Category: Equity Research

Central government of India owns a 90.40% stake in Engineers India (EIL). EIL renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects. The company derives nearly 90% of its revenue from the oil and gas sector.

Of the two segment in which it operates – consultancy and engineering and turnkey projects – the consultancy segment earns high margin, while the turnkey project division’s margin is low.

There has been a consistent improvement in the growth of the consultancy business. The business grew 5% in FY 2005, and 15% in FY 2006 and FY 2007. Also, margin continued to show improvement. The profit before interest and tax (PBIT) margin of this division improved from 28% in FY 2005 to 36% in FY 2007. EIL’s consultancy revenue is expected to grow 20% and at least maintain the margin, going forward. This is in spite of the sharp rise in salaries effected in early 2007.

New order inflow to the domestic consultancy and engineering division stood at Rs 900 crore in FY 2007 (Rs 485 crore in FY 2006). Export consultancy & engineering orders stood at Rs 68 crore in FY 2007 (Rs 325 crore in FY 2006). New-order flow from the international markets was exceptionally large in FY 2006 due to receipt of two big orders in that year. A Rs 250-crore backlog will be executed in FY 2008 and beyond. The company expects two big export orders to come by December 2007.

Recently, EIL received a Rs 900-crore contract from IOC for another refinery in Panipat. This will contribute Rs 250 crore to topline and the same margin earned in its previous contract in FY 2008.

EIL is expected to register net sales and net profit of Rs 835.60 crore and Rs 198.50 crore in FY 2008. The turnkey-project revenue is expected to be Rs 250 crore (up from Rs 82 crore in FY 2007) and consultancy business to grow 20% in FY 2008. This gives an EPS of Rs 35.3. At the current market price of Rs 478 (52-week high/low: Rs 610/ Rs 405), the scrip is available at a P/E of only 13.6 times its FY 2008 earning. With more than Rs 1000-crore liquid funds (Rs 178 per share) and strong order book, both for consultancy as well as turnkey projects.

Ranbaxy Labs, Wockhardt and Nicholas Piramal have had a good quarter which has led their stocks to be upgraded by Citigroup.

Ranbaxy Labs:
As the settlement of the Valtrex patent litigation with GSK comes as a much needed catalyst for the stock. Ranbaxy has been out of favour on the bourses despite a steady improvement in fundamentals. However, with earnings momentum likely to remain strong & valuations looking attractive at 17.6x CY08E earnings, expect a re-rating over the next 6-12 months.

The street is ignoring Ranbaxy’s improving business profile reflected in: a) rising share of high margin emerging market sales; b) tie-ups to enhance pipeline in niches like biogenerics, oncology & peptides; c) integration & rapid scale up of Terapia; d) robust growth in base US business.

Buy with a target price of Rs505/share, 35% upside potential from current levels. The stock price now factors in most negatives.

Wockhardt:
Sales up 53% and PAT up 61%, driven by partial consolidation of the recently acquired Negma Lerads business. EBITDA margin of 24% (up 238bps YoY) is higher by c270bps due to capitalization of some R&D cost that was expensed in 2QCY06. Adjusted PAT was up 43% YoY. US formulations are up 50% YoY with 5 launches in 2Q; Healthy double-digit growth in Germany as 3 launches offset the pricing pressure in the market; Steady growth in UK & India.

Wockhardt continues to combine organic and inorganic growth drivers optimally. The stock has been out of favor for some time. Wockhardt as Buy/Low Risk (1L) with a target price of Rs529. Wockhardt as an emerging global bio-generics company with strong earnings growth potential over the long term. The company has had several disappointments over the past 2 years – especially related to its US market initiatives. However, with most of these being addressed, one can expect improving fundamentals and earnings growth to once again drive good upside over the long term. At 16xJune’08E earnings, Wockhardt has a price target
of Rs529/share.

Nicholas Piramal India Ltd [NPIL]:
NPIL not only maintained FY08 guidance but also disclosed several qualitative positives related to the CRAMS franchise. Citi raises target price to Rs345/share and recommend using the post-results decline as an opportunity to buy the best Indian play on innovator CRAMS.

1Q results were weak as PAT fell 19% YoY despite 16% sales growth. EBIDTA margins fell 296bps to 13.8%. Besides 41% sales growth, 1Q had fresh evidence of the traction in NPIL’s CRAMS foray: a) 3 new clients & more business from Pfizer at Morpeth; b) 2 contracts shifted from Avecia to India; c) 1 big API deal across Digwal & UK; d) 10% staff reduction in Avecia & Morepeth.

Raising target price – to Rs345/share as we roll forward our valuation to September 2008E earnings and maintain NPIL as one of Citi’s top sector picks.

Merill Lynch has downgraded India’s IT Service Provider – Mastek to a SELL. Order intake push-out for two quarters and growing attrition, suggests competitive headwind. Post a 19% EBIT level miss this quarter Merill cut estimates by 8% and 4% for FY08 & FY09. Though at 9x FY08E PE, Merill sees more potential downside given subdued FY07-09 EPS CAGR forecast of 12%.

