Investor's Eye [April 26, 2010]

HDFC Bank

Cluster: Evergreen

Recommendation: Buy

Price target: Rs2,205

Current market price: Rs1,991

Price target revised to Rs2,205 Result highlights HDFC Bank?s Q4FY2010 performance was largely in line with our expectations. The bank?s net profit grew by 32.6% year on year (yoy) to Rs836.6 crore vs our expectation of Rs826 crore. The profit growth was mainly driven by a healthy growth in the net interest income (NII) and lower provisioning during the quarter. The NII for the quarter grew by a healthy 27% yoy to Rs2,351.4 crore. The NII growth was largely driven by an improved credit growth as well as a sequential expansion in the reported net interest margin (NIM). The sequential expansion in the NIM could be traced to a 50-basis-point sequential decline in the cost of deposits that outpaced the contraction in the yields on customer assets. Moreover, the current account and savings account (CASA) ratio improved to 52%, which also helped the bank in maintaining its margins. As expected, the non-interest income performance was weaker as the non-interest income declined by 19% yoy to Rs903.6 crore. Importantly, the fee income growth was decent at 7% yoy (considering one time items in Q4FY2009) while the foreign exchange (forex) related income grew by 18% yoy. However, this was outweighed by a treasury loss of Rs47.3 crore vs a Rs243.6-crore profit in the year-ago quarter, leading to decline in the overall non-interest income. The operating expenses growth was contained at 11.8% yoy. Consequently, the cost-to-income ratio for the quarter stood at 47.9%. Though the pre-provisioning profit was moderate at 8% yoy, the core operating profit grew by an impressive 31.3%% yoy to Rs1,741.7 crore. Importantly, the provisions during the quarter declined by 33.1% yoy to Rs439.9 crore. Of the total provisions, a major chunk was towards loan losses. Consequently, the provisioning coverage stood improved at 78.4% compared with 72.4% in the previous quarter. The asset quality of the bank improved on a sequential basis. The gross non-performing assets (GNPA) declined by 8% quarter on quarter (qoq) to Rs1,816.8 crore while the net NPAs (NNPA) declined by 28% qoq driven by the improvement in the provision cover during the quarter. In relative terms, the %GNPA declined to 1.43% from 1.98% in Q4FY2009. The restructured assets now form 0.3% of the advances book, down from 0.4% at end of Q3FY2010. In Q4FY2010, the advances grew by 27.3% yoy to Rs125,830.6 crore with the deposit growth relatively slower at 17.2% yoy to Rs167,404.4 crore. Importantly, the demand deposits grew by a strong 37.5% yoy and 8.9% qoq while the term deposits were largely flattish yoy. Consequently, the CASA ratio of the bank improved to 52%. The capital adequacy ratio (CAR) of the bank as at the end of Q4FY2010 stood comfortable at 17.4% compared with 18.3% during the previous quarter. HDFC Bank continues its streak of consistent performance. Banking on its consistent performance, visible optimisation of CBoP assets and further revival in credit demand in FY2011, we maintain our positive stance on the stock. We draw significant comfort from the bank?s healthy asset quality position. We are maintaining our earnings estimates for FY2011 and introduce our FY2012 estimates. At the current market price of Rs1,990, HDFC Bank trades at 17.9x FY2012E earnings per share (EPS), 9.8x FY2012E pre-provisioning profit (PPP) and 3.2x FY2012E price-book value. We maintain our Buy recommendation on the stock with a revised price target of Rs2,205. ICICI Bank

Cluster: Apple Green

Recommendation: Buy

Price target: Rs1,243

Current market price: Rs960

Price target revised to Rs1,243 Result highlights For Q4FY2010 ICICI Bank reported a bottom line of Rs1,005.6 crore, which includes a gain of Rs203 crore from the sale of the merchant acquisition business. Adjusting for the same the bottom line is largely in line with our estimate. The net interest income (NII) came in at Rs2,034.9 crore, down 5% year on year (yoy) and below our estimate, as the bank continued to contract its balance sheet against our expectation of a flattish trend. Meanwhile, the net interest margin (NIM) was stable at 2.6% sequentially. The non-interest income registered a growth of 13% yoy and stood at Rs1,890.8 crore, driven by a healthy fee income growth and a treasury gain of Rs196 crore (includes a gain of Rs203 crore from the sale of the merchant acquisition business). The continued declining trend in absolute terms of the operating expenses for the previous seven quarters reversed during Q4FY2010 with a sequential increase of 12%. The bulk of the increase can be traced to staff expenses, which witnessed a sequential rise of 36.5%. On asset quality front, during the quarter under review, the bank witnessed a 6% sequential increase in its gross non-performing assets (GNPA). However, the incremental gross slippages came off to Rs700 crore in Q4FY2010 from Rs750 crore in the previous quarter and approximately Rs1,200 crore run rate seen in the few quarters before that. The %GNPA stood at 5.06% (up 22 basis points quarter on quarter [qoq]) while the % net NPA (NNPA) stood at 2.12% (down 30 basis points qoq). The provisioning coverage of the bank improved significantly by 830 basis points qoq to 59.5%. ICICI Bank?s advances dipped by 17% yoy to Rs181,206 crore and the deposits contracted by 7.5% yoy to Rs202,017 crore, though on a sequential basis there was a growth of 1.1% and 2.2% in the advances and deposits respectively. Though the bank continued to operate in capital preservation mode, the bank is clearly turning to balance sheet growth (FY2011 loan growth guidance 16-20% yoy). Importantly, the current account and savings account (CASA) ratio improved sharply by 210 basis points qoq to 41.7%, driven by a strong 7.6% sequential growth in the demand deposits. The bank?s capital adequacy ratio (CAR) as on March 31, 2009 was 19.4% (as per Basel II norms), in line with that in the previous quarter. Importantly, the tier-I CAR stood high at 14.0%, one of the highest among its peers. Going forward, the bank intends to leverage its capital by focussing on balance sheet growth again. The consolidated profit of the bank for FY2010 grew by a healthy 31% Rs4,670 crore yoy, driven by improved bottom line performance for the insurance subsidiaries of the bank as well as mutual fund related business. The life insurance business of the bank turned profitable over the year while the general insurance business saw its bottom line increase five-fold over the year. At the current market price of Rs960, ICICI Bank trades at 15.8x its FY2012E earnings per share (EPS), 9.2x FY2011E pre-provisioning profit (PPP) per share and 1.8x its FY2012E standalone book value (BV) per share. We have tweaked our earnings estimates to factor in the additional information. We maintain our Buy recommendation on the stock with a revised price target of Rs1,243. Godrej Consumer Products

