Stock View on Reliance Capital, Sesa Goa

MOTILAL Oswal on Reliance Capital

MOTILAL Oswal downgrades Reliance Capital to ‘neutral’ with a revised target price of Rs 1,340. Reliance Capital’s management has reiterated its objective to emerge as one of the leaders in all business verticals of financial services. The strategy is to create ‘a difficult-to-replicate’ distribution reach across the country, a mass retail customer base and exploit cross-sell opportunities. However, the larger businesses are linked to capital markets, which pose growth uncertainty in the current environment. Life insurance premiums are growing rapidly and Reliance Capital is fast gaining market share. The company has rapidly built its consumer finance book, which stood at Rs 8,100 crore as of June ’08. Motilal expect profits and return ratios to remain low in this business. The general insurance business witnessed strong topline growth in FY08, but is likely to continue reporting losses in FY09. Profitability is expected only in FY10. The broking and distribution venture is scaling up fast and has gained ~3.5% market share in the first year of operation from purely retail business. Motilal has reduced its fair valuations for general insurance, broking and consumer finance businesses due to bleak outlook on either business growth and/or profit growth.

KOTAK SECURITIES on Sesa Goa

KOTAK Securities reiterates a ‘buy’ rating on Sesa Goa with a target price of Rs 300 per share for an investment horizon of eight months. The stock price has been tumbling continuously over the past few weeks. It has now fallen more than 50% from its peak and is even trading at a discount to the price Vedanta paid last year to acquire the company from Mitsui. At that time: (i) iron ore prices were half that of the present levels;
(ii) sales volumes were considerably lower,
(iii) cash levels were also much lower; and
(iv) other competitors had shied away from bidding due to imposition of Rs 300/tonne export duty on iron ore just before the process.

Several factors have collectively led to this fall. The key negatives are:
(i) seasonal weakness;
(ii) lower import demand from China, given curtailed steel production due to Olympics and Paralympics;
(iii) global commodities sell-off as financial institutions pull out funds to enhance liquidity amidst the global financial crisis; and
(iv) higher coke prices in China causing weakness in low-grade iron ore prices.

However, these negatives are fading away and this will result in a dramatic shift in sentiment, going forward.