Manugraph

The stock’s dividend yield is enticing, but investors must take the long term economic environment into account before betting on it

MANUGRAPH India has emerged as the country’s leading manufacturer of web offset printing machines. These machines are used for printing newspapers and periodicals and the company has benefitted greatly from a media boom in India in the last few years. Manugraph claims to control nearly two-thirds of the domestic market. Right now it is in the process of further augmenting its product portfolio.

However, the stock has taken a heavy beating on account of global economic slowdown, which has adversely affected the growth plans of print media and depressed the demand for new printing machines. The stock is down more than 80% in last one year but the dividend yield (based on FY08 dividends) has shot up to 12% nearly. This makes it an interesting bet for risk averse investors as company is expected to maintain the pay-out at last year’s level.

Business

The manufacture of printing machines of different configurations is only business line of Manugraph India. The company derives close to 30% of its business from its export sales and rest from domestic business. There is hardly any competition in the organised sector, and most of the competition comes from either the unorganised segment or foreign manufacturers. In the past six months or so, the company has suffered some setback due to the global recession, and the management has admitted cancellation of few orders by some of its overseas clients. This has led to piling up of inventories and higher inventory carrying costs, thereby forcing the company to operate its two units in Kolhapur for five days a week, instead of six days. This would affect the profitability of the company in the second half of current financial year.

Financials

An adverse impact arising out of above reasons was visible in September ’08 quarter as company’s net sales slipped by 15.3% to Rs 93.4 crore on a year-to-year basis. Even the company’s income from other sources saw a major decline and it fell to Rs 4.2 crore from Rs 11.6 crore in the corresponding quarter a year ago. The company suffered a mark-to-market foreign currency loss of around Rs 5.4 crore during the quarter. The company’s net profit slipped to Rs 13.7 crore from Rs 19.66 crore in the second quarter of FY08.

Valuation

In the light of the global economic slowdown, Manugraph is likely to close FY09 with net profit of around Rs 50 crore, which would be at least 20% below its last year’s net profit of Rs 62 crore. The second half of FY ’09 is likely to be tougher than the first half. However, considering its low debt-to-equity ratio of less than 0.5 and strong cash flows from operations, the company appears to be well-positioned to withstand the current slowdown and emerge stronger when upturn comes. At its current stock price, the stock has a dividend yield of nearly 13%, more than current yield on bank deposits. Even with estimated net profit of Rs 50 crore, the company is likely to sustain a 200% dividend payout (same as last year) even in FY ’09. This makes Manugraph a good bet from dividend yield point of view. The only risk, being a faster than anticipated deterioration in the global economic environment.

Beta: 0.71
Institutional Holding: 14.04%
Dividend Yield: 12.80%
P/E: 1.58
M-Cap: Rs 95 cr

Apollo Hospitals

Investors interested in steady and predictable earnings growth can look at accumulating Apollo Hospitals Enterprise's stock with a long-term perspective

Healthcare is one of the most underdeveloped sectors in India with a lot of growth potential. There are few large corporate players in this highly fragmented and unorganised market. Apollo Hospitals Enterprise (AHE) is the largest player in the tertiary care segment with the single largest network of integrated hospitals and pharmacies in the country. While the Sensex has lost more than 50% of its value in the last one year, the company's market capitalisation declined by just 15% during the same period. The stock has appreciated by 26% since October '08 till date. Investors can look at this stock expecting sound growth in its fairly recession-proof business.

BUSINESS:

Chennai-based AHE is a national level operator of hospitals, retail pharmacies and provider of consultancy services in healthcare management. Nearly 83% of the company's revenues are contributed by its hospitals business, while 16% is contributed by pharmacy.

The company owns 26 hospitals and manages 17 hospitals on a contractual basis. Majority of its hospitals are in metros and tier I cities in the country. The total bed capacity is 8,500 beds, with 4,500 beds in AHE's owned hospitals. The revenue per bed per day ranges from Rs 8,000 to Rs 17,000, depending on the location of the hospital. The average length of stay has largely remained the same for the company at an average of 5.7 to 5.9 days across its various hospitals.

AHE runs a chain of 785 standalone pharmacies in the country on a franchise basis. It has 40 pharmacies operating as part of its hospitals. The company also provides various precommissioning and postcommissioning consultancy services comprising of feasibility studies, infrastructure consultation, training and deployment of medical, paramedical and administrative staff and advising on hospital management.

AHE also has other subsidiary businesses providing home healthcare services, clinical and diagnostic services, medical business process outsourcing services, third party administration services and insurance.

GROWTH STRATEGY

The company's growth has been primarily driven by its hospitals business. The company has a high occupancy rate of 80%, with 7-8% more head room to grow. There is also still scope for increasing the tariff.

The company is in the process of expanding capacities in its greenfield projects. By FY10, it intends to add a total capacity of 500 beds in its hospitals at Bhubaneshwar and Vizag. Over the next five years, the company has plans to start 50 hospitals in tier II and III towns in partnership with a local doctors or entrepreneurs. AHE's pharmacy business is relatively nascent and still in investment stage. The company intends to set up 1,000 pharmacies by FY10.

In the coming years, the company expects to increase its exposure to the pharmacy business to 20-25% of the total revenues. The company has plans to eventually hive off its pharmacy business to a strategic partner.

The company has incurred a capex of Rs 157 crore in FY08. It has planned a capex of Rs 900 crore to be incurred over the next three years.

FINANCIALS

The company's net sales have grown at a compounded average growth rate (CAGR) of 21% over five years ended March 2008 to Rs 1,214.7 crore. The net profit (adjusted for the extraordinary items) has grown at a faster CAGR of 26.6% to Rs 71.8 crore. At 24.3%, the CAGR in the company's dividend has fairly matched the corresponding growth in profits.

While the hospital business has EBIDTA margins of 28-40%, the pharmacy business is a low margin business with a EBIDTA margin of 8-10%. Besides, a new pharmacy requires 12-18 months to mature and contribute to profits. Due to the company's recent expansion of its pharmacy business, its profit margins and return on capital employed have suffered in the last three years. The company has raised secured loans and has made significant investments in fixed assets during the last three years. The company expects to breakeven in the pharmacy business by FY10 and expects stability in the returns from the business.

VALUATIONS

Being the largest listed healthcare player, AHE commands a premium over its peers. It is currently trading at 25 times its earnings. Assuming the company maintains its growth in sales of more than 20%, its estimated P/E for FY09 and FY10 would be 23.4 and 18.7 respectively. Investors interested in steady and predictable earning growth can look at accumulating this stock with a long-term perspective

Hawkins Cookers

Investors can continue to hold Hawkins Cookers’ stock on the back of the company’s strong performance in the past two quarters and a sharp decline in input prices

Beta: 0.52
Institutional Holding: 10.21%
Dividend Yield: 7.05%
P/E: 13.7
M-Cap: Rs 75.04 cr

The minor correction has come at a time, when the Bombay Stock Exchange (BSE) Sensex has slipped 33% from the level of 13,500, where it was pegged then. However, on the back of strong performance in the first two quarters of FY09 and the subsequent fall in prices of aluminium — the major raw material used by the company — we continue to hold the same view. Investors who may have bought the stock earlier can continue to hold it for at least another two quarters.

BUSINESS:

The company’s main products are pressure cookers and kitchenware products. It operates in the branded segment and is among the largest manufacturers of kitchenware in the country. Its ‘Futura’ brand of non-stick kitchenware has higher margins and is growing at 20-25% per annum.

Even in its bread-and butter pressure cooker segment, the company’s sales volume is growing at 10-13% on a year-toyear (y-o-y) basis. Nearly two-thirds of the production cost is accounted for by aluminium, which the company sources from Hindalco. Hawkins is expected to gain from the recent decline in aluminium prices. At the London Metal Exchange (LME), aluminium is currently trading at $1,800 per tonne, compared to $2,900 per tonne in July this year.

Though a part of this decline has been eaten up by the depreciation in the rupee against the dollar, Hawkins is well placed to lower its raw material costs and improve its operating margins by a few percentage points.

Its results for the December ’08 quarter also reflects the buoyancy of the festive season when kitchenware products normally pick up. Diwali was followed by the wedding season, which also has a positive influence on Hawkins’ earnings growth. Thus, the growth and margins in the second half of FY08 are likely to be higher than those posted by the company in the first half. Meanwhile, the company is in the process of de-bottlenecking its units, to raise capacity, improve efficiency and bring down costs.

FINANCIALS:

The company reported net sales of Rs 60.7 crore in the September ’08 quarter of the current financial. This is up by a healthy 22% against the corresponding quarter of FY08. Its operating profit during the period surged by 48% y-o-y to Rs 7.7 crore. At 12.6% of net sales, operating margin in the second half was better than the trailing four quarters operating margin of 12.1%.

It is almost a zero-debt company as it has debtors of only Rs 8 crore. In Q2 alone, Hawkins posted a net profit of Rs 4.5 crore on a small equity base of Rs 5.3 crore. Its net profit of Rs 8.7 crore for the first half of FY09 translates into earnings per share (EPS) of over 16.5.

VALUATIONS:

The company has indicated that is unlikely to be adversely affect by the global slowdown and financial meltdown. It generates enough cash flows annually to finance its expansion and modernisation plans.

The company also has a good dividend yield of 6.7%. Thus, in view of the anticipated earnings growth in the second half and cost-savings from lower aluminium prices, Hawkins’ stock offers a good investment opportunity for investors.

Larsen & Toubro (L&T)

Though L&T’s operating margin is under pressure, the longterm fundamentals are firm. Investors may consider taking exposure in the stock with a long-term view

Larsen & Toubro (L&T) is a leading player in the Indian capital goods space. Its stock has been badly hit last year. The company’s market capitalisation fell by nearly 60% compared to a 50% fall in the Sensex in the same period. However, L&T’s 2-year and 3-year returns are still better than the Sensex, and with a longer-term perspective, the stock is promising. This is backed by the fact that though infrastructure seems to have lost its flavour among the investors now, it is going to remain a key to the country’s growth.

Further, the company has taken concrete steps over the last two years to expand its areas of operations. The stock is a good buying proposition and investors may accumulate the stock with a long-term view.