Cluster: Apple Green

Recommendation: Hold

Price target: Rs309

Current market price: Rs298

Downgraded to Hold Result highlights Godrej Consumer Products Ltd (GCPL)?s Q4FY2010 results are not comparable on a year-on-year (y-o-y) basis on account of consolidation of Godrej Sara Lee?s 49% stake in Q2FY2010. The bottom line growth for Q4FY2010 exceeds our estimate due to a higher-than-expected operating profit margin (OPM), however the stand-alone revenue growth, at just 2.1%, was disappointing. The consolidated net sales for the quarter went up by 48.6% year on year (yoy) to Rs509.2 crore, which is less than our estimate of Rs533.7 crore. The stand-alone (domestic) business registered a disappointing performance with the sales growing by just 2.1% yoy to Rs282.4 crore. This we believe is mainly on account of ~5% y-o-y decline in the sales of the soap segment (which contributes ~60% to the stand-alone sales). On the other hand, the international operations logged in a strong performance with the revenues growing by ~19.0% yoy, mainly on account of a robust performance of Rapidol and Kinky, which saw their revenues grow by ~60.0% yoy and ~27% yoy respectively during the quarter. Godrej Sara Lee contributed Rs147.0 crore to the consolidated revenues during the quarter. In spite of high spends towards advertisement cost and other expenditures, the OPM improved by 176 basis points to 21.1% (ahead of our estimate of 19.5%) mainly on account a lower y-o-y raw material cost as percentage to sales. The raw material cost as percentage to sales stood at 44.5% in Q4FY2010 as against 50.9% in Q4FY2009. The operating profit grew by 62.1% yoy to Rs107.2 crore, ahead of our estimate of Rs103.8 crore. Thus, despite a lower-than-expected growth in the top line, the bottom line grew by 54.6% yoy to Rs91.8 crore (ahead of our estimate of Rs85.6 crore), which is in line with a strong expansion in the OPM. We have revised our bottom line estimates for FY2011 and FY2012 downwards by 6.4% and 5.0% respectively, primarily to factor in the lower sales growth trajectory in the soap segment and the higher raw material cost. We expect the international business along with the recent acquisitions to register a robust growth in the coming years. In the domestic operations though the performance of the soap business (that showed signs of stress in Q4FY2010) needs to be watched out. At the current market price, the stock trades at 23.7x its FY2011E earnings per share (EPS) of Rs12.6 and 20.3x its FY2012E of Rs14.7. In line with our downward revision in the earnings estimates, our revised price target stands at Rs309 (21x its FY012E EPS). In view of the limited upside from the current level, we are downgrading our recommendation from Buy to Hold. However, we believe, the investors would do well to hold on to the stock as the likelihood of further acquisition announcements (especially in Latin America) would keep the stock in flavour and could bring in further upside potential. Also, though not quantifiable currently due to lack of information, the EPS accretive nature (as indicated by the management) of the Megassari deal could bring in a further upside to the EPS estimates and hence the stock price.

