Shiv-Vani Oil & Gas Exploration Services Cluster: Ugly Duckling Recommendation: Buy Price target: Rs725 Current market price: Rs552
Good results; order book zooms
Result highlights
Shiv-Vani Oil and Gas Exploration Services' (Shiv-Vani) Q1FY2008 results were ahead of our expectations on the back of improved profitability. The consolidated top line grew by 104% to Rs188.5 crore in line with our estimates. The top line growth was on the back of incremental revenues from the coal bed methane (CBM) project and firm realisations.
Higher realisations and increased efficiency led to a 280-basis-point year-on-year improvement in the operating margins to 40.2%. Consequently, the operating profits grew by 119.2% to Rs75.7 crore.
Both the interest and depreciation charges rose in line with our expectations on the back of the capital expenditure (capex) incurred by the firm to acquire new assets. Consequently, the consolidated net profits rose by 110.2% to Rs36.3 crore.
The company plans to spend close to Rs700 crore in FY2009. It has already taken up its fleet size to 29 rigs at present and plans to take the same to 40 rigs by the end of the fiscal.
Shiv-Vani's order book has soared to Rs4,800 crore currently, as compared to Rs3,500 crore at the end of FY2008. The order book growth has mainly been driven by an excellent growth in the onshore drilling segment. Its strong order book executable over the next three years imparts great visibility to company's future earnings. Greater focus on onshore blocks in the New Exploration Licensing Policy VII would continue to drive strong growth for the company going forward.
At the current market price, the stock trades at 15.2x FY2009 and 11.6x FY2010 estimated earnings. We maintain our Buy call on the stock with a price target of Rs725.
Sun Pharmaceutical Industries Cluster: Ugly Duckling Recommendation: Buy Price target: Rs1,640 Current market price: Rs1,410
Results beat expectations
Result highlights
Sun Pharmaceuticals' (Sun Pharma) Q1FY2009 revenues grew by 66% to Rs1,041.8 crore. The revenues were in line with our estimates and were driven by strong growth in the base business and continued contribution from the generic Pantoprazole and the generic Ethyol exclusivities.
Sun Pharma's domestic formulation revenues grew by 17.1% to Rs429.6 crore. Though the growth was relatively lower than the supernormal growth seen in the past, it was still way above the industry growth of 12-13%. We expect Sun Pharma's domestic formulation business to continue outpacing the industry.
Caraco Pharmaceuticals (Caraco Pharma), Sun Pharma's US subsidiary, continued its impressive performance by registering a three-fold jump in the revenues to $108 million in Q1FY2009, in line with our estimates. The exceptional performance was driven by continued contributions from the generic Pantoprzole and the generic Ethyol exclusivities. We estimate Caraco Pharma to have recorded exclusivity revenues of ~$60 million in Q1FY2009. Caraco Pharma has guided for a 25% growth in FY2009 on the back of a strong pipeline of new launches, which we believe is fairly conservative, given the visibility of strong upsides from the Pantoprazole, Ethyol and the potential Effexor XR exclusivities.
Sun Pharma has been awarded a 180-day exclusivity for generic Effexor XR, a blockbuster anti-depressant, with $2.6 billion in annual revenues. However, despite the expiration of the product patent on Effexor XR, the launch has been delayed as Osmotica Pharma, the other generic player, has filed a citizen petition with the US Food and Drug Administration (US FDA) in an attempt to stall Sun Pharma's launch of the product. We have not modeled the impact of the launch into our estimates. The US FDA ruling on the citizen petition and the subsequent launch of generic Effexor XR by Sun Pharma in the USA would be a trigger for an upgrade.
Driven by substantial high-margin revenues from exclusivities and scale benefits, Sun Pharma's margins expanded by 1,740 basis points to 51.6% in Q1FY2009. The margin expansion caused the operating profit to increase by a whopping 150.4% to Rs537.9 crore. We expect the margins to start moderating in the coming quarters due to the expiration of the exclusivities.
