Elder Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs508 Current market price: Rs326
Results in line with estimates
Result highlights
Elder Pharmaceuticals (Elder) has reported a revenue growth of 17.1% for Q1FY2009 to Rs146.1 crore. The revenue growth was driven by continued momentum in the company's star brands (Eldervit, Shelcal, Amrifru and Fairone), strong contribution from exports through its joint venture in Ghana, the mega success of its three products (Shelcal CP, Phyto Omega and Hibor) and strong performance of the active pharmaceutical ingredients (API) business.
Elder has reported a 90-basis-point expansion in its operating profit margin (OPM) to 19.3% for the quarter. Consequently the operating profit of the company rose by 22.6% to Rs28.3 crore in Q1FY2009.
Elder's net profit rose by 16.1% to Rs17.5 crore in Q1FY2009. The net profit growth was in line with our estimates despite substantial increase in the interest cost (on account of the new external commercial borrowing made by the company and an increase in the interest rates) and depreciation charge during the quarter (due to commissioning of new capacities).
The management has provided a rosy outlook for the next two to three years and expects to maintain its revenue momentum at around 20-25% with operating margins of around 21-22%.
At the current market price of Rs326 the stock is trading at 6.9x FY2009E earnings and at 5.5x FY2010E earnings. We maintain our Buy recommendation on Elder's stock with a price target of Rs508.
Orchid Chemicals & Pharmaceuticals Cluster: Emerging Star Recommendation: Buy Price target: Rs300 Current market price: Rs260
Disappointing performance
Result highlights
Orchid Chemicals and Pharmaceuticals' (Orchid) Q1FY2009 results have been disappointing due to lower top line growth, margin pressures, higher than anticipated interest burden and foreign exchange (forex) translation losses.
The Q1FY2009 revenues grew by 21.9% year on year (yoy) to Rs287.7 crore, way lower than our estimates of Rs350 crore. The revenue growth was restricted due to absence of new launches during the quarter. On a sequential basis the revenues were down by 24.1% due to the onset of the summer season in the USA (which is a lean period for the sale of antibiotics) and the entry of competition in Cefepime. On the positive side Orchid continued to perform well in older products like Cefoxitin and Cefdinir.
The operating profit margin (OPM) shrank by 370 basis points to 24.2% in Q1FY2009 largely due to an increase in staff costs and rising power and fuel costs (due to a rise in the crude oil prices). The declining margin restricted the operating profit growth to 5.7% at Rs69.7 crore in Q1FY2009.
Orchid reported a loss of Rs31.6 crore at the net level. This was due to poor operating performance, higher interest costs and mark-to-market translation losses on foreign currency liabilities of Rs58.8 crore (pre-tax). On excluding the net impact of the forex translation, the adjusted net profit of the company grew by 27.5% to Rs33.8crore in Q1FY2009 mainly powered by a 61x jump in the other income. The net profit reported by the company was below our estimates.
Despite repeated assurances from the management Orchid's debt level remains high at ~$300 million (excluding the foreign currency convertible bonds [FCCBs]) as reflected in the increase in the interest cost in Q1FY2009 [up by 50% on a year-on-year basis and by 24.6% sequentially]).
Orchid has strong growth drivers over the next two years. We expect the competitive scenario in the Cephalosporin segment to intensify whereas the launch of Tazo-Pip and other non-antibiotic products will fuel growth in FY2009. The opening up of the Carbapenem generic market from FY2010 onwards will maintain the growth.
Orchid has already launched Tazo-Pip in Canada and Australia (which represents a $50-60 million market collectively) and has also received the much awaited approval to launch the product in Europe through its marketing partner Hospira. The company is expecting the approvals for launching the product in the USA within the next one month. The approval and launch of Tazo-Pip in the USA would act as a major trigger for the stock.
The management has scaled down its growth guidance for FY2009 from 30% earlier to 15-20% now mainly due to the delay in the launch of Tazo-Pip in the USA and Europe. Our estimates already factor in the delayed launch. Hence we maintain our revenues and profit estimates at the current levels.
At the current market price of Rs260 Orchid is discounting its FY2009E earnings by 15.9x and its FY2010E earnings by 12.1x. We maintain our Buy recommendation on the stock with a price target of Rs300.
Tata Motors Cluster: Apple Green Recommendation: Hold Price target: Rs545 Current market price: Rs396
Price target revised to Rs545
Result highlights
Tata Motors' results for Q1FY2009 are below our expectations due to lower than expected margins. However, the profit after tax (PAT) of the company is higher than our estimate mainly on account of a higher other income and a lower tax outgo during the quarter.
The net sales for the quarter grew by 14.4% to Rs6,928.4 crore on the back of a 3.9% volume growth and a 10.1% realisation growth during the quarter.
Domestic sales of commercial vehicles (CVs) increased by 15.9% to 71,049 units while that of passenger vehicles declined marginally to 52,450 units. The export sales volume declined by 34% to 9,220 units.
An increase in the overall expenses, such as raw material cost, employee cost and other expenses, led the operating profit margin (OPM) to decline by 130 basis points to 7.7%. Hence, the operating profit dropped by 2.9% to Rs530.5 crore in Q1FY2009.