Maruti Suzuki India

Cluster: Apple Green

Recommendation: Hold

Price target: Rs1,473

Current market price: Rs1,335

Price target revised to Rs1,473

Result highlights

• Maruti Suzuki India (Maruti)?s Q4FY2010 results were in line with our expectation at the operating level, however a lower-than-expected other income pulled down the net profit below our expectations.
• The total income for the quarter grew by 30.7% year on year (yoy) to Rs8,280.8 crore on the back of a robust 21.5% year-on-year (y-o-y) growth in the volumes and a 7.5% y-o-y growth in the net average realisation.
• The operating profit margin (OPM) at 11.7% was in line with our expectation of 11.2% and was higher by 614 basis points on a y-o-y basis. The margin expansion was on account of a 277-basis-point y-o-y decline in the raw material cost as a percentage to the total income at 77.4% (the same was however 162 basis points higher on a quarter-on-quarter [q-o-q] basis). Furthermore, a 310-basis-point y-o-y decline in the other expenses as a percentage to the total income at 9% for the quarter led the operating profit to grow by a hefty 175.8% yoy to Rs967.3 crore (against our expectation of Rs914.2 crore).
• On account of much lower yields on investments in the quarter as compared to the corresponding quarter of the last year, the other income came in significantly below expectations, at Rs222.7 crore (a growth of 9.2% yoy), which subdued the performance at the operating level. Consequently, the reported net profit surged by a stellar 170% yoy to Rs656.5 crore (as against our expectation of Rs731 crore).
• For FY2010, the company has also announced a final dividend of Rs6 per share (face value of Rs5 per share).
• Maruti is likely to face headwinds both on the sales volume growth and the profit margin front going ahead. While the high base of FY2010, aggravating competition and upturn in the interest rate cycle pose a challenge to growth in volumes, the rising commodity prices are likely to pressurise the profitability.
• Though we maintain our estimates for FY2011, we are reducing our estimates for FY2012 by 4.8%. Our FY2012 estimates stand revised downwards factoring in a higher capital expenditure (capex) of Rs3,000 crore for FY2012, which will reduce the free cash on the books, thereby leading to a higher depreciation and lower other income.
• As a consequence of the downward revision in our earnings estimates for FY2012 and to factor in the above risks to the growth going ahead and a moderate earnings compounded annual growth rate (CAGR) of 10.3% for FY2010-12E, we have reduced our target price multiple to 14x (from 16x earlier). We have also rolled over our price target to FY2012 earnings.
• At the current market price, the stock is trading at 14.2x its FY2011E earnings and 12.7x its FY2012 earnings. We maintain our Hold recommendation on the stock with a revised price target of Rs1,473. We expect the stock to underperform in the near term and rather prefer Mahindra & Mahindra (M&M) in the automobile space.

Sun Pharmaceutical Industries

Cluster: Ugly Duckling

Recommendation: Buy

Price target: Rs1,757

Current market price: Rs1,604

Price target revised Rs1,757

• The twin blow of unfavourable decisions for Protonix and Eloxatin would remain as an overhang on the stock in the near term. In order to factor in the loss in the Eloxatin opportunity, we downgrade our earnings estimate by 4.2% for FY2011. Our FY2012 earnings estimate remains largely unchanged given the resumption of Eloxatin sales in FY2012. This brings our earnings per share (EPS) estimate to Rs72 for FY2011 and to Rs84.5 for FY2012. We await more clarity on the Protonix front from the management and the court?s decision.

• However, we continue to believe that Sun Pharma remains one of the best pharmaceutical plays in India with its superior business model, leadership in chronic therapies, strong balance sheet and more limited competition opportunities like Effexor XR. With the impact of Caraco Pharmaceuticals and Taro Pharmaceuticals (Taro) already built in the price, we believe that the stock?s valuations reflect most of the negatives and the risk-reward ratio has become favourable for investors. At the current market price of Rs1,604, Sun Pharma is valued at 22.4x FY2011E and 19.1x its FY2012E fully diluted earnings. Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs1,757 (20x its FY2012E and Rs67 for Taro).

Reliance Industries

Cluster: Evergreen

Recommendation: Hold

Price target: Rs1,215

Current market price: Rs1,070

Earnings below estimates; time to look for cash flow utilisation strategy

Key points

• Reliance Industries Ltd (RIL)?s Q4FY2010 adjusted net income grew by 29.9% year on year (yoy) to Rs4,710 crore, which is significantly below our and the street?s estimates. This is due to a lower-than-anticipated margin in the oil & gas business (on account of a higher-than-expected depletion rate for KG D-6 block) and a lower-than-expected gross refining margin (GRM) of USD7.5 per barrel for the refining business. However, at the operating level, the performance was much better and only marginally below the expectations. A large part of the swing in the net profit is due to a sudden jump in the depreciation charge, which went up to Rs3,392 crore in Q4FY2010 as compared to Rs2,795 crore in Q3FY2010.
• We have revised our earnings per share (EPS) estimate for FY2011 and FY2012 to incorporate: (1) the revision in our exchange rate assumption to Rs45 for FY2011 and Rs44 for FY2012, 2) a higher depreciation expenses, and 3) a slightly lower KG D-6 gas volume in FY2011. The negative impact of the above assumption is partially offset by higher petrochemical production volume and an increase in our GRM assumption for FY2012 to USD10.9 (we maintain our FY2011 GRM assumption at USD9.5 per barrel). Consequently, our revised EPS estimates now stand at Rs70.9 for FY2011 and Rs81.1 for FY2012.
• With strong demand for petroleum products, we expect the crack spreads for the middle distillates (especially gasoline and gas oil) to improve in the near to medium term. This coupled with a likely increase in the light heavy crude oil price differential at the level of USD2-3 per barrel, will help RIL to enhance its spread over the Singapore GRM. Further, RIL has signed up with Cairn for the supply of 55-60 barrel per day of cheaper Mangala crude and is also consuming KG D-6 gas for its refineries. Hence, we expect the GRM of the refining segment to improve strongly to USD9.5 per barrel in FY2011 and USD10.9 per barrel in FY2012 from USD6.6 per barrel in FY2010. We highlight that the additional supply of petroleum products on account of addition of new capacities would also remain under check due to closure of 1.43 million barrels per day (mbpd) of refining capacity.
• As per our expectation, the petrochemical segment reported a strong earnings before interest and tax (EBIT) in Q4FY2010 with the EBIT margin increasing by 45 basis points on a sequential basis to14.4%. Although the petrochem margin has been strong (supported by delay in new capacity additions), we expect the same to narrow down slightly in the next few quarters due to significant capacity addition in the Middle East. In terms of the domestic market, we see strong demand coming in from agriculture, packaging, infrastructure and automobile sectors.
• The gas production from KG D-6 field averaged 60mmscmd in Q4FY2010 (which is close to the exit rate of Q3FY2010). The company has said that the design capacity of KG D-6 gas production facilities has achieved a flow rate of 80mmscmd. With the production volumes being tested by RIL, the production ramp is largely dependent upon the HVJ pipeline capacity expansion by GAIL (which is expected by October 2010). We have factored in a gas price of USD4.2 per mmbtu and a seven-year income tax holiday in our valuations and estimates.
• Although the company?s Q4FY2010 earnings were significantly below our estimate, we are more focused on the company?s strategy to utilise the huge cash flow (USD10-12 billion over FY2011-12E) that it is expected to generate over the next couple of years. The company?s recent acquisition of a 40% stake in Atlas Energy?s Marcellus Shale gas acreage is a small-ticket acquisition. Hence, we expect strong acquisition related news flow to continue in the near term, which would indicate towards the deployment of cash flow and the long-term growth prospects of the company.
• We maintain our price target of Rs1,215 and Hold recommendation on the stock, as the company still faces uncertainties on: 1) the tax benefits on the natural gas business under section 80-IB (clarity still awaited), and (2) the gas pricing including the court case with Reliance Natural Resources Ltd (RNRL). At the current market price, the stock trades at a price/earnings ratio of 13.2x FY2012 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.3x FY2012.

