Stock Views on Info Edge, ONGC, HUL

CLSA on Info Edge

CLSA has cut Info Edge’s stock rating to ‘underperform’. The company’s flagship job portal, Naukri.com, is decelerating due to a slowdown in hiring in the domestic IT services sector as well as banking. CLSA has reduced earnings estimates for FY09-11 by 10-26%. For FY09, the company is likely to miss its 35-50% year-on-year (y-o-y) revenue growth outlook and post 20-25% growth in revenues instead. Valuations at 35x March ’09 and 26x March ’10 earnings look expensive as growth slows. Info Edge’s valuations cannot be defended by mid-single digit earnings per share (EPS) growth, which the company is likely to post this fiscal. Even assuming an upturn in FY10 and beyond, the stock’s 22-23% EPS compound annual growth rate (CAGR) over FY08-11 justifies a target price of Rs 650 — 13% down from the current levels.

CREDIT Suisse on ONGC

CREDIT Suisse maintains ‘neutral’ rating on Oil and Natural Gas Corporation. ONGC Videsh (OVL) has recently displayed a propensity to bid and acquire near discovered reserves after a year of adding to an exploratory portfolio. It has bid for Imperial Energy and is reported to be interested in stakes in Tanganyika Oil and Block 32 in Angola. Imperial Energy has reserves in Russia, but little production. Tanganyika has heavy oil reserves in Syria that need to be developed. Block 32 in deep-water Angola is yet to begin project development. Buying multibillion-dollar assets through competitive bids is unlikely to leave much value on the table now, while OVL will run capital expenditure (capex) and project-completion risks. Upside at such acquisitions can be generated by project execution — getting production volume to more than current estimates; and/or via a sustained high-oil-price environment. ONGC’s strategy of bidding for such assets implies that it is banking on its execution ability, which is a good sign.

HSBC on HUL

HSBC recommends ‘overweight’ rating on Hindustan Unilever (HUL) with a target price of Rs 277. Crude and palm oil prices have declined by 30% in the past 3-4 months. Palm oil is the main input for soap manufacture, while crude oil affects other inputs such as packing materials and linear alkyl benzene. The correction in commodity prices will not be meaningfully reversed in the near term and will impact HUL’s bottomline positively. Hence, HSBC increases its ’08 EPS estimates by 2.9% and ’09E EPS by 4.4%. It estimates that HUL’s topline growth will slow to 11.8% next year from 18% estimated this year, as both volume and price growth moderate from current levels. However, benign commodity prices will result in margin expansion, and bottomline growth is expected to be 18.5% next year, which is higher than this year’s 17.1%. HSBC values HUL at a price-to-earnings (P/E) multiple of 25x December ’09E. There is likely to be high demand for HUL as a large-cap defensive stock.