Stock views on KEC International, Thermax, Info Edge, IVRCL Infrastructure, DLF

HSBC on KEC International

HSBC maintains its `underweight’ rating on KEC International with a target price of Rs 130. The company has reported sales growth of 25% y-o-y to Rs 870 crore in the quarter. EBITDA margin was lower by 625 bps at 8.2% due to forex losses of Rs 16.6 crore and high raw material cost. The company also reported 67% y-o-y increase in interest cost due to debt raised for capex and working capital. Due to working capital and capex requirements, KEC has increased debt to Rs 900 crore while depreciation is lower because part of its assets have been transferred to the books of developers and new assets will be capitalised in FY10E. The stock is trading at FY10E PE multiple of 4.4x and PB of 1x. This compares with peer Jyoti Structures trading at 4.1x/1x and Kalpataru Power trading at 3.8x/0.7x. KEC has higher gearing and lower return ratios, which makes it more expensive than peers. The target price of Rs 130 is the mid-point of a PE fair value of Rs 125 and a PB fair value of Rs 135.


Citigroup on Thermax


Thermax’s revenues declined by 6% y-o-y, led by a decline of 9% y-o-y in the energy segment. Environment segment grew by 14% y-o-y. Margins (adjusted for forex loss) have improved by 137 bps, driven by cost-cutting initiatives. Order book of Rs 4,100 crore is up 40% y-o-y; however, the pace of order book growth has moderated. Management suggested there is “substantial resistance” from clients to finalise orders, especially large-size projects. Some clients have cancelled/slowed execution. According to Thermax, cement and metals sectors’ capex is expected to slow down while the power sector will continue to invest, albeit at a lower level than before. But there are some positives -
1) While risks to order inflows remain, increased power sector exposure should help provide some support to growth.
2) Management has been ahead of the curve and seems geared to handle the downturn; ~293 bps margin improvement for 9MFY09 is commendable, especially since it was against the backdrop of rising input costs and no pass through clauses.
3) The company has no debt and one of the highest RoEs in the sector. Citigroup cuts the target price to Rs 211 from Rs 480 based on 8x FY10E (15x Dec09E earlier). Historically, Thermax has traded on par with BHEL, but in the recent past, has been trading at a widening discount.


CLSA on Info Edge

Revenue growth in Info Edge’s flagship recruitment solutions is down to 1.5% y-o-y from 30%+ at the start of the year as the slump in hiring across all industries has taken its toll. With the customary March quarter budget flush unlikely to happen this year, March 2009 outlook for Naukri looks even weaker. Meanwhile, Info Edge’s realty business continues to face headwinds from the slowing real estate market. A course correction in the matrimony space with establishment of brick and mortar Jeevansathi centres is still in the investment phase and any positive surprises on this front are unlikely in the near term. With over Rs 330 crore of cash and continued leadership of Naukri, Info Edge remains better positioned compared to competitors in a difficult environment. With the slowdown becoming homogeneous, online traffic from recruiters has gone down significantly and recruitment solutions grew only 1.5% y-o-y in the December 2008 quarter. Info Edge’s leadership position in the online recruitment segment and Rs 330 crore of cash pile should help it encounter the economic downturn better than competitors. Also, new initiatives in education and professional networking have long-term potential. However, Info Edge’s valuations (21.5x March 2009) cannot be defended with a 2.3% FY09-11CL EPS CAGR. With visibility for even March 2009 severely constrained, risk to FY10 earnings is high.


Maquarie on IVRCL Infrastructure

IVRCL reported a 22% topline growth but decline in PAT in 3Q09 results. Company reported 22% revenue growth thus translating into strong 39% y-o-y growth for 9MFY09. However, margins came in significantly lower by 230 points in the quarter and have now declined by 100 bps y-o-y in 9MFY09 driven by a higher mix of lower margin projects. PAT declined significantly by 27% y-o-y in the quarter driven partly by margins and partly by very high interest costs of Rs 41.9 crore versus Rs 17.7 crore last year. For 9MFY09, PAT growth has come in at 7% versus our expectations of 4% growth for full year. Interest expense grew to Rs 41.9 crore in the quarter, highest ever for IVRCL, given that debt levels have increased to Rs 1500 crore, resulting in net debt/equity ratio of around 0.8x, which is on the higher side. IVRCL has an order book of Rs1,4300 crore at the end of 3Q09 which provides strong revenue visibility of 3-4 years, highest in the mid-cap construction space. The company has received robust order inflows of Rs 6600 crore in 9MFY09 (+100% y-o-y). Maquarie estimates are at the lowend of the management’s guidance with a 35% topline growth in FY09 and a lower net income growth of 4% due to interest cost pressures.


Morgan Stanley on DLF


Morgan Stanley maintains `underweight’ rating on DLF in view of an extremely weak physical property market, modest stock of on-going projects and, now, prospects of slow improvement in balance sheet (in view of the sharp fall in internal accruals). DLF’s construction starts across biz verticals in F9M09 total upto just 5-6 msf, which is a leading indicator of poor earnings trajectory ahead. Management believes that the current business environment is fluid and uncertain, and therefore, it targets to conserve capital and customize products to suit ongoing economic slowdown. Near term mid-income housing and scale up in rentals will be the areas of focus, whereas, luxury housing and commercial complexes will be slowed. To weather the current credit squeeze, DLF targets to change the maturity profile of its debt portfolio to long term by mid-2009, such that there will be no re-payment obligation for 24-36 months. Out of Rs14800 crore debt, Rs 9000 crore is already long term, with commitments for another Rs 3000 crore.. DLF will restrict its sales to DAL to 12 msf (million square feet), of which 9.5 msf will be completed shortly. It targets to raise roughly $450 million PE capital to part fund the pending receivable (Rs 5400 crore). Valuations don’t appear inexpensive at roughly 1.1x F09 P/B with increasingly slower pace of value unlocking in the land bank. Stock is at a 40% discount to the F09NAV