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VIEWPOINT

Pantaloon Retail

Robust same stores sales growth drives the top line

Result highlights

• Pantaloon Retail?s Q3FY2010 top line grew by 25% year on year (yoy) to Rs2,057 crore, which is in line with our expectation of Rs2,050 crore. 71% (Rs1,440 crore) of the turnover came from the value segment, whereas 29% (Rs628 crore) was chipped in by the lifestyle segment.
• As expected, discount offerings during the quarter (Sabse Saste 4 din) led the gross margin dilute by 90 basis points and 120 basis points on a quarter-on-quarter (q-o-q) and year-on-year (y-o-y) basis respectively to 29.1%? which is in line with our projection of 29.3%. The gross margin for the value retail segment stood at 25%, while that for the lifestyle segment came in at 38.9%
• The operating profit went up by 25% yoy to Rs216 crore, close to our projection of Rs215 crore. The value retail and the lifestyle segment registered an operating profit margin of 7.4% and 17.8% respectively.
• The profit after tax (PAT) registering a robust 63% y-o-y and 10% q-o-q growth to Rs56 crore came in slightly higher than our expectation of Rs54 crore. The bottom line growth was aided by strong operating performance coupled with lower finance cost during the quarter. The Future value subsidiary reported a profit of Rs23 crore (PAT at 1.6%), while the lifestyle segment earned Rs30 crore as profit during the quarter.
• During the quarter, the company dropped down its value retail business and transferred the same into a wholly-owned subsidiary?Future Value Retail. Hence it has reported results for the stand-alone Pantaloon Retail without incorporating the earnings of Future Value Retail segment. Further, the company proposes to evolve to a consolidated reporting from FY2011 to provide a holistic view of the performance.

Business Standard The Smart Investor - Analysts' corner

GODREJ CONSUMER PRODUCTS
Reco price: Rs 281
Current market price: Rs 282.65
Target price: Rs 299
Upside: 5.8%
Brokerage: Emkay Research

Godrej Consumer Products (GCPL) entered into an agreement to acquire PT. Megasari Makmur Group and its distribution company in Indonesia. The Megasari group manufactures and distributes a wide range of products like household insecticides, wet tissues, air fresheners and baby care products. The key brands are Hit, Mitu Baby and Stella, which contribute about 72 per cent of revenues. Megasari group has witnessed 3-year CAGR of 25 per cent in revenues and 54 per cent in EBITDA.

Megasari is GCPL’s 6th acquisition. GCPL’s underlying growth strategy is to participate in the growth potential of emerging countries – especially in Asia, Africa and Latin America. The acquisition is attractively priced at 2.2 times enterprise value to Sales and, is both earnings and value accretive in short-term and long-run.

Megasari will add approximately 25 per cent each to GCPL’s 2009-10 estimated consolidated revenues (now pegged at Rs 2,590 crore) and EBITDA (Rs 480 crore). Emkay has revised the target price upwards to Rs 295 and maintains accumulate on the stock.

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DHANUKA AGRITECH
Fair price: Rs 283
Market price: Rs 284
Fundamental grading: 3/5
Valuation grading: 3/5
Research house: CRISIL Equities

Dhanuka Agritech, a three-decade old pesticide formulations manufacturer, is well-placed to maintain its 3 per cent market share in the growing pesticides industry. CRISIL Equities expect the Rs 10,000-12,000 crore pesticides industry to grow at a 9 per cent CAGR over the next 5 years. The company’s products command a good brand recall due to innovative marketing campaigns and tie-ups with established MNC players for superior quality specialty molecules.

