Reports ----- for Monday 29th

STOCK UPDATE

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs63

Oil on the boil

Result highlights

• The Q2FY2008 results of Marico were as per our expectations. In Q2FY2008, the net revenues of the company grew by 22.7% year on year (yoy) to Rs463.8 crore. The growth was driven by a 16% organic growth and a 7% inorganic growth.
• The operating profit margin (OPM) declined by 81 basis points to 13.95% on account of a higher raw material cost, which as a percentage of sales increased by 210 basis points to 51.6%. Consequently, the operating profit grew by 16% yoy to Rs64.7 crore.
• A substantial decline of 49.3% in the depreciation charge due to a write-off of intangibles in FY2007 along with a tax incidence of just 19.3% (compared with 30.9% in Q2FY2007) led to a 63% jump in net profit to Rs42.2 crore.
• The quarter witnessed a good volume growth across products with Parachute coconut oil growing by 8%, focus segment products growing by 15% and Saffola growing by 21% yoy. The international consumer product business grew by a strong 73% aided by the Egyptian business. Also, the chain of Kaya clinics expanded to 51 as the company added three new clinics during the quarter.
• We maintain our positive outlook on the company and expect its turnover to grow by 21% in the current financial year. The stock is trading at valuations of 18.8x FY2009E earnings per share (EPS) and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.4x FY2009E. We maintain our Buy recommendation on the stock with a price target of Rs70.

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,287
Current market price: Rs1,042

The Sun continues to shine!

Result highlights

• Sun Pharma reported a strong top line growth of 24.6% year on year (yoy) in Q2FY2008 to Rs667.9 crore. The top line was significantly higher than our estimate of Rs632 crore. The strong growth was driven by an increase of 26.3% in its domestic business and a 19.2% growth in its exports.
• The domestic formulation business grew by 31.2% to Rs372.0 crore. This quarter was phenomenal for this business, which saw the highest ever revenues and growth rates. Going forward, the company expects the growth to moderate to more sustainable levels. We believe Sun Pharma's domestic formulation business will continue to outpace the industry and grow at a compounded annual growth rate (CAGR) of 20% over FY2007-09.
• Caraco Pharma, Sun Pharma's US subsidiary, continued with its impressive performance by registering a 46% growth in the revenue to $41.4 million (against our estimate of $37 million) and a 100% jump in the net profit to $4.6 million in the quarter.
• Sun Pharma demonstrated excellent cost control during the quarter, with margins expanding by 420 basis points to 36.1%, the highest operating profit margin (OPM) reported by the company so far. The sharp margin improvement was driven by a broad-based cost reduction: a 260-basis-point reduction in the raw material cost due to an improved product mix; a 30-basis-point decline in the staff cost; and a 240-basis-point dip in the other expenditure. The margin expansion caused the operating profit (OP) to grow by a robust 41.0% to Rs240.9 crore in Q2FY2008.
• Despite a robust operating performance, Sun Pharma's net profit growth was restricted to just 17.2% at Rs218.6 crore during the quarter. The profit was in line with our estimate of Rs213 crore. The profit growth slowed down due to the sharp 72% reduction yoy in the other income.
• Sun Pharma's recent wins in the Para IV patent challenges indicate the future potential of its US business. The company has recently announced favourable outcomes on four Para IV challenges, generic Protonix, generic Trileptal, generic Effexor XR and generic Exelon, thus winning a 180-day exclusivity (in certain cases, the same is shared with a few other players) for supplying these products in the USA. While the company is still evaluating its launch options for generic Protonix and generic Exelon, it has already launched generic Trileptal and is awaiting the US Food and Drug Administration's (US FDA) approval for generic Effexor XR. Upon receiving the approval it will evaluate the latter's launch and/or settlement options.
• Taro has further pushed its shareholders' meet until after the announcement of its audited results for 2006 and H1CY2007. There is no clarity on the timeline of the result announcements. With a 25% stake in Taro, Sun Pharma's management remains confident of closing the transaction after the shareholders' meeting.
• At the current market price of Rs1,042, Sun Pharma is valued at 23.3x FY2008E and 19.6x FY2009E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,287.

Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs634

Price target revised to Rs800

Result highlights

• Backed by healthy realisations in cement and paper divisions, the top line of Orient Paper and Industries grew by a robust 32% year on year (yoy) to Rs302.5 crore.
• On account of higher realisations, the paper division's margin jumped to 16% against 5% in the previous quarter and a loss in the same quarter of last year. Supported by healthy margins in the cement division, the overall earnings before interest and tax (EBIT) margin expanded by a healthy 1,525 basis points yoy and 280 basis points quarter on quarter (qoq) to 32.5%.
• The other income component for the quarter stood higher at Rs11.4 crore on account of Rs8.67 crore booked towards the realisable value of carbon credits obtained by the company from United Nations Framework Convention on Climate Change (UNFCCC).
• Thanks to the repayment of debt, the interest cost declined to Rs4.6 crore whereas the depreciation provision remained flat yoy at Rs5.6 crore, as the company has not added any asset in the last one year.
• On the back of the stellar performance of the paper and cement divisions, and a higher other income, the company's profit after tax (PAT) grew by 155% yoy to Rs58.3 crore, beating our expectations.
• The capital expenditure (capex) programme of the company is progressing well. The company will be able to get an additional cement volume of 0.3 million metric tonne (MMT) for the second half of the current fiscal. It is foraying into manufacture of CFL lamps at a capex of Rs40 crore.
• Taking cognisance of the higher margins in the division and adjusting for the income accruing from the sales of Certified Emission Reductions (CERs), we are upgrading our FY2008 earnings per share (EPS) estimate by 11.5% to Rs112.8 and the FY2009 EPS estimate by 12.8% to Rs113.2.
• The outlook for the company's business, especially cement and paper businesses, is very positive. Even though the cement cycle is expected to reverse in the next one year, the higher volume growth will partially compensate for the drop in the prices. With the industry scenario looking bright for the next couple of years, we expect the company's paper margins to remain attractive, providing a cushion to the earnings of the company. The stock is currently trading cheap at 5.1x its FY2008 EPS estimate and 5.6x its FY2009 EPS estimate whereas the cement business is trading at an EV per tonne of USD49 on the FY2009E capacity and USD29 on the FY2010 capacity. In view of the bright prospects for the paper industry and cheap valuations of the company's cement business, we believe that the stock deserves a re-rating. Hence, we revise our price target to Rs800 per share.

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs180
Current market price: Rs140

Revenue growth hit by European business

Result highlights

• For Q2FY2008 3i Infotech has reported a revenue growth of 6.8% quarter on quarter (qoq) and 91.6% year on year (yoy) to Rs277.9 crore, which is lower than our expectations of Rs283.7 crore. The flattish revenue growth in the recently acquired entity, Rhyme Systems, and the overall slowdown in the European business seem to be the key reasons for the lower than expected growth in the company's overall revenues.
• The operating profit margin (OPM) improved by 30 basis points to 24.3%, despite the increase in the selling, general and administration (SG&A) cost as a percentage of the sales (to 21.9% as compared with 21.5% in Q1FY2008). The margin improvement was largely driven by the 150-basis-point improvement in the gross margin of the service business to 38.8% in Q2FY2008. Consequently, the operating profit grew by 8.3% qoq and 98.5% yoy to Rs67.6 crore.
• However, the steep jump in the minority interest to Rs3 crore dragged down the earnings growth to 2.3% qoq and 78% yoy to Rs40.1 crore, which is much lower than our expectations of around Rs43-44 crore.
• The company has upgraded the revenue guidance to Rs1,150-1,250 crore (up from Rs1,000-1,100 crore earlier) and the earnings guidance to Rs165-175 crore (up from Rs145-155 crore earlier). The upgraded earnings guidance is in line with our estimate of Rs172.3 crore.
• In terms of operational highlights, the revenue mix remained largely constant on a sequential basis with the product business contributing around 46.7% of the revenues. The order backlog continued to show a healthy growth with an increase of 11.2% qoq to Rs728.4 crore.
• At the current market price the stock trades at 13.7x FY2008 and 10.9x FY2009 earnings estimates. We maintain our Buy call on the stock with the price target of Rs180.

Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs300
Current market price: Rs200

Price target revised to Rs300

Result highlights

• For Q2FY2008 Unichem Laboratories (Unichem) has reported a sales growth of 2.6% to Rs153.1 crore, which is lower than our expectation of Rs160 crore. The growth was subdued largely due to a 3% year-on-year (y-o-y) decline in the company's exports on account of the appreciation in the rupee. Moreover, even the flagship domestic business of the company recorded a growth of just 5.5% year on year (yoy), due to the price cuts imposed on Ampoxin and the high base of Q2FY2007.
• On account of the rising rupee, the management did not push its exports during the quarter. Instead, it chose to re-negotiate the pricing terms with its key clients. The negotiation process is currently on and the management is hopeful of improving its export realisations in the future quarters.
• The performance of Unichem's domestic formulation business moderated during the quarter, with the business growing by 10% to Rs118.1 crore. Going forward, the company expects to improve the growth seen in the domestic formulation business on the low base of H2FY2007. Also, the new prices of Ampoxin came in towards the end of Q2FY2008; the impact of the same will be felt in the improved performance in H2FY2008. However, we have modeled a conservative 12.0% growth in this business in FY2008 and we remain optimistic about the company's ability to beat our estimates.
• Unichem's active pharmaceutical ingredient (API) business declined by 16% in Q2FY2008, largely due to the 49% decline in the domestic bulk business. The management has indicated its low focus on the bulk segment. Going forward, we can expect a pick-up in the bulk business on the back of new contract research and manufacturing (CRAMS) orders in Europe (for which the talks are currently on). However, until then, we expect the bulk business to report a sluggish growth.
• Unichem's operating profit margin (OPM) contracted by 180 basis points to 20.2% in the quarter. The rising research and development (R&D) cost (on account of higher abbreviated new drug application [ANDA] filings) and an increase in the staff cost (due to the addition of new employees) adversely affected the margin. On the other hand, the gross margin showed an improvement despite the lower export realisations. The margin reported by the company was, however, ahead of our estimate of 19.7%. The shrinking margin caused the operating profit to decline by 3.8% to Rs30.3 crore.
• Unichem's reported net profit declined by 17.5% to Rs21.2 crore in Q2FY2008. The decline was due to a 58% reduction in the other income, a 29% increase in the depreciation charge and a 630-basis-point increase in the tax incidence over Q2FY2007.
• In the wake of the slowdown in the exports and the bulk business during H1FY2008, we are revising our revenue and earnings forecasts for Unichem. We have downgraded our FY2008 revenue and earnings estimates by 5% and 11.2% respectively, and our FY2009 revenue and earnings estimates by 4.2% and 9.7% respectively. Our revised earnings estimates stand at Rs25.3 per share for FY2008 and at Rs29.0 per share for FY2009.
• At the current market price of Rs200, Unichem is trading at 7.9x its estimated FY2008 earnings and at 6.9x its estimated FY2009 earnings. At these levels, the stock is very cheap when compared with its peers. We maintain our Buy recommendation on Unichem, with a revised price target of Rs300.

Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Under Review
Current market price: Rs1,279

Q2FY2008 results: First-cut analysis

Result highlights

• For Q2FY2008 Ratnamani Metals and Tubes Ltd (RMTL) has reported a year-on-year growth of 46.1% in its net revenues to Rs209.1 crore. The net revenues are in line with our expectations.
• The operating profit grew by 38.2% year on year to Rs44.9 crore, resulting in an operating profit margin (OPM) of 21.5%. The OPM fell by 121 basis points year on year, mainly on account of a change in the product mix and an increased raw material cost. The raw material cost to net sales ratio stood at 64.7% in Q2FY008 as compared with 63% in Q2FY2007.
• The other income increased sharply to Rs6 crore as compared with Rs0.4 crore in the corresponding quarter last year. The other income component was high on account of foreign currency translation gains on the raw material imports.
• The interest cost rose by 24.2% to Rs5.4 crore while the depreciation charge was up 78.3% to Rs5.9 crore. Consequently, the net profit increased by 59.7% year on year to Rs26.8 crore.
• The current order book of the company stands at Rs368 crore and is executable over the next five to six months. Out of the total order backlog, orders worth Rs163 crore are for exports and deemed exports (exports to special economic zones).
• Driven by the demand for the company's products from key user industries like the oil & gas, power and sugar (which are implementing capital expenditure programmes), the outlook for RMTL remains positive. The strong order backlog provides visibility to its earnings. We shall be back soon with a detailed analysis of the results and a revised price target. At the current market price the stock is trading at 13.3x FY2008E earnings and 9.5x FY2009E earnings. In terms of enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA), it is quoting at 6.2x FY2008E and 4.5x FY2009E EV/EBDITA

----- with due apologies and full credits to sharekhan