A higher other income and a lower tax outgo helped the adjusted PAT to grow by 59.3% to Rs412.37 crore. After accounting for a foreign exchange (forex) loss of Rs199.9 crore and a profit of Rs113.7 crore on the sale of the stake in Tata Auto Components, the reported net profit declined by 30.1% to Rs326.2 crore.
Tata Motors has not reported the consolidated results for Q1FY2009 since the financial statements of Jaguar and Land Rover (JLR) are under compilation and have not been finalised yet. However the performance of the subsidiaries was also affected by the rising commodity prices and interest rates during the quarter.
Our outlook on the CV industry remains cautious considering the lower availability of finance, the rising interest rates and the slowdown in the economy.
In view of the pressure on the company's profit margin, we downgrade our consolidated estimate for FY2009 by 7.3% to Rs54.6 and that for FY2010 by 12% to Rs60.8. At the current levels, the stock trades at 6.5x its FY2010E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.1x. We maintain our Hold recommendation on the stock with a revised price target of Rs545.
Ratnamani Metals and Tubes Cluster: Ugly Duckling Recommendation: Buy Price target: Rs1,110 Current market price: Rs786
Results in line with expectations
Result highlights
The Q1FY2009 results of Ratnamani Metals and Tubes Ltd (RMTL) are in line with our expectations. The company's revenues grew by 31.4% to Rs249.7 crore on account of a strong volume growth in both the stainless steel (SS) and carbon steel (CS) pipe segments.
The operating profit of the company grew by 24.1% to Rs56.4 crore in the quarter. The operating profit margin (OPM) declined by 133 basis points to 22.6% due to an increase in the other expenses. The company's other expenses as a percentage of sales increased by 353 basis points to 11.2% in Q1FY2009.
RMTL's interest cost declined by 29.8% to Rs3.6 crore while its depreciation charge rose by 20.9% to Rs6.4 crore in Q1FY2009.
During the quarter, the company made a provision to the tune of Rs7.86 crore for a mark-to-market (MTM) loss on its exposure to foreign exchange (forex) contracts. We have considered this as a one-off item. Consequently, the net profit of the company grew by 35.6% to Rs30.6 core. The reported net profit increased by 12.6% to Rs25.5 crore in the quarter.
The combined order book of the company stood at Rs700 crore at the end Q1FY2009 as against Rs650 crore at the end of Q4FY2008.
We have revised our earnings estimates for FY2009 and FY2010 mainly to factor in the lower OPM in the future and the MTM forex loss. Our fully diluted earnings per share (EPS) estimates for FY2009 and FY2010 now stand at Rs126.2 and Rs152.3 respectively. We reiterate our Buy call on the stock with a price target of Rs1,110 per share. At the current market price the stock trades at price-to-earnings of 6.2x and 5.2x its FY2009 and FY2010 estimates.
Andhra Bank Cluster: Cannonball Recommendation: Buy Price target: Rs90 Current market price: Rs59
Price target revised to Rs90
Result highlights
Andhra Bank reported a profit after tax (PAT) of Rs77.6 crore indicating a decline of 45.0% year on year (yoy). The same was well below our estimate.
The net interest income (NII) for Q1FY2009 came in at Rs346.3 crore, largely flat despite a healthy growth in the advances (23% yoy), as the reported margins contracted by 71 basis points yoy to 2.76%.
The non-interest income declined by 9.7% yoy to Rs118.7 crore on the back of a treasury loss of Rs1 crore during the quarter.
The operating expenses were largely stable at Rs259.7 crore during the quarter. The expenses were contained primarily due to a 2.9% decline in staff expenses, while other operating expenses grew by 11.9% yoy.
Notably the provisions witnessed a significant (over ten-fold) jump and stood at Rs122.7 crore. The spike was primarily due to a significant (Rs86 crore) marked-to-market (MTM) loss on the bank's investment book.
The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) in percentage terms came in at 1.15%, down 37 basis points yoy, while the net non-performing asset (NNPA) in percentage terms was down 10 basis points to 0.10%.
The growth in the advances though lower as compared to the industry growth, was at healthy 23% yoy, while the deposits registered a growth of 20.6% yoy.
We are lowering our earnings estimate for FY2009 by 16.4% to account for 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 Rs59 the stock trades at 5.0x 2009E earnings per share (EPS), 2.6x 2009E pre-provisioning profit (PPP) and 0.8x 2009E book value (BV). We maintain our Buy recommendation with a revised price target of Rs90.
SECTOR UPDATE
Automobiles
Weakness across all segments Automobile sales were weak across segments for July 2008. Rising interest rates and control on credit continues to impact the demand in the sector. Passenger vehicle sales were hit across spectrum due to restricted finance availability, high interest rates and increased prices due to an increase in excise duty. Two wheelers sales grew aided by low base effect and build up of stock levels in anticipation of strong festive demand. Motorcycle sales rose due to new product launches. Commercial vehicle sales were weak except for light commercial vehicles (LCVs), which witnessed good sales during the month. The medium & heavy commercial vehicle (M&HCV) sales continued to decline.