The assigned grade is tempered by the growth constraints faced by Dhanuka due to the absence of backward integration into technicals. This makes Dhanuka dependent on sales of formulations only in the domestic market. Further, the company has identified sales through its own line of retail outlets and real estate development as avenues for growth, in which it is relatively inexperienced. CRISIL Equities expects Dhanuka’s revenues from pesticides to grow at a 12.1 per cent CAGR to Rs 480 crore in 2011-12; EBITDA margins to remain flat at 14.6 per cent. Over 2008-09, PAT margin is expected to improve due to savings in interest cost and, EPS to rise by 73 per cent to Rs 43.8 in 2011-12. The valuation grade of 3/5 indicates that the current market price of Rs 271 is aligned with its fundamental value of Rs 283 based on the discounted cash flow method.

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JUBILANT ORGANOSYS
Reco price: Rs 340
Current market price: Rs 347.20
Target price: Rs 450
Upside: 29.6%
Brokerage: Macquarie Research

Jubilant Organosys raised $85 million through a QIP recently at Rs 344.50 per share. The proceeds will be used to repay high-cost (interest rate of 10 per cent) rupee debt of Rs 400 crore.

Its CRAMS business (order book of 2 times 2009-10 sales) is well poised for growth with custom manufacturing operations (CMO) and pyridine being the primary growth levers. Jubilant’s CMO business has strong presence in the niche sterile injectables space with an order book of $550 million (4 times of sales). New contracts and the ramp up of existing ones should help drive the earnings momentum with capacity peaking only by 2011-12 as current utilisation is at just 60 per cent.

Unmatched integration in pyridine provides a strong entry barrier for competition along with pricing power to Jubilant. Also, the company is putting up large vitamin B3 capacity (about 40 per cent of the current world capacity) as part of forward integration into niche nutritional business. Momentum in the speciality pharma, which was restrained by the shortage of nuclear isotopes, is expected to ease by first quart of 2010-11. With its focus on strengthening the balance sheet, expect further re-rating in the coming quarters. Macquarie believes that Jubilant is one of the best proxies to participate in the global pharma outsourcing opportunity.

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MPHASIS
Reco price: Rs 633
Current market price: Rs 642.45
Target price: Rs 890
Upside: 38.5%
Brokerage: Anand Rathi Research

MphasiS is to acquire Fortify Infrastructure Services, an offshore-based remote IT operations and management (ROM) services provider, through an all-cash deal. MphasiS would be paying $15.5million (upfront consideration) plus earn-outs (over a period of two and a half years if certain financials are attained).

Fortify Infra Services operates in India and the US. It had $20 million in revenue in 2008-09, gross margins of 22 per cent and its acquisition would be EPS accretive for MphasiS. In November 2009, it had acquired UCA Services and in April 2009 WAMS. Fortify has a wide range of ROM offerings, which include data centre operations, systems and application infrastructure management, managed security services, network monitoring and management, and virtualisation services.The acquisition should provide MphasiS access to Fortify’s accounts, an experienced management team and a platform to proffer ROM services. Through this acquisition, MphasiS would be able to increase its share from outcome-based services (currently, FPP stands at 13.4 per cent, the lowest of the top-five Indian IT companies). At Rs 890, MphasiS trades at 17 time average 2009-10 estimated earnings. Fortify would contribute only around 1.8 per cent to Mphasis 2009-10 revenue.

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UNITECH
Reco price: Rs 76
Current market price: Rs 75.95
Target price: Rs 101
Upside: 33%
Brokerage: Religare Institutional Research

Unitech’s plans to spin off its non-core businesses and focus on real estate. The proposed non-core entity would comprise the company’s 40 per cent stake in Unitech Corporate Park (UCP), 50 per cent stake in Unitech Amusement Park, 32.5 per cent holding in Uninor Wireless (telecom), and the in-house construction and power transmission divisions.

The company has six properties (five SEZs and one IT park) in the NCR region and Kolkata. UCP is a debt-free company with cash of £48.3 million as of December 2009. Knight Frank has valued the company’s six assets at £517.7 million. Accordingly, the value of Unitech’s 40 per cent stake stands at Rs 1,400 crore. Unitech’s stake in the amusement park company, which owns one park in Noida and Rohini (Delhi), is worth Rs 500 crore, while its stake in Uninor Wireless is valued at Rs 2,960 crore. The construction business is valued at 4 times market cap to EBITDA (around Rs 100 crore) and power at Rs 100 crore.

Including subsidiaries and JVs, the de-merged entity’s value stands at Rs 19.5 per share in the best case and Rs 12.9 per share in the bear case scenario. Religare expects the spin-off to unlock value for investors. However, rising interest rates and escalating realty prices that could affect volumes are concerns.

Jyothy Laboratories - Shining through

The strategy of foraying into new segments as well as expanding existing portfolio is paying off well and driving growth for Jyothy Laboratories

Jyothy Laboratories’ recent tie up with DRDO to exclusively manufacture and market a multi-insect repellent is in line with its strategy to shift focus from the traditional fabric whitener business and expand into other fast growing segments. The company is also looking to introduce new products in existing categories, to further de-risk its business model. The national rollout of Exo (dishwashing category) and move to introduce aerosols and sprays under Maxo (mosquito repellent) brand will help the company expand its non-Ujala portfolio. Likewise, its foray into the fabric care services sector through organised laundry also holds steam.

