Stock views on Larsen & Toubro, Ranbaxy, Allied Digital Services, Piramal Healthcare, Infosys, Mahindra & Mahindra

MOTILAL OSWAL on M&M
MOTILAL OSWAL maintains its 'Buy' rating on Mahindra & Mahindra. M&M had earlier mentioned in its post-2QFY09 results that it would be reviewing the Rs7,000-crore capex plan over FY09-12 for a possible reduction. After a review of the capex plans, management has now decided to go ahead with the original capex plan of Rs 7,000 crore without any cuts. Out of the Rs 7,000 crore over FY09-12, Rs 5,000 crore will be invested in the automotive business and Rs 2,000 crore in the non-auto business. In auto business, investment will be made in the Chakan plant (~Rs2,500 crore), product development (Rs 2,000 crore for Xylo, Scorpio's successor, light transport vehicles and lobal product) and further equity contribution in Mahindra Navistar JV (Rs 350 crore). In the non-auto business, it is investing Rs 500 crore in tractors business, Rs 700 crore in logistics business and defence business and Rs 750 crore for setting up world-class research facility at Chennai. Motilal Oswal has downgraded the consolidated earnings estimates by 11.7% for FY09 to Rs 58.7 and by 12.9% for FY10 to Rs 70.6, to factor in lower volumes and downgrade in subsidiary / associate earnings. Notwithstanding short-term challenges, valuations at 4.6x FY09E and 3.9x FY10E consolidated EPS are attractive.


CITIGROUP on INFOSYS

CITIGROUP EXPECTS Infosys' revenues at $1,167m, down ~4% qoq. This assumes marginal decline in volumes, stable pricing and ~4% impact of cross currency. EBIT margins are expected to fall ~150bps qoq. Citigroup forecast basic EPS of Rs 26.63 in line with guidance. Volumes continue to be under pressure with clients cutting back on discretionary projects and Q3 being also impacted due to "holiday project closures". Citigroup has lowered its FY10-11E estimates by ~6% on the back of lower volume/pricing assumptions and cross currency impact in Q3. While the stock price witnessed ~37% erosion in CY08, expected numbers are ~6% below consensus, and consensus is to be revised down further. This could put further pressure on the stock in the near term. The EPS numbers benefit from ~5% INR depreciation assumed in FY09 - in other words, Citigroup is modelling an EPS decline in constant currency terms. With a likely result disappointment and further EPS cuts, the stock could underperform in the near term.


MERRILL LYNCH on PIRAMAL HEALTHCARE


Merrill Lynch reiterates 'Neutral' rating on Piramal Healthcare (PHL). However it revises estimates to factor higher interest cost and lower target price to Rs 280 based on 12x FY10E EPS. PHL's proposed acquisition of Minrad comprises equity consideration (US$6mn), convertible debt redemption (US$30mn) and existing debt (~US2mn). Apart from this, PHL would infuse US$12mn in Minrad for working capital requirement. Post-completion of this acquisition (5th in 2008), PHL's D/E would be ~0.9x which is higher than the industry average. Minrad's acquisition bolsters the US$20mn inhalation anaesthetics business of PHL and broadens its portfolio from two products currently to five (halothane, isoflurane, enflurane, desflurane and sevoflurane). PHL-Minrad combine would be the 3rd largest player in US inhalation anaesthetics market addressing a US$1bn+ opportunity worldwide. Merrill Lynch is relatively conservative and expects the deal to be EPS neutral in FY10. The deal is expected to be closed by FY09-end. PHL's CMO business has mid-teens EBITDA margin which is the lowest among that of its peers.


INDIAINFOLINE on ALLIED DIGITAL SERVICES

Allied Digital Services (ADSL)'s pan-India presence, direct support model, established remote infrastructure and significant price competitiveness provide an edge against competition in the domestic IMS market. Its marquee clientele includes large customers won from leading Indian offshore vendors. The recent En Pointe Global Services LLC (EPGS) acquisition would significantly increase international IMS revenues apart from driving domestic revenues through offshoring. Further, the SOC services are expected to register exceptional growth driven by increasing compliance requirements globally. The company expects a hefty ~US$100-million revenue contribution from EPGS in FY10. ADSL's operating margin is likely to improve by 150-200bps in FY10 driven by lower solutions revenue share and improving profitability within IMS through offshore shift. IndiaInfoline expect revenues and net profit of ADSL to record a robust CAGR of 61% and 82% respectively over FY08-10E. Higher growth in earnings would be driven by OPM expansion. Given the strong fundamentals, current valuations of 4.7x FY10 P/E and 1.4x FY10 P/BV appear inexpensive.


JP MORGAN on RANBAXY LABORATORIES

GIVEN THE twin uncertainties of the continued US FDA import ban and potential currency exchange losses, JP Morgan remains 'Neutral' on Ranbaxy even though valuations remain attractive for longer-term investors. Ranbaxy, which has a 180-day exclusivity on generic Imitrex (Sumatriptan), has not yet been able to launch the drug in the US as the FDA approval has not yet come through. Sumatriptan First to File is approximately Rs 5/share of the target price. Brand sales of Imitrex were US$1.29 billion in 2007. Given that the generic filing is not from the manufacturing sites where the US FDA had issued warning letters, the launch approval from the US FDA for Sumatriptan is key to see if it is business as usual for Ranbaxy in the US beyond the products in the import ban. Given the large FTF (first to file) pipeline for Ranbaxy, any delay in approvals for Sumatriptan would be negative for the remaining FTF pipeline.


HSBC on LARSEN & TOUBRO

HSBC has downgraded the rating of Larsen & Toubro to 'Negative' over the Satyam stake purchase. HSBC believes this investment is a portfolio investment rather than a strategic one and views this as a negative for L&T. It thinks that the stake is not positive for L&T's subsidiary, L&T Infotech, given that it has a smaller operation versus Satyam's 53,000 employee base. The integration will be a significant issue given L&T Infotech's smaller size. Also, after allegations of misappropriation regarding Satyam's former chairman, integration could expose L&T to litigation. Moreover, there is a lot of uncertainty in terms of any liability for Satyam. HSBC reduces its FY10E PAT estimate by 8%, driven by a lower 4% change in sales and expects a 25.7% revenue CAGR over FY09-11E, driven by the existing order backlog and new orders from infrastructure, power and new verticals. HSBC is reducing its valuation of L&T subsidiaries to Rs 131 per share.