BUSINESS:

L&T’s business spans across fairly large areas of operations. The three major business segments are: engineering & construction, electrical & electronics and machinery & industrial products. The first segment accounts for nearly 75% of its revenues, and the other two segments contribute the rest. Total order book position stands at Rs 63,000 crore as on September ‘08, up by 59% over last year and is almost two-and-a-half times its trailing four quarters sales ended September ‘08.

The company plans to develop its businesses as separate entities to enable faster execution and bring in flexibility. With that aim, it is planning to create 12 operating companies within the existing company. With average revenues of about Rs 2,000 crore for each operating unit, this looks quite acceptable. L&T has also sold off its ready mix concrete unit earlier this financial year, where it had about 25% market share.

FINANCIALS:

For the quarter ended September ‘08, the company recorded sales growth of nearly 40%, and its net profit grew 32%. Cost of inputs, including purchased goods, grew 24%, significantly lower than sales growth. While a sharp rise of 62% in other expenses reduced the growth in operating margin. However, this expense may remain low for the December ‘08 quarter, improving the operating margin further. While at the operating level, the performance was reasonable, interest and depreciation cost together more than doubled and now account nearly 17% of its operating cost, up from 10% last year. With increase in debt, these costs will remain high over the next few quarters.

Over the last six quarters, the company has shown average sales growth of 43%, operating profit growth of 54% and net profit growth of 59%. While profit growth rate has now come down to 30-35% level, it is still significant, and now with easing of raw material and crude prices, it can move up a notch or two.

OUTLOOK:

L&T has entered into ship-building industry. It has set up of a shipyard in Tamil Nadu, and has the capacity to build complex ships and very large crude carriers. The company has also won some orders for construction of ships. Moreover, the company has tied-up with some global companies in the power sector to manufacture heavy machinery for generating power. The company is also looking to enter the power generation sector, but that may take time to yield results. The stock is currently trading at a PE of about 17, the lowest over the last four years. Its P/E took a beating in the aftermath of the Satyam Computer crisis. The ratio of L&T’s P/E to Sensex P/E is at its lowest since October ‘05, though the relative growth prospect favours L&T.

LOOKING UP

• L&T has a capex of Rs 1,500 crore during FY09 and FY10 each
• The company is continuously expanding and upgrading its existing manufacturing facility
• Engineering & construction business accounts for 75% of its revenues
• There is a move to increase its footprint across international operations. It’s focussing on West Asia. L&T is setting up of joint ventures and execution centres in these regions
• In the last six quarters L&T has maintained an average growth of 43% in sales, 54% in operating profit and 59% in net profit
• L&T’s stock is currently trading at a PE of about 17.5, lowest in the last four years
• There is a clear focus to exit non-core business and to provide operational freedom to core businesses. It has already sold its ready mix concrete unit earlier this financial year
  

Beta: 1.06
Institutional holding: 51.06
Current dividend yield: 2.43
Current P/E (standalone): 17.5
Current m-cap: Rs 42,151cr

Stock views on Tata Power, Bombay Rayon, Indian Hotels

CITIGROUP on INDIAN HOTELS

CITIGROUP has downgraded Indian Hotels to ‘hold’ from ‘buy’ rating with a target price of Rs 47. The downgrade is based on lower earnings estimates to take into account the recent terror attacks in Mumbai, which will lead to temporary shutdown of the company’s flagship property in Mumbai and likely lower occupancy of the company’s other properties in India. Indian Hotels is the largest hotel operator in the country and is looking to enter the budget hotel segment through its new brand ‘Ginger’. It already operates 11 budget hotels and plans to add 35 such hotels in the next few years with an investment of Rs 400-600 crore. Indian Hotels also plans to foray into the adventure business with wildlife lodges. The company is looking to expand overseas through acquisitions/management contracts. There is limited upside from current levels, given the unfavourable outlook for the hotel sector in India. The target price is based on 10x (versus 13x earlier) FY10E P/E as Citigroup builds in concerns of slower earnings growth, given expectations of lower occupancy, economic downturn and upcoming room supply.

MOTILAL OSWAL on TATA POWER

MOTILAL Oswal maintains a ‘buy’ rating on Tata Power with a target price of Rs 751. Tata Power has achieved financial closure and placed equipment orders for 5,660-mw projects under development. Its total equity commitment stands at ~Rs 6,000 crore, of which Rs 2,900 crore is likely through internal accruals, Rs 1,900 crore through issue of warrants and preferential allotment to Tata Sons, and Rs 1,200 crore via rights issue and/or monetisation of investments. In FY08, the company raised Rs 380 crore via sale of part stake in Tata Teleservices Maharashtra and Rs 710 crore via share issuance to Tata Sons. Tata Power is expected to commission 2,663 mw of capacity by FY12, including the first unit of Mundra UMPP (800 mw) in September ’11. Despite initial delays, capacity addition in FY09 and FY10 is expected at 530 mw and 120 mw, respectively. In FY09, Tata Power will have merchant capacity of 200 mw, which should contribute 6.5% of the standalone net profit in FY09 and 18.6% in FY10. Motilal Oswal expects Tata Power to report a consolidated net profit of Rs 1,410 crore in FY09 and Rs 1,610 crore in FY10.

EDELWEISS SECURITIES on BOMBAY RAYON

EDELWEISS Securities has downgraded Bombay Rayon’s stock to ‘accumulate’ from ‘buy’. Garment sales are estimated to contribute 66% to Bombay Rayon Fashions’ (BRFL) consolidated revenues in FY09. The company exports 100% of its garments to the US and Europe. With both these key geographies witnessing economic turmoil, same store sales of BRFL’s clients have dropped almost 3% to 15%. BRFL reported robust numbers in Q2 FY09 with net sales up 28% y-o-y at Rs 290 crore and EBITDA up 39% yo-y at Rs 68.7 crore. Even though the management seems confident of delivering 50% topline growth in FY10, Edelweiss has revised down its estimates of revenues from garment sales by 24% in FY10 to Rs 1,097 crore. At CMP, the stock is trading at a P/E of 5.4x FY09E EPS of Rs 19.9 and 4.9x FY10E EPS of Rs 21.9. The stock has corrected 60% since July 1, ’08, factoring in most of the risks of a slowdown in its garment business. But Edelweiss believes the overhang of negative news flow from its key markets and customers, as well as downside risks to topline due to cancellation of orders or defaults on payments, will hinder any major outperformance of the stock.

Stock views on ONGC, Hindustan Unilever

MORGAN STANLEY on HINDUSTAN UNILEVER

MORGAN Stanley reiterates ‘overweight’ rating on HUL as it believes that investors are likely to be positively surprised by the company’s structural growth story and turnaround in business fundamentals. The FMCG sector is at an inflection point and a sharp reduction in input costs is likely to benefit consumers as well as companies. HUL is not witnessing any exceptional uptrading or downtrading across its product portfolio. Industry volume growth in soaps and laundry is flat due to steep price hikes, but consumers have still been resilient. Revenue growth in FY10 is likely to be lower as it will be largely volume-led. HUL has geared up to respond to volatility in input costs and has shortened its response time and planning cycle.

INDIABULLS on ONGC

INDIABULLS has recommended a ‘hold’ rating on ONGC. During Q2 FY09, the company’s standalone net sales increased 12.9% y-o-y to Rs 17,410 crore. While the surge in global crude oil prices and the weakening rupee were expected to drive ONGC’s financials, its performance was dented by the excessive subsidy burden (Rs 12,670 crore) it had to shoulder in order to limit the losses of OMCs. As a result, ONGC’s standalone adjusted net profit declined 5.7% y-o-y to Rs 4,810 crore. Due to the global economic crisis, oil prices have fallen by more than 60% from their peak of $147/bbl in mid-July to the current lows of $50/bbl. This is mainly due to dampening fuel demand from the major consuming nations. The IEA has lowered its oil demand forecasts by 500,000 bopd for the second half of ’08 and by 400,000 bopd for ’09. Thus, with reducing demand, Indiabulls expects oil prices to be under pressure till FY10, thereby adversely affecting the company’s net realisations. However, Indiabulls believes that once the global economy revives, demand for crude oil and natural gas will recover, mainly due to increased demand from developing economies such as India and China.

Stock Views on Hero Honda, Jet Airways, HDFC, Hindustan Zinc

Centrum Broking on HINDUSTAN ZINC

Centrum Broking has cut earnings estimates of Hindustan Zinc following disappointing quarterly results, but upgraded its rating on the stock from ‘reduce’ to ‘hold.’ The company has hefty cash on books of Rs 9310 crore and its capex requirement for next two years is only about Rs 2600 crore, which translates into Rs 220/share. “We believe a part of the cash would be given back to investors in the form of dividend as the outlook for core business looks gloomy,” the Centrum note to clients said. Centrum has cut earnings estimates for FY09 by 21.5% to Rs 66.1 (earlier Rs 84.2) and for FY10 by 24.5%. We believe the stock is cheap on valuation parameters. Besides, company has indicated that it would maintain volume growth and also cost would decline by about 5-7% going forward. This along with the imposition of 5% import duty on zinc would help improve margins going forward.

Deutsche Equities on HDFC

Deutsche Equities has retained its ‘buy’ rating on HDFC, post its third quarter earnings, but slashed price target of the stock. “The exceptionally difficult environment of Q3FY09 for both demand and cost of funds has already started improving. We have pared our earnings estimates, reflecting lower treasury profits and mark-to-market on foreign currency bonds,” the Deutsche Equities note to clients said. “The sharp sell-off post announcement of results appears excessive as we believe that in such an environment, keeping margins reasonable is more important than growth. Key risks are continued high property prices hurting mortgage demand and high capital needs of subsidiaries putting pressure on HDFC’s balance sheet,” the note added.

Prabhudas Lilladher on JET AIRWAYS

Prabhudas Lilladher has retained its accumulate rating on Jet Airways, saying the company’s earnings could be under pressure for some more time, despite the price of aviation turbine fuel coming down by half. “Benefit of this (lower ATF price) has been passed on to consumers as the company announced around 40% cut in basic fares effective January 2009. This should allow the airliner to operate closer or even above the break-even load factors for the subsequent quarters,” the Prabhudas Lilladher note to clients said. “Correction in the ATF prices has provided pricing flexibility, which in turn, should drive passenger volume growth. However, this is not enough as high interest burden and depreciation expenses will result in the company reporting losses for at least for next two years,” the note added.

