[August 07, 2006]

[ViJiT]

STOCK UPDATE

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs180

Price target lowered to Rs390

Result highlights

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Orchid’s Q1FY2007 results are below our expectations. The net sales rose by 18.5% year on year (yoy) to Rs201.7 crore in Q1FY2007. The growth came on the back of increased sales in the US generics market. However, the sales were down 16% on a sequential basis due to a decline in the sales of active pharmaceutical ingredients (APIs) and US generics.
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The company's operating profit margin (OPM) expanded by 210 basis points to 28.8%, primarily on account of a drop in the raw material costs, as the company continued to derive an increasing proportion of its revenues from the sale of formulations in the high-margin regulated markets. Consequently, the operating profit grew by 27.7% to Rs58 crore in the quarter.
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Orchid's profit after tax (PAT) grew by 98.8% yoy to 14.6% in the quarter. The net profit was aided by the higher other income component and stable interest and depreciation costs.
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In view of the delay in the launch of Ceftiofur, Tazobactum and the rising interest expenses, we are downgrading our sales and profit estimates for FY2007 and FY2008. We have revised our sales downwards by 10.3% to Rs1,064.9 crore and by 3.5% to Rs1,282.4 crore for FY2007 and FY2008 respectively. Our net profit estimates have also been revised downward by 59.4% to Rs91.2 crore for FY2007 and by 20.2% to Rs154.6 crore for FY2008. Considering a fully diluted equity, the revised earnings stand at Rs15.6 per share for FY2007 and Rs24.4 per share for FY2008.
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At the current market price of Rs180, Orchid is quoting at 11.5x its FY2007 estimated earnings and at 7.4x its FY2008 estimated earnings, on a consolidated basis. The stock has undergone a steep correction in recent times, and we believe it is attractively valued at the current price. Considering the strong growth prospects and untapped potential, we maintain our Buy recommendation on Orchid, with a downgraded price target of Rs390, an upside of 121% from the current levels.





Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs131

Singing smart tune

Result highlights

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Saregama India Ltd's (SIL) Q1FY2007 pre-exceptional item results are ahead of our expectations.
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During Q1FY2007 SIL's revenues grew by 28.9% year on year (yoy) backed by a two-fold jump in the licence fee income and a 42% year-on-year (y-o-y) growth in the home video business.
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The pre-exceptional profit for Q1FY2007 grew by 125% yoy with a 720-basis-point expansion in the margins despite a steep spurt in the royalty and advertising and promotion (A&P) expenses.
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However, during the quarter under review SIL did one-time provisions of Rs2.6 crore. Hence, the reported operating profit grew by only 22.1%.
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The pre-exceptional profit grew by 190% yoy to Rs5.4 crore. With the above said provisioning, the reported net profit grew by 49.7% to Rs2.8 crore.
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We have lowered our earnings per share (EPS) estimates for the company for FY2007 from Rs13.2 to Rs9.9 and for FY2008 from Rs18.4 to Rs16.6 to take into account the higher royalty and A&P expenses.
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We believe there are several positive triggers lined up for SIL over the next two years like the revision of the rates with radio stations, growth of value added services in the telecom sector and the turn-around of its subsidiaries.
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At the current market price of Rs131, the stock is quoting at 8.2x its FY2008E EPS and 5.6x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). With attractive valuations and cash and cash equivalents of Rs28 per share, we reiterate our Buy recommendation on the stock with a price target of Rs375.




Bharat Bijlee
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs851

Earnings, price target downgraded

Result highlights

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At Rs4.6 crore the Q1FY2007 net profit of Bharat Bijlee Ltd (BBL) is below our expectation, primarily because of the execution of five 100MVA+ transformer orders. Being of entry level, these orders were of extremely low margin.
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The quarter saw a revenue growth of 22% to Rs71 crore. The growth was in line with our expectation. On a like-to-like basis, the business of transformers and motors saw a revenue growth of 41%.
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However the operating profit grew by just 10%, as during the quarter the company executed five 100MVA+ transformer orders, which were of entry level and hence had lower margins. Consequently, BBL's operating profit margin (OPM) declined by 120 basis points to 10.7%.
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The interest cost jumped by 16% as the company availed of higher working capital loans to execute the transformer orders. Depreciation too increased by 32% as the company commissioned its new 3,000MVA plant during the quarter to manufacture the 100MVA+ transformers.
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Consequently, the pre-exceptional net profit at Rs4.6 crore grew by a meagre 6%. The reported net profit, which includes an expenditure of Rs36 lakh on account of a voluntary retirement scheme (VRS), grew by 8% year on year (yoy).
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The order backlog for the quarter jumped by a very impressive 105% to Rs256 crore, driven by the inflow of orders worth Rs175 crore during the quarter.



Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs362
Current market price: Rs280

Price target lowered to Rs362

Result highlights

*
Navneet Publications India (Navneet) reported a 9% year-on-year (y-o-y) growth in its net sales to Rs173.3 crore for Q1FY2007. The revenue growth was driven largely by a 16% growth in the publication revenue to Rs125.9 crore since the stationary segment showed a decline of 9% to Rs46.2 crore. The key reason for the lower-than-expected growth in the overall revenue was the much higher spill-over of revenues to the second quarter and the decline in the revenues from the stationary business.
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The operating profit grew by 19% to Rs52.6 crore. The operating profit margin (OPM) improved by 260 basis points to 30.3% during Q1FY2007 on the back of a higher profitability in both the publication and the stationary segments.
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The growth in the profit after tax (PAT) was restricted to 9% year on year (yoy) to Rs32.1 crore, on account of a higher tax provision in the reported quarter and a negative other income (foreign exchange [forex] fluctuation loss of around Rs0.4 crore).
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Navneet is taking steps to enhance its product portfolio by entering into the non-paper stationary segment. It has introduced the Navneet brand of pencils and plans to introduce other products like pencil boxes, sharpeners and erasers. The idea is to leverage the brand and the existing distribution network to target a higher share of spending by the students.
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To factor in the lower-than-expected performance in the stationary business and the forex loss in Q1, we are revising the FY2007E earnings per share (EPS) estimates downwards by 6.4% to Rs23.6 and the FY2008E estimates by 6.5% to Rs29 (the estimates for the other income has also been revised accordingly). The price target has been revised downwards to Rs362; it is based on 12.5x FY2008E earnings; close to the lower end of the price/earnings (P/E) band of 12-14x one-year forward earnings for the past few quarters.
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Navneet's earnings are estimated to grow at a compounded annual growth rate (CAGR) of 22% over FY2006-08, largely due to the change in school syllabus in the states of Gujarat and Maharashtra. At the current price of Rs280, Navneet is available at 9.7x FY2008E earnings and 5.5x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain a Buy on Navneet with a revised price target of Rs362.