Saturday watch on Market Outlook ...: 05/08/2007

What's in my portfolio

Tamilnadu Newspaper
Parsvnath Developers
UTV Software
Zee News
Triveni Engineering
Deep Industries
Pantaloon Retail
Tata Steel
Mphasis
Tech Mahindra
Canara Bank

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Bharat Petroleum
CMP: 315.05
Target 1: 330
Target 2: 336
Current Quote of Bharat Petroleum

Bharat Petroleum Corporation Ltd (BPCL) improved its gross refining margins (GRMs) on a Y-o-Y basis during the June 2007 quarter, which helped it offset mounting under-recoveries in retail sales of auto fuels and kerosene due to surging international crude prices. Operating profit (excluding other income) was Rs 206 crore in Q1FY08 compared with an operating loss of Rs 260.9 crore the previous year, while net sales grew 5.1% to Rs 23,869.4 crore. Meanwhile, in its refining division, crude throughput amounted to 5.15 million tonnes during the June 2007 quarter compared with 4.88 million tonne a year earlier. Going forward, refining margins are expected to remain strong, in tune with the global trend. Further, BPCL, like other oil marketing companies, is expected to receive oil bonds from the central government and that should help improve its financial health. At the current price of Rs 315, the stock trades at over 7x estimated FY08 earnings.

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Six Month Call

Tech Mahindra

CMP: 1245
Target 1: 1850
Target 2: 1890
Current Quote of Tech Mahindra

Tech Mahindra (TechM) reported 4Q FY07 results slightly ahead of expectations. Revenue came in at Rs 8.75 bn (+13.6% QoQ; estimate of Rs 8.55 bn) whereas PAT (pre-exceptional items) was at Rs 1.96 bn (+17.6% QoQ; estimate of Rs 1.84 bn).

Report on Tech Mahindra

Highlights

Strong sequential revenue growth story continues

Revenue growth, in dollar terms, came in strong at about 16.0% on a sequential basis. However, this was offset by rupee appreciation to a certain extent leading to an overall revenue growth of 13.6% QoQ in rupee terms. Growth in this quarter has been mainly due to BT, which recorded a riseof 17.1% QoQ. As a result of this, the European geography also showed good growth at 18.3% on a sequential basis. Also, with five new clients in this quarter, TechM has maintained its historical trend of client additions.

USD 1 bn BTGS deal update

According to the management, the USD 1 bn deal bagged from BTGS is progressing as per plans. The groundwork of deciding the initial work to start with and transition is almost complete, with the first few projects starting to trickle in. As stated previously, the company expects the deal to take a J-shaped curve and significant revenues are expected only in 3Q FY08. TechM had also given an upfront discount of Rs 5.25 bn to BTGS and this amount has been fully expensed in this quarter. The USD 90 mn debt taken to make this payout has also been substantially repaid (only USD 4 mn remained at the end of March 2007) due to the strong internal accruals.

Margins to remain under pressure

TechM showed a QoQ operating margin decline of 155 bps in 4Q FY07. However, for the full year FY07, margins have improved by 358 bps. Going forward in FY08E, we expect a margin dip of 115 bps mainly due to the initial costs in the BTGS deal. However, I expect the margins to bounce back in FY09Eas the company has sufficient levers like the flattening of the employee pyramid, increased utilization levels, knowledge reuse and transaction based pricing. Thus, over FY07-09E, the margin dip is expected to be limited to about 85 bps.

Employee additions continue to be strong

Attrition, after being above the 20% levels for two consecutive quarters, has finally come below those levels (these exclude the BPO numbers). In this quarter, TechM has added 1,975 employees (+11.1% QoQ) on a net basis. ForFY07, the net additions have been 9,256 employees, a sharp 88% YoY increase. The utilization levels have been running a bit lower at 67%but this a fallout of the high growth as the company needs to hire aggressively in advance to meet expected project requirements.

Maintain Buy with price target of Rs1,850

The expected target is 1850.

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Target-A-Year

Banswara Syntex

Current Market price: 49.40
Target 1: 102
Target 2: 118

Current Quote of Banswara Syntex

BSL's top line growth :

BSL witnessed a top line expansion of 13.6% YoY and 24.3%QoQ to Rs 1.1 billion as compared to Rs 947 million in the corresponding quarter last year. The Top Line reported by the company was less than our expectation by 11%. The company's garmenting and cotton yarn capacities commenced operations in Q2FY2007 and are contributing positively to the company's revenues. BSL's expansions are still on going and the company will be able to expand its top line at CAGR of17.1% (FY2007-09E) to report a top line of Rs 5.2 billion in FY2009E.

Margins come under pressure with higher input costs:

BSL's OPM declined by 440 bps on a sequential basis to 10% on account of higher raw material costs and power and fuel cost. With the company moving up the value chain into garmenting the staff cost has been on the rise as well. The company's OPM's should improve with the captive thermal power plant commencing operations from Q1FY2008.Estimate that the company should report OPM's of 15.6% and 16.6%in FY2008E and FY2009E respectively.

Profits decline as margins fall:

BSL's bottom line declined by 31.7%YoY and 18.4% sequentially to Rs 29 million inQ4FY2007. This was mainly on account of decline in OPM by 440bps sequentially. On account of the poor performance in this quarter the company has fallen short of our estimates by 15% for the FY2007.

FY2007 Results:

BSL has reported a top line of Rs 3.8 billion in FY2007 as against Rs 3.2 billion in FY2006 witnessing a growth of 20.7%YoY. The growth in company's revenues was driven by new cotton yarn and trouser facilities kicking in from Q2FY2007. The company's OPM for FY2007 expanded by 230 bps to 13.7% as compared to 11.3% in FY2006 mainly on account of fall in raw material prices as the oil prices took a breather. Driven by top line and OPM expansion the company's bottom line grew by 71.4%YoY to Rs 149 million. This was much lower than our estimate of Rs 172 million. This translates into an annualized EPS of Rs 11.2; the stock is thus trading at 5.6x trailing earnings.

Valuation:

BSL has witnessed a robust bottom line growth of 71.4%YoY driven by some of its expansions commencing operations. The company's forward integration in to garments and diversification into cotton yarn will start yielding results going forward. Further, with its captive thermal power plant commencing operations in Q1FY2008 the company will be able to improve its operating margins further. The company will witness a top Line and bottom line CAGR (FY2007-09E) of 34.3% and 56.4% respectively. My expectations and research is strongly in favour of buying this stock with mentioned targets and time-frame.

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Next IPO

None at the moment!!

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Grey Market Premium

Motilal Oswal - Rs 95.
Puravankara Projects - AT PAR
Take Solutions - 310. (increased from earlier)
KPR Mills - Rs 3.
Refex - Rs 8.
I V R Prime - AT PAR
OMNI Tech Info - Rs 65. (decreased from earlier)
Zylog Systems Ltd. - Rs 240.
Asian Granito - Rs 6.
Central Bank - Rs 38.
SEL - Rs 18.

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Recent Happenings

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China makes a new high.
Inflation down to 4.36% from previous week's 4.41%.
Purvankara Project IPO price adjusted downwards, date expended.
FM asks public sector banks to reduce 1-year deposit rates.
Global market drop after Bear Stearns stop investors pulling out of hedge funds.