Merill Lynch’s top picks in Small Cap IT are Rolta and Firstsource. Target Price for Rolta is Rs540 is set at 14x FY09e PE at 7% discount to target multiple for Infotech Enterprises. For Firstsource, Target Price of Rs105 is at 22x FY09E PE at a PEG of 0.9 and current FY08 PE of 25x.

JP Morgan and Citigroup have upgraded ITC to a BUY previously from hold with a price target of Rs 195.

After 40% underperformance over the last 12 months, risk-reward looks favorable. Investors are focusing too much on cigarette volumes; we estimate that even if volumes were to decline by 5%, cigarette EBIT would increase 8% in FY08. ITC’s price hikes are heavily loaded in favor of its mid segment brands (~65% of volumes)

Target price increase to Rs195 from Rs130 reflects 1) rolling forward target P/E from FY08E to FY09E, given that we are approaching mid FY08E and expect valuations to start reflecting FY09E; 2) increase target multiple from 15x to 20x, toward the higher end of historical trading bands.

ITC Q1 Profit stands at Rs 783 crore up from Rs 652 crore a year ago [Up 20.2%]. Sales up from Rs 2850 crore to Rs 3325 crore.

HDFC Securities Research team has put a BUY Recommendation on Electrochem India with a potential upside of 50% in 15-18 months.

The core business of Electrotherm India Ltd (EIL) includes manufacturing induction furnaces required by the steel & forging industry (employing electric furnace route and not blast furnace route) and project engineering. EIL has taken initiatives to integrate forward by manufacturing major categories of steel including construction, structure/ alloy and stainless steel. EIL has set up a sponge iron unit in Kutch as a part of its backward integration measure to manufacture steel of all grades. To reduce its power cost, EIL has also setup a 30MW power unit in Kutch. The company had implemented a show case steel plant in Kutch, Gujarat.

Valuation and Recommendation:
EIL’s sales to grow at a CAGR of 41.4% over the next two-year period. The EBIDTA margins are likely to remain in the range of 14-15%. The EPS growth could be of 37% CAGR over the next two periods. We have assigned combined valuation of engineering and steel industry to EIL and expect it to command an P/E ratio of 9.5x in FY09 (E). The stock is currently available at a P/E ratio of 5.5x FY09 (E) earnings of Rs 89.2. HDFC recommends Electrochm India Limited as a compelling BUY with a price target of Rs 847 in the next 12-15 months.

Sharekhan Equity Research is bullish on the prospects of Unichem Laboratoriess and Orchid Pharma. Sharekhan has a BUY recommendation with a price target of Rs 360 and Rs 375 respectively.

Unichem Laboratories:
For Q1FY2008 Unichem Labor atories (Unichem) has reported a sales growth of 12.1% to Rs153.5 crore, which is lower than expectation of Rs165 crore. The growth was subdued largely due to a sharp 18.8% decline in the company’s exports on account of the appreciation of the rupee.

Unichem’s strong brand building efforts, the continued momentum in its power brands and therapy focused marketing initiatives have caused the domestic formulation business to perform in the quarter. The revenues from this segment grew by an impressive 20.9% to Rs126.8 crore.

Unichem’s operating profit margin (OPM) expanded by 80 basis points to 22.4% in the quarter. The management has also indicated that such a high growth rate for this business might not be sustainable going forward. The company expects the growth to moderate in Q2FY2008, due to DPCO-related price cuts imposed on its largest brand Ampoxin towards the end of Q1FY2008. However, a conservative 11.5% growth in this business in FY2008E is doable and remain optimistic about the company’s ability to beat estimates.

At the current market price of Rs245, Unichem is trading at 8.6x its estimated FY2008 earnings. BuyUnichem, with a price target of Rs 360.

Orchid Pharmaceuticals:
Orchid’s top line grew by 18.1% year on year (yoy) to Rs238.2 crore in Q1FY2008. The top line growth was above estimates of Rs223.2 crore. Orchid’s operating profit margin (OPM) expanded by 110 basis points to 29.9% in Q1FY2008. On the other hand, the rising R&D costs (due to FTF filings) and increasing staff costs adversely impacted the margins. On a like-to-like basis (excluding the Rs10 crore incremental cost incurred on FTF filings), the margin expansion would have been even more robust at 530 basis points to 34.1%. Consequently, the operating profit grew by 22.8% to Rs71.2 crore in Q1FY2008.

At the current market price of Rs234, Orchid is quoting at 9.9x its estimated FY2009 earnings, on a fully diluted basis. In view of the bright prospects for the company, Sharekhan retains positive stance on the stock and maintain a Buy call with a price target of Rs 375.

Kotak has a price target of Rs 300 on Orchid Pharmaceuticals.