Stock & Sector Update

STOCK UPDATE

Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs120
Current market price: Rs115

Results ahead of expectations

Result highlights

• Navneet Publication Ltd's (NPL) Q3FY2008 results are ahead of expectations. The net sales grew by a robust 29.2% year on year (yoy) to Rs59.1 crore on account of healthy growth in the stationery business, which grew by 38.6% yoy to Rs22.7 crore.
• Though the turnover of the stationery business increased, the profits from the business did not increase proportionately on account of additional sales promotion cost of Rs1.1 crore. However, the company expects to benefit from these sale promotion activities going forward.
• The operating profit margin (OPM) declined marginally by 39 basis points to 13.3%. This was mainly because of the increase in the other expenditure, which grew by 33.6% to Rs12.61 crore. The operating profit increased by 25.5% to Rs7.87 crore in Q3FY2008 from Rs6.27 crore in Q3FY2007.
• The increase in depreciation by Rs99 lakh was mainly on account of windmills, which started operating from September 2007. Higher depreciation and interest expenses led to a much lower growth of 7.7% yoy in the profit after tax (PAT) to Rs3.64 crore.
• Going forward the publication segment, which is one of the major contributors (63% of the total revenue) to the topline of the company, will achieve a flat growth, as syllabi is no more being revised in the schools of Gujarat and Maharashtra. The flat growth of the publication segment would however be offset by some of its new initiatives such as non-paper stationery products, introduction of Urdu publication and e-learning business, which would drive the growth for NPL in near future. Grafalco, its Spanish subsidiary, has performed as per expectation showing a growth of 81% in its revenues to Rs11.6 crore.
• The company's foray into e-learning business is being well recognised among schools in Gujarat and Maharashtra. At the current market price of Rs114.8, the stock is trading at 18.4x its 2009E earnings per share (EPS) and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.9x. Though the valuation appears to be stretched, we believe that the e-learning business could throw up positive surprises. Consequently, we maintain our Hold recommendation on the stock with a revised price target of Rs120.

Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs535
Current market price: Rs295

To raise funds through stake sale in TICL
Tata Chemicals Ltd (TCL) proposes to sell its 13.35% to 14.51% stake in Tata Investment Corporation Ltd (TICL) to Tata Sons at a price of Rs600-650 per share. The proposed sale would take place on or after February 13, 2008. At present, TCL owns 5,297,400 shares or 15.37% stake in TICL. The stake sale will enable TCL raise approximately Rs274-325 crore which we believe will be used to part-finance the proposed acquisition of General Chemical Industrial Products Inc. (GCIP) for $1.005 billion (~Rs3,970 crore).

Sanghvi Movers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs298
Current market price: Rs250

Price target revised to Rs298

Key points

• Large investments in core sectors like refineries, windmills, petrochemicals, cement and power will create huge demand for cranes. Sanghvi Movers Ltd (SML) which is the largest player in crane hiring business in the country is likely to corner a large share of the opportunity
• In the first nine months of FY2008, SML added 16 cranes to its fleet and is expected to add another 22 cranes in the Q4FY2008. By the end of FY2008, SML would have a fleet size of 283 cranes with capacity ranging from 20 to 800 tonne. The fleet would be the biggest in the country and the wide tonnage range would enable SML to provide unmatched service.
• In FY2010, we expect SML to clock revenues of Rs407.1 crore though yields are likely to be lower. We expect the revenues to grow at a compounded annual growth rate (CAGR) of 31.6% over FY2007-10E. Stable operating performance should help the bottom line to grow at a CAGR of 31.8% over FY2007-10E.
• SML plans to spend Rs200 crore in FY2008, Rs390 crore in FY2009 and Rs100 crore in FY2010 to acquire more cranes.
• The Q3FY2008 results were above our expectation. The robust top line growth and stable operating performance resulted in a strong profit growth during the quarter. We have fine-tuned our earnings for FY2008 in wake of better than expected Q3FY2008. On increased capital expenditure (capex) guidance, we have revised our FY2009 estimates by 3.1% to Rs18.90 per share.

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SECTOR UPDATE

Information Technology

Cognizant boosts confidence
Cognizant, one of the leading offshore information technology (IT) service vendors, has given a robust revenue growth guidance for CY2008. Moreover, the management appears quite confident and its comments on market scenario are quite encouraging. This has boosted the overall sentiments towards tech stocks