Sharekhan Update.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs977
Price target revised to Rs1,240
Result highlights
ICICI Bank's Q3FY2007 net profit at Rs910 crore was much above our and market expectations. The net profit saw a growth of 42.2% year on year (yoy) against our expectation of a 26.1% year-on-year (y-o-y) growth. The robust performance was driven mainly by a very high growth in the fee income and the other income compared with our expectations. Despite a rise of 125.6% in the provisions, the profit growth was very strong on the back of a 65.4% growth in the operating profit.
The net interest income (NII) grew by 31.9% yoy to Rs1,708.8 crore. What's impressive is that in Q3FY2006 the NII included a securitisation income excluding which the y-o-y NII growth stands at 53%.
The other income grew by 68% yoy to Rs1,980.6 crore, of which the core fee income grew by a strong 52.7% yoy to Rs1,345 crore.
The operating profit was up by a strong 65.4% on the back of a good NII growth and a sharp rise in the fee income. The operating expenses increased in line with the business growth.
The provisions increased by 125.6% mainly due to higher provisions for the non-performing assets (NPAs). The asset quality deteriorated as non-collateralised retail loan products like credit cards reported defaults. The gross non-performing asset (GNPA) increased by Rs650 crore on a sequential basis and the net non-performing asset (NNPA) also increased in absolute and percentage terms.
The capital adequacy ratio (CAR) stood at 13.4%, with the Tier-I CAR at 8.63%. Incorporating the Basel II guidelines the Tier-I CAR would be 9.5% and we feel the bank can maintain its current growth rates without any dilution in the medium term.
We have revised our FY2007 and FY2008 estimates based on the bank's improved performance on the non-interest income front. We have also factored in the higher provisions that may be made in future in view of the signs of deterioration in the retail loan book. We have revised the FY2007 and FY2008 profit after tax (PAT) estimates by 2.9% and 2.4% to Rs3,375.7 crore and Rs4,041.9 crore respectively. We have also introduced our FY2009 numbers as we believe that slowly the market would start factoring in the FY2009 financials.
At the current market price of Rs977, the stock is quoting at 17.5x its FY2009E earnings per share (EPS), 7.2x its pre-provisioning profits (PPP) and 2.8x book value (BV). The valuation looks attractive if one considers the value of the bank's subsidiaries which works out to Rs400 per share of the bank. We maintain our Buy recommendation on the stock with a one year price target of Rs1,240.
Maruti Udyog
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs939
Loss of new plant impacts reported profits
Result highlights
The Q3FY2007 results of Maruti Udyog Ltd (MUL) re in line with our expectations.
The company's net sales for the quarter grew by 18.5% to Rs3,679.5 crore from Rs3,112.0 crore in Q3FY2006. The growth was led by a volume growth of 18.7% during the quarter and was in line with our expectations.
The expenditure for the quarter was higher due to higher employee costs, an increase in royalty and a loss with respect to Maruti Suzuki Automobiles India Ltd (MSAIL). Considering all these the operating profit margin (OPM) declined by 52 basis points to 14.36%. The margins were affected due to higher royalty expenses. Consequently, the operating profit grew by 14% to Rs528.48 crore.
The interest and depreciation costs for the quarter were higher due to the commencement of the Manesar plant. The adjusted net profit grew by 14% to Rs384.81 crore. The reported profit after tax (PAT) rose by 12% to Rs376.4 crore.
MUL is expected launch the diesel Swift in January 2007. This is expected to be a big boost for MUL as it would be its first serious attempt to cater to the fast-growing diesel segment. The diesel segment constitutes about 25% of the total car market in India.
We maintain our positive outlook on MUL, considering its leadership position in the Indian car market, planned product launches including the foray into the diesel segment and a strong outsourcing potential. Despite its rising raw material cost, MUL has been able to maintain its margins at commendable levels due to increasing efficiencies and a better product mix.
At the current market price of Rs939, the stock quotes at 14.4x its FY2008E earnings and 9.9x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,050.
Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs217
Strong growth potential despite poor performance
Result highlights
The net sales of Orchid Chemicals & Pharmaceuticals (Orchid) rose by 0.5% year on year (yoy) to Rs238.7 crore in the third quarter of FY007. The sales growth was slightly below our expectations, partly due to an absence of any significant new product launches in the USA and partly due to the high base of Q3FY2006.
The company maintained its performance in its major market, the USA. Its key products�Ceftriaoxne and Cefproxil�continued to maintain a healthy market share in excess of 20-25%.
The company's operating profit margin (OPM) expanded by 350 basis points to 32.6% as against our expectation of 31.5%. The improvement in the margin was primarily on account of a 27% drop in the raw material cost, as the company continued to derive an increasing proportion of its revenues from the sale of formulations in the high-margin regulated markets. Formulations constituted roughly 45% of its sales, almost 90% of which came from the USA.
Consequently, the operating profit grew by 12.4% to Rs77.8 crore in the quarter.
Despite a substantial improvement in the margins, the high interest cost (up by 19.4% yoy) and the higher tax provisioning as compared to Q3FY2006 dragged down the net profit, which declined by 2.2% to Rs28.3 crore in the quarter. The profit growth was in line with our estimate.
Orchid has just received approval from the UK MHRA for its betalactum API facility at Aurangabad. This development indicates that Orchid is on track to make its big entry into Europe in FY2008, which will add to its growth from FY2008 onwards.
