ShareKhan Newsletter Blog

STOCK UPDATE

Maruti Suzuki India   
Cluster: Apple Green
Recommendation: Buy
Price target: Rs947
Current market price: Rs647

Q1FY2009 results: First-cut analysis 

Result highlights

• Maruti Suzuki India's Q1FY2009 results are ahead of our estimates primarily due to a higher-than-expected other income.
• The net sales for the quarter grew by 20.9% to Rs4,731 crore, backed by a volume growth of 13.5% and a realisation improvement of 7%. 
• The operating profit margin (OPM) declined by 487 basis points year on year, but improved by 82 basis points quarter on quarter to 9.75%. The decline in the OPM was due to increase in all the input costs—raw material, employee, and manufacturing costs—due to rise in fuel cost, selling and distribution, and royalty. The operating profit at Rs463.6 crore declined by 19.3%.
• The other income grew by 47.3% to Rs328.8 crore. This was mainly due to a 41% increase in the non-operational income to Rs222 crore and a 55% increase in the scrap sales to Rs53.5 crore.
• The depreciation increased by 102% to Rs166 crore, in line with the change in the depreciation policy implemented by the company from Q4FY2008. This resulted in an additional depreciation of Rs61.9 crore during the quarter.
• Thus, the profit after tax (PAT) for the quarter is down by 6.7% to Rs465.9 crore.
• At the current market price of Rs648, the stock is quoting at 8.9x its FY2010E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 4.1x. We maintain our Buy recommendation on the stock and would review our estimates and price target, if required, after the conference call and management guidance.

Apollo Tyres  
Cluster: Apple Green
Recommendation: Buy
Price target: Rs50 
Current market price: Rs30

Price target revised to Rs50 

Result highlights

• Apollo Tyres' results for Q1FY2009 are in line with our expectations. 
• The company's sales for the quarter grew by 23% to Rs1,075.8 crore. The growth is much higher than our expectations and was backed by a higher than expected volume growth of 14%. Price increases effected during the quarter also contributed to the sales growth.
• The operating profit margin (OPM), however, declined by 130 basis points year on year (yoy) and by 220 basis points quarter on quarter (qoq) to 10.2% due to a sharp rise in the raw material cost. The profit after tax (PAT) for the quarter grew by 3.8% yoy to Rs48.6 crore.
• On a consolidated basis, the net sales for the quarter grew by 15% to Rs1,322 crore whereas the PAT grew by 7.4% to Rs58.6 crore. The South African subsidiary, Dunlop South Africa, has reported sales of Rs246 crore for the quarter. That's a decline of 10.7% yoy. However, the subsidiary's PAT increased by 28.2% to Rs10.1 crore during the same period.
• The company's outlook for volume growth for FY2009 has been revised to a double-digit growth. The sales growth is to be driven by the replacement sales. The prices of the company's raw materials are expected to rise further and despite price hikes expected in the replacement and original equipment (OE) segments, the margins are expected to remain at levels similar to that seen in the current quarter.
• Due to a higher than expected sales growth and a lower profit margin, we maintain our stand-alone earnings estimates for FY2009 and FY2010 at Rs4.2 and Rs4.5 respectively. The consolidated earnings per share (EPS) estimate for FY2010 are the same at Rs5.6. However, considering the decline in the profit margin and the weak market conditions , we are reducing the price/earnings (PE) multiple allotted to the company earlier from 10x to 9x. Consequently, we are revising our price target to Rs50.
• At the current market price of Rs30, the stock discounts its FY2010E consolidated earnings by 5.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs50.

Shree Cement  
Cluster: Cannonball
Recommendation: Buy
Price target: Rs950 
Current market price: Rs513