De-risking, but Ujala still shining
Jyothy traversed for a long time as a single-product company with Ujala (fabric whitener), which is currently the leader (72 per cent in market share) with brands like ‘Ujala Supreme’, ‘Ujala Washing Powder’ and ‘Stiff & Shine’. However, the product profile now is getting diversified. The share of Ujala-branded products in the overall revenues has slowly reduced over the years to a little less than half as brands like Exo and Maxo are taking over.

THE GLOW GETS BRIGHTER
in Rs crore	FY08	FY09 * 9MTH	FY10E	FY11E
Net sales	375.3	352.3	540.8	645.2
EBITDA (%)	16.8	14.4	18.2	19.0
Net profit	46.2	40.1	74.7	89.7
EPS (Rs)	6.3	7.4	10.3	12.4
P/E (x)	-	23.7	16.9	14.1
E: Analysts estimates * EPS and PE are based on annualised 9 months figures

Meanwhile, even as the overall business is doing well, the company would consider introducing products like stain removers, conditioners and liquid detergents under the Ujala brand to sustain growth momentum. It intends to introduce new brand extensions to take advantage of Ujala’s brand image and large distributor network (about 3,000 distributors). In terms of brand extensions, the company envisages a national campaign for ‘Stiff & Shine’, going ahead. Besides, focus on ‘More light’ brand could help counter the competition in the low-priced fabric whitener category in markets like Bihar, UP and Orissa. Furthermore, it intends to launch powdered whitener in the next few quarters, which could help the company to have products across the fabric care segment. Overall, the Ujala-branded fabric care segment is expected to grow at around 20-25 per cent annually going forward with products like ‘Stiff & Shine’ leading the way.

Exo & Maxo effect
Apart from Ujala, Maxo is another popular brand in Jyothy’s portfolio. It is the third largest mosquito repellent brand in the country with about 22 per cent market share. The share of coil-based products vis-à-vis aerosols and sprays is higher, at 90 per cent of its overall portfolio, against the industry average of 60 per cent in favour of coils.

However, the company is already working on improving its product mix within the mosquito repellent segment, in favour of aerosols and sprays, which command higher profit margins. This should see margins improve in this business, going ahead.

In February 2010, Jyothy signed an agreement with government-owned Defence Research and Development Organisation for exclusive global marketing rights of the latter’s mosquito repellent product. The product will be launched in cream, lotion and spray formats and is estimated to be 4-5 times effective than its competitors. The company estimates the market opportunity at Rs 100-200 crore in two years (FY11-13), and expects Rs 30-40 crore revenues in 2010-11 with gross margin of over 50 per cent.

In the dishwashing segment, Exo contributes around 19 per cent to the topline. Besides Exo Dishwash bar, the company’s portfolio also includes Exo liquid (dishwashing liquid detergent) and Exo Saffa (dishwashing scrubber). While it is present in states like UP, Delhi, Maharashtra, the company is planning for a national roll-out (liquid and Saffa) in a phased manner.

The national roll-out would help the business grow at 45-50 per cent in the next two years and its contribution to the overall sales to touch 21 per cent by 2010-11.

Organised wash foray
Jyothy forayed into the laundry business with the acquisition of Snoways, a Bangalore-based laundry company, in March 2009. Since then, the company expanded from 8 outlets to 30 Snoways outlets catering to both institutional and retail clients.

In the institutional segment, the company serves clients in the hotels, airlines including Royal Orchid, ITC –Fortune, Lufthansa, Jet, etc. In the retail category, it offers premium services under the Fabric Spa and economy services under the Snoways brand.

Jyothy Fabricare, a 75 per cent subsidiary through which the laundry business is undertaken, washed around 20,000 pieces a day with about 85 per cent of volumes coming from institutional clients where margins are lower. Even though the retail segment’s contribution to laundry segment is small, its margins are much higher. Going forward, the company plans to focus more on the retail premium and economy category. Overall, while this business is in the nascent stage, expect its share to grow to over 5 per cent in the next 1-2 years.

Conclusion
Jyothy’s topline and bottomline grew at an average annual rate of 7 per cent and 10 per cent, respectively in the last five years. The period coincided when the company was growing out of the shadows of Ujala and extending its product profile to Maxo and Exo. In the next two years, sales and net profit are expected to grow faster with EBITDA margins of about 18-19 per cent. Expect a larger share of Maxo and Exo in the overall portfolio, going ahead. Fabric care business operates primarily from Bangalore, and expects the operations to break-even in 2010-11. Post 2010-11, plans are afoot to expand in to cities like Pune, Hyderabad and Chennai.

Jyothy is virtually debt-free with cash worth about Rs 100 crore, suggestive of a healthy balance sheet, which could come in handy with expansion plans on.

At Rs 173, the stock trades at 14 times its estimated 2010-11 earnings and can deliver 15-20 per cent returns in a year’s time.

Short-term weakness visible

Support at 4,700 should hold

The market zoomed to a new high and then consolidated inside a very narrow range. The Nifty closed at 4,829 points on Friday, up 3.19 per cent, after hitting a new 2009 high at 4,889. The Sensex was up 3.66 per cent at 16,264 points. The Defty gained 3.8 per cent with the rupee up substantially.

