ICI India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs622 Current market price: Rs493
A hefty other income boosts performance
Result highlights
The Q1FY2009 results of ICI India are not comparable with its Q1FY2008 performance because the company's adhesives business was divested in Q4FY2008.
ICI India's net sales for the first quarter of FY2009 stood at Rs227.5 crore and are in line with our expectations. The sales growth is flat on a year-on-year (y-o-y) basis as the divested adhesives business had contributed Rs31.1 crore to the total sales in Q1FY2008. On a like-to-like basis, in Q1FY2009, ICI India's sales grew by 16.3% year on year (yoy) on the back of a ~16% growth in the volumes of the paint business.
The operating profit margin (OPM) of the company declined by 50 basis points yoy to 9.2% due to a decline in the margin of the paint business on account of a rise in the input cost. To improve the margin the company has hiked by 15% the prices of its solvent-based paints that account for one-third of its total paint sales. More price hikes are likely to be announced in the emulsion category in August 2008.
A 377% rise in the other income due to capital gains from its mutual fund investments and a lower tax rate led to a 209.7% jump in its net profit to Rs70.9 crore in Q1FY2009.
We have revised upwards our adjusted net profit estimates for FY2009 and FY2010 by 4.1% and 6.8% respectively to reflect the higher yield on the mutual fund investments and the lower tax rate.
With ~Rs1,000 crore cash on books, we expect the company to go for capacity expansion, acquisitions, a share buy-back or a dividend pay-out, thereby rewarding its shareholders.
At the current market price of Rs493 the stock trades at 14.7x its FY2010E earnings per share (EPS) of Rs33.7 and discounts its core EPS (ie earnings excluding the other income) of Rs18.3 by 12.4x. We maintain our Buy recommendation on the stock.
Satyam Computer Services Cluster: Apple Green Recommendation: Buy Price target: Rs521 Current market price: Rs383
Muted guidance for Q2FY2009
Result highlights
The consolidated revenues of Satyam Computer Services (Satyam) grew by 8.5% quarter on quarter (qoq) and 43.2% year on year (yoy) to Rs2,620.18 crore in Q1FY2009. In dollar terms, the revenues grew by 3.9% qoq to $637 million. The revenues in dollar terms were inflated by $13.5 million due to accounting difference in the US GAAP and the Indian GAAP. Adjusting for this, the company's revenues grew 1.7% qoq to $624 million, which were below its guidance range of $631.7-634.8 million. This was primarily due to loss of the animation business in Satyam's BPO subsidiary, aggregating to $6.7 million.
The operating profit margin (OPM) improved by 134 basis points qoq to 24.1%, despite the negative impact of the rise in the visa cost (80 basis points). The improvement in the OPM was due to the positive impact of the rupee depreciation and operational efficiency. Consequently, the company's operating profit grew 14.8% qoq to Rs632.3 crore.
The net income grew by 17.3% qoq to Rs547.7 crore, above our expectation of Rs519 crore. The net income was higher primarily due to higher-that-expected OPM and other income. Despite foreign exchange (forex) loss of Rs36 crore in Q1FY2009, the other income was at Rs33 crore in Q1FY2009 v/s Rs23 crore in Q1FY2008.
In terms of guidance for Q2FY2009, the revenues in dollar terms are guided to grow at a muted sequential rate of 2.3% (unadjusted for accounting difference). The earnings in dollar terms for the next quarter are guided to decline by 7.9% sequentially due to the wage hike (effective July). The management is cautious on the demand environment in the retail and the banking, financial services and insurance (BFSI) verticals and maintain its stable outlook on pricing.
We have revised our exchange rate assumption of Rs42 for FY2009 and Rs41 for FY2010 earning estimates. We have also lowered the tax rate for FY2010 to 12%, in line with the management guidance. Consequently, we have revised our FY2009 earning estimates by 5.8% and FY2010 earning estimates by 6.8%. We maintain our Buy recommendation with price target of Rs521. At the current market price, the stock is trading at attractive valuation of 11.9x FY2009 earning estimates and 10.3x FY2010 earning estimates.
