Stock Picks by SSKI

Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,061
Current market price: Rs618

Price target revised to Rs1,061

Result highlights

• The consolidated revenues of Aditya Birla Nuvo (ABN) increased by 28.6% year on year (yoy) to Rs3,594.1 crore in Q2FY2009. 
• The operating profit margin (OPM) declined by 499 basis points to 4.9% in Q2FY2009 primarily due to the losses in the insurance, garment and business process outsourcing (BPO) businesses. Furthermore, margin pressure in the major business segments further deteriorated the overall operating profit margin (OPM). Consequently, the operating profit declined by 36.6% to Rs174.4 crore despite a strong revenue growth during the quarter.
• For the quarter the company has reported a net loss after minority interest of Rs104.6 crore compared with a profit after minority interest of Rs47.8 crore in Q2FY2008. An increase in the interest (up 54.8%), depreciation (up 29.0%) and tax (up 38.5%) expenses resulted in the loss. The interest expenses increased due to a higher short-term debt during the quarter. The company’s tax expenses were higher as the benefit of the loss in the insurance business was not fully reflected in the consolidated numbers.
• We believe that the value (insulators, textiles, fertilsers, carbon black and rayon) businesses would experience margin improvement on the back of the declining raw material cost due to the sharp fall in the commodity prices. However, looking at the liquidity crunch, the growth (garments, life insurance, BPO, software and telecommunications) businesses will remain under pressure in the near term. We expect deceleration in growth of the new business premium in the insurance business, as the company could cut down on its aggressive branch expansion plans due to the ongoing global financial meltdown. In the telecommunications business, although the Spice acquisition will add to the subscriber base, yet we expect contraction in the OPM due to the higher operational expenses related to the commencement of operations in the new circles. A high debt-to-equity ratio of 1.4 and lower possibility of warrant conversion by the promoters remain the key issues that might affect the financing of its capital expenditure (capex) plans.
• At the current market price, the stock trades at a price/earnings ratio of 39.5x FY2010E consolidated earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.7x FY2010E. We have valued the stock based on the sum-of-the-parts method as the company has diverse businesses. We have adopted a conservative approach of taking fully diluted shares of 11.4 crore, including warrant conversions, to arrive at the fair value. We have reduced ABN’s price target to Rs1,061 in view of multiple contraction (especially for insurance and telecommunications businesses) and the higher borrowing cost of the company. We maintain our Buy recommendation on the stock.
  
  

  Patels Airtemp
  Cluster: Emerging Star
  Recommendation: Buy
  Price target: Rs103
  Current market price: Rs34
  
  Price target revised to Rs103

  Result highlights

  • Patels Airtemp’s Q2FY2009 results are slightly below our expectations on account of a lower than expected growth in its top line. The company’s net sales rose by 26.5% to Rs22 crore in the quarter. 
  • The operating profit margin (OPM) remained firm at 18.2%, declining only slightly by 80 basis points year on year (yoy) and by 60 basis points on sequential comparison. Consequently, the operating profit grew by 21.4% to Rs4.0 crore during the quarter. Stable interest and depreciation costs led to a profit growth of 26.1% to Rs2.1 crore.
  • Currently, the company has an order book of Rs52 crore, executable in the next six to nine months. The management also hopes to maintain its margins going forward. The order inflows so far have remained steady for the company. The company bagged a big order of Rs16.1 crore during the second quarter for Essar Oil’s refinery project in Gujarat.
  • At the current market price the stock is available at 2.3x FY2009E earnings and 2x FY2010E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs103, valuing the company at 6x FY2010E earnings.