Merrill Lynch on HERO HONDA

Merrill Lynch has retained its buy rating on Hero Honda citing better than expected third quarter earnings. “Margins expanded 50 basis points year-on-year and 90 basis points quarter-onquarter at 14.5%, mainly driven by lower raw material costs. We expect margins to improve further as the full benefit of softening commodity prices will be reflected hereon,” the Merrill note to clients said. “We expect the industry to end the fiscal year with low-single digit growth, constrained by lack of financing. However, we expect Hero Honda to stay ahead on the strength of its brand, and new launches. We maintain our 9% and 6% volume growth assumptions for FY09 and FY10 respectively,” the note added.

Stock Views on Federal Bank, NTPC, Nalco

GOLDMAN SACHS on NTPC

Goldman Sachs maintains its earning estimates of NTPC and `Buy’ rating on the stock. The 12-month target price of Rs 208 is the value of its FY2010E financial assets (Rs 37/share) plus the value of its operating assets using a residual income (RI) model (Rs 171/share). India’s central electricity regulator (CERC) has announced the final tariff norms for generation and transmission projects for FY2010-14. Takeaways for NTPC -
[1] Minimum regulated post-tax ROE (return on equity) raised from 14% to 15.5% (16% in case of new projects completed within prescribed time).
[2] Benefit of tax holidays to be retained, but tax on incentives will not be a pass-through.
[3] Fixed-cost recovery linked to ‘plant availability’ and not utilisation rate (PLF or plant load factor).
[4] Option to avail R&M (repairs and maintenance) allowance for more than 25-year-old units. [5] Normative levels for operational and working capital parameters have been tightened.
[6] Depreciation rate for tariff setting largely aligned with accounting norms.

Prima facie, CERC’s final tariff norms for FY10-14 are neutral-to-positive for NTPC’s earnings outlook; consensus expected them to be neutral-to-negative. We maintain that
[1] effective tax rate and,
[2] economic life of projects, are critical parameters to assess NTPC’s profitability during FY10-14.

CITIGROUP on FEDERAL BANK

Citigroup maintains `Buy’ rating on Federal Bank. However, it revises the price target down to Rs 215 from Rs 270. Federal Bank reported a strong P&L quarter in 3Q09, with high NIMs (net interest margins) of over 450 bps, core fee income growth over 90%, trading and bond portfolio gains, and relative cost moderation (excluding one-offs). However, the balance sheet was under pressure, with high asset deterioration and loan-loss provisions. Overall, a mixed quarter - a resilient P&L but marked by increasing asset risks. Federal Bank’s loan book comprises 36% SMEs (small and medium enterprises) and 32% retail, both of which have seen significant pressures over the last couple of quarters, and contribute to the bulk of the deterioration in asset quality. Incremental slippages increased to about 1.4% of loans in 3Q09, meaningfully above its larger peers. Citigroup increases FY09E earnings by 28%, to incorporate gains on the bond portfolio, but reduces FY10E and FY11E earnings by 21% and 31% respectively, reflecting significantly higher loan-loss provisioning costs.

DEUTSCHE BANK on NALCO

Deutsche maintains `Sell’ rating on Nalco with a price target of Rs 126. Nalco’s latest alumina sale tender, which is used as a benchmark for the spot market globally, has been closed at US$194/MT. The new contracted price is down 58% from a high of US$458/MT which Nalco got for a 30,000-tonne shipment in July ‘08. Outlook for alumina remains negative as brought out by the bidding range. Apart from the winning bid of US$194/MT, the majority of bids from traders ranged between US$153-US$176/MT, which provides an indication of market expectations of future alumina price movement. Nalco is averse to any production cuts despite the global demand weakness. Consequently, its aluminum inventory situation is expected to get worse. According to the news flow, inventory is hovering around 15 Kt which is already double of the normal levels of 8 Kt. The inventory situation is expected to get even worse with average inventory increasing to 30 Kt by the year-end. Deutsche remains negative on alumina/aluminium demand and pricing outlook in 2009

Stock views on HDFC, Bharti Airtel, Hero Honda

BANK OF AMERICA / MERRILL LYNCH on HDFC

Bank of America cuts HDFC’s target price to Rs 1,980 from Rs 2,450 owing to lower sum of parts value and factoring in moderation in growth. However, the stock can still trade at 2.5-3.0x FY10E given the comfort in asset quality; earnings growth of 16-17% through FY10-11E and ROE (return on equity) of 29% on its core business. HDFC’s 3QFY09 earnings were down 2% y-o-y and 4-5% lower than market estimates. This was primarily due to the absence of Rs 100 crore of high investment gains and extraordinary income and Rs 50 crore of exchange losses booked by HDFC in its convertible bond. Adjusting for these factors, both topline and pre-tax earnings grew by about 19% y-o-y. The other disconcerting feature was the 8% contraction in approvals - which appears to be a more conscious decision, as HDFC had been reluctant to lend in October-November ‘08 as conditions worsened. Bank of America has cut the FY09-10 reported earnings by 6-11% to capture the lower investment gains.

HSBC on BHARTI AIRTEL

HSBC reiterates `Overweight’ rating on Bharti Airtel. The 15% fall in Bharti’s share price since the launch of RCOM’s GSM service in December is an overreaction. Instead, investors should focus on Bharti’s market leadership strengths and RCOM’s longer-term structural limitations of operations in 1,800 MHz which require additional base stations. HSBC believes the combination of low revenue yields and bloated cost structure will reduce the scope for disruptive pricing and competitive intensity will become more rational. HSBC estimates FY10E traffic growth of 32% against the historical average of about 70% and cuts FY10-11E EPS by 7% and 4% respectively to factor in increasing competition and the slowing economy. The core business is valued at Rs 645 on 13.7x FY10E core earnings based on a 15% premium to HSBC’s Sensex target of 11.9x. The tower business is valued at Rs 141, which reflects a 36% discount to recent transaction multiples. Risks are early implementation of MNP (mobile number portability), rollout of flat rate plans, higher than estimated slowdown in usage, higher than estimated decline in margins on the back of rural penetration, lower termination charges and higher spectrum charges.

MORGAN STANLEY on HERO HONDA MOTORS

Hero Honda posted a decent set of 3Q09 numbers with net income 7% higher than the expected and in line with Street expectations. Despite a volume decline of 5%, an 11% y-o-y improvement in realisations helped the company to report revenue of Rs 2,880 crore (up 5% y-o-y). Margin came in at 14.5%, 50 bps above last year, primarily due to softening raw material commodity prices. This was on the back of an 11% y-o-y realisation improvement, improving product mix, and ramp up of capacity at the excise duty-exempt Haridwar facility. Net income of Rs 300 crore, improved 9% y-o-y, and came in 7% above estimate on the back of an improvement at the operating level and a lower tax rate as the company increased production in tax-free zones such as Haridwar. Hero Honda is on course to achieve 2009 growth estimate of 9% given its year to-date volume growth of 10.4%, and an improvement in market share of 5.5% to 58.5% in the fiscal year to date in the domestic motorcycle category.

Views on banking stocks Corporation Bank, Karnataka Bank, South Indian Bank, Dena Bank,

Angel Broking on CORPORATION BANK

We are positive on Corporation Bank due to its efficient operations reflected in low operating expenses, as a percent to average assets, superior asset quality and proactive investments in modern distribution and payment systems. But the bank’s relatively small size and scope of operations as well as urban focus that subjects it to greater competition from private banks, temper the growth outlook on the key competitive parameters of CASA and fee income.

Karvy Stock Broking on DENA BANK

At current valuations, Dena Bank is the most attractively valued bank in our government banking universe, it is also the smallest. As a result of the wage hike provisions and lower other income we revise our FY2009 EPS to Rs 12.8 and FY2010 EPS to Rs 16.8. In FY2009 earnings would only increase by 2% y-o-y.

SMC Global on SOUTH INDIAN BANK

Kerala-based South Indian Bank has drawn up a five-year plan to drive total business to Rs 75,000 crore by March 2013. Under the five-year plan, banks deposit are likely to grow to Rs 44,000 crore and advances to Rs 31,000 crore by March 2013. We believe that stock is undervalued to the future potential price.

SMC Global on KARNATAKA BANK

Karnataka Bank has a dominant presence in the southern and western parts of India. With 12.17% capital adequacy as on March 2008, we believe the bank has sufficient capital to grow its loan book and comply with Basel II norms. With the implementation of Basel- II norms, the management expects a 100bps impact on its capital adequacy. We believe that stock is undervalued to the future potential price.

Deepak Fertilisers

Deepak Fertilisers is generating healthy cash flows. This together with attractive dividend yield and better business prospects makes for a good long term investment

DEEPAK Fertilisers and Petrochemicals (DFPCL) is a Pune-based company with an annual turnover of Rs 1,400 crore and a market capitalisation of Rs 475 crore. The company derives over 72% of its revenues from chemicals and 25% from fertilisers. The company is generating healthy cash flows and is likely to emerge a key beneficiary of increased availability of natural gas in India over next few months. The company is placed attractively with little downside risk, healthy dividend yield and with promising growth prospects over next 12 months.

Business:

DFPCL manufactures various basic chemicals occupying high market share in most of them in India. It enjoys nearly 45% market share in nitric acid, 35% market share in ammonium nitrate, 16% in methanol and is the only producer of isopropyl alcohol (IPA) in India. However, availability of natural gas remains an ongoing concern due to which the company is forced to operate its methanol and nitrophosphate fertilisers units at lower than full-capacity.

Also the company has diversified into real estate. It has built a shopping mall Ishanya with 5.5 lakh sq feet leasable area. With around 50 stores, a little over half of total area is operational. Last year DFPCL entered into a joint venture with Yara International, a Norwegian manufacturer, to sell its specialty fertilisers in India.