Wipro Cluster: Apple Green Recommendation: Hold Price target: Under review Current market price: Rs366
Q1FY2009 results: First-cut analysis
Result highlights
Wipro's IT services revenues in Q1FY2009 grew by 3.5% quarter on quarter (qoq) to $1,067 million, ahead of the guidance of $1,060 million. The sequential growth was driven by a volume growth of 2.2% and an improvement of 1.2% in its blended realisations.
The revenues for the IT services business are guided at $1,089 million for Q2FY2009, which amounts to a muted sequential growth of 2% as compared with 5-6% sequential growth for Infosys Technologies. The management sounded less confident about the growth in the near term vis-à-vis its peers. On the brighter side, the deal flow was healthy during the quarter, with addition of seven large deals including one deal over $100 million.
Another concerning factor is the net decline of 725 employees in its global IT services business (IT services excluding India and Middle East). This again is not in line with the healthy employee additions made by Infosys and Tata Consultancy Services.
Yet another area of concern is the huge foreign exchange (forex) cover of $2.6 billion and the transfer of around Rs900 crore of unrealised forex losses in its balance sheet under US GAAP.
On a consolidated basis, the revenues grew by 6.6% sequentially to Rs5,962 crore, whereas the earnings declined by 7% qoq to Rs813.9 crore. The operating profit margin (OPM) declined by 114 basis points to 16.4%. The OPM drop was largely due to forex losses of Rs66 crore (111 basis points) made on external commercial borrowing of $350 million (raised for acquisitions over the last years) and Rs4 crore (7 basis points) on the cost associated with fringe benefit tax (FBT) on employee stock option (ESOP). However, this was partially offset by the positive impact of the rupee depreciation (10 basis points).
We would revise our estimates in a detailed report. However, given the expected weakness in the performance in the coming quarters on the back of poor growth in volumes and wage hikes, we are downgrading the stock to Hold. Moreover, the aggressive forex hedges (and the possible further loss on the same) would also continue to be a drag on the stock. At the current market price, the stock is trading at 13.2x FY2009 and 11.6x FY2010 earning estimates.
SKF India Cluster: Apple Green Recommendation: Book Profit Current market price: Rs208
Book profit
Result highlights
SKF India's Q2CY2008 results are below our expectations due to lower both sales and profits.
The company's sales growth slowed down in Q2CY2008 to 7.4% year on year (yoy) to Rs431.2 crore.
During the quarter, the operating profit margin (OPM) declined by 300 basis points yoy to 13.2%. The OPM dropped due to an increase in the raw material cost. The operating profit declined by 12.4% to Rs56.8 crore.
Despite a higher other income and interest income, the net profit declined by 10% to Rs36.7 crore.
SKF India has deferred its plan to expand its operations at Haridwar, Uttarkhand. The project involved capital expenditure (capex) of Rs150 crore and was expected to be operational by the end of 2008. The expansion plan has been put on hold because of a slowdown in two-wheeler sales.
On account of the slower growth in its main user industries, the pressure on its profit margins due to the rising raw material prices and the deferral of its expansion plan, the company's earnings are expected to remain flat this year. The earnings are forecast to grow by only 5% in CY2009. Despite its low valuations, the poor growth in the earnings of the company will act as a drag on the stock. Hence, we advise investors to book profit.
Allahabad Bank Cluster: Cannonball Recommendation: Buy Price target: Rs95 Current market price: Rs58
Price target revised to Rs95
Result highlights
Allahabad Bank reported a profit after tax (PAT) of Rs93.4 crore for Q1FY2009, indicating a decline of 53.4% year on year (yoy). The decline in the PAT was on the back of a substantial increase in the provisions. The provisions and contingencies increased to Rs202.2 crore as at the end of Q1FY2009 compared with Rs24.5 crore in Q1FY2008. The sharp rise in the provisions was primarily due to higher investment depreciation to the tune of Rs264.1 crore.
The reported net interest income for the quarter stood at Rs495.5 crore, up by 9.8% on a year-on-year (y-o-y) basis. The increase was mainly driven by a 23.9% increase in the advances during the quarter.