Price target revised to Rs950 

Result highlights

• Shree Cement's Q1FY2009 revenues grew by 39.3% year on year (yoy) to Rs614.3 crore. The volumes increased by 33.6 % to 1.9 million tonne during the quarter due to capacity additions carried out by the company. 
• The operating profit margin (OPM) declined by 700 basis points yoy to 34.3%. The drop in the OPM was mainly on account of a sharp increase in the power & fuel and employee costs. Consequently, the operating profit grew by 15.5% to Rs210 crore.
• On per tonne basis, the power & fuel cost increased by 37.7% yoy due to a rise in the price of pet coke. The freight cost increased by 14.7% due to an inter-unit clinker transfer. The employee cost increased by 22.1% while other expenses rose by 10.2% due to an increase in the packing cost and higher store & spares. However, the raw material cost per tonne declined by 13.6% as the company has adopted the latest technology for mining.
• During the quarter, the blended realisation per tonne increased by 4.2% to Rs3,201, the cost per tonne grew by 16.8% to Rs2,104 and the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne declined by 13.6% to Rs1,097. 
• The interest expenses increased by 334.3% to Rs17.1 crore while the depreciation charge increased by 28.7% to Rs46.1 crore. The increase in the interest and depreciation charges was on account of capacity additions carried out by the company. 
• Thus, the reported net profit declined by 5.1% to Rs110.9 crore. In Q1FY2009 the company had written off an asset of Rs7.6 crore. Therefore, the adjusted net profit for Q1FY2009 shows a decline of 0.4% Rs116.4 crore.
• We have revised our earnings estimates to factor in the lower depreciation charge and the higher input cost. We now expect the company to post earnings per share (EPS) of Rs88.9 and Rs78.9 in FY2009 and FY2010 respectively. At the current market price of Rs513, the stock trades at 5.8x and 6.5x its FY2009E and FY2010E earnings and enterprise value (EV)/EBIDTA of 2.3x and 2x for FY2009 and FY2010 respectively. We maintain our Buy recommendation on the stock with a revised price target of Rs950.

Bharat Heavy Electricals   
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,381
Current market price: Rs1,506

Q1FY2009 results: First-cut analysis 

Result highlights

• Bharat Heavy Electricals Ltd (BHEL) reported a robust 33.9% growth in the revenues to Rs4,329.2 crore in Q1FY2009. The same is above our expectation.
• On segmental basis, the industry segment reported a stunning 39.7% growth in its revenues to Rs1,285.1 crore, while the earnings before interest and tax (EBIT) margin improved to 14.1% as against 3.7% in Q1FY2008. The power division reported a strong 28.2% growth in its revenues to Rs3,508.7 crore. 
• The operating profit grew by 2.5% to Rs373.7 crore. The operating performance was below our expectation mainly on account of higher-than-expected employee cost and other expenses. The employee cost and the other expenses as percentage of sales increased by 200 basis points and 140 basis points respectively on a year-on year basis. Consequently, the operating profit margin (OPM) declined by 265 basis points to 8.6%.
• The other income increased by 41.4% to Rs291.7 crore.
• The adjusted profit after tax (PAT) grew by 12.1% yoy to Rs384.4 crore inline with our estimates (Rs385.3 crore), boosted by a better-than-expected revenue growth and a higher other income. The reported PAT is up 33.1%.
• The current order book of the company stands at Rs95,000 crore. The order inflow is up 29% yoy to Rs14,204 crore. 
• At the current market price, the stock discounts our FY2010E earnings by 14.9x and is trading at a enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) multiple of 9.7x FY2010 estimates . We would present our detailed analysis of the Q1FY2009 results and revisit our estimates if required after the conference call of the management. We continue to recommend Buy on the stock. 

Canara Bank   
Cluster: Apple Green
Recommendation: Buy
Price target: Rs234 
Current market price: Rs166

Price target revised to Rs234 

Result highlights

• Canara Bank reported a disappointing set of numbers for Q1FY2009, primarily due to significant mark-to-market (MTM) losses on the investment book. The bottom line at Rs122.7 crore indicated a decline of 49% year on year (yoy). 
• The net interest income growth was healthy at 14% yoy to Rs1,019.2 crore on the back of a slight improvement in the margins coupled with a moderate credit growth. The non-interest income declined by 3.1% yoy to Rs368.5 crore.
• The advances growth during the quarter was muted at 16.1% (vs the industry growth rate of ~25%), as the retail advances growth dropped to 1.9%. On the deposit front, the current account savings account (CASA) balance registered a robust growth of 20.4% yoy (versus a 4.2% growth in the term deposits), which helped the bank report a notable improvement (320 basis points) in its CASA ratio. 
• The operating expenses growth was contained at 3.3% to Rs684.1 crore on the back of a 1.5% decline in the staff expenses, which helped offset the 12.1% growth in the other expenses.
• Notably, the provisions spiked up 79.4% yoy to Rs540.9 crore due to higher MTM provisions (~Rs250 crore) as bond yields moved up during the quarter. The spike in the provisions was the primary reason for a disappointing bottom line performance.
• The asset quality improved further during Q1FY2009 on both absolute and relative basis at gross level. The gross non-performing assets (GNPA) declined by 1.9% yoy to Rs1,447 crore, while on a relative basis, the GNPA in percentage terms improved to 1.31% from 1.55% a year ago. However, at net level, the net non-performing assets (NNPA) increased by 11.9% to Rs938 crore.
• The capital adequacy ratio was healthy at 12.66% as at end of March 2008, though it was down compared with the year-ago level of 13.65%. 
• We are lowering our earning estimate for FY2009 by 4.5% to account for the higher-than-expected MTM losses on the investment portfolio. Further, we are raising our cost of equity assumptions to factor in the higher 10-year g-sec yields. At the current market price of Rs166, the stock trades at 4x 2009E earnings per share (EPS), 2.2x 2009E pre-provisioning profit (PPP) and 0.7x 2009E book value (BV). We maintain our Buy recommendation with a revised price target of Rs234. 

