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.