GROWTH DRIVERS:

The company recently increased the capacity of its nitric acid plant by one third to 400,000 tonne per annum (TPA). It has built up ammonia storage tanks of 15,000 tonne capacity at JNPT. Once these become operational from April 2009 the company will be able to import ammonia and save natural gas, which can be diverted to increase production of other products.

The company is now firmly connected to the national natural gas grid and has access to natural gas produced anywhere in the country. With RIL commencing natural gas production, DFPCL’s chances to secure a long-term supply of natural gas at reasonable price appear bright.

The company is setting up a 140,000 TPA nitric acid plant by end of 2009 and 300,000 TPA ammonium nitrate plant near its existing plant in Taloja at a cost of Rs 650 crore in first half of FY 11.

FINANCIALS:

The net sales of DFPCL have grown at a CAGR of 21.7% over last five years while the net profits grew at 9.5%. Its debt-to-equity ratio stood at 48.6% for the year ended March 2008 with the return on capital at 17.2%.

The company posted 8.5% fall in profits during the quarter ended December 2008. However, the poor performance was due to crash in commodity prices and also due to 2-month closure of its nitric acid plant for expansion. Hence, if we look at the 12-month period ending December 2008, the company has expanded its profits by 45% to Rs 140 crore with 51% jump in net sales to Rs 1,396 crore. In the past the company has distributed almost one-third of its annual profits by way of dividends with Rs 3.5 per share in FY08.

VALUATIONS:

For FY09, we expect the company to report net profit of Rs 145 crore, which translates in a P/E of 3.2 on current market price of Rs 52.8. If the company maintains its divided payout ratio around 30% of its net profit, the dividend per share will go above Rs 4 this year. At current market price this translates in a dividend yield of 7.5%. The low P/E and attractive dividend yield limit the downside in the scrip with definite growth prospects over next 12 months
Beta 0.76
Institutional Holding 18.01%
Dividend Yield 6.5%
P/E 3.3
M Cap Rs 465.7 Cr

Gitanjali Gems

Gitanjali Gems, with its wide product range, could gain a larger share of the domestic branded jewellery market

Beta: 0.79
Institutional Holding: 8.52%
Current dividend Yield: 4.01%
Current P/E: 2.69
Current m-cap:
Rs 381.9 cr

THE GEMS and jewellery sector has taken a hit due to the global financial slowdown. However, for the branded jewellery segment, the retail demand still looks robust. While there are a few players in this segment, Gitanjali Gems seems to be uniquely placed with its business model that tries to tap both international and domestic gems and jewellery markets. The stock has fallen by over 80% in the last few months, and currently, it is trading at one-fifth of its book-value. This provides a good entry for investors, looking for a pie of the branded jewellery and luxury segment in their portfolio.

BUSINESS:

Gitanjali Gems is one of the leading diamond and jewellery manufacturers and retailers. It has an integrated business model, which includes sourcing and retailing of diamonds and branded jewellery. The company sources diamonds from Diamond Trading Company (DTC), the rough diamond sales and distribution arm of the De Beers Family of companies.

Gitanjali earns nearly 45% of its revenues through exports, while it has a wide range of established brands like Nakshatra, Gili, Asmi, Sangini, Giantti in the domestic branded jewellery market. It also has a joint venture with UAE-based retailer Damas to sell jewellery in India under D’damas brand.

The company also is trying to push its lifestyle business with its subsidiary Gitanjali Lifestyle, which has nearly 35 outlets. It has entered into a 50:50 JV with Italian group Morellato and Sector for distributing the latter’s jewellery and watch brands such as Cavalli, Galliano Moschino and Miss Sixty. Besides, the company has struck a similar JV with Italian fashion group Mariella Burani to introduce the luxury and fashion products of the Italian company in India. The company has entered in the US with by acquiring two retail chains Samuels Jewellers, which has 100 stores, and Rogers that owns 50 stores.

Further, Gitanjali is also setting up a special economic zone for gems and jewellery in Hyderabad that spread across 200 acres of land.

FINANCIALS:

The top line of the company has been growing consistently. It has showed a compounded annual growth rate (CAGR) of 20% in the last four years ended March 2008. Operating profit during the period grew by a CAGR of 55%, while net profit stood at 86% per year. The top line of the company has been growing consistently. It has showed a compounded annual growth rate (CAGR) of 20% in the last four years ended March 2008. Operating profit during the period grew by a CAGR of 55%, while net profit stood at 86% per year.

In the last four quarters, the jewellery business showed a sustained growth, helping boost profitability, while contributing 40% in the total revenue. However, the diamond segment has showed a lower profit growth. The segment suffered a net loss in the December 2008 quarter that weighed on the company’s profitability. However, for year ended December 2008, the company has managed to sustain growth in its profit margins.

GROWTH DRIVERS :

The risk of a slowdown in exports is somewhat mitigated by the company’s plan of rapidly increasing the domestic business. It has entered into a tripartite share purchase agreement with MMTC and the newly formed JV company MMTC Gitanjali (MGPL) to grow its jewellery showroom line. Through MGPL, the company plans to establish and maintain a large number of retail jewellery showrooms. It also plans to add 0.5 million square foot of space in its existing 1.5 million sq ft showroom area in the next 18 months. Besides, Gitanjali plans to boost its presence in the lifestyle business. Its subsidiary Gitanjali Lifestyle has signed a JV agreement with Kuwait-based Hassan’s Optician to import, manufacture and distribute sunglasses, eyewear, contact lenses and other similar products under different brands.

RISKS/CONCERNS:

The company has experienced a significant growth in its interest expenditure in the last two quarters that adversely affected its net profit. The gross block grew at a CAGR of 45% in the last four years that could explain the decline in interest cover ratio to 2.7 in the December quarter.

The diamond segment is struggling to show a growth in profitability in the last six quarters and weighs on bottom line. While the company plans to cut down on the wholesale activity in the diamond segment, it also expects a further drop in the segment’s fruitfulness in the coming quarters.

VALUATIONS:

Due to a high beta, the company has witnessed a loss of nearly 75% in its market capitalisation, while the Sensex has lost more than 50% in 2008. At the current market price, the P/E is at 10% of its average since March 2006. With a wider product range and potential to tap the premium end of the market through tie-ups with international retailers, Gitanjali is likely to make larger strides in the domestic retail space.

Stock views on ACC, Mundra Port, Idea Cellular, Ambuja Cements, GMR Infrastructure

HSBC on GMR Infrastructure
HSBC maintains the `Underweight' rating on GMR Infrastructure with a target price of Rs 53. There has been no respite in GMR's existing business. GMR's airport business faces: a) continuing decline in air traffic b) continuing delays in real estate development at Delhi airport, impacting fund availability, and c) inability to raise tariff at the Delhi and Hyderabad airports, impacting overall profitability. However, there has been some relief in the power business due to fresh gas supply and lower naptha prices. GMR runs a refinancing risk on the loan at the end of the two-year period. HSBC expects that in order to complete the Delhi airport in time, the government will have to provide incentives to GMR. These incentives might be in the form of allowing it to charge higher user fees or a higher equity contribution to meet the fund requirement. However, given the current financial condition of the airline industry, it would be difficult for the government to increase the charges without opposition from the airline industry. The outlook for the company remains weak given: a) no signs of recovery in airport traffic growth b) the ability to increase airport charges remains dependent on the government's approval c) no improvement in real estate outlook d) potential difficulties in refinancing its acquisition.

Merrill Lynch on Ambuja Cements

Merrill Lynch maintains `Underperform' rating on Ambuja Cements due to lack of upside triggers. Ambuja's CY09 earnings decline will likely be modest versus other majors due to a tad better supply-demand outlook for west India. Ambuja sells ~30-40% of volumes in the west, which is forecast to witness fewer capacity additions versus other regions. However, exposure to the north will likely hurt. Ambuja's CY08 EBITDA stood at ~Rs 1,770 crore, down ~13% y-o-y due to cost-led margin pressures. The company indicated that high-cost coal inventories, greater use of imported coal and year-end adjustments/provisions dragged 4Q results. 4Q realisations were up 1% y-o-y and 3% q-o-q; cost increase was sharper at ~10-12%. Volumes grew 5% y-o-y and 16% q-o-q. In its 4Q press release Ambuja said the industry's demand growth in CY09 will range between 6-8%. This compares with 11-12% volume growth witnessed in November-December 2008, likely led by pre-election government spending. Reflecting the pattern of previous election years, we worry that the recent demand impetus will ease in 3-4 months as elections draw closer.

Indiabulls Securities on Idea Cellular

Indiabulls Securities has reiterated the `Hold' rating on Idea Cellular, however, it has downgraded the target price to Rs 49. Idea ended the third quarter with a handsome topline growth of 13.1% q-o-q, backed by a robust 13% share in the all-India net additions of 38 lakh and a 3.7% improved realisation of 65 paise per minute. Idea's market share (excluding Spice) is to inflate beyond 11% by March 2010 from the current 9.9%. The company's share of the market net additions is likely to peak at 14-15% in FY10, given the upcoming roll-outs in five new circles and the overwhelming response received for the roll-out in Bihar and the re-branding in Punjab. Moreover, Idea's brand, which has all-India recognition, renders it a competitive edge over the other entrants in the new circles. The operating margin will likely remain under pressure in FY10E-11E and is expected to come down to ~11% as Idea opts for higher opex rather than capex for network expansion. In addition, intensifying competition and penetration in Class C circles calls for competitive pricing, which would further bring down ARPUs to around Rs 250 and Rs 210 for FY09E and FY10E respectively. While the company's business model points towards a strong longer-term growth trajectory, the upcoming congestion in the telecom market would exert significant strain on its key operating and financial parameters, thereby limiting major upsides in the stock price.

Citigroup on Mundra Port

Citigroup initiates `Sell' rating on Mundra Port and Special Economic Zone (MPSEZ) as the stock looks expensive. MPSEZ is a private port (capacity ~55 mtpa) on India's west coast:
1) Strategically located for north-bound cargo;
2) Handles more container volumes than all major ports, except JNPT and Chennai;
3) Has one of the deepest drafts;
4) ~40% of projected volumes are under long-term contracts; and
5) SEZ over ~32,000 acres should support volume growth.