Sun Pharma's net profit grew by a stellar 120.7% to Rs501.5 crore during Q1FY2009 and was ahead of our estimates of Rs479.3 crore. The profit growth was restricted due to reduction in other income and increase in tax provision.
Sun Pharma remains confident on closing the acquisition of Taro Pharmaceuticals (Taro Pharma), however it does expect to undergo a protracted legal battle with Taro Pharma and is a shareholder for the same, which could result in a delay in closing the acquisition. While the successful closure of the acquisition is strategically important for Sun Pharma, the failure to do so would not impact our estimates, as our estimates do not factor in the impact of Taro acquisition. The uncertainty around the acquisition of Taro Pharma could act as a sentimental overhang on the stock in the near term, while positive news flow on the acquisition would catalyse the stock's upward movement.
At the current market price of Rs1,410, the stock is valued at 17.3x FY2009E and 17.2x FY2010E fully diluted earnings. We reiterate our Buy recommendation with a revised price target of Rs1,640 (20x FY2010E earnings).
Television Eighteen India Cluster: Emerging Star Recommendation: Buy Price target: Rs355 Current market price: Rs220
Price target revised to Rs355
Result highlights
TV18's Q1FY2009 results were below our expectations with the revenues of the news and the internet businesses below the estimates. The operating revenue for the quarter grew by 36.5% year on year (yoy) to Rs93 crore, which was below our and street's expectations.
The news business' revenues grew by only 30.1% yoy to Rs75.3 crore (as against our estimate of 48% revenue growth). The lower revenue growth for the segment can be attributed to seasonal weakness and slowdown in the financial sector that impacted the advertising revenues. The operating profit margin (OPM) for the segment was up 389 basis points to 33.1%.
The revenue growth of Web18 was disappointing at 41.3% yoy to Rs13.2 crore. The revenues declined by 27.1% quarter on quarter (qoq) and points towards the impact of the stock market on the segment's revenues as ~70% of Web 18's revenues come from www.moneycontrol.comthe website catering to stock markets. In our preview, we had mentioned that Web18's revenue growth would be a key monitorable in the Q1FY2009 results. As the Q1FY2009 performance of Web 18 was lower than expectations, we have downgraded our revenue growth estimates for FY2009 and FY2010 to 35% and 30% respectively.
The newswire business grew in line with our expectations to Rs4.5 crore, albeit on a low base. The operating expenditure of the business went up to Rs7.2 crore leading to an operating loss of Rs2.7 crore.
The consolidated OPM of the company during the quarter stood at 18% against 15.2% in the corresponding quarter of the last year. The lower revenue growth in the news and web businesses (the increase in the expenditure is in line with estimates) led the actual OPM remain lower than the expected OPM of 20.8%. Thus the operating profit grew by 61.8% yoy to Rs16.7 crore on a low base of Q1FY2008.
Consequent to a higher interest charge and an extraordinary expenditure (interest payable for acquisition of Infomedia India) of Rs6.48 crore, the company reported a net loss of Rs9 crore for the quarter.
We have revised downwards our revenue and profit estimates for FY2009 and FY2010 to factor in the lower revenue growth for the web business, increased losses for the web and newswire businesses and the increase in the interest cost as a result of a higher debt. Consequently we are downgrading our price target on the stock to Rs355 based on our sum-of-the-parts valuation.
Ashok Leyland Cluster: Ugly Duckling Recommendation: Hold Price target: Rs39 Current market price: Rs29
Price target revised to Rs39
Result highlights
Ashok Leyland's results for Q1FY2009 were below expectations mainly on the profitability front.
The net sales for Q1FY2009 grew by 16.2% year on year (yoy) to Rs1,884 crore. Despite a lower volume growth of only 1.4% the sales were boosted by higher sales of engines and spare parts and higher than expected price increase.
The increase in the raw material cost led the operating profit margin (OPM) decline to 8% in Q1FY2009 from 9.5% in Q1FY2008. The decline in the OPM was higher than expectations and led the operating profit to drop by 2.2% to Rs151.1 crore.
