by a strong growth in the treasury income.
• The net interest income growth was muted at 3.8% yoy to Rs997.5 crore largely due to the continued pressure on the net interest margin (NIM) coupled with a relatively slower credit growth of 23% compared to 27.1% during H1FY2008.
• During the quarter, the deposits grew by 22% yoy to Rs136,900 crore, while the advances rose by 23% yoy to Rs 95,518 crore. With the advances growth outpacing the deposit growth, the CD ratio improved to 69.8% for the quarter from 68.7% for the previous quarter and 69.2% for the year ago period.
• The non-interest income spiked up 85.3% yoy to Rs618 crore on the back of strong treasury gains, thereby supporting the bottom line. The treasury gains for the quarter came in around Rs194 crore, nearly five times the gain in the year ago period.
• The operating expenses growth was contained at 7.1% yoy to Rs683 crore, while on quarter-on-quarter (q-o-q) basis it declined by 14.4%. This was largely due to a 8.5% year-on-year (y-o-y) decline in the staff expenses, offset by a 40% y-o-y jump in the other operating expenses.
• The asset quality remained healthy with the gross non-performing assets (GNPA) declining by to Rs2,040.3 crore, while the net non-performing assets (NNPA) were largely flat at Rs517.2 crore. However, the provisioning coverage declined to 75% for the quarter from 77% for the previous quarter and 78% for the year ago period.
• The bank remains well capitalised with a capital adequacy ratio of 13.5% at the end of December 2007 compared with 12.9% at the end of September 2007 and 12.2% at the end of December 2006.
• In short term, the proposed initial public offering (IPO) of the UTI Mutual Fund should act as a trigger for BoB, as the latter holds 25% stake in the fund. Recent media reports suggest a valuation of about Rs6,500 crore for the UTI Mutual Fund compared with our valuation of Rs4,000 crore.
• At the current market price of Rs391 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.3x its pre-provision profit (PPP) and 1.3x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs500.

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs432
Current market price: Rs391

Q3FY2008 results: First-cut analysis

Result highlights

• Bank of India's (BoI) profit after tax (PAT) during Q3FY2008 grew by a whooping 101% year on year (yoy) and 20.4% quarter on quarter (qoq) to Rs511.9 crore. The PAT growth was significantly above our and consensus estimates. The strong PAT growth was on the back of robust rise in the interest income, spike in the non-interest income led by treasury gains, and contained operating expenses.
• The net interest income (NII) of Rs1,079.5 crore during the quarter indicates a robust growth of 25.7% yoy mainly due to continued strong growth in advances coupled with an improvement in the net interest margin (NIM).
• The reported NIM of 3.14% for the quarter reflects an improvement of 10 basis points yoy from 3.04% for the year-ago period. The NIM improvement was mainly due to the improvement in yields on advances (115 basis points) and the investments (105 basis points), which outweighed the 83-basis-points year-on-year (y-o-y) increase in the cost of funds.
• During the quarter, the advances grew by a strong 30% yoy to Rs103,657 crore indicating an uptick in the credit off take compared with H1FY2008. The growth in advances was led by a strong growth in foreign advances (up 32.7%). Meanwhile the deposits grew by 27.4% yoy to Rs135,835 crore on the back of a 36% y-o-y growth in the term deposits and a 32.5% y-o-y growth in the current account deposits. However, due to the higher growth in the term deposits, the current account and saving account (CASA) ratio declined to 37% for the quarter from 40.7% a year ago.
• The non-interest income witnessed a whooping growth of 72% yoy to Rs554.1 crore. The growth in the non-interest income was primarily due to the surge in treasury gains, which were up 109% yoy. Meanwhile the fee income grew by a strong 39.5% yoy.
• Notably, the operating expenses were up by only 5.5% yoy, whereas it declined by ~2% qoq to Rs 662.2 crore. The lower operating expense growth can be traced to the decline in other operating expenses (down 13% yoy), whereas the staff expenses were up 17% yoy. As a result of lower operating expenses and strong income growth, the cost-income ratio for the quarter improved significantly to 40.5% compared with 50.6% for the year-ago period.
• Asset quality continued to improve yoy with a 10% y-o-y decline in the gross non-performing assets to Rs1,969.3 crore and a 29.5% decline in the net non-performing assets to Rs633.5 crore. Consequently, the provision coverage for the quarter improved significantly to 78% from 66% for the year-ago period.
• Capital adequacy remains healthy with the capital adequacy ratio (CAR) at 12.5% at the end of December 2007 compared with 11.7% at the end of December 2006.
• At the current market price of Rs391, BoI trades at 10.1x its 2009E earnings per share (EPS), 5x its 2009E pre-provisioning profit (PPP) and 2x its 2009E book value. In view of the higher-than-expected Q3FY2008 numbers, we intend to revisit our earnings model.

BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs330
Current market price: Rs280

Price target revised to Rs330

Result highlights

• BASF India (BASF) has registered good results for Q3FY2008, which is in line with our expectations. The net sales grew by 22% year on year (yoy) to Rs222.7 crore, mainly driven by a strong 27% growth in the sales of agricultural products and a 27.9% growth in the sales of plastics.
• The operating profit margin (OPM) expanded by 60 basis points yoy driven by better profitability of the agricultural product division. Consequently, the operating profit grew by 29.9% to Rs20.7 crore.
• Inspite increased interest and depreciation charges, the company's net profit increased by 24.6% to Rs11 crore.
• We expect the consumption boom in the company's user industries (white goods, home furnishings, paper, construction and automobiles) to continue and hence we remain optimistic on the company's growth prospects. BASF has already expanded its polymer dispersion capacity at Mangalore from 20,000 tonne per annum (tpa) to 65,000tpa in March 2007 to cater to the growing demand.
• We believe the company is trading at an attractive valuation of 8.9x FY2009E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.0x. We maintain our Buy recommendation on the stock with a revised price target of Rs330 valued at 10.5x its FY2009E earnings.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,850
Current market price: Rs1,701

Price target revised to Rs1,850

Result highlights

• Bharat Electronics Ltd (BEL) has reported another quarter of disappointing results. Its revenues declined by 23.3% to Rs662.2 crore in Q3FY2008 as compared with Rs863.8 crore in Q3FY2007. The management has indicated that the delay in obtaining the approval for some of its products and the bottlenecks in the supply chain have been the key reasons for the lower than expected revenues in the third quarter of FY2008.
• The operating profit margin (OPM) declined by 370 basis points to 19.2% largely due to an increase in the staff cost as a percentage of the sales (which jumped to 24.2% as compared with 12.8% in Q3FY2007). The staff cost jumped by 44.3% on the back of Rs12 crore of provisions made (pertaining to FY2007 as per the guidance given by the Sixth Pay Commission).
• The net profit declined by 23.8% to Rs113 crore. The company has disappointed for three quarters in a row.
• For the first nine months, the revenues and earnings of BEL declined by 18.6% and 26.4% respectively. The OPM plummeted by 540 basis points to 15.5% during the period.
• To factor in the weak performance in the first nine months, the earnings estimates of BEL have been revised downwards by 20.8% in FY2008 and 6.5% for FY2009. In addition to a possible negative growth in the earnings in FY2008, for the first time in ten years the management might not be able to achieve the revenue targets set as per the memorandum of understanding (MoU) signed with the defence ministry. At the current market price the stock trades at 20.9x FY2008 and 15.2x FY2009 earnings estimates. We downgrade our recommendation to Hold with a revised price target of Rs1,850.

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,845
Current market price: Rs2,092

Price target revised to Rs2,845

Result highlights

• For Q3FY2008, Bharat Heavy Electricals Ltd (BHEL) reported a 14.4% growth in its net sales to Rs4,964.2 crore, whereas the net profit reported a 15.6% rise to Rs771.9 crore. The results were below are expectations.
• The operating profit margin (OPM) for the quarter declined by 130 basis points year on year (yoy) to 20.1% mainly on account of the higher staff cost. The staff cost as percentage of sales increased by 330 basis points due to the provisions made by the company in anticipation of the wage hike to be recommended by the sixth Pay Commission. The company also made provision for productivity-linked incentives during the quarter.
• The order book continued to be robust with a 91% year-on-year (y-o-y) increase in the order inflow. Orders worth Rs10,929 crore were booked during the quarter taking the unexecuted order book to Rs78,000 crore, which represented a growth of 67% yoy and 7.4% quarter on quarter (qoq).
• BHEL has recently increased its capacity to 10,000 mega watt (MW) per annum. The company is now looking to increase it further to 15,000MW by 2009 and 20,000MW by 2012.
• BHEL has won its first order for a 600MW unit from the Tamil Nadu Electricity Board (TNEB) for Rs2,475 crore. The company had earlier denied bidding for 600MW units, as the company's product was not approved by the Central Electricity Authority (CEA).
• BHEL has lately won an order from Reliance Industries Ltd (RIL) for setting up a 345MW captive power plant in Maharashtra on EPC basis. The order is valued at Rs866 crore.

Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,100
Current market price: Rs858

Results ahead of expectations

Result highlights

• Bharti Airtel (Bharti) reported a revenue growth of 9.9% quarter on quarter (qoq) and 41.7% year on year (yoy) to Rs6,963.4 crore during Q3FY2008. The sequential revenue growth was driven by a strong growth of 10.9% in the mobile business, whereas the non-mobile revenues grew by 7.1% qoq to Rs2,194 crore.
• The operating profit margin (OPM) declined by 20 basis points to 42.6% during the quarter. In terms of segments, the margins of mobile and non-mobile businesses declined by 20 basis points and 10 basis points respectively. The operating profit grew by 9.4% qoq and 47.8% yoy to Rs2,963.4 crore.
• The consolidated earnings grew by 6.7% qoq and 41.7% yoy to Rs1,721.4 crore, which is ahead of our and street expectations. The earnings growth was aided by the foreign exchange (forex) fluctuation gains of Rs2.4 crore (compared with a loss of Rs35.9 crore in Q2FY2008). On the other hand, the jump in the effective tax rate to 8.2% (up from 6.5% in Q2) limited the sequential growth in earnings.
• In terms of operational metrics for the mobile business, Bharti reported a record net addition of 6.3 million subscribers during the quarter, taking its subscriber base to 55.2 million as on December 31, 2007. The average revenue per unit (ARPU) declined by 2.2% qoq to Rs358 and the total minutes of usage increased at a lower-than-expected rate of 14.7% qoq to 73.8 billion minutes. Consequently, the average revenue per minute declined by 3.3% to Rs0.76 (down from Rs0.79 in Q2FY2008) and the spread per minute declined by 3.7% to Rs0.31 (compared with Rs0.32 in Q2FY2008). The company's overall market share stood at 23.6%, a 20-basis-points improvement over 23.4% reported in Q2FY2008.
• In terms of key highlights, the company has joined hands with Vodafone and Idea to pool in their passive infrastructure in 16 circles under a new entity Indus Towers. Bharti Infratel Ltd (BIL), subsidiary of Bharti, would hold a 40% stake in Indus Towers. This is a positive development in terms of limiting the incremental capital expenditure of the joint venture partners. Apart from this, Bharti Infratel (with 22,000 towers in circles other than 16 covered by Indus Towers) has raised $1 billion through placement to the leading foreign institutions. BIL has been valued in the range of $10-12.5 billion depending on the actual performance in FY2009.
• The company is entitled for additional spectrum in 10 circles under the new Telecom Regulatory Authority of India (TRAI) norms and has already received formal intimation for five circles. It expects to launch DTH and IPTV services in the first half of FY2009.
• To factor in the better-than-expected performance in Q3, we are upgrading our earning estimates by 4.1% and 2.7% for FY2008 and FY2009 respectively. At the current market price the stock trades at 24.3x FY2008 and 19.6x FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs1,100.