Cargo/profits growth has been impressive at 53%/132% CAGR over FY04-08. Citigroup expects cargo, revenues and profits to grow at 17%, 25% and 47% respectively over FY09-11E, and RoEs to improve to 24% by FY11E from 11% in FY08. While Citigroup forecasts healthy cargo growth at MPSEZ, they see risks in the medium term given the deteriorating global environment. Volumes at major ports grew only by 4% y-o-y in April-November 2008 and fell 28% y-o-y in December 2008 at the DP World-operated container terminal at Mundra. A pullback in investments would hit development of the SEZ, a growth driver for the port. We value: 1) the port at Rs 262/sh; 2) SEZ at Rs 22/sh; 3) investments in subs at Rs7/sh. MPSEZ trades at 24x FY10E PE, a premium of ~85% to Asian ports' average of ~13x, which we find excessive despite EPS growth of 47% over FY09-11E versus the Asian average of -1%. Upside risks include better-than-expected traffic growth and demand for land at the SEZ.

Macquarie on ACC

Macquarie lowers the rating on ACC from `Neutral' to `Underperform' in the absence of cost-reduction levers and the stock lacks any positive catalyst except for cement prices. It believes that the current rally in the stock along with an improved business outlook is a good opportunity to book profits. ACC declared its CY08 results, which were about 11% below the estimates at the operating level due mainly to lower volumes and higher costs. Macquarie reduces the target price by 2% to Rs 452 to factor in lower volumes for the next year and also reducing CY09 and CY10 estimates to account for lower volume expectations because it foresees some delays to expansion plans. ACC has already exhausted the easy ways to reduce costs because most of its production is based on domestic subsidised coal. It already has coal-based captive power plants and it is reaching saturation in blending. The only major avenue is a merger with its sister concern, Ambuja Cements. The majority of 7 mtpa of further expansion will not be completed until CY10. ACC will, at best, grow in line with the industry.

Financial indicators to gauge a company’s underlying health

WITH MARKET valuations having fallen drastically, many investors seem to be rummaging for value picks. But they must remember, all that glitters is not gold. An investor must have the skill to spot the good stocks from the bad ones. ETIG thought it a good idea to lay down the basic framework so that investors can zero in on the right stocks. Investors can consider certain financial indicators to gauge the underlying health of a company, which may not be adequately represented by its stock price.

BUSINESS MODEL:

One of the basic features of a stock is the business model of the company, which makes it a defensive or aggressive bet. A growth stock is likely to perform very well in a bull run, while a defensive bet may pay off in a bearish market. When buying stocks of commodity-based businesses, an investor should be aware of the specific commodity cycle and hence, the consequent cyclicity in the company’s earnings.

POSITIVE OPERATING CASH FLOW:

The net cash that a business generates through its operations, as reflected in the company’s cash flow statement, is also a critical feature. It is important for a company to have a positive cash flow from its operations. A company can report net profit in its profit & loss account without generating a positive cash flow from the socalled ‘profitable’ growth. Another parameter to be considered is free cash flow, i.e. the cash left with the company after capital expenditure (capex). Any company may have negative operating cash flow (OCF) for one or two years, but a good company with a sustainable business model cannot have a history of negative OCFs. Similarly, a well-managed company should not have negative free cash flow for many years in a row.

RELATIVE VALUATIONS:

The price-to-earnings (P/E) multiple of a company cannot be an important indicator by itself, unless it is considered in comparison with the P/E multiples of other companies in the same sector, or against the company’s own historical P/E, or against the market’s P/E.

DEBT-EQUITY RATIO:

This is a critical tool to measure a company’s leverage. A low debt-equity ratio is generally preferred, but is not always necessary. Companies in capital-intensive sectors like infrastructure, real estate, cement, steel and oil & gas typically have high debt-equity ratios, while those in sectors like FMCG, IT and pharmaceuticals generally have low debt-equity ratios.

The phase of a company’s growth is also an important factor to be considered. A company in a growth phase may, at times, choose to leverage itself more than ideally required, against a company that has an established business. Higher debt increases the finance costs, which can be costlier to service in a high interest rate regime. Conversely, raising money through equity can be difficult during a bear phase.

INTEREST COVERAGE RATIO:

The company’s ability to service its debt is another important criterion to judge its health. The lower the interest coverage ratio, the more difficult it is for the company to service its debt. Investors should consider the debt-equity and interest coverage ratios simultaneously. Suppose a company has high debtequity ratio, but it also has high interest coverage, then it is in a good position to service its debt.

PRICE-TO-BOOK VALUE (P/BV):

This ratio of the stock’s market value to book value helps in knowing its relative under or over-valuation. A lower P/BV multiple typically indicates that the stock is under-valued, but this may not always be the case. Again, this ratio varies from industry to industry. A capital-intensive industry will typically have a lower P/BV multiple. Banks generally use this ratio, because unlike manufacturing companies, they measure their assets at market value. Since book value takes into account only tangible assets and liabilities, this ratio may not be useful for companies holding a significant intellectual property, or an FMCG company with many brands.

RETURN ON CAPITAL EMPLOYED (RoCE) & RETURN ON NET WORTH (RoNW):

For a company, RoCE and RoNW should be significantly higher than the prevailing interest rate. If a company’s RoCE is consistently lower than say 15%, that is not a healthy sign and it indicates an economically inefficient operation. However, any good company may report lower RoCE or RoNW during an economic downturn or high investment phase. So it’s always helpful to compare RoCE or RoNW on a historical basis. But it doesn’t make sense to compare RoCE of two companies in two different sectors. It’s best to compare it with peers in the same or related industries.

DIVIDENDS:

A company which consistently pays dividends implies it’s rewarding its shareholders. Preference should always be given to a company with higher dividend yield. Higher the yield, more is the investor’s return on his/her investment. However, long-term investors should be wary of companies which dole out dividends at the cost of growth. It is also important to compare growth in dividend to growth in profit. A corresponding growth in dividend and profit indicates that the business model is sustainable and the company is confident of its cash flows. It also signals the management/promoter’s willingness to share the growth with the company’s shareholders.

MANAGEMENT OR PROMOTERS’ CREDIBILITY:

Last, but not the least, while fishing for a good stock, investors must also scrutinise the promoter’s credibility. A corrupt and fly-by-night management can inflict greater damage on a company than any other factor. This explains why companies owned by reputed and well-regarded business houses are widely sought-after on the bourses.

Stock Views on JSW Steel, Hindalco Industries,

Citigroup on JSW STEEL

Citigroup has maintained its ‘sell’ rating on JSW Steel while cutting its target price to Rs 185 from Rs 190. “We are revising our estimates to account for lower raw material prices, domestic realisation, revised volumes and capex, and weaker performance by the US subsidiary,” the investment bank said in a report. “The benefit of lower raw material prices is largely offset by weaker prices,” it said. “We expect total net debtequity ratio by March 2009 to be approximately 2x (times), making JSTL (JSW Steel) riskier in a downturn,” Citi added.

JP Morgan on HINDALCO

JP Morgan is reviewing its earnings estimates for Hindalco amid concerns over the outlook of US-based Novelis, which the Aditya Birla Group has acquired a couple of years back. Novelis reported a sharp decline in earnings in the December quarter. The brokerage has a 'neutral' rating on the stock. " On the operating front, we are negatively surprised by the sharp decline in shipments (-13% y/y) While there is a strong element of de-stocking (similar to steel), given Novelis' large exposure to Europe and North America, we expect shipments to remain weak well into the second half of financial year 2009-10 (estimated)," the investment bank said in a report.

Stock Views on DLF, Idea Cellular, Glaxo Smithkline Pharma

Goldman Sachs on DLF

Goldman Sachs has maintained its ‘sell’ rating on DLF while reiterating its cautious outlook on the real estate sector. According to the investment bank, New Delhi-based realty major’s third-quarter results have confirmed a significant slowdown in property sales and construction activity in India. “We push back our medium-term develop-ment pipeline projections and lower our property price assumptions,” Goldman Sachs said in a report. The investment bank has lowered its earnings per share (EPS) estimates for FY2009-FY2011 by 29-62% and cut its 12-month target price to Rs 124 from Rs 203.

CLSA on IDEA CELLULAR

CLSA has maintained its ‘outperformer’ rating on Idea, with price a target of Rs 53, as it feels the company’s stronger balance sheet would support valuations. “Idea’s balance sheet has improved significantly with Telekom Malaysia’s Rs 73 billion cash injection (a 15% preferential placement) and another Rs 21 billion from its stake sale in ABTL (Aditya Birla Telecom), with 3QFY09 net debt/equity of 0.18 times (against 1.8x in 1QFY09),” the investment bank said in a report. “The company’s aggressive expansion strategy and inferior margins for its Spice Communications business have compressed margins, but the big improvement in its balance sheet and strong valuation benchmarks from recent deals for start-ups, will support the stock,” the report added.

India Infoline on GLAXO SMITHKLINE

India Infoline has assigned an ‘add’ rating to Glaxo Smithkline Pharma, citing stable growth, zero debt and strong cash balance as the key positives. According to the brokerage, the company has more than $300 million cash on its books. “We believe that new product launches under patent protection will help Glaxo maintain its growth rates in the foreseeable future. Glaxo has a lean asset base, with most of manufacturing being outsourced,” the brokerage said in a note to its clients. “Hence, the company also stands to gain from falling prices of intermediates and APIs. This, we believe, will help the company maintain its EBITDA margin at CY08 levels, even in the event of a slow-down in the domestic market,” the note added.

Stock Views on Savita Chemicals, Selan Exploration Tech

Crude oil prices have come down to a level of $41 a barrel from a high of $146 a barrel last year. Consequently, upstream oil companies lost, but downstream companies gained. In terms of share price appreciation, downstream companies have outperformed the broader index, the Sensex.

Angel Broking on SAVITA CHEMICALS

Savita Chemicals has reported an above average performance for FY2008 mainly on account of the rise in the product prices, almost stable base oil prices and favourable exchange rate. The high crude oil prices may push up the base oil prices, which would adversely impact the company’s operating profit margins.