The company has provided for foreign exchange (forex) losses of Rs33.9 crore during the quarter as against gains of Rs19.7 crore in the same quarter last year and VRS expenses. Consequently, the reported profit after tax (PAT) declined by 42.6% to Rs50.6 crore.
In view of the rising interest cost and non-availability of funding, we would like to take a cautious stand on the growth this year.
Taking this into consideration, we have reduced our growth estimates for FY2009 and FY2010. Coupling this with the decline in margins, we are downgrading our estimates for FY2009 by 13.5% to Rs3.2 and for FY2010 by 7% to Rs3.9. Consequently, we are reducing our price target to Rs39 and maintain a Hold on the stock.
Unity Infraprojects' (Unity) top line grew by 50.9% year on year (yoy) to Rs223.7 crore on account of better execution. The top line growth was above our expectation of Rs197.2 crore.
The operating profit margin (OPM) remained flat at 12.6% inspite of a significant rise in the raw material cost.
The company's interest and tax expenses also grew by 42.7% and 55.7% respectively. Consequently the company's net income grew by 43.5% yoy to Rs15.6 crore, which is above our expectation of Rs13.4 crore. The results were above our expectations primarily on account of better than expected sales and OPM during the quarter.
The order inflow remained healthy during the quarter. The company's order book grew by 22.9% quarter on quarter (qoq) to Rs2,963 crore. On the back of a healthy order book, we expect the company's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 29.2% and 26.7% respectively during the period FY2008-2010.
We maintain our earnings estimates for FY2009 and FY2010. In terms of valuation, we are now removing UMC project valuation as the company is facing delay in terms of land hand over from UMC.
We continue to value the stock with sum-of-the-parts (SOTP) methodology and maintain our Buy recommendation on the stock with revised price target of Rs871. At the current market price, the stock is trading at attractive valuation of 7.2x FY2009 and 5.7x FY2010 earnings estimates.
The Q1FY2009 results of Indo Tech Transformers Ltd (ITTL) are better than our expectations on both revenue growth and profitability fronts.
The company's revenues increased by 37.1% to Rs54 crore on the back of a strong growth of 44.6% in the volumes to 875 mega volt ampere (MVA) from 605MVA in Q1FY2008. The realisation was, however, down by 5.2% to Rs6.17 lakh/MVA. The realisation declined mainly due to a change in the company's product mix as ITTL has now started selling larger transformers.
The operating performance of the company continues to surprise on the positive side. In Q1FY2009, the company's operating profit margin (OPM) improved by 385 basis points to 28.9% on the back of a decline in its other expenses. Consequently, the operating profit grew by 58.2% to Rs15.6 crore.
The interest cost increased by 208.3% to Rs0.4 crore as the company raised term loan for its new plant. The depreciation charge also rose by 177.1% to Rs1 crore in the same quarter.
The other income shot up by 57.5% to Rs1.37 crore as the company received Rs0.43 crore on account of insurance claims during the quarter. Led by a strong revenue growth and better than expected operating profit, the net profit grew by 51.2% to Rs10.4 crore, which is higher than our estimate.
Currently, the order book of the company stands at Rs123 crore as against Rs153 crore in Q4FY2008. The slowdown in the company's order inflows remains our prime concern.
The new 4,000MVA plant of the company is now in commercial operation and shipped 350MVA of transformers during the current quarter. Going forward, we expect the company to ramp up production in this plant and aggressively look at opportunities in the large transformer space.
We maintain our estimates for ITTL and Buy recommendation on its stock with a revised price target of Rs460.
Corporation Bank Cluster: Apple Green Recommendation: Buy Price target: Rs321 Current market price: Rs258
Price target revised to Rs321
Result highlights
For Q1FY2009 Corporation Bank has reported a profit after tax (PAT) of Rs184.3 crore, indicating a growth of 4.1% year on year (yoy). The PAT is above our estimate of Rs143 crore.