Jaiprakash Associates   
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs289
Current market price: Rs167

Price target revised to Rs289 

Result highlights

• Jaiprakash Associates Ltd's (JAL) top line grew by 21.9% year on year (yoy) to Rs1,148.7 crore in Q1FY2009. The company has restated Q1FY2009 revenues from Rs927 crore to Rs942 crore. On the other hand, it has lowered the other income for the quarter to Rs62.1 crore from Rs78 crore earlier.
• The operating profit margin (OPM) improved by 18 basis points to 27.2% during the quarter on account of revenue contribution from the higher-margin real estate business. 
• The net income declined by 9% yoy to Rs127.3 crore, below the street expectation of Rs163 crore, largely on account of a lower other income. In Q1FY2008, the company received a dividend of Rs30 crore from its subsidiary (Jaiprakash Power Ventures). The company expects this dividend income in the second quarter of this fiscal year.
• The board of directors also decided to allot 12 crore warrants convertible into equity to a promoter group company on a preferential basis. This is however subject to approval from shareholders. This is in addition to the 5 crore warrants already allotted to the promoters group.
• The revenues from the real estate segment declined by 70.8% quarter on quarter (qoq) to Rs75 crore, which is below our expectations. This was largely on account of the cumulative impact of change in the accounting policy in Q4FY2008 from the complete contract method to the percentage completion method.
• We have revised our price target to Rs289. We value Taj Expressway Project and Jaypee Greens based on the NPV method. Under our NPV method, we have considered the discount rate of 16% due to higher debt and equity cost and higher gestation period for both these projects. We have assumed a cap rate of 12% for the Noida land parcel. We have also factored in the delay of one to two years in the project launches. These projects together contribute Rs16,633 crore to our valuation.
• Notably, we have not considered the conversion of the recently announced warrants in our valuation. These warrants, if approved by the shareholders, would lead to about 10% equity dilution. We continue to value the stock using the sum of the parts (SOTP) method and maintain our Buy recommendation. At the current market price, the stock is trading at 27x FY2009 and 21x FY2010 earning estimates. 

VIEWPOINT

Cipla

Strong revenue growth driven by buoyant exports

Result highlights

• On a year-on-year basis, Cipla's net revenues grew by 33.9% to Rs1,207.1 crore and net profit increased by 17.1% to Rs140 crore in Q1FY2009. 
• The domestic business grew by 16% and formulation exports rose sharply by 50% during the quarter. The sharp rise in the exports was primarily due to a 117% increase in the active pharmaceutical ingredient (API) exports and a 32% surge in the formulation exports. The sharp growth in the API exports was possibly driven by the supply of Alendronate API to Teva under exclusivity as well as the supplies of Omeprazole over-the-counter (OTC) API to Dexcel. 
• The operating profit margin (OPM) improved by 460 basis points to 22.4% and the operating profit increased by 68.1% to Rs270.1 crore during the quarter on account of favourable currency and product mix. However, with the waning off of the Alendronate exclusivity revenues from Q2FY2009 onwards and the rising cost of key raw materials imported from China, we expect Cipla to witness some margin pressure in the coming quarters.
• The company has provided Rs75 crore for mark-to-market (MTM) losses on account of losses on forward contracts, foreign exchange (forex) loans and receivables.
• At the current market price of Rs226, Cipla is trading at 21.8x its consensus FY2009E earnings and at 18.8x its consensus FY2010 earnings. We feel that the stock is richly valued at these levels, considering the limited near-term visibility of the company's future growth opportunities.