Tuesday, September 4, 2007

Sharekhan Investor's Eye dated September 04, 2007

Tata Tea   
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs762

Getting branded

Key points

  • In FY2007 the consolidated net sales of Tata Tea Ltd (TTL) grew by 29.6% year on year (yoy) to Rs4,024.9 crore. The growth was mainly driven by higher branded sales across the business and the inclusion of revenue of Rs558 crore from new acquisitions. The organic growth in FY2007 was 11.5%. Branded sales now constitute around 89% of the total sales compared with 85% in FY2006.
  • TTL reported a 24.6% year-on-year (y-o-y) jump in its consolidated net profit (adjusted for extraordinary items) to Rs366.2 crore. 
  • In the domestic market, the company reported a top line growth of 9% to Rs1,054 crore in FY2007. The branded business (which constitutes 80% of the sales) continued with its impressive performance during the year, registering a 9% growth in volume and a 12% rise in value compared with that in the last year.
  • For the same period, the turnover of the Tetley group (a 77.7% British subsidiary of TTL) was Rs2,298 crore, which was 13% higher than that in the previous year. The organic growth was 8.5% which includes the benefits of exchange transactions. For FY2007 the profit after tax (PAT) of Tetley was lower by 12% at Rs130 crore as against Rs147 crore in FY2006. The PAT was lower mainly on account of an interest charge incurred due to the acquisition of Energy Brands Inc., USA (EBI).
  • During the year the company acquired a 25% shareholding in EBI, commonly known as Glaceau®, for US$677 million (enterprise value of EBI was estimated at US$2.2 billion). Subsequently, TTL has agreed to sell its stake in EBI for an approximate consideration of $1 billion to the Coca Cola Company. This transaction is expected to result in a pre-tax profit of approximately $415 million.
  • TTL also acquired a 15% stake in Mount Everest Mineral Water (MEMW), the owner of the Himalayan brand, by subscribing to a preferential issue at a price of Rs140 per share. It will purchase another 9.15% stake in MEMW from the latter's current promoters at the same price. The company would also make an open offer to acquire an additional stake of up to 20% in MEMW at Rs140 per share This acquisition makes TTL a complete beverage company, having presence in all the verticals, ie tea, coffee and water.
  • TTL is selling North Indian Plantation Operations (NIPO), which includes 24 tea estates in northern India, to a new company called Amalgamated Plantation Pvt Ltd (APPL). The sale would be effective from April 1, 2007. We believe that this move is in line with TTL's overall strategy to focus on packaged and specialty tea.
  • We believe the company is poised to become a strong player in the beverage market by penetrating new geographies through the inorganic route as well as by gaining presence in every segment of the beverage industry. On the valuation front, the TTL stock looks attractive at 11x its FY2009E diluted consolidated earnings per share (EPS) when compared with its peers in the fast moving consumer goods (FMCG) sector, especially when with the sale of NIPO, TTL has become a pure branded FMCG play. We maintain our Buy recommendation on the stock with a price target of Rs970.

 

Bharat Electronics  
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,975 
Current market price: Rs1,775

Annual report review

Key points

  • Gross sales of Bharat Electronics Ltd (BEL) grew by 11.8% in FY2007 on the back of a healthy growth in the civilian segment whereas the defence business remained stagnant during the year. The earnings growth of 23.2% was aided by a jump of 65.6% in the other income component and a decline in the interest outgo. In terms of balance sheet, the huge jump in the sundry debtors resulted in a lower than expected growth in the free cash on its books.
  • The order backlog at the beginning of the year stood at a record level of Rs9,130 crore of which Rs3,969 crore is executable in the current fiscal. The company has agreed to a revenue target of Rs4,725 crore for FY2008.
  • BEL is gearing itself to meet the increasing competition through the roll-out of new products (leveraging its research capabilities) and tie-ups with suitable partners (domestic and foreign vendors). During the year, the company signed agreements with leading global defence vendors including Lockheed Martin, Boeing, Northrop Grumman and CASA.
  • At the current market price the stock trades at 13.7x FY2008 and 11.2x FY2009 earnings estimates (adjusted for the estimated free cash on its books). We maintain our Buy call on the stock with a price target of Rs1,975.

 

 

Tata Motors   
Cluster: Apple Green
Recommendation: Buy
Price target: Rs792 
Current market price: Rs691

Continued decline in key M&HCV segment

Key points

  • Tata Motors' overall sales for the month stood at 45,144 vehicles. The overall sales declined slightly by 0.4% on year-on-year basis. 
  • The commercial vehicle sales grew by 1.6% to 23,431 vehicles. The sales growth was driven by strong sales of light commercial vehicles (LCVs), which grew by 23% year on year on the back of its new launches Magic and Winger. The medium and heavy commercial vehicles (M&HCV) sales declined by 13.6% to 11,625 vehicles as the low demand continued in the segment. Our channel checks also reveal that the lower demand for M&HCV vehicles (particularly in the 12-16-tonne segment) led to a greater inventory creation in the system. Consequently, to fuel the growth the company has been offering attractive discounts of almost 4-6%.
  • Lower cargo availability during the monsoons caused the truck rentals to fall by about 1.5-2% on an average during the month. The lower cargo availability also led to a sharp decline in the round trips for truck operators, which is affecting their profitability slightly. The situation is expected to improve from the next month with the start of the festive season.
  • The passenger vehicle sales remained weak and declined by 5% in August to 16,620 vehicles. Indica sales dropped by 4% while Sumo and Safari sales dropped by 12% during the month. The lack of new product offerings has been the prime reason for the decline in the sales. The company has been offering discounts on most of its products and the discounts are likely to continue in September as well.
  • The exports remained stable and grew by 8% in August to 5,093 vehicles.
  • At the current market price of Rs691, the stock discounts its FY2009E consolidated earnings by 10.6x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs792.

SECTOR UPDATE

Cement

Cement prices to pick up post-monsoon
Industry majors ACC and AV Birla Group have come out with their cement dispatch numbers for the month of August. ACC continued to record a healthy growth of 15% at 1.57 million metric tonne (MMT) whereas AV Birla Group recorded a dispatch growth of 12.25% to 2.36MMT. But on a sequential basis both the companies, ACC and AV Birla, witnessed a de-growth of 4% and 2% respectively because of the monsoons in August .

Posted by Tushar Surekha at 10:41 PM

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