The net interest income (NII) of the bank increased by a muted 7.2% yoy to Rs378.0 crore despite a healthy growth in the advances (up 28.3% yoy) because the reported margin contracted by 58 basis points yoy to 2.43%.
The non-interest income increased by 13.8% yoy to Rs157.6 crore on the back of a 77.0% year-on-year decline in the treasury income.
The operating expenses were flat at Rs214.6 crore during the quarter. The expenses were contained primarily due to a 13.0% decline in the staff expenses while the other operating expenses grew by 12.4% yoy.
Notably, the provisions witnessed a significant (five-fold) jump and stood at Rs100.8 crore. The spike was primarily due to a significant (Rs63.8 crore) mark-to-market (MTM) loss on the bank's investment book.
The asset quality of the bank remained healthy with an improvement in absolute and relative terms. The gross non-performing assets (GNPAs) in percentage terms came in at 1.46%, down 61 basis points yoy; the net non-performing assets (NNPAs) in percentage terms declined 10 basis points to 0.36%.
The growth in the advances was healthy at 28.3% yoy, while the deposits registered a growth of 26.6% yoy. The healthy business growth implies that the bank is again focusing on building the advances book after a muted performance in Q4FY2008.
We are lowering our earnings estimate for FY2009 by 5.0% 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 Rs258, the stock trades at 4.8x 2009E earnings per share (EPS), 2.8x 2009E pre-provisioning profit (PPP) and 0.8x 2009E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs321.
Punjab National Bank Cluster: Ugly Duckling Recommendation: Buy Price target: Rs587 Current market price: Rs451
Price target revised to Rs587
Result highlights
Punjab National Bank (PNB) reported a profit after tax (PAT) of Rs512.4 crore in Q1FY2009 indicating a growth of 20.5%. The PAT was slightly below our estimate of Rs526 crore.
The net interest income (NII) for the quarter stood at Rs1,444.7 crore, up 11% year on year (yoy). The moderate growth in NII was primarily due to sub-industry advances growth coupled with contraction in the net interest margin (NIM).
The calculated NIM witnessed a contraction of 33 basis points to 2.85% primarily due to a ~50-basis point increase in the cost of funds. With a view to improve NIM, the bank has announced a 100-basis-point hike in its prime lending rate (PLR) in response to monetary tightening, which should help avoid further erosion in the margins.
The non-interest income registered a 10.4% decline yoy to Rs456.1 crore. The decline primarily stems from a 90.2% decline in the treasury income.
Notably the operating expenses growth was contained at 4.7% to Rs918.5 primarily due to a higher base last year when the bank provided for AS-15 transitional liability. Notably the bank provided excess provision of Rs150 crore towards AS-15.
Interestingly the provisions and contingencies were down by 31.5% yoy to Rs210.5 crore. The decline in provisions was primarily due to a higher base last year on account of a surge in non-performing assets (NPAs). With an improvement in the asset quality in recent quarters, the provisions have been declining.
The advances registered a growth of 19.6% yoy to Rs95,640 crore, while the deposits were up by 21.4% yoy to Rs173,074 crore. The current account and saving account (CASA) ratio declined by ~300 basis points to 41.3% but remains one of the best among peers.
The asset quality improved yoy on both absolute and relative basis. The gross non-performing asset (GNPA) in percentage terms stood at 2.82%, significantly down from 3.81% a year ago, while the net non-performing asset (NNPA) in percentage terms declined to 0.63% from 0.98% a year ago. However on sequential basis the %GNPA is up 12 basis points.
We have maintained our estimates for FY2009 and revised FY2010 estimates downwards by 1.5%. We are raising our cost of equity assumptions to factor in the increase in the 10-year G-sec yields and consequently we are revising our price target downwards to Rs587. At the current market price of Rs451, the stock trades at 6.1x 2009E earnings per share (EPS), 3.1x 2009E pre-provisioning price (PPP) per share and 1.1x 2009E book value (BV) per share. We maintain our Buy recommendation on the stock.