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs315
Current market price: Rs274

Q3FY2008 results: First-cut analysis

Result highlights

• Canara Bank during Q3FY2008 reported a profit after tax (PAT) of Rs458.8 crore beating our estimate of Rs410.4 crore. The Q3FY2008 PAT indicates a growth of 26.4% year on year (yoy) and 14.2% quarter on quarter (qoq), primarily driven by a jump in non-interest income coupled with lower provisions.
• The reported net interest income (NII) for the quarter stood at Rs934.4, down 1.3% yoy from the NII of Rs961.9 crore (adjusted for tax refund and amortisation) for the year-ago period. Excluding the adjustments, the NII would have declined by 10% yoy.
• Meanwhile, the operating expenses grew by 13.5% yoy to Rs723 crore, mainly driven by a higher other operating expenses. Moreover, the other expenses are likely to remain high in the next quarter as well, owing to the re-branding exercise launched by the bank recently.
• The provisions at end of the quarter stood at Rs199 crore, down 24.3% yoy while up 11.3% qoq. The lower provisions yoy helped support a higher PAT growth.
• Asset quality remained robust during the quarter with gross non-performing assets (GNPA) witnessing a 18.6% year-on-year decline to Rs1,524.8 crore. Meanwhile, the net non-performing assets were largely flat at Rs873.2 crore.
• Capital adequacy ratio (CAR) remained healthy at 13.7% at the end of December 2007 compared with 12.7% at the end of December 2006 and 13.9% as at the end of September 2007.
• At the current market price of Rs274, the stock is quoting at 6.6x FY2009E earnings per share (EPS), 3.4x its 2009E pre-provisioning profit (PPP) and 0.9x FY2009E book value. We are revisiting our earnings model following the higher-than-expected numbers released by the bank.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs395

Steady performance continues

Result highlights

• Net sales of Elder Pharmaceuticals (Elder) grew by a strong 19.9% to Rs138.8 crore in Q3FY2008, thereby maintaining the growth momentum seen in the previous quarters. The sales growth was marginally ahead of our estimate of Rs136 crore and was driven by the continued momentum in the company's star brands as well as the new products and line extensions launched by the company over the past one year.
• Elder reported an expansion of 370 basis points in its operating profit margin (OPM), which stood at 21.8% during the quarter. The expansion in the OPM was led by a 230-basis-point reduction in the raw material cost, a 100-basis-point drop in the other expenses and a 50-basis-point decline in the staff cost incurred by the company.
• Consequently, the company's operating profit rose by 44.7% to Rs30.2 crore in Q3FY2008.
• Elder's net profit rose by 30.7% to Rs19.0 crore in Q3FY2008. The growth in the profit was ahead of our estimate of Rs17.5 crore and was robust despite an increase of 63.6% in the interest cost and a rise of 33.4% in the depreciation charge during the quarter.
• Elder is exploring new contract research and manufacturing service (CRAMS) opportunities through its 29 alliance partners. Having executed one such project with its Italian partner, Angelini, the company hopes to get three to four more such manufacturing contracts from Angelini, which will enable it to scale up its CRAMS business.
• At the current market price of Rs395, the stock is quoting at 9.8x FY2008 estimated earnings and 8.7x FY2009 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.

Genus Power Infrastructures
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs803
Current market price: Rs680

Price target revised to Rs803

Result highlights

• For Q3FY2008, the net sales of Genus Power Infrastructures Ltd (GPIL) grew by 25.2% year on year (yoy) to Rs105.3 crore, which was marginally below our estimates.
• The operating profit for the quarter grew by 30.8% to Rs16.5 crore. The operating profit margin (OPM) expanded by 70 basis points yoy to 15.7%, which was in line with our expectation. The OPM improved on account of operating leverage.
• The interest cost increased by 10.7% yoy to Rs4.7 crore while, the depreciation charge declined by 14.7% yoy to Rs1.2 crore.
• A larger contribution from the Haridwar plant (which falls in the tax-free zone) resulted in the lower tax rate of 10.9% for the quarter as compared with 14.7% in the same quarter last year. Consequently, the net profit grew by 59.2% yoy to Rs9.97 crore as against our estimates of Rs10.8 crore.
• The current order book of the company stands at Rs400 crore, which is 1.1x its FY2007 sales. The company is also the lowest bidder for orders close to Rs800 crore.
• For the nine months of FY2008, GPIL reported a spectacular revenue growth of 35.9% yoy to Rs289.6 crore, whereas the profits grew by 67.5% yoy to Rs26.1 crore.

HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs354
Current market price: Rs274

Price target revised to Rs354

Result highlights

• HCL Technologies (HCLT) has reported a revenue growth of 6.3% quarter on quarter (qoq) and 24% year on year (yoy) to Rs1,816.6 crore for the second quarter ended December 2007. In dollar terms, it has reported a sequential growth of 7.4% in its consolidated revenues to $461 million. The sequential growth in the revenues was driven by a 6.6% growth in the volumes, a 1.6% improvement in the blended realisations and a 1.3% gain from hedging. On the flip side, the revenue growth was adversely impacted by 1.1% due to lesser number of working days in Q2, by 0.8% due to the offshore shift and by 0.2% due to lower effort based pricing revenues during the quarter.
• The operating profit margin (OPM) improved by 10 basis points to 21.4% on a sequential basis due to the cumulative positive impact of higher realisations (123 basis points), hedging gains (100 basis points) and efficiency gains (69 basis points). This positive affect was however partially offset by higher overheads cost (89 basis points due to global customer meet), rupee appreciation (107 basis points) and lower working days (83 basis points).
• The healthy growth of 34.9% in the other income and lower effective tax rate resulted in an earnings growth of 7.9% qoq to Rs332.9 crore, which is ahead of the street expectations. The company realised treasury gains of $12.3 million in Q2 (as compared with $9 million in Q1). It has around $20.3 million of unrealised treasury gains on its books. In terms of accounting treatment for foreign exchange (forex) cover, the company realised net gains of $9 million in Q2, of which
  $7 million was accounted for in the revenues. It has around $63 million of unrealised forex gains on its books as on December 2007.
• In terms of operational highlights, the company has signed two large deals (multi-million, multi-year) during the quarter, including a $300-million deal (the fourth deal of over $200 million in the past 24 months). The company added 2,312 employees in Q2 (5,937 in H1) and the attrition rate in the software services business declined to 15.5% (declining for the fourth consecutive quarter). It reported robust sequential growth in revenues from US geography (7.9%) and financial services vertical (14.1%) during the quarter.
• HCLT sounded more confident about the demand environment as compared with some of its peers. The management, as per its assessment, believes that the weak economic environment could put pressure on the discretionary Information technology (IT) spending in USA. But the focus is more on investing in IT solutions to improve the overall organisational efficiencies and cope up with the challenging environment (rather than cut cost as seen post the dotcom bubble bust in 2001). In fact, the management believes that certain pockets would witness an increase in discretionary IT spending due to tough economic conditions such as enterprise solutions (ERP and CRM). This is clearly reflected in the record license sales by SAP during the last quarter.
• To factor in the change in accounting for forward covers, we have fine-tuned our estimates. At the current market price the stock trades at 14.8x FY2008 and 11.6x FY2009 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs354 (15x FY2009E earnings).

Housing Development Finance Corporation
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,362
Current market price: Rs2,820

Q3FY2008 results: First-cut analysis

Result highlights

• For Q3FY2008 HDFC has reported a profit after tax (PAT) of Rs648.9 crore, which is marginally above our estimate of Rs626.2 crore. The Q3FY2008 PAT grew by a strong 82.5% year on year (yoy) driven by a strong year-on-year growth in the net interest income, other operating income and a gain of Rs120.9 crore from the sale of the 7.2% stake in HDFC Standard Life Insurance.
• The net interest income for the quarter came in at Rs665.6 crore, up 62% yoy and 8% quarter on quarter (qoq), buoyed by a strong growth in the disbursements. The interest income registered a growth of 46% yoy against which the interest expense was up 39% yoy.
• Our calculation indicates that the net interest margin for the quarter has improved by ten basis points qoq to 3.6% due to a higher prime lending rate and a lower cost of funds.
• The other operating income witnessed a whopping growth of 134% yoy to Rs65.4 crore owing to a jump in the gain from deployment of surplus cash in mutual funds—at Rs44.4 crore against Rs6 crore in Q3FY2007.
• On a year-to-date (YTD) basis, the loan approvals reached Rs29,376 crore, up 30% from Rs22,666 crore for the prior year period. Meanwhile, the YTD loan disbursements grew by 28% to Rs22,285 crore from Rs17,465 crore in the same period of the last year.
• Though the provisions as a percentage of the loan book went up to 1.2% as in December 2007 from 0.8% as in December 2006, the same were well under control.
• The asset quality improved as the gross non-performing asset percentage (GNPA as a percentage of the loan portfolio) declined by 14 basis points yoy to 1.12%. However, on absolute terms, the GNPA increased to Rs710.6 crore from Rs646.8 crore last year.
• HDFC's capital adequacy ratio (CAR) as at the end of December 2007 stood at 17.6% compared with 13.7% in the previous year, whereas its tier-I capital ratio stood at 15.3%. Both, the CAR and the tier-I capital ratio were well above the minimum requirement of 12% and 6% respectively.
• The strong quarterly results of HDFC reinforce our bullish stance on the company. In addition, the expected initial public offering of HDFC Standard Life in 2009, any increase in the cap on foreign holdings in insurance companies and value unlocking from HDFC's general insurance business through a stake sale to ERGO (Germany) should act as triggers in future.
• At the current market price of Rs2,820, the stock is trading at 20.7x its 2009E earnings and 3.7x its 2009E book value, and 17x its 2010E earnings and 3.2x its 2010E book value. Based on the various positives and the attractive valuations, we reiterate our Buy rating on the stock with a price target of Rs3,362.

HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,694
Current market price: Rs1,518

Q3FY2008 results: First-cut analysis

Result highlights

• HDFC Bank reported a blockbuster set of numbers for Q3FY2008 beating our estimates. The profit after tax (PAT) for the quarter came in at Rs429.4 crore indicating a whooping growth of 45.2% year on year (yoy) and 16.5% quarter on quarter (qoq). The strong PAT growth was primarily due to strong growth in the net interest income and the non-interest income.
• Net interest income (NII) for the quarter witnessed a strong growth of 65.6% yoy to Rs 1,437.6 crore. The strong growth was driven by continued robust growth in advances coupled with net interest maring (NIM) expansion.
• Our calculation indicates a NIM of 4.6% for Q3FY2008, reflecting an improvement of 55 basis points yoy and 25 basis points qoq. The reported core NIM stood at 4.3% compared with a 3.9% core NIM (adjusted for amortisation) for the year-ago period. The improvement in the NIM was mainly due to better yields on advances and investments and contained cost of funds.
• Net advances during the quarter registered a growth of 48.7% yoy to Rs71,387 crore. The growth in net advances was backed by strong advances growth in retail loans, which grew by a strong 45% yoy. On fund mobilisation front, the deposits were up 48.9% yoy to Rs99,387 crore led by strong growth in term deposits (up 62.3% yoy) and current account deposits (up 46.9% yoy). Owing to higher term-deposit growth relative to current accounts and saving accounts (CASA), the CASA ratio slipped by 4% yoy to 50.9%, but remained healthy compared with its peers.
• Non-interest income spiked up 82% to Rs678.9 crore on the back of strong fee income growth and jump in treasury gains. The fee income for the quarter stood at Rs460 crore and was up 38.8% yoy and 17.4% qoq, while the treasury gains were at Rs131.5 crore compared with a loss of Rs21 crore for the year-ago period.
• The 73.6% year-on-year growth in the operating expenses was well above the ~40% growth seen in H1FY2008. The jump in the operating expenses was mainly due to a 78.3% year-on-year (y-o-y) growth in other operating expenses along with a 65% y-o-y growth in staff expenses.
• Provisions during the quarter reached Rs423 crore, up 105.4% yoy and 46.2% qoq, as the bank provided more to maintain its provision coverage ratio. The provision coverage ratio for the quarter stood at 67.7% compared with 66.7% for the year-ago period.
• Asset quality remained robust with the gross non-performing assets (Rs867 crore) as percentage of net customer assets improved marginally yoy to 1.2%, while the net non-performing assets (Rs279.8 crore) as percentage of net customer assets stood at 0.4%, flat yoy.
• Capital adequacy ratio (CAR) for HDFC Bank at the end of the quarter was 13.8%, up from 12.8% a year ago. Meanwhile the Tier-I CAR came in at 10.5% compared with 8.4% a year ago. The improvement in the capital ratios is due to the capital raised through the American depositary shares issue in July 2007.
• At the current market price of Rs1,518, HDFC Bank trades at 27.5x its FY2009E earnings per share, 10.6x its FY2009E pre-provision profit and 4.1x FY2009E book value. We are reviewing our earnings model to factor in the strong set of numbers reported for Q3FY2008.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,528
Current market price: Rs1,185