Advances comfortably outnumbered declines and breadth was good in terms of traded shares. However heavyweights outperformed smaller scrips with the Mid-caps gaining only 0.6 per cent while the BSE 500 rose 2.67 per cent. The Bank Nifty delivered an outstanding 6.3 per cent return. Both domestic institutional investors (DII) and foreign institutional investors (FIIs) were buyers but the latter bought with far greater enthusiasm. Volumes eased towards the end of the week after being high in the initial sessions.

Outlook: We may see a pullback in the early part of next week with support between 4,700-4,750 being tested. The upside is apparently limited by massive resistance between 4,825-4,900 as well as higher up. The long-term trend remains firmly bullish. The intermediate trend has been up for around eight weeks and may be close to maturity.

Rationale: The new 2009 high and a rising 200-day moving average (DMA) together confirm the strong long-term uptrend. However, the short-term trend looked weak on Friday with volumes tapering at higher levels.

Counterview: The current trading zone of 4,775-4,850 is too narrow to be sustainable so a breakout must occur. Support at 4,700-4,750 should be fairly solid and the intermediate trend would only come into question if that is broken. On the upside, volume expansion would be required to break past apparent resistance in the 4,800 and 4,900 zones. The DIIs could tip the balance since they have the resources to buy in greater quantity.

Bulls & bears: Banks were the standout performers this week on what seemed to be a technical bounce after several weeks of underperformance. This was at least partially driven by a focus on PSU banks, where more disinvestment is expected. Other PSUs also gained with the exception of refiners. The CNXIT also registered a net gain despite the stronger rupee. Wipro, Infosys and HCL Info all looked strong.

Metals were also among the lead performers with Hindalco leading the way. L&T, Patel Engineering and GVK were among several engineering and construction outfits that saw bullish support. The losers on Friday included the entire real estate sector and most refining stocks as well as metal scrips like Sterlite. If the market does see a short-term downtrend, selling in these sectors could intensify.

MICRO TECHNICALS

GE Shipping
Current Price: Rs 272.5
Target Price: Rs 300

The stock may be in the relatively early stages of a turnaround. It’s climbed above its 200 day average and established a pattern of higher peaks and bottoms. It’s sitting at a good support after testing resistance at the Rs 300-level. It’s likely to bounce back to Rs 300 again. Keep a stop at Rs 265 and go long.

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Guj NRE Coke
Current Price: Rs 66.3
Target Price: Rs 80

The stock has made impressive gains on strong volumes. It has just cleared a critical resistance. There is some more resistance around Rs 70-71 but if that is cleared, Guj NRE could ride till around the Rs 80-mark. Keep a stop at Rs 64 and go long. Increase the position as and when the stock closes above Rs 71.

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DLF
Current Price: Rs 398.55
Target Price: Rs 375

The stock has been sold down on high volumes, which is a danger signal. It has reasonable support at the current price and down to around Rs 390. However, if it closes below Rs 390, it is likely to fall till around the Rs 375-mark. Keep a stop at Rs 403 and short. Increase the position below Rs 390 and cover at Rs 375.

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PNB
Current Price: Rs 715
Target Price: Rs 745

The stock has moved up from a base at around Rs 660 on somewhat increased volumes. It broke a key resistance at Rs 705. Projections suggest a target of Rs 740-750 is possible. Keep a stop at Rs 705 and go long. Start covering the position above Rs 740.

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Hindalco
Current Price: Rs 124.4
Target Price: Rs 135

Heavy buying in the past week has driven the stock to a 52-week high. One can project a target of Rs 135 if the volume pattern is maintained. Keep a stop at Rs 120 and go long. If the stock closes above Rs 128, increase the position. Book profits above Rs 135.

Caraco shock: Sun Pharma to revise guidance

Sun Pharma today said it would revise the revenue guidance for 2009-10 as the company was not sure when its US subsidiary, Caraco Pharmaceuticals, would be able to meet the regulatory standards of the Food and Drug Administration (USFDA).

“We are withdrawing the earlier guidance for the year and will soon announce a revised guidance which will factor in the impact of the developments at Caraco,” Sun Pharma Chairman and Managing Director Dilip Shanghvi told an analyst conference.

While announcing the fourth quarter results of 2008-09, Sun Pharma had said the company was expecting sales growth of 13-15 per cent in 2009-10.

The US regulators on Thursday had seized about 33 drugs and raw materials at three plants of Caraco in the US, citing deviation from manufacturing standards.

The regulator said it would not permit Caraco to sell any drug in the US manufactured from these plants, until it met the quality standards.

Shanghvi said the road ahead for Caraco was not smooth. It will have to appoint independent lawyers to negotiate with USFDA to enter into a consent decree with timelines on complying with its standards, as the seizure was based on a court order.

Transfer of existing products of Caraco to Sun Pharma’s other facilities in the US or to India is also a complex process.

“The regulatory process for transfer of a product is similar to that of getting approval for a new product. We need to evaluate this and it has to be on a product to product basis. Basically we need to know whether USFDA will allow us to move out production,” he said.

Meanwhile, Caraco today said its financial position will give the company time to resolve the issues. The cash balance as of June 25, 2009 is approximately $64 million, which includes a loan of $18 million. The products in its inventory related to the USFDA action are currently being identified and the early estimated value of the inventory is in the range of $15 million to $20 million.

Shanghvi said the developments would have a negative impact on Caraco and its shareholders in the short term, but a smaller impact on Sun Pharma. “We have given more emphasis on credibility than money and this is the worst phase for both Caraco and Sun Pharma,” he said.