Sharekhan on SELAN EXPLORATION TECH

The highlight of the annual report is the upgradation of the proven and probable (2P) reserves of its Bakrol oil field from 43.22 million barrels estimated earlier to 73.3 million barrels after the completion of the current drilling campaign in the field. It drilled seven new wells in the last quarter of FY2008.

Invest Shoppe Views on Indraprastha Gas , Gujarat State Petronet

Crude oil prices have come down to a level of $41 a barrel from a high of $146 a barrel last year. Consequently, upstream oil companies lost, but downstream companies gained. In terms of share price appreciation, downstream companies have outperformed the broader index, the Sensex.

Invest Shoppe on GUJARAT STATE PETRONET

GSPL owns and operates the second largest natural gas (NG) transmission network in India. The availability of natural gas is set to jump three-fold in the next four years. Moreover, its long-term contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to be-come effective in the March 2009.

Invest Shoppe on INDRAPRASTHA GAS

Indraprastha Gas has maintained its consistent performance. The company has firm cash reserves of more than Rs 400 crore. It has already built the gas distribution infrastructure in Delhi, which connects more than 95,000 customers. The order of Supreme Court to states like Haryana and UP to set up CNG stations will help its business to grow.

Stock Views on Reliance Industries, Petronet LNG

Crude oil prices have come down to a level of $41 a barrel from a high of $146 a barrel last year. Consequently, upstream oil companies lost, but downstream companies gained. In terms of share price appreciation, downstream companies have outperformed the broader index, the Sensex.

Angel Broking on RELIANCE INDUSTRIES

RIL made two gas discoveries in the KG basin during the quarter. Development work of the gas from D1 and D3 fields is underway and production is likely to commence from 4QFY2009. RIL delivered decent set of numbers for 3QFY2009, which exceeded our expectations. It made a capital expenditure of Rs6,708cr in oil and Gas business.

Prabhudas Lilladhar on PETRONET LNG

Petronet’s capacity expansion at Dahej from 5.0mmtpa to 10.0mmtpa is on track and is scheduled to be completed in mid February. Expanded capacity will enable it to process higher spot volumes. Its blended re-gassification margin declined a little but management indicated this as a one-off incident.

Eveready Industries

Though Eveready Industries’ growth has stagnated in the last few years, the company bids to make a comeback with new product launches and diversification

Beta 0.76
Institutional Holding 18.01%
Dividend Yield 6.5%
P/E 3.4
M-Cap Rs 475 cr

EVEREADY Industries, a market leader in dry cell batteries and flashlights, is a good pick in the relatively defensive FMCG segment. Leveraging on its distribution network, the company has diversified into products like packed tea, insect repellents and compact fluorescent lamps (CFL). FMCG companies usually trade at a substantial premium to their book value. However, Eveready is currently valued at one fourth of its book value. The stock is thus attractive in view of its turnaround story.

BUSINESS:

Incorporated in 1934, the company has traditionally been the manufacturer and marketer of carbon zinc batteries, rechargeable batteries, alkaline batteries and flashlights under the Eveready brand. Over the years, the company has emerged as the largest dry cell battery player with a market share of more than 50%, with the largest distribution networks across the country.

The company witnessed a period of stagnation in growth since FY02 posting losses in the four intermittent years. Higher debt on the company’s books resulted in larger interest costs. The company currently has plans to leverage its national distribution network to market other FMCGs like packaged tea, insect repellents and CFL.

In the case of its tea business, the company has not really aggressively advertised its four brands such as Tez, Jaago, Premium Gold and Classic, which are positioned for different consumer segments. The company’s insect repellent business is still relatively new. It has launched mosquito coils over the target markets across the country. The market share is varying between 1% and 4% in various states.

GROWTH STRATEGY :

Eveready has charted out an aggressive growth strategy by entering into new categories in the power source and lighting space. It is launching products in the alternative lighting space based on the energy-efficient LED (light emitting diode) technology. It is bullish on increasing its presence in the rural markets.

The company expects the newly diversified product businesses to mature within a period of 2-3 years. It is also looking at doubling its turnover to Rs 1,600 crore by FY10 helped by its recently-launched ‘Ultima’ alkaline battery and ‘HomeLight’ LED cells. Eveready also has plans to enter into GLS (general lighting solutions) bulbs category.

FINANCIALS:

The company’s consolidated net sales have stagnated in the last five years at an average of around Rs 777 crore. It has reported loss in three of the last five years with last two consecutive years posting negative growth. The company’s operations suffered due to high zinc costs in the last two years. Falling input prices has augured well for the company’s operations. However, a weak rupee has had an adverse impact on its margins. Lower demand in the battery business is likely to be a short term concern. Liquidation of its real-estate has also helped the company raise funds to pay off its debts. Consequently, the company has been able to generate profits in the last three consecutive quarters, an unprecedented feat since 2006.

The company has a debt of Rs 320 crore on its books. It is yet to receive Rs 110 crore as balance amount on the sale of its real estate. These funds are likely to help the company tide over the debts that it has on its books.

VALUATIONS:

While Eveready’s new businesses are generating profits, they are likely to mature over the next couple of years. Their contribution to profits has become visible from the recent quarterly results. Besides, the new product launches are likely to increase volumes and profitability. The company’s stock has under performed the Sensex, registering a fall of 70% over the last one year. At current valuations, it is good time to invest in the company, which is emerging from a bad phase, but is showing signs of a recovery.

Castrol India

A high dividend yield, stable business and sound financials make Castrol an attractive pick for long-term investors. It’s a must-have defensive bet during tough times

Beta: 0.41
Institutional Holding: 13.5%
Dividend Yield: 4.6%
P/E: 13.7
M-Cap: Rs 3,739.5 cr

AROBUST balance sheet, sound business model and strong brand equity of its products is enabling Castrol India to churn out good cash flows year after year. Even amidst a slump in the automobile sector, the company’s lubricants will still have a large potential market to tap.

In the past five years, there has been a dramatic increase in the number of cars and commercial vehicles on India’s roads. This aftermarket is likely to be a big growth driver for the lubricant industry in general and Castrol in particular, over the next few years. With a year-on-year outperformance of 10%, Castrol is a must-have defensive stock during difficult times.

BUSINESS:

Castrol India is the Indian subsidiary of UK-based Burma Castrol and is engaged in manufacturing and marketing of automotive and industrial lubricants and specialty products. It operates in the automotive as well as nonautomotive segments. The former includes oils for heavy-duty vehicles, cars, motorcycles and bikes, while the latter includes industrial lubricants, marine and energy lubricants and the services segment.

Public sector players like IndianOil, Bharat Petroleum (BPCL) and Castrol account for around 70% of the domestic lubricants market. Several other players, including global majors, account for the balance share, resulting in a highly competitive market. Besides having technologically superior products, Castrol also has strong distribution network and brand recall. The company is the market leader in the retail segment with a share of around 21% in the total automotive lubricants market.

GROWTH STRATEGY:

Castrol has gained market share in a declining lubricants market. The entry of new original equipment manufacturers (OEMs) offering new technology vehicles will provide additional opportunities for the company’s products. Lube consumption is projected to grow strongly in cars, fourstroke bikes, as well as building and construction equipment segments.

Gradual growth in personal mobility, as well as corresponding growth in demand for automotive services, are positive factors for the company in the long term. Castrol seeks revenue and value growth through higher dependence on superior technology products relevant to new generation of vehicles, as well as focus on volume growth in the key growth sectors which it has identified. Rather than a broad volume growth strategy, the company is looking at building on profitability.

FINANCIALS:

The company’s balance sheet size has only doubled in the past one-and-a-half decades, while its topline has quadrupled. This shows that the business is not capital-intensive and is earning high returns. The company’s return on capital employed (RoCE) for CY07 stood at 80%. Like a typical multinational company, Castrol adopts conservative financing by being debtfree and distributing the bulk of its profits in the form of dividends.

The company’s net sales have witnessed a compound annual growth rate (CAGR) of 10.8% over the fiveyear period ended December ’07 to Rs 1,966 crore. Its net profit has recorded a lower CAGR of 7.4% to Rs 218.4 crore. At an average payout of 85% of its profits, the company’s dividend payout has broadly grown in line with the corresponding growth in profit during the past five years.

Castrol posted a smart recovery in its operating and net profit margins in ’07. This was fuelled by certain factors like price hikes, exit from low-margin segments that have been commoditised, new product launches, and re-launch of old products with new identity, packaging and strong consumer propositions.

Rising crude oil prices have been a concern for the company since the past two years as oil is a critical raw material for lubricants. However, the company is expected to benefit from the recent crash in crude prices.

CONCERNS:

The growth in use of longer drain lubricants, especially in the commercial vehicle segment, is expected to significantly reduce consumption of lubricant per vehicle. This is expected to reduce volume growth significantly over the next 3-5 years.

Price undercutting by low-cost competitors in an attempt to gain volume share is another threat for this premium-category lubricant manufacturer. A long-drawn slump in the automobile segment may hamper future volume growth of the company’s products. Curtail in infrastructure spend due to the general economic slowdown is also likely to curb the market for lubricants. With an industrial slowdown, the company’s business in the non-automotive segment may also take a hit.

VALUATIONS:

Castrol’s current price-earnings (P/E) multiple is 13.7. This is fairly in line with the 12.8% growth in profit registered by the company over a period of 15 years. The stock is fairly valued at current multiples. Besides, a high dividend yield, stable business and sound financials make the stock an attractive pick for the long term.

GE SHIPPING

THE Rs 3,108-crore Great Eastern Shipping is the largest private sector shipping company in the country. Its fleet comprised 41 vessels with a capacity of 2.85 million dwt. Like other domestic players in this sector, GE Shipping has deployed a majority of its fleet capacity (30 vessels) in the tanker segment (vessels used for transporting crude oil and allied products). A key advantage that GE Shipping enjoys over SCI is that the average age of its vessels is 10.6 years, which is much lower than that of SCI. This enables GE Shipping to quickly deploy its vessels in response to the changing market conditions. The company follows an operational strategy, whereby it enters into long-term contracts with its key customers, to minimise violent fluctuations in the spot freight rates. For instance, during FY08, GE Shipping derived 42% of its earnings from the spot market.


