Srock views on MTNL, Titan Industries, SIEMENS, Yes Bank, Colgate Palmolive, GREAT Offshore

HSBC on COLGATE PALMOLIVE

HSBC has initiated an ‘overweight’ rating on Colgate-Palmolive with a potential return of 25.8%. The oral care category in India has a penetration rate of 78% and a per-capita usage of toothpaste, which is half that of China. Increased usage and penetration, along with a shift from toothpowder to toothpaste, are likely to drive volume growth of 8-9% for the next several years. Colgate is the undisputed market leader in all the sub-categories of oral care and has a diversified product portfolio covering all price points and an excellent distribution network. Colgate is poised for steady growth. It has increased gross margins by changing its raw material mix, reducing complexity, and increasing in-sourcing with minimal price increases, protecting volume growth. HSBC values Colgate on a price-earnings (P/E) and a direct cash flow (DCF) basis. The P/E valuation, at 18x FY10E earnings per share (EPS), comes to Rs 424. The target price of Rs 470 is an average of the two. Colgate is currently trading at a 12-month forward P/E of 17.1x, the lowest forward P/E in three-and-a-half years.


DEUTSCHE BANK on YES BANK

DEUTSCHE Bank believes that Yes Bank’s recent severe underperformance relative to the market and the banking index has factored in most of the concerns about its asset quality, margins and fee income growth and has upgraded the stock to ‘hold’. However, it has reduced the target price to Rs 55 and cut earnings by 11-17% for FY09-11. The major concerns are: asset quality due to large exposure to mid-corporate group and commercial real estate; margins due to weak funding franchise; and a sharp slowdown in non-interest income growth due to relatively high dependence on capital market-linked activities. The target price of Rs 55 is based on a single-stage Gordon growth model with a price-to-book value (P/BV) of 1.0x, arrived by using a blended return on equity (RoE) of 15.5%. The key upside risk to Deutsche Bank’s hypothesis is a sharp recovery in loan growth accompanied by a rise in margins. The key downside risks are higher-than-expected deterioration in asset quality and stagnation of branch network due to unavailability of branch licenses, which can pose a challenge for Yes Bank.


JP MORGAN on SIEMENS

SIEMENS reported a standalone net profit of Rs 225 crore in Q4, substantially below the estimate of Rs 360 crore. Operating profit margin was down 300 basis points (bps) year-on-year (y-o-y) to 12.5%. Markto-market (MTM) losses on short positions in foreign exchange (forex) derivatives contracts, in a quarter where the rupee depreciated 10% visà-vis the dollar, can be responsible for a large part of the margin decline. With the underlying hedged being of longer maturity, JP Morgan can expect gains on the underlying in coming quarters. The performance of the company’s subsidiaries is a drag on results: Siemens’ FY08 consolidated revenue of Rs 9,680 crore was in line with estimates, while its profit after tax (PAT) of Rs 470 crore was 30% below full-year estimates. The company’s 100%-owned principal subsidiary, SISL, performed poorly in FY08. Siemens’ standalone revenue growth from continuing operations is higher at 15%, but power (which contributes 49% to the topline), posted a growth of 3.2% y-o-y. There has been little incremental visibility in the power segment, as the Qatar order has neared completion. All other segments have shown strong revenue growth.

JM FINANCIAL on TITAN INDUSTRIES


TITAN benefits from the presence of extremely strong brands in largely unorganised segments. The domestic jewellery market is pegged at Rs 75,000 crore, less than 5% of which is ‘branded’ and Titan controls 65% thereof. With extremely low penetration level, there is huge scope for the ‘democratisation of luxury’ in India. With Titan now partially linking jewellery-making charges to gold value, profitability may not be so susceptible to the movement in gold prices, going forward. In the watches segment, JM has projected a compounded annual growth rate (CAGR) of 13% in sales between FY08 and FY11E. Viewed in the context of India being an attractive retail market (more so in the luxury segment, in which India is still at the nascent stage), Titan emerges superior among retail players in terms of profitability, as well as return on capital employed (30%-plus). Also, y-o-y generation of free cash flow is a source of distinct advantage for Titan. In light of a slowing economy where future growth potential is a key concern, the P/E to growth (PEG) method of valuation appropriately recognises future growth rate and adjusts the P/E multiple accordingly.


CITIGROUP on GREAT OFFSHORE

GREAT Offshore has announced a combined contract for two of its assets — Malaviya Thirty Three (a heavy lift vessel) and Gal Ross Sea (an anchor handling tug) — for a total of $22 million for one year in the Khafji oilfields of Saudi Aramco. The assets have been contracted out at a combined day rate of $63,000. Although the exact day-rate split between the two assets is not known, they estimate the heavy lift vessel to fetch ~ $55,000. This contract is a key positive, indicating strength in the offshore services segment, as opposed to the downtrend witnessed in segments such as dry bulk. Citigroup retains a ‘buy’ rating on the stock, given a relatively stable business profile (75% of revenues from ONGC) and good earnings visibility (average contract durations ~2-2.5 years), making it less exposed to a cyclical downturn in the offshore cycle. Though spot rates have declined 10- 15%, the company has only five of its 41 vessels operating on spot. Q3 should see sequential growth in revenues and profits on account of commencement of new contracts, as well as higher dry-docking expenses in Q2.


BNP PARIBAS on MTNL

BNP Paribas initiates coverage on Mahanagar Telephone Nigam (MTNL) with a ‘reduce’ rating and target price of Rs 55, based on cash per share of Rs 39 and a core business valuation of Rs 16 at 2.5x FY09 EBITDA. Historically, MTNL traded close to its book value, but the valuation is now converging towards its cash per share as its return on equity (RoE) has declined to 3.3%, well below its cost of capital. Moreover, one-fourth of its book value is amount recoverable from the Department of Telecom (DoT), which is unconfirmed and outstanding for several years. Cash per share will dip to Rs 39 from Rs 61. BNP believes MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs. MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators, which are reducing tariffs, leveraging scale economies, coupled with superior customer service.