All round growth

Result highlights

• ICICI Bank reported a profit after tax (PAT) of Rs1,230 crore for Q3FY2008, an increase of 35% year on year (yoy) and 22.7% quarter on quarter (qoq) on the back of an all round growth. The Q3FY2008 PAT was however marginally below our estimate of Rs1,257 crore.
• During the quarter, the net interest income grew by a strong 32% yoy and 9.7% qoq to Rs1,960 crore primarily driven by an improvement in the net interest margin (NIM) and a strong credit growth.
• The calculated NIM improved by 13 basis points qoq and by six basis points yoy to 2.11%. The NII improved on the back of improved yield on investments, coupled with the cost of funds remaining under control.
• The reported non-interest income (including treasury gains) registered a strong growth of 22.5% yoy on account of a significant growth in the fee income (up 32.7% yoy). Notably, the treasury income declined by 9% yoy to Rs282 crore in Q3FY2008 owing to a provision of Rs150 crore for the mark-to-market provision arising from the credit derivative portfolio.
• Total advances increased by 24.7% to Rs215,517 crore on the back of continued whopping growth in international advances (up 117.6% yoy), while the retail advances growth remained moderate at 12.2%.
• Total deposits reached Rs229,779 crore, up 16.7% yoy, mainly due to a strong 33% growth in the current account and saving account (CASA) balance. A higher CASA balance coupled with a sequential decline in the term deposits, helped improve the CASA ratio by ~2% sequentially and by ~3% yoy to 27.2%.
• Provisioning for the quarter was up 14% yoy in line with the uptick in the non-performing assets (NPA) and the focus on unsecured advances, which offer higher yields.
• The Bank's capital adequacy ratio (CAR) at the end of Q3FY2008 stood at a healthy 15.8% with Tier-1 capital ratio of 12.1% due to the capital raised through the follow-on-public offering in June 2007.
• ICICI bank has received board's approval for the proposed capital raising through stake dilution of upto 15% in ICICI Securities through an initial public offering (IPO) and private placement in three to six months time. ICICI Bank's other subsidiaries also continued to do well gaining market share in their respective spaces.
• At the current market price of Rs1,185, the stock is quoting at 25.6x its FY2009E earnings per share (EPS), 12.5x its pre-provision profit (PPP) and 2.6x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs1,528. ICICI Bank remains one of our top picks in the private sector banking space.

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs330
Current market price: Rs205

Focus on cost savings and expansion

Result highlights

• The current quarter/nine-months ended account of India Cements Ltd (ICL) have been prepared after taking into consideration the transactions of the erstwhile Visaka Cement Industry Ltd (VCIL) and is therefore not comparable with the corresponding figures of the previous periods, which do not include transactions of VCIL.
• The net sales for Q3FY2008 were up 56% year on year (yoy), but down 3% sequentially at Rs737.8 crore. The net sales were lower than our estimate of Rs798 crore.
• The operating profit for the quarter went up 84% yoy, but was down 20% sequentially at Rs245 crore. The operating profit was down sequentially as the volumes fell by 5% quarter on quarter (qoq) and as total expenditure rose 9% qoq. The operating profit margin (OPM) for the quarter was at 33.2%.
• The reported profit after tax (PAT) was up 60% yoy, but was down 43% sequentially at Rs127 crore. The PAT was below our expectation of Rs182 crore, mainly on account of higher provision for tax at 49% during the quarter compared with 14% tax rate during Q2FY2008.
• The transportation and handling cost per tonne jumped up 26% qoq at Rs520/tonne. This was mainly because more cement was sold in areas outside Tamil Nadu as sales in the region were affected due to rains.
• The company is buying two 40,000-tonne dry bulk carriers, which would result in substantial savings in fuel costs going forward.
• At the current market price, the stock is trading at 6.9x its FY2008E earnings per share (EPS), 7.5x its FY2009E EPS and at an enterprise value (EV)/tonne of USD109 on expanded capacities.

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs180
Current market price: Rs137

Cost controls bring a positive surprise

Result highlights

• Indian Hotels Company Ltd's (IHCL) Q3FY2008 numbers were ahead of our expectations. The company posted a revenue growth of 14.6% year on year (yoy) at Rs520.6 crore. For 9MFY2008, the revenues showed a strong traction, growing by 16.3%yoy to Rs1,206.9 crore on account of a 17.1% and a 13.5% increase in the room sales and the food and beverages (F&B) sales respectively. The growth in average room rates (ARRs) by 15.4% yoy continues to be healthy.
• The operating profit margin (OPM) improved by 511 basis points to 47.0% mainly due to stringent cost controls and increase in ARRs. The total operating expense increased by a minimal 4% yoy. The operating profit thereby grew by 28.5% yoy to Rs244.7 crore.
• The expenditure on interest for the quarter (and nine months) increased by 53.1% to Rs23.9 crore on account of full use of foreign currency convertible bond (FCCB) proceeds for international acquisitions coupled with incremental debt raised.
• Consequently, profit after tax (PAT) for the quarter grew by 31.2% to Rs134.6 crore and that for nine months rose by 29.1% to Rs 242.6 crore.
• IHCL has shown better performance on the revenue front on account of a healthy improvement in ARRs and a steady growth in F&B revenues. We expect consistent growth in foreign tourist inflow, continuous rollout of properties and better economic conditions to drive IHCL's growth. At the current market price of Rs137, IHCL trades at 18.5X its FY2009E earnings per share (EPS) of Rs7.4 (post-dilution on account of the rights issue) for FY2009E. We maintain our Buy recommendation on the stock with a price target of Rs180.

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs830
Current market price: Rs634

Price target revised to Rs830

Result highlights

• For Q3FY2008, Indo Tech transformers Ltd (ITTL) reported a growth of 15.7% in the net sales, which was in line with our expectation. The volume growth remained flat, while the realisation improved significantly for the quarter.
• The operating profit grew by 49.2% year on year (yoy) to Rs17.7 crore, which was above our expectation. The operating profit margin (OPM) expanded by a whopping 770 basis points and was way above our expectation. The improvement in the OPM came mainly on account of reduced raw material cost. The raw material cost as a percentage of sales declined by 770 basis points yoy to 56.5%.
• The interest cost declined by 47.8% to 0.12 crore, while the depreciation charge rose by 32.1% to 0.37 crore.
• Consequently, the net profit margin reported a jump of 67.9% yoy to Rs12.2 crore, ahead of our expectation.
• The order book of the company stood at Rs180 crore, which is executable over the next six-seven month period.

Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,135
Current market price: Rs1,600

Price target revised to Rs2,135

Result highlights

• Infosys Technologies (Infosys) reported a revenue growth of 4% quarter on quarter (qoq) and of 16.9% year on year (yoy) to Rs4,271 crore in Q3FY2008. The sequential growth in the revenues was achieved on the back of a volume growth of 4.5% in its consolidated information technology (IT) service business, an increase of 0.8% qoq in its blended realisation and other scale benefits (0.6%). On the other hand, the rupee appreciation of 1.9% qoq adversely affected the growth in the revenues during the quarter.
• The operating profit margin (OPM) improved by 130 basis points sequentially to 32.6% in Q3FY2008. The OPM expanded due to the cumulative impact of an improvement in the blended realisation (up by 80 basis points), savings in overhead cost as a percentage of sales (a gain of 140 basis points) and a surge in the scale benefits (up 60 basis points). On the other hand, the rupee appreciation had a negative effect of around 80 basis points on the OPM. However, there were one-time items in Q3 that had a net adverse impact of around $6 million on the OPM: an expense of $26 million related to the settlement for overtime payment to certain employees in California and the write-back of provisions worth $18 million related to excess provisions for insurance charges made earlier. Adjusting for the same, the OPM stood at a healthy level of 33.1% for the quarter.
• Despite the foreign exchange (forex) fluctuation loss of Rs14 crore in Q3 (as compared with a gain of Rs5 crore in Q2), the other income component grew marginally to Rs158 crore due to a higher interest income. Moreover, the reversal of tax provisions of Rs50 crore boosted the earnings to Rs1,231 crore. Adjusting for the same, the earnings grew by 7.4% qoq and 20.1% yoy to Rs1,181 crore which is largely in line with our and street's expectations.
• The revised guidance for FY2008 is also in line with the expectations. In dollar terms, the revenue growth guidance has been upgraded marginally to 35-35.2% (up from 34.5-35% guided in October 2007). The earnings growth guidance in dollar terms has been upgraded by around 1.5% to $2.02 per share (up from $1.98-1.99 per share in October 2007). In rupee terms, the upward revision in the revenue growth guidance was largely flat at Rs16,627-16,651 crore (up from Rs16,588-16,648 crore in October 2007) with an exchange rate assumption of Rs39.41/USD. Including the tax write-back, the earnings growth guidance in rupee terms has been upgraded to Rs81.07 per share (up from Rs79.49-79.88 per share given in October last), which is in line with the consensus estimates.
• For Q4, the management has guided to a sequential growth of 4.8-5.4% in its consolidated revenues and a growth of around 3.5% qoq in the earnings per share (EPS) to Rs21.38 as compared with the adjusted EPS of Rs20.66 in Q3FY2008.
• In terms of operational highlights, the company reported a healthy net addition of 8,100 employees in Q3 and raised the guidance for gross employee addition to 31,000 for the full year (it does not include the addition of 1,500 employees from the Philips deal). The revenue growth of 8.6% in the banking and financial services (BFS) segment was also encouraging and the company was able to negotiate higher billing rates from some of its financial service clients during the quarter. It bagged nine large deals (worth over $50 million each) in Q3, including two clients from the financial service vertical.
• The management re-iterated that there is no material impact of the uncertainties in the USA on the overall demand environment. However, the management indicated that there is a delay in the finalisation of the IT budgets for 2008 by many of the company's clients and it expects better clarity on the same by the end of January or early February. On the positive side, there is an average growth of around 6% in the IT budgets of clients that have already finalised the same for 2008.
• We have maintained our exchange rate assumption at Rs39.8 per USD in FY2008 and at Rs39 per USD for FY2009 and have kept the earnings estimates largely unchanged. However, given the continued uncertainties and the lack of any short-term triggers, we don't expect any re-rating of the tech stocks in the coming months. Consequently, we are adjusting the target multiple to 22x FY2009E earnings (down from 24x FY2009E earnings earlier). At the current market price the stock trades at 19.8x its FY2008 and 16.5x its FY2009 earnings estimates. We maintain our Buy recommendation on the stock with the a revised price target of Rs2,135.

Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs875
Current market price: Rs638

Results in line with expectations

Result highlights

• Ipca Laboratories (Ipca) reported a 21.2% year-on-year (y-o-y) increase in its net sales to Rs281.8 crore in Q3FY2008. The sales growth was in line with our expectations and was driven by a 32% rise in the domestic business and a 14% growth in the exports.
• After a subdued performance in Q2FY2008 (on account of lower sales of anti-malarials), Ipca's domestic formulation business resumed its strong momentum. The domestic formulation sales grew by an impressive 32.1% in Q3FY2008, clearly outpacing the industry growth of 12.3%. The strong performance was driven by increased traction seen in the chronic therapy segments of cardiovascular, diabetology and arthritis.
• Ipca's formulation exports grew by 19.2% to Rs86.4 crore during the quarter. This was on the back of a strong performance in Europe, on account of new product approvals received during H1FY2008. The African, Asian and Commonwealth of Independent States (CIS) markets also performed well. The performance seems impressive when viewed in light of the ~12-13% appreciation in the rupee against the US Dollar.
• Ipca's active pharmaceutical ingredient (API) business grew by 13.1% to Rs77.0 crore in Q3FY2008, driven by a 33.3% rise in the domestic API sales and a muted 6.6% growth in the export of APIs. Ipca's API exports have been under pressure over the last few quarters, due to the sharp appreciation in the rupee against the US Dollar. However, Ipca has now initiated the process of raising prices across some of the key products and remains confident of a much improved performance in the coming quarters, given the strong order visibility.
• Ipca's operating profit margin (OPM) expanded by 40 basis points to 21.8% in the quarter. The expansion in the margin was driven by a 100-basis-point drop in the staff cost and a 150-basis-point reduction in the other expenses. Consequently, the operating profit grew by 23.7% to Rs61.6 crore in Q3FY2008.
• Ipca's pre-exceptional net profit increased by 12.8% to Rs38.3 crore and was in line with our estimate. The growth in the net profit was restricted due to a sharp reduction in the other income. On the other hand, the net profit was boosted by an 80-basis-point drop in the tax incidence of the company.
• At the current market price of Rs638, Ipca is discounting its FY2008E earnings by 10.6x and its FY2009E earnings by 8.7x. The valuations at these levels seem absolutely compelling when viewed in context of the strong growth potential that awaits the company. We retain our positive stance on the stock and maintain our Buy call with a price target of Rs875.

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs247
Current market price: Rs203

Price target revised to Rs247

Result highlights

• ITC's operating performance for Q3FY2008 was in line with our expectations. The sales growth of 11% year on year (yoy) was below our expectations primarily on account of a decline in the agri-business revenues due to restrictions imposed on the export of non-basmati rice.
• The operating profit margin (OPM) for the quarter stood at a strong 34.7% against 34.8% in the corresponding period last year (Q3FY2007) and 31.5% in the previous quarter (Q2FY2008). The operating profit thereby grew by 10.8% to Rs1,199.7 crore.
• A year-on-year (y-o-y) jump of 96.9% in the other income component to Rs137.4 crore that was above expectations helped the net profit grow by a handsome 15.8% yoy to Rs830.7 crore.
• The cigarette segment made a comeback in volume terms during the quarter as it saw a dip of just ~1% in the volumes, which is ahead of our expectations. We expect the volumes to catch up the normal growth rate of 5-7% in FY2009. The gross revenues for the segment increased by 7.6% yoy and the profit before interest and tax (PBIT) rose by a good 16% yoy.
• The non-cigarette fast moving consumer goods (FMCG) business continued its remarkable progress with a 50.1% y-o-y growth in the revenues. The segment loss increased to 64.5 crore (a loss margin of 9.8%) on account of spends on new product launches, particularly those in the personal care segment. The agri-business profitability rebounded with a PBIT margin of 4.2% after a one-off slip in the previous quarter. However the segment's revenues showed a y-o-y de-growth of 9.4% due to restrictions on the export of non-basmati rice.
• While the cigarettes business is expected to gather momentum in FY2009, ITC's increasing presence in the FMCG space would transform it into a full-scale FMCG play. We believe that ITC's business model rests on a strong footing with multiple revenue drivers. We have revised upwards our profit estimates for FY2008E and FY2009E by 4.6% and 2.6% respectively considering the improved visibility on the performance of various businesses. At our revised earnings per share (EPS) target of Rs9.9 for FY2009, the stock trades at 20.5x. We maintain our multiple of 25x FY2009E EPS for the stock, consequent to which our revised price target stands at Rs247.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs424

Price target revised to Rs484

Result highlights

• Jaiprakash Associates' (JP Associates) net sales for Q3FY2008 stood at Rs900 crore, down 0.2% on year-on-year (y-o-y) basis.
• Operating profit margin (OPM) for the quarter was at 24.8% against 26.8% during the same quarter last year. The OPM contracted mainly due to lower revenues and higher total expenditure, which went up 2.6% year on year (yoy).
• Other income shot up by 251.7% yoy to Rs102 crore mainly on account of dividend received from Jaiprakash Hydro Power Ltd.
• Profit after tax (PAT) was up 53% yoy at Rs156 crore on account of higher other income and lower tax rate, which was 20% for Q3FY2008 compared with 35% for the corresponding period last year.
• At the current market price the stock is trading at 75x its estimated FY2008 earnings and 74x its estimated FY2009 earnings. Though this appears to be over stretched, it should be noted that the company has huge value in its subsidiaries, investments and large build, operate and transfer (BOT) projects. We are revising our price target to Rs484. The revision is driven by the higher than expected valuations of its power generation subsidiary, Jaiprakash Power Venture Limited (JPVL) including the value of JP Associates' holding in Jaypee Hotels and Malvika Steel. We maintain our Buy call on the stock with a revised sum-of-the-parts (S-O-T-P) based fair value of Rs484.

Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,302
Current market price: Rs1,178

Price target revised to Rs1,302

Key points

• Jindal Saw, the largest pipe manufacturer in the country, has recently bagged a number of orders aggregating to $250 million. This takes its order book to around $850 million, and the same is executable by January 2009.
• For the quarter ended December 31, 2007, we expect the company to report a 4.2% decline in its net sales, as the US division was operational only till October 2007. We expect the net profits to rise by 19.3% to Rs71.7 crore as the operating profit margin (OPM) is expected to improve to 13% from 11.4% in the same period last year.
• On the back of greater visibility and improvement in the margins, we are raising our earnings estimate by 8.9% to Rs91 for CY2009.
• Improved outlook of the industry has also led to an expansion in the valuation multiples of the entire industry. We have valued the company on the sum-of-the-parts basis. We value the core business of the company at 13x its CY2009E earnings and take the investment value at a 75% discount to its current value.
• At the current market price of Rs1,178, the stock is trading at 13x its CY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs1,302.

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs330
Current market price: Rs160

Q3FY2008 results: First-cut analysis

Result highlights

• JK Cement's Q3FY2008 net sales grew by 22% year on year (yoy) to Rs389.8 crore on the back of 22% yoy higher realisations, which stood at Rs3,899 crore against Rs3,187 crore in the corresponding period last year. The net sales also rose because of higher volumes which were up by 37% at 1 million metric tonne (MMT) for the quarter.
• The total expenditure grew by 18.6% yoy to Rs273.6 crore mainly on account of higher volumes. Higher volumes led to a 35% increase in the freight cost to Rs79.6 crore. Also employee expenses went up by 39% to Rs17.4 crore.
• The operating profit during the quarter grew by 31.7% to Rs116 crore, whereas the operating profit margin (OPM) for the quarter stood at 29% against 25% in the corresponding period last year.
• The interest cost grew by 12% to Rs9.1 crore in the quarter against Rs8.1 crore in the year ago period. The depreciation up 32% yoy at Rs10.8 crore.
• The tax provision for the quarter was at Rs18 crore implying a tax rate of 21.6% against 33.7% tax rate in the corresponding period last year.
• The reported profit after tax (PAT) was up 60% yoy at Rs80 crore on the back of higher realisation and higher volumes.
• Earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne for the quarter was up 32% yoy at Rs1,163.
• We will keep you updated, if any revisions take place in our earnings estimate for the company after meeting with the management.

KEI Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs125
Current market price: Rs89

Steady growth

Result highlights

• For Q3FY2008, the net sales for KEI Industries (KEI) grew by 45.5% year on year (yoy) to Rs233.5 crore. The net sale growth was in line with our expectation.
• The operating profit grew by 22.9% to Rs30.1 crore, while the operating profit margin (OPM) declined by 240 basis points to 12.9% during the quarter. The OPM was under pressure mainly due to lower margins in the HT cable business and squeezing margins in the stainless steel (SS) wire business.
• On segmental basis, the power business reported a growth of 32.9% yoy to Rs208.8 crore, whereas the SS wire business grew by 1.7% yoy to Rs24.7 crore. The margins for SS wire business were under pressure due a steep decline in nickel prices, which affected the inventory cost of the division.
• The interest cost increased by 48.6% yoy to Rs10.4 crore on account of the interest on working capital borrowings. The depreciation charge rose by 20.5% yoy to Rs1.9 crore.
• Consequently, The net profit reported a growth of 22.7% yoy to Rs13.5 crore against our estimates of Rs13.1 crore.
• The company has decided to form a joint venture (JV) to enter the power generation business using renewable energy resources.
• KEI is also scouting for technological partners to enter the 132 Kilo volt (Kv) extra high voltage (HV) cable market. The company currently manufactures products up to 66Kv class HT cables. However, the company has not yet announced any concrete steps in this direction.
• The order book of the company stood at Rs300 crore.

Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs840
Current market price: Rs515

Another strong quarter

Result highlights

• Lupin's consolidated revenues increased by 43.8% year on year (yoy) to Rs721.3 crore in Q3FY2008. The growth in the top line was above our expectations and was driven by a 25.3% growth in the domestic formulation business, an appreciable 169.8% jump in the export of formulations to advanced markets and the consolidation of the recent acquisitions. Excluding the impact of the acquisitions (which contributed Rs65-70 crore collectively during the quarter), the like-to-like growth stood at ~30% yoy.
• Lupin's consolidated operating profit margin (OPM) shrank by 40 basis points yoy to 16.8% in Q3FY2008, led by a 50-basis-point rise in the other expenses. The operating profit grew by 40.8% to Rs121.5 crore in the quarter.
• The company received Euro 20 million from the sale of its Perindopril patent rights to Laboratories Servier of France, which boosted the other income and the net profit substantially. As a resultant, the net profit level grew by a whopping 191.6% to Rs180.9 crore in Q3FY2008. The profit growth was way above our expectation of Rs149 crore. Excluding the impact of the Euro 20 million received from the sale of the Perindopril patent rights and its associated tax impact, the net profit grew by approximately 70% yoy.
• With Lupin still awaiting the approval of US Food and Drug Administration (USFDA) for generic Altace, the exclusivity opportunity for Lupin remains uncertain, as Cobalt (the first-to-file for generic Altace) has already launched the product in the USA towards the end of December, thus triggering off the 180-day exclusivity period. While the management is confident of securing a sizeable time period of limited competition to benefit out of the Altace opportunity, any delay in the USFDA resolution could significantly restrict Lupin's window of opportunity. The USFDA resolution and clarity on the launch would act as a near-term catalyst for the stock.
• At the current market price of Rs515, Lupin is discounting its FY2008E earnings by 14.4x and its FY2009E earnings by 11.7x. Keeping in mind the strong business fundamentals and the growth potential of the company, we reiterate our Buy recommendation on Lupin with a price target of Rs840.

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.

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs62

Momentum continues

Result highlights

• Marico Industries Ltd's (Marico) sales growth in Q3FY2008 was in line with our expectations. The company posted a strong top line growth of 23.7% year on year (yoy) to Rs506.2 crore aided by an impressive performance across the businesses. The stirring top line growth was a result of a 19% organic growth and a 5% inorganic growth.
• Affected by a hefty 34% year-on-year (y-o-y) increase in the staff cost and a higher-than-expected increase in the other expenses (up 32.9% yoy to Rs81.2 crore) the operating profit margin (OPM) declined by 79 basis points to 12.68%. The operating profit thereby grew by 16.4% yoy to Rs64.2 crore.
• The raw material cost was under check as copra prices during the quarter were lower by about 10-12% yoy. However, the input cost for edible oils continued to rise and was up by 20-30% across categories. Thereby the adjusted net profit grew by 57.1% to Rs 43.53 crore.
• The company changed its method of charging the depreciation on the factory building that led to a one-time charge of Rs4.29 crore. There was a one-time exchange rate gain of Rs 7.8 crore. After this the reported net profit stood at Rs45.9 crore, which was up 61.5% yoy.
• Marico continued to implement its three-pronged growth strategy of enhancing the existing products, introducing new products and achieving inorganic growth through acquisitions. During the quarter it entered the South African ethnic hair care and health care markets by acquiring the consumer division of Enaleni Pharmaceuticals, which has an annual turnover of ~Rs53 crore.
• We remain positive on Marico's businesses and maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price of Rs62, the stock trades at 18.5x our FY2009E earnings per share (EPS) of Rs3.30.

