Saturday, November 17, 2007

Sharekhan Investor's Eye dated November 15, 2007

 

SHAREKHAN SPECIAL

Broking companies have a lot to cheer

The stock prices of the listed broking companies have grown phenomenally in the recent past. We therefore decided to take a sneak peak into what actually is driving this upsurge. We feel that the significant increase in the market turnover, which would drive earnings growth for these broking companies and the re-rating possibilities of these companies based on valuations commanded by the ongoing initial public offer (IPO) of Edelweiss Capital are actually pushing their prices up. 

STOCK UPDATE

Hindustan Unilever     
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs200

Results below expectations

Result highlights

  • Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
  • The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
  • The operating profit grew by 11.1% to Rs447.6 crore. However, the net profit rose by only 6.9% to Rs409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
  • Sales of soaps and detergents grew by a robust 12.8% yoy to Rs1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%. 
  • Sales of processed food segment grew by 32.5% yoy to Rs128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
  • The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh (UP) thereby expanding the water purifier business to eight states. Pureit, HUL's in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
  • At the current market price of Rs200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs8.1 and 21.9x its CY2008E EPS of Rs9.2. We maintain our Buy recommendation on the stock with a price target of Rs280.

Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs188
Current market price: Rs149

Price target revised to Rs188

Result highlights

  • Net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) grew by 2% year on year (yoy) to Rs216.9 crore. The chemical division and the fertiliser division contributed 69% and 31% respectively to the net sales. The revenue from the chemical division increased by 29% yoy to Rs155.8 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division dropped by 32% yoy to Rs70.7 crore due to reduced availability of phosphoric acid in the international market and lower availability of material for trading.
  • Operating profit during the quarter grew by 26% yoy to Rs32.2 crore. A strong contribution from the chemical division expanded the overall operating profit margin (OPM) by 290 basis points to 14.9%. The segmental profit before interest and tax (PBIT) for the chemical division reduced by 0.3% to Rs37.3 crore with the margin declining from 31% to 24%. The loss in the fertiliser division reduced to Rs1.5 crore from Rs6.6 crore. The increased raw material cost including that of the outsourced ammonia and propylene decreased the segmental PBIT margin for the chemical division, while the higher price realisation reduced the segmental loss for fertiliser division.
  • Interest expenses were higher by 7% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 21% yoy during the quarter.
  • The adjusted profit after tax (PAT) increased by 21.4% yoy to Rs21.9 crore with the margin expanding by 160 basis points to 10.1%.
  • With the completion of retrofitting of ammonia plant, the company has increased its capacity to 130,000 tonne per annum (TPA) from 90,000TPA. This along with the increased natural gas availability and the additional ammonia storage tank would help the company in reducing its raw material cost as well as enhancing its nitric acid capacity.
  • The completion of Dahej-Uran pipeline would improve the natural gas supply to Taloja plant from December 2007, which would help in replacing naphtha with natural gas for steam generation, depending upon its supply. Natural gas at around $8.5 per Million British Thermal Units (MMBTU) would cost almost half the price of naphtha.
  • The company is expected to complete land acquisition process for its ammonium nitrate project in Orissa by November 2007. The plant with a 300,000TPA capacity is expected to be operational by November 2009.
  • The company's specialty mall Ishanya, for interiors and exteriors, is expected to commence operations from the third quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
  • At the current market price of Rs149, the stock is trading at 8.7x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x. The improved supply of natural gas would benefit the fertiliser division in the coming years, while its ammonium nitrate project would also start contributing from H2FY2010. In view of future earnings visibility, Ishanya, the company's specialty mall for interiors and exteriors is valued at Rs28.7 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs188 valued at 11.0x its FY2009E earnings.

SECTOR UPDATE

Telecommunications

Bharti remains our top pick
GSM operators added 5.7 million subscribers during October 2007, increasing the overall subscriber base to 159.7 million during the month. There has been a slight increase in net additions from 5.6 million subscribers in September to 5.7 million subscribers in October. Thus the month-on-month (m-o-m) growth in subscribers has decreased from 3.8% in September to 3.7% in October in spite of the beginning of festive season.

Posted by Tushar Surekha at 12:34 PM

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