Voltas - Cooling effect

A recovery in demand and robust order book augur well for Voltas.

Synonymous with air-conditioning, Voltas once again proved its mettle in the electro-mechanical project business when it bagged two larger orders worth Rs 300 crore pertaining to the Chennai and Kolkata airports. This comes immediately on the back of a good set of results declared on May 29. These events have led to the stock rising 35 per cent as against the BSE Sensex’s four per cent gain since then. For those who think they might have missed the bus, don’t lose hope as there is scope to make healthy returns in the long-run.

Larger than perception
Many people view Voltas as an air conditioning (AC) company. Yes, it is a dominant player in the commercial and residential AC segment, but there’s a lot more to it. Post it’s restructuring in 2003, Voltas increased its focus on the engineering segment to emerge as a niche player in the electro-mechanical projects (MEP) and services business. This segment includes complete turnkey solutions for work related to central air-conditioning (airports, malls, offices, etc), refrigeration and solutions for water treatment and management.

The move helped Voltas de-risk its revenues as well as reduce its dependence on the low margin business, where stiff competition and seasonality were among concerns. It has also helped the company reach higher scale and tap upcoming opportunities in the projects business, where profit margins are relatively better.

The recently won orders worth Rs 300 crore for electro-mechanical work at the Kolkata and Chennai international airports is in addition to similar orders won in the past. For instance, while Voltas completed the project for the new Hyderabad international airport last year, it has completed similar projects for the world's largest passenger terminus of Hong Kong International Airport as well as the Mumbai airport. Going by the various estimates, the opportunities in this segment is huge as the government is also planning to invest in over 30 new non-metro airports besides, modernising existing airports of the country.

There are equally large long-term opportunities in segments like metro railways (stations), shopping malls, hospitals, hotels, education institutes, corporate buildings, high rise towers, multiplexes and cold storage. The company has already has a successful track record of having executed several projects in these segments. However, over the last one year, analysts were worried about the slowdown in these segments and the impact of high raw material prices on the company’s profit margins. But, the MEP segment, which accounted for 62 per cent of total sales, reported a revenue growth of 53.7 per cent year-on-year for 2008-09. This can be attributed to the company’s strong order book position. For now, the worries haven’t vanished totally and some concerns still exists, which pertain to the slowdown in the international operations (contributes 60 per cent to the project business); largely the gulf countries. For instance, during 2008-09, there was a 40 per cent contraction in flow of new orders from international markets, which analysts attributed to slow down in capital expenditure, particularly by crude oil producing countries due to lower oil prices.

In comfort zone
But, given the company’s current order book of Rs 4,700 crore, the same is good enough for the company to maintain a revenue growth at about 20 per cent this year. And, for the next year and beyond, if the recent improvement in the economic environment is sustained (including the rise in crude oil prices, which have crossed to $70 per barrel), then expect Voltas’ order book to swell further. Notably, the management, too, has guided for robust order inflows from countries like Qatar, Abu Dhabi and Saudi Arabia. In the domestic front, recovery in the industrial capex and near-term impetus provided by the government stimulus packages could further add to the kitty.

Equipment business
Additionally, the economic recovery will also augur well for the company’s engineering products business (13.4 per cent of total revenues), which primarily includes manufacture and distribution of equipments for materials handling, mining and construction and textiles industries. Here too, the company is among the leading domestic players. However, this segment reported a two per cent decline in revenue in 2008-09 as against nearly 30 per cent growth in the past few years. This business also reported significant erosion in operating profit margins, from 20.5 per cent in 2007-08 to 11.6 per cent in 2008-09. While a meaningful recovery could take another 2-3 quarters, analysts believe that the company’s move to cut down its inventory levels coupled with the recovery in industrial activity and winning of an Rs 210 crore order for mining equipment from Hindustan Zinc, are all good signs. Nevertheless, the segment holds good long-term prospects.

SOOTHING NUMBERS
in Rs crore	FY09	FY10E	FY11E
Revenue	4,033	5,100	6,100
EBIDTA	294	383	464
EBIDTA (%)	7.3	7.5	7.6
Net profit	228.0	270.0	329.0
EPS (Rs)	6.9	8.2	10.0
PE (x)	19.1	16.1	13.2
E: analyst estimates

Evolving opportunities
Meanwhile, the company’s second largest revenue contributor (22.5 per cent of sales) is the unitary cooling systems division, which includes residential and commercial ACs, commercial refrigeration and water coolers. This business is expected to report stable 10-12 per cent revenue growth on a sustainable basis. During 2008-09, revenues grew by 11.3 per cent, while operating profit margins were up at 7.4 per cent, albeit marginally. Although this is a highly competitive segment, the company is among the leading players (second in AC segment). In light of the rising income levels of individuals, increasing affordability, higher availability of electricity and demand from the commercial office and retail segments, the long-term prospects of this business too are good.

Outlook
The company operates in three growing segments, where the penetration levels are still low in India compared to some of the international markets. Its leadership in these segments and increasing focus on expansion into foreign markets should help it sustain healthy growth. Attributes like consistent revenue track record, regular dividend payments and negligible capex needs put the stock in better light. At Rs 133, the stock trades at 16 times and 13 times its estimated 2009-10 and 2010-11 earnings.