HDFC Bank Cluster: Evergreen Recommendation: Buy Price target: Rs1,482 Current market price: Rs1,095
Price target revised to Rs1,482
Result highlights
HDFC Bank reported a profit after tax (PAT) of Rs464.4 crore indicating a growth of 44.6% year on year (yoy). The Q1FY2009 financials include the effect of the merger of Centurion Bank of Punjab (CBoP) with HDFC Bank and hence are not strictly comparable with prior periods.
The net interest income (NII) for the quarter stood at Rs1,723.5 crore, up 74.9% yoy buoyed by acquisition-led balance sheet expansion. The reported core net interest margin (NIM) stood at a healthy 4.1% though it has contracted by 30 basis points sequentially from 4.4% in the previous quarter. The capital raised by HDFC Bank and CBoP during FY2008 has contributed the same.
The non-interest income growth was muted at 3.6% and stood at Rs593.4 crore. The muted growth in the non-interest income primarily stemmed from a treasury loss of Rs77.6 crore (includes mark-to-market loss of Rs72 crore) compared with a gain of Rs52.6 crore. The treasury loss was offset by a robust growth (37.3% yoy) in the fee income.
The operating expenses grew by 66.5% yoy to Rs1,289.4 crore primarily driven by a 90.4% year-on-year (y-o-y) growth in staff expenses and a 52.7% y-o-y growth in other operating expenses. Considering the fact that CBoP retail franchisee was relatively less profitable, the merger has resulted in a 590-basis-point increase in the cost-income ratio to 55.7%. Consequently, the growth in the operating profit was contained at 31.1% yoy to Rs1,027.5 crore, while the core operating profit (excluding treasury income) grew by a strong 51.2% yoy.
Notably, provisions were up by only 12.2% yoy to Rs344.5 crore. During the quarter, the bank provided for CBoP's non-performing assets (NPAs) through reserves, while the MTM loss provisions were reported under non-interest income, which resulted in a moderate growth in the provisions.
The asset quality of the merged entity indicated deterioration but remains healthy. While the increase looks substantial on absolute basis (GNPA up 111.6% yoy and NNPA up 131.5%), it is misleading due to the effect of merger. On a relative basis, a more reliable indicator, %GNPA increased by 20 basis points to 1.5% while %NNPA increased by 10 basis point to 0.5%.
HDFC Bank's balance sheet saw significant expansion owing to the consolidation of CBoP's balance sheet with itself. The net advances grew by 79.8% yoy to Rs96,797 crore, while the deposits grew by 60.4% yoy to Rs130,918 crore. Notably the growth in the current and savings account (CASA) balance was relatively lower at 39.8%, which resulted in a 660-basis-point contraction in the CASA ratio to 44.9%.
We have revised our earnings estimates to factor in the effect of CBoP merger. At the current market price of Rs1,127, HDFC Bank trades at 20.2x FY2009E earnings per share (EPS), 8.1x FY2009E pre provisioning profit (PPP) and 3.1x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs1,482.
ITC Cluster: Apple Green Recommendation: Buy Price target: Rs247 Current market price: Rs188
Non-cigarette FMCG disappoints
Result highlights
ITC's Q1FY2009 results are below our expectations as its profitability was hurt by increase in the raw material cost and the continued brand building expenditure on new launches.
The company registered a growth of 17.3% year on year (yoy) in its net sales to Rs3,899.7 crore during Q1FY2009 led by more than expected growth in cigarettes and strong performance by agri-commodities and paperboards, paper & packaging businesses. The top line was higher than our expectation of Rs3,624.3crore.
The raw material cost as a percentage of sales increased by 311 basis points to 46.2% and the other expenses as a percentage of sales increased by 161 basis points to 19.3%. Both these led to a hefty 500.6-basis-point decline in the operating profit margin (OPM) to 28.9% for the quarter. Thus a higher raw material cost coupled with an increase in the other expenses resulted in year-on-year (y-o-y) flat operating profit to Rs1,127.2 crore in Q1FY2009.
