ShareKhan Newsletter Blog

Result highlights

• The top line of Orbit Corporation (Orbit) grew by 28.8% year on year (yoy) to Rs81.8 crore in Q1FY2009. The bulk of the revenues were booked from Orbit WTC (approximately Rs56 crore) and Orbit Arya (approximately Rs11 crore). Orbit had pre-sales revenues worth Rs578.3 crore at the end of Q1FY2009 compared with Rs644.8 crore at the end of Q4FY2008.
• The operating profit margin (OPM) of Orbit declined by 348 basis points to 40.5% during the quarter due to an increase in both its corporate expenses and its raw material cost. Consequently, the company's operating profit grew by 18.6% yoy to Rs33.1 crore during the quarter.
• The company's effective tax rate stood at 32.2% in Q1FY2009 vs 23.6% in Q1FY2008, as none of its projects qualified for tax benefits under the section 80 IB during the quarter. The company has indicated that none of its projects is going to qualify for tax benefits in the future as well. Hence, going forward, the company is likely to pay tax at full rate.
• During Q1FY2009, the company's interest expenses grew at a lower rate than expected, as it capitalised the interest expenses on compulsorily convertible debentures worth Rs200 crore raised for the Orbit Highcity project. The interest expenses on the project stood at Rs8.27 crore during the quarter but the same were not recognised as the project is not expected to start in the near term. 
• Orbit's net income remained flat at Rs18.2 crore, below our expectation of Rs21 crore, during the quarter.
• In Q1FY2009, the company acquired an 85% stake in Ahinsa Buildtech Pvt Ltd at a cost of Rs130 crore. The acquisition will give Orbit the right to develop the Orkay Mills project at Saki Naka, Andheri. The average cost of land for this project works out to Rs4,725 per square feet (sq ft). The company plans to develop the saleable area of 275,000 sq ft for mixed use.
• We have revised our effective tax rate estimate for Orbit to 33% each for FY2009 and FY2010. However, the capitalisation of the interest expenses for the Orbit Highcity project would also lead to a reduction in the interest expenses of Orbit because the project is not likely to start in the near term. Consequently, we have revised our earnings estimates for FY2009 and FY2010 downward by 0.9% each.
• At the current market price, the Orbit stock is trading at attractive valuations of 4.3x FY2009 earnings estimate and 3.1x FY2010 earnings estimates. Given the huge opportunities in the re-development space, we continue to value the stock using the price/earnings (PE) multiple approach and maintain our Buy recommendation with a revised price target of Rs808.

Key points

• In the recently held conference call, HCL Technologies (HCL Tech) has announced that it is likely to report foreign exchange (forex) losses in the range of $67-$77 million in FY2008. These losses are likely to consist of two components:

  • A forex loss of $30 million on unwinding of $540 million-worth of forex hedges that includes a cash loss of $9 million and reversal of mark-to-market (MTM) gains booked earlier. 
  • The balance forex loss of $37-47 million is MTM forex loss on the remaining unassigned outstanding hedges (worth around $459 million).
• For the remaining $1.2 billion of forex exposure (assigned hedges, where the accounting treatment is based on cash flow hedge accounting method), the MTM losses aggregating to $114 million will be transferred to balance sheet under the head of 'Other comprehensive income'.
• We see two key issues here. First, the aggressive hedging has misfired and has forced the management to unwind some of the forward cover. Second, the company has $459 million of cover that is not strictly hedges but a directional view on the exchange rate. Such a practice is likely to be taken negatively by the markets and would reflect in the company's valuations.
• If we factor in the MTM losses of $77 million in Q4FY2008, the earnings are likely to decline by 24.3% on a year-on-year basis. We will review our FY2009 and FY2010 earning estimates and price target after Q4FY2008 results. We are downgrading the stock from Buy to Hold, as such inconsistent forex practices will continue to be a drag on the valuation.

Result highlights

• Axis Bank reported a bottom line of Rs330.1 crore for Q1FY2009. The same grew by a whopping 88.6% on a year-on-year (y-o-y) basis and was well above our estimate of Rs234 crore.
• The net interest income (NII) for the quarter came in at Rs810.5 crore, up 81.4% year on year (yoy). The impressive NII growth was due to continued growth momentum in the advances coupled with healthy margins.
• The non-interest income too recorded a strong growth of 82.5% yoy and reached Rs624.8 crore. This was on the back of a robust growth in the fee income (up 80%) and the forex income. Meanwhile, the treasury income (excluding customer forex earnings) registered a decline of 17.7%.
• The operating expenses for the quarter stood at Rs632.9 crore, up 50.3% yoy, but down 4.4% on a quarter-on-quarter (q-o-q) basis. The sequential decline in the operating expenses was largely due to a higher base in Q4FY2008 on account of the re-branding exercise among other things.
• The operating profit grew by up by 118% yoy on the back of a robust growth in the net total income (up 81.9% yoy) coupled with a relatively lower growth in the operating expenses (up 50.3%). Notably, the core operating performance was even better with a 150.3% y-o-y growth.
• Importantly, the provisions spiked up by 194% yoy to Rs296.7 crore during the quarter. The spike was primarily due to a provision of Rs225.2 crore made towards depreciation (mark-to-market losses) in the value of investment portfolio.
• On the asset quality front, the bank witnessed a substantial increase of Rs144 crore on a sequential basis in its gross non-performing assets (GNPA), while on a relative basis (%GNPA) it saw an improvement of 9 basis points to 0.92%. Importantly, the incremental GNPA as percent of incremental advances jumped significantly to 9.5% compared with 0.4% in the previous quarter. This increase indicates rising defaults for the bank.
• While the Q1FY2009 results came in better than expected, we have lowered our 2009 estimates by 3.2% and 2010 estimates by 7.9%. The estimates have been lowered to factor in the various concerns that have emerged over the past few months including MTM losses on investments, higher loan loss provisioning and moderation in fee income growth. At the current market price of Rs636, the stock trades at 16.6x 2009E earnings per share (EPS), 7.7x 2009E pre provisioning profit (PPP) and 2.3x 2009E price-adjusted book value. We maintain our Buy recommendation with revised price target of Rs901.