At the current market price of Rs217, the stock is quoting at 8.5x our estimated FY2008 earnings. The valuation is very attractive given the strong growth potential for FY2008 and FY2009 in view of some forthcoming big launches in the USA and a big entry into Europe. Hence, we maintain our Buy call on the company with a price target of Rs390.
Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs898
Current market price: Rs811
Price target revised to Rs898
Result highlights
Nucleus Software Exports has announced lower-than-expected sequential growth in its revenues at 2% quarter on quarter (qoq) and 50.3% year on year (yoy) to Rs56.2 crore (against the expectations of Rs58.6 crore). The product revenues have grown at a robust rate of 12.8% sequential. However the revenues from the project and services business declined 9.3% sequentially and resulted in a lower-than-expected overall growth in the revenues during the third quarter.
The operating profit margin (OPM) declined by 110 basis points sequentially to 27.9% during the quarter, largely due to the steep increase in the selling, general and administration expenses (SG&A) as a percentage of sales (up from 12.6% of the sales in Q2 to 15.7% in Q3). The huge jump in the SG&A expenses was driven by the additional cost incurred (on travel and other related expenses) in pursuing some of the large deals in the pipeline (including the recently bagged order from ACOM).
Consequently, the earnings were largely flat at Rs13.9 crore on a sequential basis. However, the earnings grew at a robust rate of 58.1% on an annual basis.
Notwithstanding the muted performance (sequentially) during the quarter, the company has shown an exponential growth in its order backlog that is likely to boost the overall revenue growth in the coming quarters. The pending order book jumped to Rs335 crore, up from Rs135 crore at the end of the previous quarter. The order backlog includes the multi-million multi-year order from ACOM, a leading consumer finance company in Japan.
To factor in the impact of the huge fresh order intake, we are revising upwards the revenues and earnings estimates by 7% and 9% respectively, for FY2008. At the current market price the stock trades at 22.8x FY2007 and 16.5x FY2008 earning estimates. We maintain our Buy call on the stock with a one-year revised target price of Rs898 (15x its rolling four-quarter earnings).
India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs242
Net profit up 1,000%
Result highlights
India Cements achieved a net profit of Rs79.77 crore for Q3FY2007, clocking a year-on-year (y-o-y) growth of 1000% , though it was below our expectations on account of higher-than-expected increase in the costs.
The top line grew by a robust 36% year on year (yoy) to Rs472 crore on the back of a 4% y-o-y growth in the volumes to 1.75 million metric tonne (MMT) and a 32% growth in the realisations to Rs2,700 per tonne.
The company's operating expenditure increased by 13% yoy to Rs339 crore on the back of a 20% increase in the raw material costs and an 18% rise in the distribution costs. Sequentially, the freight cost and the power & fuel cost increased by Rs30 per tonne and Rs15 per tonne respectively.
The company's high leverage to the cement prices resulted in an operating profit growth of 185% yoy to Rs133 crore whereas the operating margin expanded by a mammoth 1,40 basis points to 28%.
The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne tripled to Rs761 though it was down 12% quarter on quarter (qoq) on account of lower volumes due to the monsoons in the southern region namely Tamil Nadu and Andhra Pradesh.
The interest expenditure and the depreciation cost remained flat qoq at Rs34.7 crore and Rs19.82 crore respectively. These factors coupled with a negligible tax provision helped the company's net profit to register a 1,000% year-on-year jump to Rs79.77 crore.
The company's plan to augment its capacity by 2MMT at its existing facilities (namely Sankaridurg and Vishnupuram) is well on schedule. One million tonne of the capacity is expected to come in June 2007 whereas the balance one million will kick in by December 2007.
We expect the company's volumes to bounce back in the fourth quarter and also expect the prices to firm up further by Rs5-10 per bag.
At the current price of Rs242, the stock trades at 12.2x its FY2007E and 8.5x its FY2008E earnings. On an enterprise value (EV)/tonne basis, the company is trading at USD115 per tonne, which is a steep discount to its peer Madras Cement, which is trading at USD155 per tonne. We continue to maintain our positive outlook on the company with a price target of Rs315.
Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs335
Current market price: Rs288
Price target revised to Rs335
Result highlights
The Q3FY2007 results of Indo Tech Transformers Ltd (ITTL) are above our expectations.
The company has reported strong quarterly results. The revenues for the quarter grew by 130% to Rs45.04 crore as against our expectations of Rs40 crore while the net profit grew by 166% to Rs7.3 crore against our expectations of Rs5.3 crore. The volume growth was 89% as the company sold 672 mega Volt Ampere (MVA) during the quarter as against 355MVA in Q3FY2006.
The above performance was due to the fact that the company executed some high-margin orders during the quarter under review and hence the operating profit for the quarter grew by 153% to Rs11.86 crore. The operating profit margin (OPM) for the quarter improved by 240 basis points to 26.3% as against 23.9% in Q3FY2006. Going forward the company expects to maintain its OPM in the range of 19-20%.
The interest expense for the quarter stood at Rs0.23 crore while the depreciation cost for the quarter was Rs0.28 crore.
The order backlog at the end of Q3FY2007 stood at Rs153 crore as against Rs79 crore at the end of the previous quarter, showing a growth of 94%.