On the margin front, while the margins remained largely stable sequentially, the net interest margin (NIM) declined by 22 basis points yoy to 2.75% from 2.97%.
The growth in advances was slightly below the industry growth during the quarter. However, it still remains healthy at 23.9% yoy, which may be due to higher demand from the oil marketing companies. Meanwhile, the deposits registered a growth of 16.5% yoy.
The non-interest income for Q1FY2009 stood at Rs117 crore, up 23.6% yoy on the back of higher treasury gains. The core fee income increased 6% yoy to Rs107.3 crore.
The asset quality of the bank remained healthy during the quarter. The gross non-performing assets (GNPAs) in percent terms improved by 59 basis points to 1.87%. However, the net non-performing assets (NNPAs) in percent terms remained flat at 0.75%.
The capital adequacy ratio (CAR) of the bank stood at 11.68% in Q1FY2009 compared with 12.71% a year ago.
We are lowering our earning estimate for FY2009 by 5.1% primarily to factor in the higher-than-expected provisions made for depreciation on investment. Importantly, we are raising our cost of equity assumptions in line with the increase in the 10-year g-sec yields. At the current market price of Rs58, the stock trades at 3x 2009E earnings per share (EPS), 1.8x 2009E pre-provisioning profit (PPP)/share and 0.5x 2009E book value (BV)/share. We believe at the current valuation, the stock looks attractive considering its high return on equity. Hence we maintain our Buy recommendation with a revised price target of Rs95.
HCL Technologies Cluster: Apple Green Recommendation: Hold Price target: Under review Current market price: Rs201
Enhancing UK presence HCL Technologies (HCL) has recently announced that it has agreed to acquire Liberata Financial Services (LFS), a division of UK-based outsourcing company Liberata Ltd, for an undisclosed consideration. The acquired division, LFS, provides comprehensive end-to-end administrative and customer services including policy administration and claims handling services for life insurance and pension industry.
The Q1FY2009 revenues of UltraTech Cement (UltraTech) grew by 10% year on year (yoy) to Rs1,496 crore. The volumes (cement, clinker and export) during the quarter declined by 3.6 % to 4.3 million tonne largely due to ban imposed by the government on cement export (which was subsequently diluted).
The operating profit margin (OPM) declined by 240 basis points yoy to 29.8%. The drop in the OPM was mainly on account of a sharp increase in the power & fuel and employee cost. Due to a fall in the OPM, the operating profit reported a marginal growth of 1.8% to Rs445.8 crore.
The power & fuel cost on per tonne basis increased by 32.2% due to higher international coal prices. The imported coal prices increased from $78 per tonne to $179. The employee cost surged by 55.5% due to revision in the compensation structure. The freight cost increased by 10.7%, while other expenses increased by 30.3%.
The blended realisation per tonne increased by 14.1% to Rs3,503.5. The cost per tonne increased by 18.1% to Rs2,459.3, while the earnings before interest, depreciation and amortisation (EBIDTA) per tonne rose by 5.7% to Rs1,044.1. The higher year-on-year (y-o-y) realisation during the quarter was due to lower portions of clinker sales.
The interest expenses increased by 11.3% to Rs24.7 crore, while the depreciation rose by 27.3% to Rs71.13 crore. The increase in the interest and the depreciation was due to capacity additions carried out by the company. Apart from this, the company also revised the estimated useful life of some of the assets, which resulted in a Rs7.01-crore rise in the depreciation .
The profit before tax (PBT) declined by 2% to Rs376.6 crore due to higher interest and depreciation. However, due to a decline in the provisions for tax by 10.8% to Rs111.58 crore, the net profit increased by 2.2% Rs265 crore.
We have revised downwards our estimates to factor in the higher input cost. We now expect the company to post earnings per share (EPS) of Rs80 and Rs67.6 in FY2009 and FY2010 respectively. At the current market price of Rs540, the stock trades at 6.7X and 8X its FY2009 and FY2010 earnings respectively and an enterprise value (EV)/EBIDTA of 4.2X and 4.6X for FY2009 and FY2010 respectively. We maintain our Buy recommendation on the stock with a with revised price target of Rs735 at its replacement cost (EV per tonne of $100).
