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The quarterly express

MONEY TODAY presents to you snapshots of recommendations from investment houses.

Print Edition: November 16, 2006

CONCOR: Buy
Current price: Rs 1,965

SSKI India Research flagged Concor as an Outperformer after the second quarter results: “Concor reported its second quarter, 2006-7 net profit at Rs 190 crore, sharply ahead of our estimates on account of higher than estimated operating margins in the exim segment. Concor passed on the entire 20-25% hike in haulage charges in April 2006 to its customers. Consequently, overall operating margins improved by 290 basis points in the second quarter of 2006-7.

The recent policy on entry of private players is unlikely to impact Concor in the medium term due to its strong infrastructure of wagons and ICD’s at historical cost. We have upgraded our 2006-7 and 2007-8 earnings per share estimates by 9% each, led by strong operating margins as Concor passed on the entire freight hike. Concor currently trades at 14.8 times our estimates of 2007-8 earnings. This is attractive considering the earnings growth (25% CAGR over 2006-7 and 2007-8), high visibility in earnings and high return ratios (30%+). We maintain our Outperformer rating on the stock.”

ICICI Bank: Hold
Current price: Rs 759

India Infoline advises a hold on ICICI Bank and points out increasing default on the loan portfolio: “Profit growth of 30% surprised us on the upside. While this was supported by strong operating performance, the lower tax rate of merely 15% helped improve the net profit figure. Asset growth remained steady at 45%, with retail continuing the charge. We value the stock with 2006-7 valuations at Rs 718 on a sum of parts basis with the standalone bank valued at 2.2X its 2006-7 adjusted book value and its subsidiaries at Rs 133. However, with six months already elapsed in the current year and no negative surprise expectation, we revise our BUY rating to a HOLD on a 2007-8 price target of Rs 784.”

Bajaj Auto: Buy
Current price: Rs 2,751

Prabhudas Lilladher is negative about Bajaj Auto, downgrading it to Market Performer: “Bajaj Auto has reported disappointing results for the second quarter of 2006-7, the key reason being the drop in operating margin. The raw material cost was 309 basis points higher year-on-year and pulled the EBIDTA margin down by 192 basis points year-onyear to 15%. With successful products such as Discover and Pulsar, Bajaj has increased marketshare. Among the recent launch successes, Platina has been characterised by a huge promotional effort, which essentially led to cannibalisation of the CT100.

Bajaj Auto has focused on motorcycles in its two-wheeler portfolio and raised its market share from 29.2% to 34.1% in a year’s time. But this marketing success has come at the cost of its margins. In our view, Bajaj has chosen to offer more discounts to banks and NBFCs in lieu of advertising. This has left it with, at Rs 9,416, a lower contribution per vehicle (almost 9% year-on-year). We have reduced our PAT estimates for 2006-7 and 2007-8 accordingly. Bajaj should maintain a healthy 20.1% overall volume growth rate in the next six months. The poor margin outlook balanced against a sharp fall in stock price, post-second quarter results, necessitates a re-rating of Bajaj Auto to Market Performer.”

Tata Steel: Buy
Current price: Rs 500

Enam Securities believes the Corus takeover is in line with Tata Steel’s global strategy: “Tata Steel is taking over Corus Plc. at an estimated equity value of $8 billion. The acquisition is management-friendly. The acquisition makes Tata Steel the fifth largest global steel producer. Tata Steel will have a low cost growth platform in Asia along with the high value stable European market. The synergies are likely to take shape from: (a) low cost Indian iron and steel production and supply (b) value added steel processing technology that can be transferred and leveraged in India. Operating margins should rise to about 18% soon. In the long term, the Tata Steel management has set a target of 25% operating margin. The offer is likely to be complete by February 2007.

The funding would be as follows: (a) Tata Steel would inject about $2 billion into Tata Singapore entity; (b)Tata Singapore would in turn, raise a further $2 billion as debt; (c) This $4 billion will be injected into Tata Steel UK, which would further raise a debt of about $6 billion. Financially, this move would increase Tata Steel’s consolidated net debt to about $8.5 billion opposed to the current net $1.4 billion cash of the standalone entity. We believe that Tata Steel’s combination of cost competitiveness, scale and geographical reach along with strong cash flows would be a structurally positive development. There are short-term concerns about the operating and financial leverage. We maintain an Outperformer rating on the stock, with a longterm view.

ONGC: Buy
Current price: Rs 1,154

SSKI rates ONGC as an outperformer despite higher subsidy under recovery concerns: “ONGC reported robust second quarter, 2006-7 numbers—net profits ahead of our estimates at Rs 4,174 crore (1% increase year-on-year despite 75% increase in under recovery contribution) driven by higher crude oil production and firm crude realisations even after contributing over Rs 503 crore towards under recoveries. Gas production during the quarter was affected due to floods that adversely impacted revenues to the tune of Rs 485 crore.

