Reco price: Rs 160
Current market price: Rs 161.15
Target price: NA
Brokerage: Angel Broking
Bharat Forge (BFL) reported a 46.8 per cent year-on-year (y-o-y) fall in consolidated net sales to Rs 611.4 crore in the March quarter. Its operating profit margins (OPMs) also fell by 1,317 bps to 2.9 per cent. Net profit including forex gains of Rs 101 crore, fell 68 per cent to Rs 20.3 crore. BFL’s consolidated numbers do not include FAW Bharat Forge and its joint venture in China.
Revenues from the CV segment and from US and European geographies are expected to be weak, going ahead. BFL is however, confident of growing its non-auto business faster thus derisking its business model. FCCB loans make up a major portion of the company’s loan book. Of the total Rs 730 crore FCCB loans, Rs 410 crore is due in April 2010. However, with the conversion price way above the current market price, the company may have to raise fresh loans. The brokerage downgraded its 2009-10 EPS estimates to Rs 5.2 from Rs 7.6 earlier. At Rs 160, the stock is trading at 30.5x and 16.6x its 2009-10E and 2010-11E consolidated adjusted EPS, respectively and 2x 2010-11E adjusted BV.
Godrej Consumer Products
Reco price: Rs 160
Current market price: Rs 160.90
Target price: Rs 165
Upside: 2.6%
Brokerage: Motilal Oswal Securities
For the March 2009 quarter, net sales grew 26 per cent y-o-y to Rs 340 crore ahead of estimates. Gross margin declined 850 bps y-o-y to 49.1 per cent. However, lower ad-spend pushed earnings before interest, depreciation, tax and amortisation (EBITDA) margin up to 19.3 per cent versus the estimated 18.3 per cent. Adjusted profit after tax grew 45 per cent y-o-y to Rs 59.4 crore on higher interest income and lower tax rate.
Toilet soap volumes grew around 34 per cent y-o-y, while realisations increased 12 per cent; Godrej No 1 has been the key growth driver. However, competitive intensity could increase in the category, as the market leader HUL tries to regain market share. Hair care sales increased 20 per cent as benefits of the trade push and price increases got reflected. The management aims at increasing market share in hair colours through new launches and increasing its distribution reach.
The company also plans to exploit synergies with other FMCG companies of the Godrej group to accelerate growth in coming years. The management is confident of margin expansion in H1 2009-10 even as international operations are likely to remain under pressure. The EPS estimates are revised by 14 per cent for 2009-10 and 11 per cent for 2010-11 to factor in stronger volume growth. The stock trades at 17.5x its estimated 2009-10 EPS and 15.1x 2010-11 EPS.
Punj Lloyd
Reco price: Rs 182
Current market price: Rs 182
Target price: Rs 240
Upside: 31.9%
Brokerage: Ambit Capital
During March 2009 quarter, Punj Lloyd (PLL) registered consolidated operating income of Rs 3,220 crore, a growth of 37 per cent as compared to Rs 2,350 crore in March 2008 quarter. It reported a loss of Rs 78.51 crore at the EBIDTA level, as against a profit of Rs 248.6 crore in March 2008 quarter. EBIDTA is adjusted for Rs 207crore cost over-run and Rs 223.5 crore for the SABIC bank guarantee as well as cost over-run in ONGC’s Heera project. PLL reported a net loss of Rs 257.8 crore as against Rs 112.96 crore during March 2008 quarter. This was higher on the back of SABIC-related losses in Simon Carves and rationalisation measures to reduce costs.
PLL changed accounting policies resulted in higher profits to the tune of Rs 46.3 crore. The brokerage has revised upwards the EBIDTA margins by 110 bps and 80 bps for 2009-10 and 2010-11, respectively. With the decisive political mandate, infrastructure projects are likely to be fast tracked . The stock is trading at 14.4x its estimated 2009-10 earnings.
Punjab National Bank
Reco price: Rs 677.55
Current market price: Rs 663.25
Target price: Rs 420
Downside: 36.7%
Brokerage: Citi Investment Research
Punjab National Bank’s (PNB) net profit was up 59 per cent y-o-y for March 2009 quarter, about 48 per cent ahead of estimates. The P&L (profit and loss) was well rounded with strong fees and treasury gains offsetting moderation in margins.
PNB’s net interest margins (NIM) declined 30 bps, but at over 3.50 per cent, they remain the highest amongst peers. Fee income growth was healthy at 24 per cent y-o-y, riding on its large technology platform. The P&L was boosted by treasury gains and portfolio write-backs, which made room for relatively higher loan loss charges, employee provisions and cushioned the NIM dip (largely in-line with peers).
PNB’s loan book is growing rapidly (9 per cent sequentially; 29.5 per cent y-o-y), and appears to carry relatively higher sectoral (real estate, SME, Agri) and concentration risks. However, these risks have been contained. Restructured loans are at 3 per cent of book, slippages account for 1.5 per cent of loans and loan loss coverage of 90 per cent is amongst the highest relative to peers.
Citi has a sell on the stock as it expects the bank to increasingly come under pressure due to a deteriorating funding franchise, greater mid-market and agriculture focus, relatively greater dependence on treasury gains; and inability to grow fee incomes rapidly.
Sun Pharmaceutical
Reco price: Rs 1,302
Current market price: Rs 1,289.75
Target price: Rs 1,510
Upside: 17.1%
Brokerage: Macquarie Research
The US Court of Appeals for the Federal Circuit unanimously affirmed a September 2007 ruling that denied a motion filed by Wyeth and Altana for a preliminary injunction (PI) related to Protonix generic. Teva and Sun are currently involved in patent litigation with Wyeth and Altana concerning this product. A trial date has not been set for the same, and further ruling is not expected before 2010. A PI win does not necessarily translate into a victory for generic players in the trial, as the onus would now be on generic players to prove non-infringement.
Given the favourable PI ruling, Sun may decide to be a bit more aggressive on capturing additional upside in this product. However, as this is an ‘at-risk’ launch, it does not build any potential upside for this product going forward. Macquarie has maintained an outperform on the stock as Sun offers an unique defensive play in the Indian pharma space with lower earnings risk backed by a superior business model. It has a given a 12-month price target of Rs 1,510 based on sum-of-parts methodology. A positive catalyst will be the resolution of Taro acquisition.
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