GLOBAL SHIPPING ENVIRONMENT:

Meanwhile, current spot freight rates for tanker segments like VLCC (very large crude carriers typically used for transporting crude from West Asia to refiners in Western countries) have now fallen by nearly two-thirds to $42,400 per day levels, compared to the average of $119,722 per day for July ’08. Spot freight rates in the tanker segment have weakened in tune with sluggish global oil demand in CY08. Similarly, in the dry bulk segment, the Baltic Dry Index has plummeted a whopping 92% to 711 currently, compared to the average of 8,936 in July ’08. Transportation demand has been curtailed since China’s steel industry, which is the key client in the dry bulk segment, is currently grappling with a slowdown.


FINANCIALS:

GE Shipping reported strong revenues and profit growth for the three years ended FY08. Its consolidated core operational income jumped by over 50% during the period to Rs 3,108.4 crore in FY08. But this was accompanied by a 200 bps decline in OPM to 43.9% in FY08. The company’s OPM came under pressure due to surging costs related to the hire of chartered ships to meet global cargo demand. Nevertheless, GE Shipping’s OPM remained superior to that of SCI during this period. During the September ’08 quarter, GE Shipping’s OPM grew by 1,370 bps y-o-y to 59.9%. The company’s cash flow from operations rose nearly 60% y-o-y to Rs 1,667 crore in FY08. This helped to bring down its debt-equity ratio to 0.66 in FY08, compared to 0.94 in FY05.


GROWTH PLANS:

The company has a capex of around $779 million (Rs 3,778 crore) which should enable it to add 14 shipping vessels by FY12, and also give it an additional 1.17 million dwt of capacity. Analysts do not expect a rise in GE Shipping’s debt-equity ratio in the medium term, as the company has traditionally enjoyed strong cash flows. Though shipping freight rates have declined over the past six months, the company is positioning itself for long-term growth opportunities. These include transporting imported crude to the country, coupled with opportunities in other countries.


VALUATIONS:

At Friday’s closing price of Rs 217.60, GE Shipping trades at just 2.5 times its estimated FY09 earnings. The stock is a good long-term buy. However, given the global economic uncertainties in the next 6-12 months, making forward earnings estimates remain a challenge.


Beta: 0.54
Institutional Holding: 34.77%
Dividend Yield: 6.89%
P/E: 2.23
M-Cap: Rs 3,313 cr

Hindustan Zinc (HZL)

Low-cost production, higher liquid investments, cash & bank balance and strong operational cash flows make HZL an attractive buy

Beta 0.73
Institutional Holding 33.14%
Dividend Yield 1.4%
P/E 3.8
M Cap Rs 14,750 Cr

The prices of almost all nonferrous metals have declined to their multi-year low levels. At current prices, many global producers are either making losses or have shut down production. As per reports, the world’s zinc production has declined 30% and stock prices of these metal producers have also taken a hit. Though it is very difficult to find the exact bottom, prices of these commodities are close to their sustainable historic average of $1,000 (please refer the chart for detail). This is why we believe that the downside for zinc from here onwards is limited.

Hindustan Zinc (HZL), the largest integrated producer of the metal in the country, is one of the low-cost zinc producers, at around $750 a tonne, in the world. Such low-cost production, almost zero debt and high liquid investment, makes the stock, which has been more than halved from its peak, a very attractive buy. Long-term investors with a horizon of 2-3 years can add this stock to their portfolio.

BUSINESS:

HZL has its own mines, smelting capacity and power plants. The company’s total mining reserve and resources is estimated at around 225 million tones (MT), which contain 5-12% of zinc and 1.5-2% of lead. The company produces around 7 MT zinc and lead mine metal from its mines in Rajastan. Similarly, it has a smelting capacity of 0.75 MT and last year, the company operated at a capacity utilisation of around 65-70%. HZL also produces around 100-120 tonnes of silver, which is a by-product of the core operation. The company exports around 20-30% of its products to overseas destinations.

FINANCIALS:

Industries in 2002. Net sales of the company have more than tripled over last three years, whereas net profit increased by more than seven times during the same time period. Its backward integration plan puts it on the top decimal of the lowcost zinc producers in the world. And, this has translated into superior operating margin. Its core operating margin rose to 75% in the financial year 2007, when the zinc prices were at their peaks. With the commodity prices falling, current operating margin has come down to around 50-55% level. Even if the prices fall by 20-30%, its operating margin will be maintained at around 30% much higher than many companies across industries. Its cash flow from operations is in sync with the movement in net profit over the last five years. HZL has very little debt outstanding, and hence, a very low debt-equity ratio of close to zero.

FUTURE GROWTH PLANS:

HZL aims to be the largest integrated zinc producer in the world and plans to augment its zinc and lead production capacity to around 1 MT by 2010. The company also plans to set up a 160 MW power plant and increase its mining capacity to 10 MT a year. Once, its production capacity increased, silver production would also rise to 500 tonnes a year, boosting its top line. The total investment required for this is estimated at around Rs 3,600 crore, which would be financed through internal accruals.

RISK:

The company bears less business and operational risk owing to the low-cost production, negligible debt and higher liquid investment and cash/bank balance. However, any drastic fall in zinc prices below $750 would significantly affect the company’s operating performance.

VALUATION:

HZL has huge liquid investments in debt funds, at around Rs 6,700 crore and cash/bank balance of around Rs 1,360 crore. The discounted cash flow from operations for the next four years and the sum-of-parts from investment and cash and bank balances yield a value of around Rs 14,000 crore, very close to current market capitalisation. We have taken into account of lower zinc prices and new capacities from mid-2010 while arriving at the future cash flows. However, we have not included the terminal cash flow, which would definitely add much more to it. Even in 2002-03 when the zinc prices were at the lowest level, the stock was trading at around 6-7 times of price-earning multiple compared to current P/E of 4. We believe the stock has good upside potential and investors with 2-3 years of horizon are advised to add it to their portfolio.

Stock views on Bharati Shipyard, Nitin Fire Protection, GAIL India

BNP Paribas on GAIL INDIA

BNP Paribas has initiated coverage on GAIL India with a ‘reduce’ rating, as it expects gas transmission prices to fall thereby affecting the company’s core business segments. “We initiate research coverage on GAIL India with reduce rating to factor in a steep decline in profitability of GAIL’s petrochemicals, LPG and liquid hydrocarbons (LPG/LHC) segments in the wake of a cyclical downturn,” says a brokerage report. These business segments together accounted for 51.8% of GAIL’s FY08 EBITDA, adds the report. BNP Paribas expects EBITDA of petrochemicals and LPG/LHC segments to decline by 50.5% and 10.7%, respectively, in FY08-10. The bearish outlook is also based on the fact that the Petroleum and Natural Gas Regulatory Board (PNGRB) has proposed to use the depreciated asset value of GAIL’s existing pipelines to determine tariffs. Gas transmission tariffs will likely fall on new regulation, notes the report. The brokerage also feels that RIL’s ongoing legal dispute over the supply and pricing of gas could delay the onset of gas supplies beyond its estimate of April 2009.


Karvy Stock Broking on NITIN FIRE PROTECTION

Karvy Stock Broking has maintained a ‘buy’ rating on Nitin Fire Protection even while lowering the target price by 33.60% to Rs 239. “We are downgrading our earnings estimates by 4% and 11.5% for FY09 and FY10, respectively. We expect the company’s fire protection safety and security business to be impacted on account of slowdown in the construction sector and corporate capex plans,” says a report. The brokerage has also lowered its revenue estimates from the company’s high pressure cylinder business on account of lowerthan-expected capacity utilisation at the Vizag plant. “We are reducing our sales estimates for the cylinder business by 8.1% and 15% to Rs 1,508 million and Rs 2,036 million for FY09E and FY10E, respectively,” says the report. On consolidated basis, Karvy has lowered its sales estimates by 5.5% for FY09E and 12.6% for FY10E.


Prabhudas Lilladher on BHARATI SHIPYARD

Prabhudas Lilladher has retained a ‘buy’ rating on Bharati Shipyard after the company’s wholly-owned subsidiaries lent Rs 2-2.5 billion to Great Offshore’s promoters against a pledge of 14% equity. According to the brokerage, although there would not be any P/L implication on the company, as the interest rate on the loaned amount is at commercial terms, Bharati Shipyard “would have to leverage further in order to fund its capex”.

Ahluwalia Contracts

Ahluwalia Contracts is changing its order mix to buck the slowdown and continue the growth story in the long run

One year Beta 0.68
Institutional Holding 7.67%
Dividend Yield 2.1%
Current P/E 3.79
Current Mcap Rs 221.24 cr

FINDING A company that has a good track record, strong balance sheet and positive cash flows is the key to success in long term investing. It works across sectors. One such company in the construction sector is Ahluwalia Contracts. Though it is primarily dependent on the real estate sector, it has a strong order book and the mix is expected to change for the better. While, the company’s CAGR in sales stood at 31%, both operating profit and net profit posted a rise of 40% between the fiscal 2000 and 2008. Also, the firm has generated positive cash flows from operations in eight out of the past 10 fiscals. Its debt to equity ratio was less than one for the past few years. The company is expected to continue with its growth story, albeit at a slower pace in the future. Ahluwalia Contracts is a cash contractor and also caters to industries such as healthcare , hotels, educational institutions, etc. It produces ready mix concrete (RMC) on a small scale. The company caters to a wide range of players from government organisations to private sector developers.

GROWTH PROSPECTS:

Ahluwalia Contracts is going to reap the benefit of positive macro-economic and demographic factors in the long term. The company’s order book of Rs 4,150 crore as of December 2008 stands comfortable at 3.85 times trailing its four quarter sales ending September 2008. It has bid for projects worth Rs 1,200 crore including L1 stage orders of Rs 200 crore whereas its strike rate is 20-25%. The company is planning to include more of government contracts, which now include 20% of the total order book, and work for projects such as multi-level car parking, bus/railway terminal, airport,etc. This will enable it to diversify its client base and cut the risk of default.