The OPM was impacted by a 2.75x increase in the losses of the non-cigarette FMCG business. We believe a lower contribution (to the sales) of the high margin cigarettes business and an increase in the contribution of the low margin agri-commodities business led to lower operating margins.
Consequently no growth at operating level coupled with higher incidence of tax led to decline of 4.4% in the bottom line to Rs748.7, which is less than our expectation of Rs819.6crore.
Despite the exit from non-filter cigarettes, ITC's cigarette business registered a growth of 6.2% in its revenues to Rs1,739.7crore (ahead of our expectation of Rs1,659.5 crore) in Q1FY2009. As against popular expectations of a 6-7% decline in the cigarette business volumes consequent to the closure of the non-filter cigarettes business (~20% of total cigarette volumes) the actual decline in cigarette volumes stood at ~3% which is commendable and points towards upgrading of 60-70% of the non-filter cigarette smokers to filter cigarettes.
After several quarters of strong performance, the non-cigarette FMCG business recorded a revenue growth of only 27.9% to Rs693.6crore, which is below our expectation. The segmental loss increased to Rs122.6 crore (a margin loss of 17.7%) on account of the gestation costs of several new products in the personal care category and significant brand building activity for the new products.
We believe the cigarette business continues to be a cash cow for ITC and remains a key cash generator to plough in new businesses, which would ensure sustained growth for the company. In near term as ITC ramps up its food and personal care businesses, consequent gestation costs would lead to significant cash losses. However hefty marketing and brand building exercise undertaken by ITC specifically on the personal care products would lead to creation of strong brands in the medium to long term. Thus while losses in the non-cigarette FMCG business would be a dampener, substantial and continuous top line growth is what one has to watch out for. At the current market price of Rs188 the stock trades at 19.5x FY2009 earnings per share (EPS) of Rs9.6 and 16.3x FY2010E EPS of Rs11.5. We maintain our Buy recommendation on the stock with a price target of Rs247.
Cadila Healthcare Cluster: Emerging Star Recommendation: Buy Price target: Rs372 Current market price: Rs310
Q1 net profit higher than estimated
Result highlights
Cadila Healthcare's (Cadila) total operating income grew by 24.8% to Rs714.0 crore in Q1FY2009. Its net profit rose by 21.4% to Rs89.7 crore (against our estimate of Rs67 crore) in the same quarter.
The top line growth is above our estimate. It is also broad based and was driven by strong traction in the US generic, Brazilian and French businesses, and the higher than expected contribution from the Nycomed joint venture (JV).
The domestic formulation business grew by a tepid 5.1%, well below the industry growth rate, due to a shortage of raw materials imported from China. The management has, however, maintained its growth guidance for the domestic formulation business at 13-15%, as it expects the growth to scale up in the coming quarters with the easing of the raw material shortage.
Cadila's revenues from its JV with Nycomed (formerly Altana) increased by an impressive 32.7% to Rs27.6 crore, while the profits grew by 38.6% to Rs21.2 crore. This was contrary to our expectation of a decline in the business. The strong growth was driven by the demand from the European and the rest of world (ROW) markets. Further, the management has expressed its confidence in maintaining the contributions from this JV at the FY2008 levels in FY2009 and FY2010.
A higher contribution from the high-margin Nycomed JV and an improved profitability of the French business caused Cadila's margins to expand by 320 basis points to 22.6%, which is ahead of our estimate of 19.3%. Consequently, the operating profit rose by 45.4% to Rs161.7 crore in Q1FY2009.
At the current market price of Rs310, the stock is available at attractive valuations of 13.2x our FY2009 and at 11.0x our FY2009 estimated earnings. We reiterate our Buy recommendation on Cadila with a sum-of-the-parts based price target of Rs372.
SECTOR UPDATE
Banking
Impact of debt waiver guidelines he Reserve Bank of India (RBI) has released prudential guidelines on income recognition, asset classification and provisioning, and capital adequacy requirements related to the Agricultural Debt Waiver and Debt Relief (ADWDR) Scheme, 2008.