Stock Views on RCOM, HPCL, OPTO CIRCUITS

RCOM

CMP: RS 442.25
TARGET PRICE: RS 501

Merrill Lynch has downgraded Reliance Communications from‘buy’ to ‘neutral’on lower than expected earnings due to weak revenues from its fixed wireless division. “The size of PCO (fixed wireless public call offices) revenues comes as a surprise to us,” says Merrill Lynch, adding that the topline and EBITDA was 8% and 11% below its expectations. The foreign brokerage has cut EBITDA forecasts by 10% for the current financial year and by 20% for FY10E “owing to unlikely pick-up in PCO revenues, continuing weak elasticity in mobile min-utes and lower global-biz EBITDA margins, post-Vanco acquisition.” In the first quarter of FY09, RCOM’s overall EBITDA fell 3% QoQ against 8% QoQ EBITDA growth for Bharti, says the report. According to ML, it would be difficult for RCOM to list its tower subsidiary (R-Infratel) and its global business (R-Globalcom) in the current volatile equity environment, owing to complex revenue forecasting and difficult valuation benchmarking. Merrill Lynch has lowered its target price from Rs 725 to Rs 501.


HPCL

ICICI Securities has maintained a ‘buy’ rating on HPCL even after the company reported a recurring loss of Rs 880 crore in the first quarter of the current financial year due to lower than expected subsidy sup-port from the government and upstream companies. The brokerage expects subsidy support to increase over the year as the government has not yet accounted for the Rs 40,000 crore unallocated burden. “Though we continue to believe that the stock may remain subdued in the short term till the government decides the final subsidy burden sharing formula, the company is trading at a significant discount to the replacement value of its asset,” says the report. The brokerage also highlights the fact that risks of further increase in interest costs along with expectations of a fall in refining margins could potentially impact earnings. Positive surprise, however, on higher subsidy sharing by upstream companies and oil bonds could be a boost to stock prices, it adds. Positive news on the E&P front and implementation of subsidy reforms recommended by the Rangarajan Committee could trigger re-rating in the stock, says the report.


OPTO CIRCUITS

CMP: RS 338.35
TARGET PRICE: RS 509

India Infoline has maintained a ‘buy’ rating on Opto Circuits after it reported better than expected results for the first quarter of the current financial year. According to the brokerage, the revenue of the company surpassed its estimate and grew 84% year-on-year. “Even better was the EBITDA margin expansion of 60bps YoY and 284bps QoQ, despite the inclusion of the significantly lower margin Criticare business,” says the report. This, it goes on to add, suggests that the management was able to realise synergies faster than expected. The brokerage has raised its FY09 earnings estimate by 10%. According to the brokerage, the international healthcare business of the company grew 97% in the first three months of the current financial year.