Stock Views on Hindustan Zinc, Nestle, Jaiprakash Associates

CITIGROUP on Hindustan Zinc

CITIGROUP has downgraded Hindustan Zinc’s (HZL) rating to ‘sell’ by reducing the target price to Rs 430 on the back of an earnings cut of 22% for FY09 and 27% for FY10. Citigroup’s new estimates incorporate changed zinc and lead forecasts, updated trends in rupee-dollar exchange rates and small changes in volumes based on management feedback. Zinc prices are expected to fall 41% year-on-year (y-o-y) in FY09, further fall 10% y-o-y to reach a bottom in FY10, and recover thereafter in FY11. HZL enhanced its zinc capacity by 88,000 tonnes per annum (tpa) to 669,000 tpa in April ’08 (total zinc-lead capacity to 755,000 tpa). In addition, HZL has announced further capital expenditure (capex) to enhance zinc capacity by 210,000 tpa and lead capacity by 100,000 tpa — taking the total to 1.07 million tpa by ’10, together with additional mining and captive power capacities. Citigroup sees a fall in earnings and EBITDA margins despite positive factors for HZL, such as its status as one of the lowest-cost producers globally, strong zinc volume growth (20% in FY09E and 40% in FY10E), high realisations for by-products like sulphuric acid, and savings from commissioning of captive power.

EDELWEISS on Nestle

EDELWEISS initiates coverage on Nestle with an ‘accumulate’ recommendation. Nestle is expanding into tier-II and III cities by introducing stock-keeping units (SKUs) below Rs 10. Also, its turnover from innovations/renovations, positioned on the health and wellness platform (priced at a substantial premium to existing products) has increased fivefold over the past few years. The turnover is expected to remain at high levels, going forward, on the back of the company’s strong product pipeline. At the current market price, the stock is trading at P/Es of 28.9x and 23.5x to CY08E and CY09E earnings, respectively. Nestlé is trading near the upper end of its recent band of 23-27x forward earnings. Edelweiss believes these levels are sustainable, given Nestlé’s strong growth and defensive nature of its business. Amidst volatile capital market conditions, the stock looks attractive over the long term. Edelweiss has valued Nestle at 26x CY09E earnings, which results in a target price of Rs 1,830. It expects Nestlé’s earnings to witness a compounded annual growth rate (CAGR) of 25.5% over CY07-09E.

MERRILL Lynch on Jaiprakash Associates

MERRILL Lynch has maintained a ‘buy’ rating on Jaiprakash Associates (JPA), but has reduced the target price to Rs 335 from 395. This is because it has reduced the value of Yamuna Expressway due to indefinite delay in the proposed Greater Noida International Airport, higher expressway cost and lower real estate realisations till FY11E. This can impact development of realty at three (3,750 acres) of the five land parcels (6,250 acres) of JPA’s Yamuna Expressway located in and around Noida airport. Hence, Merrill Lynch has removed these parcels from the valuations till visibility emerges. It has also factored in a higher cost of the expressway at Rs 7,400 crore on higher land/construction costs and lower realisation assumptions on the Noida land bank till FY11E on continued weakness in the realty market in National Capital Region (NCR). Key triggers are: a) Improved macro situation — lower inflation/rates; b) Execution of power/infrastructure projects on time; and c) Monetisation of realty land bank.