Sharekhan Investor's Eye dated May 22, 2008

 

Investor's Eye [May 22, 2008] Please see the attachment for details Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE JK Cement        Cluster: Cannonball Recommendation: Buy Price target: Rs250 Current market price: Rs148 Price target revised to Rs250 Result highlights For Q4FY2008 JK Cement has reported a 5.2% year-on-year (y-o-y) increase in its net sales to Rs385.6 crore. The sales growth was achieved on the back of an 8.6% rise in the y-o-y blended realisation per tonne to Rs3,888. On the other hand, the volumes declined 3.1% yoy to 9.92 lakh tonne (9.3 lakh tonne grey cement and 0.64 lakh tonne white cement) due to a shutdown at one of its kilns during the quarter. There was a sharp increase of 14.6% in the total cost per tonne of cement to Rs2,853. This was mainly on account of a 59.3% y-o-y increase in the employee cost to Rs20 crore along with a 10.1% y-o-y increase in the per tonne cost of power and fuel to Rs920. The freight cost also increased by 9.7% to Rs786 per tonne. Consequently the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne declined by 5.2% yoy to Rs1,035 during the quarter.  The operating profit margin (OPM) of the company witnessed a sharp decline of 390 basis points to 26.6%. The margin came under pressure on account of the rising input cost and the company's inability to pass on the increase to the consumer. Consequently, the operating profit declined by 8.1% year on year (yoy) to Rs102.6 crore.  The reported profit after tax (PAT) also declined by 2.6% yoy to Rs59.8 crore. This was much lower than our estimate of Rs72 crore due to a lower volume growth and effective higher tax rate.  For the year ended FY2008, JK Cement has reported an 18.2% y-o-y growth in its net sales to Rs1,485.3 crore and a 48.5% growth in its reported PAT to Rs265.2 crore. The company has declared a dividend of Rs5 per share for the quarter. To factor in the cost savings arising due to the full operation of all its captive power plants, including the 13-megawatt (MW) waste heat recovery plant, we have increased our FY2009 earnings per share (EPS) estimate by 10% to Rs30.9. We have also introduced our FY2010 estimates in this note.  At the current market price of Rs148, the stock is trading 4.8x its FY2009E EPS, 3.4x its FY2010E EPS and an enterprise value (EV) per tonne of US$48 based on the expanded capacities. We maintain a Buy on the stock with a revised price target of Rs250. Bajaj Holdings & Investment         Cluster: Apple Green Recommendation: Hold Price target: Rs1,044 Current market price: Rs672 Q4FY2008 results: First-cut analysis Result highlights Bajaj Holdings & Investment Ltd (BHIL) has reported a consolidated top line of Rs62.6 crore for Q4FY2008 and that of Rs3,629.8 crore for FY2008. Since the company was formed after the de-merger of the erstwhile Bajaj Auto, the previous comparable figures are not available. BHIL is the holding company having a 30% stake each in both the new Bajaj Auto and Bajaj Fin Serv. BHIL also holds cash and investments held by the erstwhile Bajaj Auto. The sales of Bajaj Auto, which consists of the automobile portfolio, stood at Rs2,074.4 crore during the quarter. The operating profit margin (OPM) stood at 12.6%, which was lower than expected despite an 11.7% drop in the volumes in the fourth quarter. However, the results contained a foreign exchange loss of Rs16 crore. Adjusting for the same, the OPM works out to 13.4%. For the full year, the company has reported a top line of Rs9,168.8 crore, OPM of 14.3% and net profits of Rs756 crore. The activities of Bajaj Fin Serv include the wind farm business and the financial services business. It has two insurance subsidiaries, dealing in life insurance and general insurance. For FY2008, Bajaj Fin Serv has reported consolidated sales of Rs12,225 crore and a consolidated net loss of Rs32.7 crore. The growth in the life insurance subsidiary's new premiums has been lower than our estimate. We have valued the stakes of Bajaj Auto and Bajaj Fin Serv at a 50% holding company discount, which works out to Rs236.7 per share. Further, as on date the value of BHIL's investment portfolio is Rs495 per share.  The company has given a flattish outlook on the two-wheeler industry for the next year and an early revival of the industry appears difficult. However, the company would endeavour to outperform the industry on the strength of its products. We will come back with a detailed performance note along with our revised estimates. SECTOR UPDATE  Power       Power to empower We recently attended the conference on "Key Inputs for Power Sector for 11th Plan & Beyond" organised by the Confederation of Indian Industry (CII). We present the key takeaways from the meeting.

Regards, The Sharekhan Research Team myaccount@sharekhan.com

 

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