CONCERNS:

Real estate and IT oriented projects, which form more than 70% of the company’s order book, are going through tough times and it is expected to continue for some more time. The company has experienced some strain in its receivables owing to the downturn in the real estate space. Its average debtor days have gone up from 45-60 days four-five months back to 60-90 days, now. Also, payments are delayed or overdue for 50-55% of the projects. If the situation persists for a longer period, it will impact the liquidity position and cash flows of the company. The company’s average cost of debt at 12% is quite high. Though general interest rate scenario shows a downward bias, it will take some time for benefits to trickle down to users of debt.

FINANCIALS:

In the first half of the current fiscal, net sales rose 55% to Rs 555.7 crore, while operating profit grew 45% to Rs 64.3 crore on sharp rise in raw material and employee costs. Net profit growth was slower at 32.5% due to higher fixed costs at 79.5%. We expect the firm’s growth to slowdown to sub-30% in FY09 and FY10. Margin, particularly net margin, is expected to come under pressure in FY09 owing to higher interest costs. We expect a 190 basis point hit on the net margin from 5.9% in FY08. However, we expect things to slightly improve especially on the margin front in FY10 on lower input prices and interest costs.Thus 25 basis point improvement in both operating profit and net profit margin is expected.

VALUATION:

The stock trades at 3.8 times its trailing four quarter (TTM) earnings ending September 2008. This is on the lower side of 2.83-57.12 times price to TTM earnings multiple band since its listing in February 22, 2007. The stock looks cheap given the visibility in the business.

Stock Views on GAIL, HDFC, Ananth Raj Industries

HSBC GLOBAL RESEARCH on ANANT RAJ INDUSTRIES

HSBC Global Research initiates an ‘underweight’ rating on Anant Raj Industries (ARIL) with a target price of Rs 50, which is at a 50% discount to ’09E NAV of Rs 100. ARILs owns residential land parcels in upmarket locations in Delhi, and has four hotel properties near Delhi airport. Its land bank of 61 million square feet has been aggregated at a cheap value of Rs 200 per share. Execution has faltered, despite a healthy balance sheet. With consistent capital raising, ARIL has maintained a healthy balance sheet with marginal debt and has a net cash position of Rs 500 crore. Also, 90% of its land is paid for, so the carrying cost of land on its balance sheet is not a cause for concern. Despite these factors, its execution track record does not inspire confidence. There have been delays on its major projects, and only two projects have been delivered in the past 24 months. ARIL faces the daunting task of increasing the pace of execution in the wake of strong cash availability. However, with the demand outlook getting bleaker, HSBC expects there to be limited room for ARIL to accelerate its project development.


GOLDMAN SACHS on HDFC

GOLDMAN Sachs reiterates ‘buy’ rating on HDFC, but it has cut the 12-month target price to Rs 1,890 from Rs 2,070. Investors have expressed concerns about HDFC’s ability to meet growth expectations due to two reasons: 1) Lending spreads can be narrowed by higher borrowing costs due to tighter credit conditions and HDFC’s reliance on wholesale funding; and 2) Non-performing assets on HDFC’s exposure to property developers can rise due to a marked downturn in the property market. However, Goldman Sachs feels HDFC has sufficient financing flexibility, including the ability to raise deposits and fund growth if conditions warrant. HDFC’s investment appeal rests on three factors: 1) Demonstrated resilience in its earnings through market cycles; 2) The long-term potential for growth in an underpenetrated market, and the strong and long-term sustainable return metrics that HDFC currently enjoys; and 3) A well-capitalised balance sheet that should enable fund growth through internal accruals without requiring additional equity capital over the next 3-5 years. Goldman Sachs values the core mortgage business using the mid-point of Camelot-derived P/BV and its ex-growth value. HDFC currently trades at or below historical P/BV and P/E multiples, making the valuation appear attractive.


BNP PARIBAS on GAIL

BNP Paribas initiates research coverage on Gail, India’s largest gas transmission utility, with a ‘reduce’ rating and a target price of Rs 176 per share. The low estimates factor in a steep decline in profitability of Gail’s petrochemicals, LPG and liquid hydrocarbons segments in the wake of a cyclical downturn. These business segments together accounted for 51.8% of Gail’s FY08 EBITDA. Gas transmission tariffs are likely to fall on new regulation. The Petroleum and Natural Gas Regulatory Board (PNGRB) proposes to use the depreciated asset value of Gail’s existing pipelines to determine tariffs. Starting FY10, BNP Paribas will model tariffs of Gail’s existing pipelines as per PNGRB’s proposals. BNP Paribas uses a sum-of-the-parts approach to arrive at target price of Rs 176 per share. It values the petrochemicals and LPG/LHC business segments at 10-year trough EV/EBITDA multiple of 2.6x, Gail’s unlisted investments at book value, and its investments in listed securities at 30% discount to current market prices.

Stock views on NTPC, Aban Offshore, Everest Kanto Cylinder,

CITIGROUP on EVEREST KANTO CYLINDER

EVEREST Kanto Cylinder (EKC) is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. Citigroup believes EKC is uniquely positioned to capture the significant growth potential in India for high-pressure gas cylinders, driven largely by increasing CNG penetration, both in India and abroad. While the CNG segment in India is still at a relatively nascent stage, cost economics, improving refuelling infrastructure, visibility of gas supplies and clarity on regulations should accelerate the trajectory for city gas distribution and consequently, CNG penetration, thereby boosting demand for CNG cylinders. The 12-month target price for EKC of Rs 280, based on 15x September ’09E consolidated earnings — which includes contribution from India, Dubai, US-based CP Industries and the China plant — is in line with the fair value multiple range for its manufacturing/engineering peers in India. Citigroup prefers comparing EKC with capital goods companies that manufacture industrial goods and have a similar growth profile.


EDELWEISS on ABAN OFFSHORE

EDELWEISS initiates coverage on Aban Offshore with a ‘reduce’ recommendation. Day rates for Aban Offshore’s rigs that are on short-term contracts are likely to ease, in line with Edelweiss’ lacklustre jack-up industry outlook. Jack-up day rates are expected to ease 18-19% year-on-year (y-oy) in both CY09E and CY10E and test industry return on average capital employed (RoACE) of 8%. This is based on expectations of a lower jack-up demand (down 14.5% and 5.3% y-o-y in CY09E and CY10E, respectively) and a significant supply coming on stream in CY08-10E. Weak demand is likely due to low commodity prices, revision/deferment of small company and exploratory spend, and weak global outlook. Lacklustre industry outlook, a weak rupee (impacting debt) and short-term contracts/uncontracted Singapore assets are expected to be an overhang on the stock. This renders low fair value of Rs 685. Global drillers’ comparative multiples like EV/EBITDA (at 3.2x two-year forward), price/earnings (at 3.4x two-year forward), and price/book value (at 0.7x two-year forward) have shrunk on the back of low crude prices and economic weakness.


JP MORGAN on NTPC

JP MORGAN upgrades its rating on NTPC to ‘overweight’. The key risks to the target price of Rs 185 include major execution delays and a shortage of coal. NTPC’s size, strong balance sheet and assured-return structure put it in a strong position to achieve its growth plans. JP Morgan advises investors to use share price corrections due to hiccups in execution, if any, to buy the stock, as near-term delays do not affect its valuation much. Apart from execution, customers’ ability to absorb the rise in tariffs and the impact of coal shortages on incentives are the key concerns. With coal prices declining, the cost of debt is the main inflationary factor — power tariff can rise 6-7% per annum if interest costs rise by 500 bps. Access to KG Basin gas is an important potential catalyst to improve gas stations’ PLF and incentives. NTPC is trading at 15.6x FY10 P/E, 2.2x FY10 P/BV and is close to the March ’10 target price of Rs 185. This includes Rs 11/share value for NTPC’s 2 billion tonnes mineable coal reserves. Any positive news flow when coal production commences can improve this valuation. A replacement value-based approach for current capacities suggests a fair value of Rs 140, indicating the market is paying a reasonable premium for 2x capacities in the pipeline.

Stock views on Britannia, Piramal Healthcare, Gwalior Chemicals,

ICICI SECURITIES on EDUCOMP


ICICI SECURITIES has recommended a buy rating on Educomp, citing the increasing education spend by the government. “In the current economic slowdown, we believe that education spend will be the least affected given the increasing importance to education by the government and the private sector. Education spend is the last item to be cut by private households in the current slowdown as it forms a mere 7-8% of the total consumption expenditure,” the brokerage said in a not to its clients. “US-based education companies have considerably outperformed the domestic education-focussed companies in the past one year. We expect the valuation-gap to narrow down and expect Indian education companies to catch up soon,” it added.


ANTIQUE STOCKBROKING on BRITANNIA INDS

ANTIQUE STOCK BROKING has rated Britannia a buy, citing improvement in sales, profits and operating profit margins over the next couple of years. “In view of the expected outperformance of the biscuit industry in a scenario of slowdown and given the company’s consistent value-market share over the last two years, we believe that the stock would trade at a one-year forward PE (price to earnings) of 14x (times),” the brokerage said in its report. The broking firm is of the view that going ahead, Britannia’s sales would be driven by Good Day, which has been growing at 25-30% in the premium category and Tiger brand, which has been growing at 18-20% in the value for money category.


KOTAK SECURITIES on PIRAMAL HEALTHCARE

KOTAK SECURITIES’ private client research has maintained an accumulate rating on Piramal Healthcare, post the acquisition of Minrad International. “We view the acquisition as strategically fit with the PHL’s anaesthetics business model and is reasonably valued at price to sales (2008) of 1.5x,” the brokerage said in a report. After the acquisition, PHL will have products portfolio with all five known inhalation anaesthetics gases, which will help address all global markets along with manufacturing foot print across the US and India. PHL management expects acquisition to be earning accretive (additional EPS Re1/share in FY10) with the revenue of $65 million from Minrad in FY10E.


LKP SHARES on GWALIOR CHEMICAL

LKP SHARES has downgraded Gwalior Chemical Industries to sell from neutral, citing weak profit outlook. “We believe that although the topline growth could be achieved, as it has already done ~60% of estimated sales till Q2FY09, bottom line would falter owing to unstable demand and the losses on account of diminution in raw material values,” the brokerage said in a report.