Investment Call by Sharekhan - 15.09.06
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ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs89
Price target revised to Rs190
The key takeaways from the latest annual report of ORG Informatics are given below.
Significant scale-up in operations: ORG Informatics’ consolidated revenues have grown at a compounded annual growth rate (CAGR) of 75.7% over the past three years. The management expects the mega orders bagged in the last fiscal and a healthy order pipeline to further boost its growth momentum in the current fiscal.
Improving profitability: The robust growth in revenue has been accompanied by consistent improvement in the operating profit margin (OPM) due to the reoriented business strategy to focus on the high-value solution and service business.
Better operational metrics: It generated free cash flow of Rs12.2 crore in FY2006. The return ratios have also improved dramatically with the return on average capital employed (RoACE) and return on average net worth (RoANW) at 37.5% and 43.2% respectively. The debt/equity ratio stood at comfortable level of 0.46 times.
Reduction in promoter holding is a concern: On the flip side, the promoter holding has declined by 10 lakh shares to 74.6 lakh equity shares (63.8% stake holding).
Re-iterate Buy recommendation: At the current market price the stock trades at 7.6x FY2007 and 5.6x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs190 (12x FY2008E earnings per share, including the convertible warrants in the equity base).
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs764
Price target lowered to Rs970
Key points
Tata Tea Ltd (TTL) would be raising Rs420-460 crore through the preferential allotment of shares and warrants to its promoter, Tata Sons. We expect the allotment to result in equity dilution of 10-11% for TTL. However, it is not clear as to how much funds will be raised through direct equity and how much through warrants.
TTL requires Rs1,100 crore for various acquisitions that it has done over the past few months. We expect the company to raise the balance amount required by selling its investments in group companies as well as its North India Plantation Operations.
We expect TTL to raise short-term debt of Rs320-550 crore depending upon the amount of the warrants and their conversion period.
We have lowered our earnings per share (EPS) estimates for the stock to take into account the short-term debt along with the equity dilution. Accordingly we have revised our EPS estimates from Rs57 to Rs49.5 for FY2007 and from Rs64.5 to Rs59.5 for FY2008, ie a dilution of 13.4% and 7.7% respectively. We have not taken the numbers of Energy Brands Inc into account.
We expect the lack of clarity with regard to the stock’s earnings to continue till the management of the company clears the cloud over the funding structure for its inorganic expansion.
Taking both the above factors into account, we are lowering our price target on the stock to Rs970 per share.
Over the long term, we expect TTL to be a good candidate for re-rating as:
— it becomes a pure play on the branded fast moving consumer goods (FMCG) business, and
— it reduces its exposure to low-yielding investments in the group companies and invests in high-growth companies like Energy Brands Inc.
----------------------------------------------------------------------
ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs89
Price target revised to Rs190
The key takeaways from the latest annual report of ORG Informatics are given below.
Significant scale-up in operations: ORG Informatics’ consolidated revenues have grown at a compounded annual growth rate (CAGR) of 75.7% over the past three years. The management expects the mega orders bagged in the last fiscal and a healthy order pipeline to further boost its growth momentum in the current fiscal.
Improving profitability: The robust growth in revenue has been accompanied by consistent improvement in the operating profit margin (OPM) due to the reoriented business strategy to focus on the high-value solution and service business.
Better operational metrics: It generated free cash flow of Rs12.2 crore in FY2006. The return ratios have also improved dramatically with the return on average capital employed (RoACE) and return on average net worth (RoANW) at 37.5% and 43.2% respectively. The debt/equity ratio stood at comfortable level of 0.46 times.
Reduction in promoter holding is a concern: On the flip side, the promoter holding has declined by 10 lakh shares to 74.6 lakh equity shares (63.8% stake holding).
Re-iterate Buy recommendation: At the current market price the stock trades at 7.6x FY2007 and 5.6x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs190 (12x FY2008E earnings per share, including the convertible warrants in the equity base).
Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs970
Current market price: Rs764
Price target lowered to Rs970
Key points
Tata Tea Ltd (TTL) would be raising Rs420-460 crore through the preferential allotment of shares and warrants to its promoter, Tata Sons. We expect the allotment to result in equity dilution of 10-11% for TTL. However, it is not clear as to how much funds will be raised through direct equity and how much through warrants.
TTL requires Rs1,100 crore for various acquisitions that it has done over the past few months. We expect the company to raise the balance amount required by selling its investments in group companies as well as its North India Plantation Operations.
We expect TTL to raise short-term debt of Rs320-550 crore depending upon the amount of the warrants and their conversion period.
We have lowered our earnings per share (EPS) estimates for the stock to take into account the short-term debt along with the equity dilution. Accordingly we have revised our EPS estimates from Rs57 to Rs49.5 for FY2007 and from Rs64.5 to Rs59.5 for FY2008, ie a dilution of 13.4% and 7.7% respectively. We have not taken the numbers of Energy Brands Inc into account.
We expect the lack of clarity with regard to the stock’s earnings to continue till the management of the company clears the cloud over the funding structure for its inorganic expansion.
Taking both the above factors into account, we are lowering our price target on the stock to Rs970 per share.
Over the long term, we expect TTL to be a good candidate for re-rating as:
— it becomes a pure play on the branded fast moving consumer goods (FMCG) business, and
— it reduces its exposure to low-yielding investments in the group companies and invests in high-growth companies like Energy Brands Inc.