Maruti Suzuki India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,230
Current market price: Rs857

Meets expectations

Result highlights

• Maruti Suzuki's Q3FY2008 results are in line with our expectations. The net sales of the company have grown by 27% to Rs4,654 crore on the back of a 17.1% volume growth and an 8% realisation growth.
• The operating profit margin (OPM) has reduced by 120 basis points year on year (yoy) but is flat sequentially at 13.1% owing to higher both commodity prices and royalty payments. Consequently, the operating profit has grown by 16% yoy to Rs613.3 crore.
• A higher other income, and stable interest and depreciation charges led to a 24.1% growth in the profit to Rs467 crore.
• The company is raising the capacity at its Manesar plant from 100,000 units to 200,000 units. It is aiming to play a bigger role in Suzuki's global operations and is all set to manufacture its new export vehicle A-Star, which shall be marketed mainly in Europe. Its production is scheduled to begin from October 2008 from the Manesar plant.
• We remain positive on the prospects of Maruti Suzuki considering its strong product portfolio. At the current market price of Rs857, the stock is quoting attractively at 11.2x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.9x. We maintain our Buy recommendation on the stock with a price target of Rs1,230.

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs377
Current market price: Rs300

Currency appreciation impacts growth

Result highlights

• Nicholas Piramal India Ltd's (NPIL) results for Q3FY2008 were marginally below the expectations. The top line grew by 12.8% year on year (yoy) to Rs732.3 crore and the pre-exceptional profit rose by 33.5% to Rs78.4 crore. The growth was driven by strong traction in the Indian custom manufacturing (CMG) operations, the branded formulation business and the pathology laboratories (path labs) business.
• With normal Phensydyl sales, NPIL's branded formulation business grew by 15.6% to Rs337.2 crore. NPIL's branded formulation business outpaced the industry growth of 12.3% (ORG IMS MAT December 2007).
• While the overall CMG revenues grew by 7.2% yoy to Rs341.0 crore, the CMG business from India saw a 3.0x jump to Rs55.4 crore. Having already garnered Rs152.2 crore in M9FY2008, NPIL is well placed to exceed its guidance of a 100% growth in the Indian CMG business.
• On the other hand, the product development service (PDS) business declined by 26.9% to Rs30.8 crore in Q3FY2008. The decline was largely due to ~20% appreciation of the Canadian dollar against the US dollar over the past one year. NPIL's global PDS business is carried out from its Torcan site in Canada and hence the impact.
• NPIL's path labs business grew by 88.5% to Rs31.5 crore. The growth was contributed by both the organic expansion of centres and the acquisition of labs.
• The operating profit margin (OPM) improved by 160 basis points yoy to 16.5%. The OPM improvement was arrived after charging off the new chemical entity (NCE) research and development (R&D) expenses of Rs22.9 crore and was driven by a 80-basis point reduction in the staff costs and a 290-basis point drop in the other expenses. On adjusting the NCE R&D expenses, the margin expansion was even more robust at 450 basis points to 19.4%. Consequently, the reported operating profit grew by 24.9% to Rs121.2 crore.
• Despite a 38.9% jump in the interest expense and a 42.9% rise in the depreciation, the sharp decline in the tax incidence caused the company's pre-exceptional net profit to jump by 33.5% to Rs78.4 crore. The reported net profit of the company (after the adjustment of extraordinary items), however showed an increase of 31.0% to Rs72.8 crore. The net profit was below our estimate of Rs82 crore.
• At the current market price of Rs300, NPIL is discounting its FY2008E earnings by 17.5x and its FY2009E earnings by 14.7x. With strong traction expected across all the businesses, we maintain our positive outlook on NPIL. Hence, we maintain our Buy recommendation on the stock with a price target of Rs377.

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs355
Current market price: Rs280

Price target revised to Rs355

Result highlights

• Nucleus Software Exports reported a revenue growth of 4.6% quarter on quarter (qoq) and 31.1% year on year (yoy) to Rs73.6 crore in third quarter ended December 2007. The sequential growth in the revenue was primarily driven by a 5.2% sequential growth in the product business whereas the revenue from the projects & services business grew by 3.1% sequentially.
• The operating profit margin (OPM) declined by 160 basis points sequentially to 24% during the quarter. The margin decline was primarily contributed by the 290-basis-point increase in the selling, marketing and overhead cost as a percentage of the sales (15.8% up from 12.9% in Q2). The selling & marketing expense increased sharply to Rs6.3 crore in Q3 (up from Rs4.5 crore in Q2) due to the company's participation in industry conference in Q3 (amounting to an additional cost of around Rs0.7 crore) and the addition of around eight employees to its sales force (over 30% increase in the sales force). The management is targeting an OPM of around 25% in Q4.
• The other income declined by 58.5% qoq to Rs1.3 crore (down from Rs3.2 crore in Q2) due to a lower dividend income and marginal foreign exchange (forex) loss of Rs0.1 crore (as compared with gains of Rs1.7 crore in Q2). Consequently, the consolidated earnings declined by 4.6% qoq to Rs15.5 crore.
• In terms of operational highlights, the company added five new clients and bagged orders for 14 product modules during the quarter. The pending order backlog has increased to Rs330 crore (after declining for the previous two quarters). The order pipeline is strong with bids for a record number of deals in the last quarter. On the flip side, the company indicated some delay in the execution of the phase I of the Acom project by a couple of months. However, the delay will not have any material impact on the revenues in Q4.
• To factor in the higher than expected pressure on the margins and the unexpected slackness in product revenues, we have revised downwards the earnings estimates for FY2008 and FY2009 by around 4-4.5% each. At the current market price the stock trades at attractive valuations of 14.5x FY2008 and 11.8x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs355.

Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,060
Current market price: Rs757

Higher expenses limit profit growth

Result highlights

• Orbit Corporation has announced its results for Q3FY2008. Since the company had come out with its initial public offering (IPO) in March 2007, a year-on-year (y-o-y) comparison of its results is not possible. Hence, we have done a quarter-on-quarter (q-o-q) comparison.
• Orbit's revenues grew by 129.3% quarter on quarter (qoq) to Rs223.6 crore in Q3FY2008 as the company started booking revenues from Orbit WTC. The company booked revenues worth Rs151 crore from this project.
• Orbit's operating profit margin (OPM) contracted by 328 basis points qoq to 46.2% during the quarter under review. The decline was largely due to a higher revenue contribution from the open space project (Orbit WTC), which has a lower margin compared with the redevelopment project.
• Orbit also reported interest expenses of Rs27.7 crore compared with Rs3 crore in Q2FY2008, as it had raised debt worth Rs300 crore for the Orbit WTC project. The effective tax rate for the company also increased to 28.0% in Q3FY2008 from 12.4% in Q2FY2008 as most of its projects were fully taxed during the quarter compared with all the projects qualified under section 80 IB taxed at the minimum alternative tax (MAT) rate in the previous quarter.
• At the current market price of Rs757, Orbit is discounting its FY2008E earnings by 15.0x and FY2009E earnings by 9.8x. We retain our positive stance on the stock and maintain our Buy recommendation.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs375
Current market price: Rs292

Strong performance continues

Result highlights

• Orchid Chemicals & Pharmaceuticals' (Orchid) top line grew by 39.4% year on year (yoy) to Rs332.7 crore in Q3FY2008. The top line growth was above our estimate of Rs302.5 crore and driven by the consolidation of market share in niche products such as Cefdinir, Cefepime and Cefoxitin.
• Orchid's operating profit margin (OPM) shrank by 310 basis points yoy to 29.5%, driven by significant escalations in the raw material and staff costs. Consequently, the operating profit grew by 26.1% to Rs98.1 crore.
• The reported net profit jumped up by 91.1% to Rs54.1 crore, powered by foreign exchange (forex) gains (on the outstanding foreign currency convertible bonds [FCCBs]) recorded during the quarter and the reduction in the interest expense. However, on excluding the net impact of the forex gain of Rs11.3 crore, the adjusted net profit of the company (derived solely from the operations) stood at Rs50.6 crore, up by 78.7% yoy. This was way above our estimate of Rs46 crore.
• Orchid's management has guided towards a 35% growth in the company's top line and a doubling of the operational net profit (excluding the forex gains on the outstanding foreign currency liabilities) in FY2008. To account for the better than expected performance in M9FY2008 and taking into account the guidance provided by the management, we have revised our revenue and earnings estimates for FY2008 and FY2009. We believe Orchid's revenues will grow by 28.8% to Rs1,175.6 crore in FY2008 and by 24% to Rs1,458.1 crore in FY2009. The pre-exceptional net profit (excluding the forex gains on the outstanding foreign currency liabilities) will grow by 64.4% to Rs158.9 crore in FY2008 and by 42.4% to Rs226.2 crore in FY2009. This will yield fully diluted earnings of Rs17.4 per share in FY2008 and Rs23.4 per share in FY2009.
• At the current market price of Rs292, Orchid is discounting its FY2008E earnings by 16.8x and its FY2009E earnings by 12.5x. The valuations at these levels seem absolutely compelling when viewed in context of the strong growth potential that awaits the company. We retain our positive stance on the stock and maintain our Buy call with a price target of Rs375.

Patels Airtemp India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs135
Current market price: Rs86

Q3 results beat expectations

Result highlights

• Patels Airtemp's Q3FY2008 results are ahead of our expectations owing to higher than expected profitability.
• The net sales of the company have declined by 17.3% year on year to Rs10.4 crore but the same is in line with our expectations. The bulk of the order book of the company is executable in the fourth quarter and hence we should witness a strong performance in Q4FY2008.
• The order book of the company still remains strong at Rs44 crore, which is executable over the next six to eight months.
• The operating profit margin (OPM) has risen to 23.2% from 16.9% in the same quarter last year. Consequently, the operating profit has grown by 13.8% to Rs2.41 crore. Lower interest and depreciation costs have led to a 76.9% growth in the profit to Rs1.36 crore.
• We continue to believe that the company would benefit from the ongoing boom in its user industries such as oil and gas, refineries, power, cement and fertilisers.
• At the current market price of Rs86, the stock is trading at 5.8x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.4x. We maintain our Buy recommendation on the stock with a price target of Rs135.

Punj Lloyd
Cluster: Apple Green
Recommendation: Buy
Price target: Rs620
Current market price: Rs445

Listing of PSL to unlock value

Key points

• Pipavav Shipyard Ltd (PSL) has filed the draft Red Herring Prospectus (DRHP) to raise funds for constructing facilities for shipbuilding and repairing and for funding its working capital needs. The issue would be for shares equivalent to 13.04% of the post-issue equity.
• During September 2007, Punj Lloyd Ltd (PLL) subscribed to 12.93 crore equity shares at Rs27 per share aggregating to Rs349.3 crore. Currently PLL holds a 22.34% stake in the company. Post-issue, PLL's stake would come down to 19.43% of the total equity.
• PLL made a strategic investment in PSL to support growth of PLL's offshore business by getting access to PSL's facilities for the fabrication of platforms, SBMs, rigs and jackets. Upstream oil and gas companies are expected to make significant investments in the revamping of the existing offshore platforms. To capitalise on the opportunity, PLL would use PSL facilities for the fabrication of vessels for petrochemical companies and refineries.
• PSL is a large state-of-the-art shipyard located on the west cost of India. It is being constructed over 210 acres of land at a total capital cost of Rs2,371.29 crore and is expected to be complete by October, 2008. PSL has already agreed to build 26 Panamax bulk carrier of 74,500 DWT each for delivery between 2009-2012.
• We have currently valued PLL's investment in PSL at 2x its price-to-book value (Rs25 per share). Media reports suggest PSL to raise a close to $200 million through the issue. This would lead to a significant upside to our current valuation for PLL's investment in PSL. However, at the moment we are maintaining our estimates.
• PLL recently won an order worth Rs590 crore from Indian Oil Corporation Ltd for its Vadodara Refinery in Gujarat. The consolidated order book for the company now stands at Rs18,484 crore (3.6x its FY2007 sales).
• We expect a robust performance by PLL in Q3FY2008. We expect the consolidated top line of the company to grow by 54.3% year on year (yoy). Led by a better operating profit margin, the consolidated post-tax earnings is expected to grow by 102.5% yoy to Rs97.8 crore.

Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs675
Current market price: Rs618

Q3FY2008 results: First-cut analysis

Result highlights

• For Q3FY2008, Punjab National Bank (PNB) reported a profit after tax (PAT) of Rs541 crore, beating our estimate of Rs502 crore. The Q3FY2008 PAT indicates a growth of 26% year on year (yoy), but remains largely flat on a quarter-on-quarter (q-o-q) basis.
• The quarterly performance at the net interest income (NII) level was lacklustre, with reported NII registering a 1.5% decline yoy and a growth of 10.3% quarter on quarter (qoq). The disappointing NII performance was primarily due to the net interest margin (NIM) contraction yoy coupled with a moderate growth in the advances.
• On a year-on-year (y-o-y) basis, NIM continued to remain under pressure. The calculated NIM for Q3FY2008 was 3.2% compared with 3.8% for the year-ago period and 3.2% for the previous quarter. The y-o-y decline of 58 basis points in NIM was due to the higher cost of funds (up 106 basis points yoy), which outweighed the 48-basis-points y-o-y improvement in the yield on funds. The reported NIM for the quarter stood at 3.66% compared with 3.85% for the year-ago period.
• Meanwhile, the non-interest income jumped by 49.6% yoy to Rs483 crore. Of the total non-interest income, treasury income contributed Rs134 crore.
• The rise in the operating expenses was contained at 12.8% yoy compared with a 22.4% growth in H1FY2008. The increase in the operating expenses was driven equally by the staff expenses and the other operating expenses. However, the resulting operating profit grew by a weak 3.6% yoy.
• Despite the weak operating profit growth, the PAT grew substantially, mainly due to a significant 56% y-o-y decline in provisioning.
• Advances at the end of the quarter stood at Rs101,534 crore indicating a growth of 15.8% yoy, while remaining flat on a q-o-q basis. The growth in advances was primarily due to a strong growth of 28% yoy in retail advances (excluding trade advances) and a healthy growth in agricultural advances. Meanwhile, the deposits grew by a healthy 17.2% yoy to Rs152,622 crore. Currently, the management's focus area is controlling the quality of the existing advances book and not the advance growth per se.
• Asset quality improved sequentially as evidenced by a 28% q-o-q decline in gross non-performing assets (GNPA) to Rs1,339 crore and a 10% decline in net non-performing assets (NNPA) to Rs4,251 crore. While the sequential improvement in asset quality is a positive, the NPA levels (%GNPA of 4.1%, %NNPA of 1.3%) are still high compared with peers in public and private sector banking space.
• Capital adequacy ratio (CAR) as on December 2007 stood at a comfortable 14% compared with 12.6% in September 2007 and 12.9% in December 2006.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs350

Price target revised to Rs558

Result highlights

• Ranbaxy Laboratories (Ranbaxy)'s performance in Q4CY2007 and CY2007 has been above expectations. Its consolidated revenues grew by 5.1% in rupee terms to Rs1,784.50 crore in Q4CY2007 and by 9.5% to Rs6,017.0 crore in CY2007. The growth in dollar terms was more robust: 19% in Q4CY2007 and 20% in CY2007.
• The growth was driven by a 24% growth in the sales to the emerging markets and a steady growth of 14% in the sales to the developed markets. The US business declined by 3.7% (on a high base of Q4CY2006 when the company had recorded substantial revenues from exclusivity opportunities) to $104 million during the quarter. However, the base business in the USA (excluding the impact of exclusivity revenues) grew by 8%.
• Despite the sharp appreciation in the rupee and the high base of Q4CY2006 (when the company had recorded high-margin Simvastatin revenues under exclusivity), the company's operating profit margin (OPM) expanded by 100 basis points year on year (yoy) to 16.7%. Consequently, the operating profit of the company rose by 11.7% to Rs297.7 crore in Q4CY2007.
• Despite a 55.5% rise in the interest expense and a 76.6% decline in the foreign exchange (forex) gains recorded by the company in Q4CY2007, the net profit rose by 1.1% to Rs187.9 crore. This was above our estimate of Rs164.7 crore.
• For CY2007, Ranbaxy's consolidated revenues grew by 20% to $1,607 million. However, due to the impact of the appreciating rupee, the growth in rupee terms was more moderate at 9.5% to Rs6,590.4 crore. The sales reported by the company were ahead of our estimates. The net profit for CY2007 stood at Rs790.1 crore, up by 53.3% yoy. Excluding the impact of forex gains, the net profit stood at Rs606.9 crore, a growth of 15% yoy.
• Ranbaxy has decided to demerge its new drug discovery research (NDDR) operations into a separate entity effective from January 1, 2008 and list it subsequently. While the specific framework and other details of the de-merger are currently under finalisation and will be announced by February 2008, the management has indicated that the company will save about $20-25 million of expenses incurred on NDDR projects annually from CY2008 onwards. The announcement of the details of the demerger scheme will act as a near-term catalyst for the stock.
• The management has guided towards an 18-20% top line growth in dollar terms in CY2008. That's an expansion of the OPM from 15.1% in CY2007 to 17.5-18% in CY2008, resulting in a net profit growth of 20-25% in CY2008. This guidance is excluding any revenues and profits from the exclusivity opportunities in the USA.
• We have upgraded our estimates to reflect the guidance provided by the management. Based on our new estimates, we expect Ranbaxy's recurring revenues (excluding the exclusivity opportunities) to grow by 18.2% in CY2008 to $1,900 million and by 16.0% in CY2009 to $2,202.0 million. However, the growth in rupee terms will be lower (as per our assumption of continued rupee appreciation) at 12.5% to Rs7,412 crore in CY2008 and at 12.9% to Rs8,369 crore in CY2009. This will result in a recurring net profit growth (excluding the extraordinary items) of 8% to Rs852.2 crore in CY2008 and of 15% to Rs980.3 crore in CY2009. This will, in turn, translate into fully diluted earnings of Rs21.3 and Rs24.5 in CY2008 and CY2009 respectively.
• Ranbaxy believes that it has first-to-file (FTF) status on approximately 18 Para IV abbreviated new drug application (ANDA) filings, representing a market size of about USD27 billion. It expects to monetise at least one FTF opportunity every year for the next few years and has already announced the opportunities until CY2010 (generic Imitrex in CY2008, generic Valtrex in CY2009 and generic Lipitor and Flomax in CY2010). Based on our discount-cash-flow (DCF) calculations, we believe that the FTFs announced so far are collectively valued at Rs2,716 crore, translating into a per share value of Rs68.
• Using the sum-of-the-parts valuation method, we arrive at a fair value of Rs558 per share for Ranbaxy (after assigning a 20x multiple to CY2009E base earnings per share of Rs24.5 plus the Rs68 per share value of the FTFs). At the current market price of Rs350, Ranbaxy is trading at 16.4x its estimated CY2008 and 14.3x its estimated CY2009 earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs558, an upside of 52% from the current levels.

Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs505
Current market price: Rs370

Price target revised to Rs505

Result highlights

• Satyam Computer Services (Satyam) reported a growth of 8.1% quarter on quarter (qoq) and 32.2% year on year (yoy) in its consolidated revenues to Rs2,195.6 crore. In dollar terms, the consolidated revenues grew by 10.5% sequentially (registering a double-digit growth in all the three quarters of the current year), primarily driven by the robust quarter-on-quarter (q-o-q) growth of 9.4% in the volumes.
• The operating profit margin (OPM) declined by 164 basis points to 21.5% in Q3FY2008, primarily due to the improvement in the blended realisations (2.4% qoq in onsite and 2.3% qoq in offshore rates), leverage in selling, reduction in the general and administration (SG&A) cost as percentage of the sales (positive impact of 44 basis points), higher utilisation rate and better cumulative performance of its subsidiaries (60 basis points). Consequently, the operating profit declined by 17% qoq to Rs471.2 crore.
• However, the other income declined by 36.2% qoq to Rs70.5 crore. Consequently, the earnings grew at a relatively lower rate of 6% qoq and 28.6% yoy to Rs433.6 crore, which is largely in line with our and street expectations.
• In terms of outlook, the earning guidance for Q4 is quite encouraging. The revenues are guided to grow by 5.3-5.8% sequentially (which is line with guidance given by some of its other peers and factors marginal contribution from its recent acquisitions). However, indicated a robust earning growth of 11.6% qoq in Q4, which is far ahead of its peers and implies another quarter of considerable improvement in the margins.
• For the full year, the revenue guidance has been revised upwards by around 2-2.5% both in dollar as well as rupee terms. In dollar terms, the revenue has increased by around 2.2% to $2,119-2,122 million (45-45.2% growth) and the earning per share (EPS) has been upgraded by around 2.4% to $1.27 (a 39.6% growth). In rupee terms, the revenue guidance has been revised upwards by 2.1% to Rs8,368-8,379 crore (a 29-29.2% growth) and the average EPS guidance has been upgraded by 1.8% to Rs25.5 (a 18.9% growth; despite the lower exchange rate assumption of Rs39.3, as against Rs39.5/USD taken in October). In terms of the margins, the company has re-iterated its guidance of a decline of 170-200 basis points in the OPM for the full year FY2008.
• Satyam's overall performance in Q3 was encouraging. It has been able to maintain a healthy volume growth in the range of 9-10% for the past six consecutive quarters. The Q4 earning guidance was also higher than street expectations. The company added 3,432 employees in Q3 and 9,647 employees in the first nine month (amounts to an increase of 24.4% over base at end of FY2007). This was the highest among the frontline information technology (IT) companies and clearly reflected the management's confidence in the revenue growth visibility going forward.
• In terms of outlook for year 2008, the management has indicated that it has not witnessed any significant change in the overall demand environment. Most of the clients have indicated an increase of 5-6% in their IT Budgets. On the flip side, some of the clients (10-15%) have delayed firming up their budgets. Moreover, the management believes that the continued economic uncertainties in the US requires some caution.
• We have fine-tuned our estimates to reflect the strong performance in the past two quarters. At the current market price, the stock trades at 14.4x FY2008 and 12x FY2009 earning estimates. We maintain Buy call on the stock with a target price of Rs505.

Shiv-Vani Oil & Gas Exploration Services
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs670
Current market price: Rs611

Price target revised to Rs670

Result highlights

• Shiv-vani Oil & Gas Exploration Ltd (SOGEL) reported a healthy growth of 73.6% in its consolidated revenues to Rs126.7 crore in the quarter ended December 2007. In addition to an increased fleet base and higher realisations, the growth was partially contributed by incremental revenues of around Rs20 crore from the coal bed methane project.
• The operating profit margin (OPM) improved by 560 basis points to 41.5% primarily driven by the improvement in realisations and better utilisation of its fleet. The positive impact of the higher realisations is clearly reflected in the 390-basis-point decline in the drilling expenses (and other operational expenses) as a percentage of the sales. The operating profit grew by 100.8% to Rs52.6 crore.
• The decline in the depreciation charges as a percentage of the sales and the lower effective tax rate enabled the company to report a relatively higher growth of 178.7% in its earnings to Rs26.7 crore in Q3FY2008.
• In the first four quarters, the consolidated revenues and earnings have grown by 42.8% and 104% respectively. The OPM has improved by 350 basis points to 38.5% during the same period. The company was able to more than make up for the steep increase of 50% in the staff cost by scale benefits (savings of 120 basis points in the overheads cost as a percentage of the sales) and higher realisations (saving of 290 basis points in drilling expenses as a percentage of the sales).
• In term of operational highlights, the company bagged an order worth Rs261 crore to deploy four onshore rigs with Oil India for a period of two years. The average day rate works out to around $22,600, which is around 10-15% higher than the recent contracts with day rates in the range of $18,000-20,000. The contract has further boosted the company's existing order backlog of over Rs3,000 crore, thereby improving its revenue growth visibility.
• To factor in the higher than expected margins, we are revising upwards the earnings estimates for FY2009 and FY2010 by 5.4% and 8.6% respectively. At the current market price the stock trades at 16.9x FY2009 and 12.8x FY2010 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs670 (14x FY2010E earnings).

Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,625
Current market price: Rs1,323

Q3 net sales higher on better realisations

Result highlights

• In Q3FY2008 the net sales of Shree Cement stood at Rs523.5 crore, up 43% year on year (yoy).
• At Rs225.29 crore Shree Cement's operating profit was a tad higher than our expectation, mainly on account of a 23.8% year-on-year (y-o-y) growth in realisations.
• The reported profit after tax (PAT) at Rs35 crore was much below our expectation, mainly on account of accelerated depreciation on the newly commissioned plants.
• The earnings per share (EPS) for the quarter was at Rs10.06 against Rs29.90 in Q3FY2007.
• At the current market price of Rs1,323, the stock is trading at 11.38x its FY2008E EPS and 9.22x its FY2009E EPS. We continue to maintain our positive outlook on the stock with a price target of Rs1,625.

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,680
Current market price: Rs2,405

Q3FY2008 results: First-cut analysis

Result highlights

• The public sector behemoth State Bank of India (SBI) reported a profit after tax (PAT) of Rs1,808.6 crore for Q3FY2008, beating our estimate of Rs1,413 crore. The PAT was up 69.8% year on year (yoy) and 12.3% quarter on quarter (qoq) on the back of a strong all-round growth. On a consolidated basis, the Q3FY2008 PAT stood at Rs2,442.3 crore, up 55.1% yoy and 10.8% qoq.
• The net interest income for the quarter stood at Rs4,256 crore, registering a robust growth of 23.8% yoy on the back of a strong growth in the advances and an improvement in the net interest margin (NIM).
• The NIM during the quarter improved by eight basis points sequentially on the back of an improvement in the yield on assets, which was partially offset by the higher cost of funds. On the year-on-year (y-o-y) basis, the NIM continued to remain under pressure. However, we expect the NIM to improve going forward as the high-cost bulk deposits raised earlier get repriced at lower rates.
• The non-interest income witnessed a whooping growth of 48% yoy to Rs2,697 crore on the back of jump in treasury income and foreign exchange (forex) income. The treasury income was up 107% yoy to Rs644 crore while, the forex income tripled yoy to Rs431 crore. Meanwhile, the core fee income growth was robust at 19% yoy.
• The operating expenses during the quarter grew by 13.2% yoy to Rs3,294 crore. The growth was mainly due to a 25.2% y-o-y increase in the other operating expenses as the bank expanded the coverage of its core-banking solution (CBS) platform aggressively. Meanwhile, the staff expenses grew by a moderate 8% yoy. Going forward, we expect the other operating expenses to taper down as the bank has been able to bring ~95% of its branches under the CBS. The core operating profit for the quarter stood at Rs3,016 crore, up a strong 48% yoy and 32.4% qoq.
• During the quarter, the provisions increased significantly to Rs804 crore compared with Rs85 crore for the previous quarter. While the non-performing asset (NPA) provisions increased in line with the strong credit growth, the provisions on investments declined to Rs57.5 crore compared with Rs166.6 crore for the year-ago period.
• Net advances at the end of the quarter reached Rs390,312 crore indicating a growth of 26% yoy and 8.8% qoq. In line with the industry trend, the advances experienced an uptick during the quarter after a moderate growth in the previous quarter (6% qoq for SBI). The uptick in advances was mainly driven by a strong growth in corporate segment, while retail and other advances continued to clock a moderate growth. Meanwhile, the deposits at the end of the quarter stood at Rs510,132 crore, up 26.2% yoy primarily due to the high-cost deposits. The low-cost deposits (current & savings) reached Rs202,642 crore. Owing to a lower current account and saving account (CASA) growth relative to high-cost deposits, the CASA ratio declined to 39.7% from 42.3% a year ago.
• Asset quality continued to improve further during the quarter as evidenced by a sequential reduction of Rs220 crore in the net non-performing assets (NNPA), while the gross non-performing assets (GNPA) were largely stable at Rs10,641. In percentage terms, the GNPA as percentage of advances reached 2.7% compared with 3.3% for the year-ago period, while the NNPA as percentage of advances reached 1.4% compared with 1.6% for the year-ago period.
• The capital adequacy ratio at the end of December 2007 stood at a comfortable 12.3% compared with 12.8% for the previous quarter and 11.9% for the year-ago period. During the quarter, the bank raised Rs916 crore by issuing perpetual bonds to boost its Tier- I capital. In addition, the bank has lined up a mega rights issue to raise Rs16,730 crore, which would further boost the capital adequacy for the bank.
• Besides the strong stand alone performance, SBI's various subsidiaries and associate banks continued to clock a healthy growth. Notably, SBI Life, the life insurance arm of the bank, reported a PAT of Rs37.7 crore compared with a loss of Rs 33.5 crore for the year-ago period.
• Following the bank's announcement of its plans to merge the associate banks in itself, the labour unions for the public sector banks have declared their strong opposition against the merger plan. A recent meeting between the Indian Bankers Association and the labour unions on their demands has not yielded any results. Meanwhile, the proposed merger of the State Bank of Saurashtra has received a nod from the boards of both the banks.
• At current market price of Rs2,405, SBI trades at 22.5x its 2009E earnings per share, 8.9x its 2009E pre-provisioning profit and 2.6x its 2009E book value. Currently we are reviewing our earnings model following the significantly higher than expected results.

Subros
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs68
Current market price: Rs50

Margins maintained

Result highlights

• The Q3FY2008 results of Subros are slightly ahead of our expectations.
• The top line of the company grew by 2.2% year on year (yoy) to Rs160.2 crore led by a growth of 15% in the volume and a decline of 11% in the realisation. The realisation dropped because Subros supplied only components for newer models of passenger cars during the quarter instead of full kits comprising compressors as well as components.
• Despite this the operating profit margin (OPM) was maintained at 12.9% which led the operating profits to grow by 1.4% to Rs20.6 crore. The raw material cost as a percentage of sales reduced by 140 basis points to 68% while the staff cost and other expenditures increased.
• A lower other income, and higher interest and depreciation costs led the profit after tax (PAT) to decline by 11.7% to Rs7.2 crore. However, the majority of the capital expenditure (capex) has already been incurred and the company has recently raised low-cost debt. Hence, we expect the interest cost to rationalise going forward.
• Good sales volume growth should lead to a substantial improvement in the OPM going forward. The company has already bagged an order from Suzuki to supply compressors for the latter's new export vehicle. This would boost Subros' FY2009 volumes.
• We are altering our estimates marginally to account for the lower than expected sales due to a substantial decline in the realisations and a higher than expected OPM. The PAT estimates remain unchanged.
• At the current market price of Rs50 the stock is trading at compelling valuations of 6.1x FY2009E earnings per share (EPS) and 3.1x FY2009E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). The stock's valuations are at a huge discount to that commanded by its peers. We maintain our Buy recommendation on the stock with a price target of Rs68.

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).

Surya Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs205
Current market price: Rs110

Results in line; strong growth ahead

Result highlights

• Surya Pharmaceuticals (Surya) reported an impressive 46.7% increase in its top line to Rs118.9 crore in Q3FY2008. The growth was driven by the increase in the company's existing active pharmaceutical ingredient (API) business and a 15-20% contribution from the new business of menthol and its derivatives. The sales growth was in line with our estimate.
• Surya's operating profit margin (OPM) expanded by 80 basis points to 18.8% in the quarter, primarily due to a decline in the other expenses. The other expenses rose by only 7.5% year on year (yoy; as compared with the 46.7% rise in the top line) and declined by 200 basis points yoy as a percentage of the sales. Consequently, the company's operating profit grew by 53.3% to Rs22.4 crore in the quarter.
• Surya's net profit grew by an impressive 72.0% to Rs12.0 crore in Q3FY2008 and was in line with our estimate. The net profit growth was strong despite a 59.4% increase in the interest expense and was aided by a 50-basis-point drop in the tax incidence. The earnings for the quarter stood at Rs8.3 per share.
• The company has recorded Rs340 crore in revenues in M9FY2008 and the management has reiterated its confidence of achieving Rs500 crore of revenues for the full year, implying a top line of Rs160 crore in Q4FY2008 and a growth of 93% yoy. This strong growth would be on the back of an increasing capacity utilisation in the existing API business and a substantial scale-up of the recently started menthol exports.
• At the current market price of Rs110, Surya is trading at 4.8x its FY2008E diluted earnings of Rs23.2 and 3.4x its FY2009E diluted earnings of Rs32.1. At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations. We view this as a strong buying opportunity and hence maintain our Buy call on the stock with a price target of Rs205.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs960

Price target revised to Rs1,250

Result highlights

• Tata Consultancy Services (TCS) has reported growth of 5% on quarter-on-quarter (q-o-q) basis and of 21.9% on year-on-year (y-o-y) basis in its consolidated revenues to Rs5,924.1 crore during Q3FY2008. The sequential growth in the revenues was contributed by a 5.3% growth in the volume, a 53-basis-point improvement in the billing rates (including productivity gains) and a favourable effort mix (81-basis-points positive impact due to higher proportion of onsite revenues). On the other hand, the appreciation in the rupee adversely affected the revenue growth by 160 basis points on a sequential basis.
• The earnings before interest and tax (EBIT) margin improved by 33 basis points sequentially to 24.2% during the quarter. The improvement in the billing rates and productivity gains boosted the margins by 125 basis points, whereas the appreciation of the rupee had an adverse impact of 92 basis points on the EBIT margins during the quarter. The EBIT grew by 6.5% quarter on quarter (qoq) and 12.9% year on year (yoy) to Rs1,431.4 crore.
• The other income declined by 5.1% qoq to Rs104.8 crore inspite of foreign exchange fluctuation gains of Rs66.1 crore (as compared with 57.7 crore in Q2). However, the lower-than-expected effective tax rate of 12.7% resulted in earnings growth of 6.7% qoq and 20.6% yoy to Rs1,330.8 crore (slightly higher than our estimates of Rs1,311.4 crore).
• The company did not give any specific growth guidance. However, the management is not witnessing any slowdown in the information technology (IT) budgets or deterioration in the demand environment (due to the sub-prime mess) as of now. The revenues from the banking, financial services and insurance (BFSI) vertical registered a healthy sequential growth of 7.9% in Q3. The company signed nine large sized deals of over $50 million (including the contract worth $1.2 billion from Nielsen Co.) during the quarter and has a pipeline of around 25 deals of over $50 million each. However, given the continued flow of negative news from some of the large financial institutions in USA, the management is cautious and is not clear about the possible impact on the discretionary IT spending going forward. In terms of margins, the company expects to maintain the EBIT margin in the range of 24% to 25% in FY2008 (largely in line with the margins reported in FY2007).
• In terms of key operational highlights, the net addition of 4,037 employees is lower than expectations. However, the campus offers of 22,295 fresh graduates this season (up from around 11,500 in the last fiscal) reflects the management's confidence in the growth outlook. Another noticeable point is the healthy double-digit sequential growth in all the relatively new service lines such as consulting, assurance, and business process outsourcing (BPO).
• TCS has adopted an aggressive hedging strategy (forward cover of $3.1 billion) resulting in a much higher than expected other income in the first nine months. To factor in the same we have marginally revised upwards the earning estimates. At the current market price, the stock trades at 18.3x FY2008 and 15.3x FY2009 estimated earnings. We maintain the Buy call on the stock with a revised price target of Rs1,250 (around 20x FY2009E earning per share in line with the revision in target multiple for Infosys Technologies).

Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs792
Current market price: Rs790

December sales decline by 2%

Key points

• Tata Motors' sales for December 2007 stood at 47,678 vehicles. Total sales declined by 2.2% year on year (yoy) and grew by 1.6% month on month (mom).
• Commercial vehicle (CV) sales in the domestic market for the month grew by 6.6% to 28,661 vehicles. Light commercial vehicle (LCV) segment continued to exhibit strong growth of 19% yoy. Medium and heavy commercial vehicle (M&HCV) sales declined by 9.2% to 15,689 vehicles. However on a month-on-month (m-o-m) basis M&HCV sales grew by 8.8%.
• Passenger vehicle segment continued its weak performance and losing its market share, as no new products were launched. Further, being the last month of the year, off take to dealers was curtailed to limit year-end stock. The domestic sales declined by 12.3% to 14,316 vehicles. Passenger car sales for the month declined by 14.1%. Indica sales declined by 10% yoy to 9,497 units, while Indigo sales fell by a whopping 33.6% yoy to 1,379 vehicles. Sales of Utility vehicles declined by 10.6% yoy to 3,440 units. However, sales of Safari recorded a growth of 10% to 1,161 units mainly due to recent launch of Safari Dicor VTT.
• Export sales for the month grew by 15.7% yoy and 26% mom to 4,701 vehicles.
• Tata Motors has recently launched six new products in the M&HCV segment, which includes multi-axle trucks, heavy-duty trucks (31-49 tonne capacity), tractor-trailers and tippers. These vehicles have multiple applications and will cater to sectors like mining, construction, road works and logistics.
• The company also plans to unveil its new one-lakh car scheduled for launch by mid 2008 at the forthcoming Auto Expo.
• At the current market price of Rs790, the stock discounts its FY2009E consolidated earnings by 12.4x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Hold recommendation on the stock with a price target of Rs792.

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.

Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs554
Current market price: Rs455

Price target revised to Rs554

Result highlights

• Wipro's global information technology (IT) service business reported a revenue growth of 11.4% quarter on quarter (qoq) and 24.6% year on year (yoy) to Rs3,597.3 crore (under US GAAP) for Q3FY2008. In dollar terms, the revenues grew at a reasonably healthy rate of 14.3% sequentially to $910.1 million (ahead of its guidance of $905 million). However, it included incremental revenues of $61.4 million contributed by the recent acquisitions (as compared with $6.4 million in Q2 as acquisitions were effective from September 20, 2007). Adjusting for the same, the revenue growth in the global IT service organic business stood at 7.4% qoq in dollar terms, which was contributed by a 7.2% sequential growth in the IT service business and a 9.3% sequential growth in the business process outsourcing (BPO) segment. The volume growth of 6.4% qoq in the IT service business was in line with expectations, whereas the improvement of 0.5% qoq in the blended realisations was ahead of expectations.
• The operating profit margin (OPM) declined by 150 basis points sequentially to 20.7%, largely because of (1) The adverse impact due to the consolidation of Infocrossing (impact of 1.1%); (2) The full impact of wage hikes (12-13% hike given to offshore employees in IT service segment with effect from August 1,2007 and to BPO employees with effect from October, 2007)and (3) The appreciation in rupee (impact of 80 basis points). This was more than nullified by the improvement in the blended realisation (0.5% sequential improvement) and the leverage in the overheads cost as a percentage of sales (down to 3.4% of sales as compared with 9.1% in Q2).
• The company has given a revenue guidance of $955 million for the global IT service business in Q4, which amounts to a growth of around 4.9% sequentially (and is relatively muted as compared with the revenue growth guidance of 7.7% and 6.9% in Q4FY2006 and Q4FY2007 respectively). The margins are expected to remain in a narrow range in spite of the adverse impact of around 1% due to the annual wage hikes to onsite employees in January. In terms of the overall demand environment, the management has not felt any impact of the weak economic conditions in the US on its deal flow or the deal pipeline as of now. However, it indicated that some of the clients were looking at reducing their total IT budgets in 2008 and that a clear picture would emerge only by the end of the quarter. This further added to the continued uncertainty about the demand environment that has been dragging down the tech stocks.
• In case of other businesses run by the company, the Indian IT service business reported a sequential growth of 5.1% in the revenues to Rs920.7 crore and it bagged some large deals (including the total outsourcing deal from a cellular operator in India close to $350-400 million). The consumer care business and the other business segment also reported healthy double-digit sequential growth of 13.7% and 17.2% respectively.
• Consequently, Wipro's consolidated revenues grew at a healthy rate of 10.7% qoq and 32.1% yoy to Rs5,236.1 crore (as per the US GAAP). The OPM declined by 30 basis points sequentially to 17.0% (with gross margins declining by 110 basis points). The earnings grew marginally by 1.7% qoq to Rs826.1 crore. The lower than expected growth in earnings was largely contributed by the unexpected decline of 38.8% in the other income component to Rs45.5 crore in Q3FY2008.
• We have fine-tuned our earning estimates for FY2008 and FY2009 to factor in the lower than expected other income. At the current market price, the stock trades at 20.2x FY2008 and 16.8x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs554 (20.5x FY2009E earnings).

Zee News
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs79
Current market price: Rs67

Price target revised to Rs79

Result highlights

• Zee News Ltd (ZNL)'s Q3FY2008 results are better than our expectations. The operating revenues of the company grew by a handsome 39.1% to Rs98.3 crore led by a strong 48.8% year-on-year growth in the advertising revenues to Rs77.7 crore.
• The operating profit margin (OPM) dipped by 268 basis points year on year (yoy) to 22.4% in the third quarter primarily due to the higher spend on the new businesses (new business loss of Rs13.8 crore). Thus, the operating profit grew by 24.2% yoy to Rs22 crore in the same period. With a much lower other income, higher depreciation charge and tax rate, the net profit stood at Rs12.8 crore, which was above our estimate of Rs10.9 crore but lower than Q3FY2007's net profit of Rs14.2 crore.
• The regional channels registered a good growth in viewership. Zee Marathi increased its gross rating points (GRPs) by 23.3% whereas Zee Bangla's GRPs rose by 49.4% compared with that in Q3FY2007. The new businesses, Zee Telugu, Zee Kannada and Zee 24 Ghanta, also registered sharp gains in viewership on a lower base. The GRPs of Zee Telugu increased by 92.6% yoy while that of Zee Kannada and Zee 24 Ghanta increased by 22.8% and 86.2% respectively.
• We have revised upwards our estimates for ZNL to factor in the expectations of better revenues and improvement in the OPM over our previous estimates. After the revision in the estimates our new price target for the stock is Rs79.
• ZNL owns a unique bouquet of channels; we expect gains in viewership in the regional channels. The south Indian channels would especially ensure a strong upmove in the revenues and profits. We also expect ZNL to launch Tamil and Malayalam channels going forward, completing the south Indian portfolio. With the net profit of the company expected to grow at an impressive compounded annual growth rate (CAGR) of 132% over FY2007-10E, we maintain our positive outlook on the stock.
• At our revised price target of Rs79, ZNL is valued at 35x FY2009E earnings per share (EPS) and 26x FY2010E EPS. At the current market price of Rs67.5 ZNL discounts its FY2009E and FY2010E EPS by 30x and 22.3x respectively. We maintain a Buy recommendation on the stock.

---

SHAREKHAN SPECIAL

Fed rate cut—implications for India

To combat the weakening economic outlook in the USA, the US Federal Reserve (Fed) lowered interest rates by 75 basis points on January 22, 2008, thereby increasing the likelihood of the Reserve Bank of India (RBI) doing the same in India. It is believed that a decision on a rate cut would be taken at the RBI's monetary policy review meeting on January 29, 2008.

Monetary policy review

Belying our expectations of a 25-basis-point rate cut, the Reserve Bank of India (RBI) maintained the status quo for all key rates. A 75-basis-point cut in the interest rates by the US Federal Reserve (Fed) had renewed expectations that the RBI would follow suit. However, these expectations were not met due to continuing inflation concerns on the domestic front and an increasingly worsening international situation.

---

MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.

---

SECTOR UPDATE

Automobiles

Nano steals the show at Auto Expo 2008
Auto Expo is Asia's largest automotive show, organised jointly by the Automotive Component Manufacturers Association Of India, the Confederation of Indian Industry and the Society of Indian Automobile Manufacturers. Over the years, the exhibition has witnessed greater participation (over 2,000 participants in Auto Expo 2008) both by local and global companies. Displayed in this year's exhibition were vehicles, components, accessories, information technology for the auto industry, oil and lubricants, auto electronics, leasing/financing companies, insurance companies, battery-operated vehicles and design concepts.

---

VIEWPOINT

Bharat Forge

In a de-risking mode

Result highlights

• Bharat Forge Ltd's (BFL) Q3FY2008 results were lower than consensus estimates, as the company's performance was adversely impacted by the rupee appreciation and the slow down in the US commercial vehicle (CV) market.
• On a standalone basis, BFL's sales for the quarter grew by 16.7% year on year (yoy) to Rs556.7 crore. The domestic revenues rose by 16.2% yoy, while the export revenues went up by 17.4% yoy.
• Increase in the employee costs and the other expenditure led the operating profit margin (OPM) for the quarter decline by 150 basis points yoy, leading the operating profit to grow only by 10.1% yoy to Rs136.4 crore.
• Higher interest and depreciation costs and a foreign exchange (forex) loss of Rs2.3 crore led the profit after tax (PAT) decline by 7.6% yoy to Rs58 crore.
• On a consolidated basis, the sales grew by 6% yoy to Rs1,080 crore, while the PAT was down by 7.8% yoy to Rs71 crore.
• BFL's expansion plans to enter the non-auto segment are on track and two of its plants are expected to commence operations from Q4FY2009 and Q1FY2010. BFL has also proposed to enter into a joint venture (JV) with the National Thermal Power Corporation (NTPC) to manufacture power equipment.
• Though there has been a revival in the domestic market, the expected recovery in the US CV market has been delayed till Q3CY2008. This recovery is at risk if there is a recession in US. At the current market price of Rs300, the stock quotes at a price/earnings ratio of 22.5x its FY2007 consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.1x.

CMC

Stuck in a range

Result highlights

• Prima facie CMC's Q3FY2008 performance was disappointing. On an annual comparison, its revenue declined marginally by 1.5% to Rs294.2 crore whereas its earnings grew by 7.4% to Rs21.9 crore.
• However, the performance looks much better after adjusting for the one-time items. In Q3FY2008, the company took a hit of Rs2.8 crore, pertaining to a change in the accounting treatment for bonus/incentives (cost related to the past five quarters was accounted for in Q3FY2008 alone). On the other hand, in Q3FY2007, the company had net one-time gain of Rs5 crore; one-time income of Rs13 crore; and provisions of Rs8 crore. Adjusting for the same, the earnings have grown at a robust rate of 42.8% to Rs24 crore.
• Adjusting for the one-time items, the operating profit margin (OPM) would stand at 11.4% rather than 10.5%, as reported for Q3FY2008. The OPM has been on an uptrend due to the continued focus on increasing the proportion of both the international business and the service business in its total turnover. On a nine-month basis, the OPM has improved by 240 basis points to 11.9% in FY2008 (after adjusting for the one-time items).
• On the flip side, the performance has been stagnant for the past five to six quarters with revenues stuck in a range of Rs250-300 crore and profit before tax of around Rs27-30 crore.
• At the current market price the stock trades at 18.5x FY2008 and 16x FY2009 rough earnings estimates. Some of the frontline quality stocks like Infosys Technologies and Satyam Computer are available at similar or discount to CMC's current valuations.

Dr Reddy's Laboratories

Disappointing performance
Dr Reddy's Laboratories' (DRL) Q3FY2008 results were significantly below the street's expectations, primarily on account of a one-time amortisation charge of Rs236.1 crore relating to the Betapharm operations. While the branded formulation business in India and Russia, along with the base US generic and active pharmaceutical ingredient (API) businesses continued to perform well, problems continued to plague the Betapharm operations and the Mexican custom pharmaceutical business.

New Delhi Television

Promoters make open offer
With a slew of new channel launches in the second quarter of FY2008, NDTV stepped in the execution phase of its mega plans in the broadcasting space. It has recently launched four channels, the lifestyle channel NDTV Good Times, NDTV Arabia that caters to the news and infotainment market in the Middle East and north Africa, NDTV MetroNation, an English channel catering to Delhi and the national capital region (NCR) and Astro Awani Malaysia, a Bahasa language channel launched through its joint venture with Astro. These ventures are a testimony to NDTV's intention to be a major player not only in the Indian broadcasting arena but also other countries of Asian region.