Subsidy contribution for the quarter stood at Rs 50,300 crore, up 75% year-on-year on the back of ad-hoc increases in upstream contribution by the government to bear additional burden of petrol, diesel and SKO/ LPG losses. During the quarter, crude oil production increased 10% year-onyear to 6.39 mt while natural gas production was down 5.8% yoy to 5.18BCM due to floods that impacted production for 10 days. An increase in OVL’s production along with the restoration of Bombay High output will be a major positive driver going ahead along with strong crude prices. However, profit redistribution due to higher subsidy under recovery is a concern. Reiterate Outperformer.”

Wipro: Buy
Current price: Rs 557

Prabhudas Liladher maintains a buy on Wipro:“Wipro’s results were ahead of our expectations: revenue, at Rs 3,510 crore, rising 12.2% quarter-on-quarter (41% year-on-year), a slight slide in the operating margin (to 20.4%) and a good 47.5% quarter-on-quarter rise in other income (from Rs 51 crore to Rs 75.5 crore) led to a 13.1% increase in profit before tax, to Rs 790 crore. This resulted in Rs 696 crore in net profit, with 13.1% growth quarter on quarter. Global IT revenue, at Rs 2,717 crore, climbed by a robust 10.9% quarter-on-quarter (and 44% yearon-year), ahead of the $577 million guidance. Of this $589 million, BPO accounted for $49.5m.

The company has guided to global IT revenue of $633 million (a 7.5% quarter-on-quarter growth). For 2006-7, we are raising our revenue and net profit estimates by 2.8% and 2%, respectively; and, for 2007-8, by 5.6% and 3.9%. We expect the company to record revenue and net profit of Rs 14,527 crore and Rs 2,884 crore in 2006-7, and of Rs 18,612 crore and Rs 3,705 crore in 2007-8. That is growth of 37% and 28% respectively in revenue, and 42.3% and 28.4% in net profit. Wipro trades at 27.7x and 21.5x the 2006-7 and 2007-8 estimated EPS respectively; and at 24.4 x and 18.1x of 2006-7. We reiterate our Buy rating on it, with a target price of Rs 650 (at 25.2x 2007-8E earnings, implying a 17% upward potential).

HDFC: Buy
Current price: Rs 1,449

SSKI says there’s no slowdown in HDFC’s home loan disbursements: “HDFC has reported Rs 368 crore net profit (23% year-on-year growth)—marginally ahead of our estimate. No perceptible slowdown in home loan disbursements and HDFC’s ability to maintain its loan spreads at around 2.2% in spite of rising funding costs are the key takeaways. HDFC’s ability to maintain spreads delivering consistent growth without sacrificing asset quality points to strengths in HDFC’s business model and its understanding of real estate. We maintain our EPS estimates of 2006-7 and 2007-8 at Rs 60.1 and Rs 72.0 and we expect about 20% CAGR in earnings between 2006-8 with 30% return on equity. If we assign Rs 440 per share to HDFC’s strategic investments, the core business is valued at 4.7x FY07E book value. We reiterate our Outperformer rating with a 12-month price target of Rs 1,600.

ULTRATECH: Buy
Current price: Rs 866

Prabhudas Liladher stays positive about Ultratech Cement: “Ultratech Cement recorded Rs 127 crore in second quarter PAT (against Rs 8.2 crore a year earlier). Revenue rose 58.3% yoy. Realisations per tonne of Rs 2,783, improved 17.5% with volumes up 35%. The operating margin per tonne was Rs 705. Sequentially, realisations rose by Rs 133/tonne, which failed to offset cost increases. We estimate 2006-7 EPS of Rs 57.5 and in 2007-8 Rs 71.5. We retain our Outperformer rating.

TCS: Buy
Current price: Rs 1,079

Khandwala Securities is bullish on TCS: “TCS management suggested very strong demand for IT services, supported by wide range of offerings like business intelligence solutions, testing, BPO, and consulting. TCS is close to securing five deals at greater than $50 million and pursuing five greater than SD 100 million deals and another five greater than USD 50 million deals. The management is aiming at $4 billion revenue. We believe that there is scope for improvement in onsite-offshore mix and utilisation, and in selling, general and administrative expenses offering leverage for further margin improvement. We expect revenue and profit to grow at 35% and 33% CAGR respectively over 2006-8. We maintain a Buy with a 12-month target of Rs 1,250.

Hero Honda: Hold
Current price: Rs 740

Enam Securities is neutral about Hero Honda following results that disappointed Dalal Street: “Hero Honda’s second quarter numbers were in line with our estimates but below street expectations. While Hero Honda managed to contain raw material pressure, other expenditure was higher due to festive discounts. It is important to note that operating margin of 12.7% is the lowest in the last 26 quarters. Net profit “degrew” by 9% year-on-year. Margin pressure is likely to persist through 2006-7.

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