Stock views on Maruti, Marico, Cadila Healthcare, Essar Oil, Infosys, IVRCL

IVRCL INFRASTRUCTURE

RESEARCH: MACQUARIE
RATING: OUTPERFORM
CMP: RS 365

IVRCL is one of the top picks of Macquarie in the construction space. In addition to the Sion-Panvel Highway project, IVR Prime is the lowest bidder for two new road projects—one at the Indore-Gujarat border and between Salem-Coimbatore. These two road projects would entail a cost of Rs 1,200 crore each. Of the current portfolio of road projects, the Kumarapalayam-Chengapalli toll road has already been commissioned. Another two—Salem to Kumarapalayam and Jalandhar to Amritsar—are expected to be commissioned by end of December '09. Out of these projects, IVR Prime would be required to put in equity for three new projects to the tune of Rs 1,170 crore. As per the restructuring strategy, IVRCL would receive the construction contract for these projects which would add almost 16% to its current Rs 15,000 crore order book. Moreover, the company is confident of achieving its guidance of around 30% topline growth and margin expansion of 100-150 bps. IVRCL is trading at 12.2x FY11E earnings adjusted for subsidiary valuations. The increased focus on the core EPC (Engineering, Procurement and Construction) business result in a robust 35% adjusted earnings CAGR over FY09-11E.

INFOSYS

RESEARCH: DEUTSCHE BANK
RATING: OVERWEIGHT
CMP: RS 2455

Infosys will continue to be the sector leader on both margins and earnings growth. The company's three-pronged strategy is to:

1) invest in newer geographies and services;

2) adequately de-risk the business model by broad-basing geographical and service line revenues; and

3) increase focus on 'non-linear' initiatives.

The company is proactively investing in new initiatives, but it will not compromise its positioning of 'profitable growth'. Deutsche Bank believes investments in new solutions, IP-based platforms and transformation services to drive almost 2/3rds of revenues over the long term. Also, these services are to be increasingly non-linear and as such should drive margins further. With a greater emphasis on laterals, especially as client engagement partners, and increase in the span of control at each hierarchy, the company is laying the building blocks for growth from new services. The price target is based on 22x PE FY11E, which is fair given a FY10-12E earnings CAGR of 24%.

ESSAR OIL

RESEARCH: JP MORGAN
RATING: NEUTAL
CMP: RS 140

Essar Oil is emerging as an integrated player across the energy chain with value-creation options in refining and upstream. While the competitive position in refining could be advantageous in the current environment, further value-unlocking through low-cost refinery expansion and the development of Ratna fields are likely to be contingent on funding and government approvals. ESOIL is upgrading its 10.5-mmtpa refinery to 16 mmtpa, adding significant secondary processing capacities. The expansion would give ESOIL significant advantages in:

(1) complexity-allowing ESOIL to process a tougher crude diet (API 24.8), enabling better gross refining margins (GRMs); and

(2) competitive cost structure-an operating expenditure of about $2/bbl versus $4-5/bbl for western peers.

By H1CY10 ESOIL will begin to monetise its CBM asset at Raniganj-this will deliver significant revenue and value to ESOIL. The price target of Rs 160 is based on 7x EV/EBTIDA for the 16-mmtpa refinery, net present value for Raniganj, and the value of tax incentives. JP Morgan assumes option values for refinery expansion (50% value accretion) and Ratna field (50%).

CADILA HEALTHCARE

RESEARCH: CLSA
RATING: BUY
CMP: RS 651

CLSA initiates coverage on Cadila Healthcare, one of the largest companies in domestic formulations with an expanding presence across international markets. While CLSA expects its domestic segment to grow steadily, exports of formulations will develop at an exponential pace on the back of aggressive filings across geographies and strong ramp-up in its joint venture with Hospira. CLSA expects net profit to enjoy a 29.4% CAGR over FY09-12 with potential for upgrades. CLSA expects a 28% CAGR in export revenue over FY09-12, led by continued growth momentum in formulations on the back of aggressive filings in key geographies such as the US, Latin America and other emerging markets. The company has delivered a steady RoE of more than 25% over the past three years. It has been utilising free cash generated to acquire small entities to enter specific geographies. With a 29.4% net profit CAGR over the next three years and further potential for upgrades, CLSA finds Cadila attractive and initiates coverage with a `Buy' recommendation and Rs 785 target price.

MARICO

RESEARCH: MOTILAL OSWAL
RATING: BUY
CMP: RS 104

Marico leads in the Rs 1,500-crore branded pure coconut oil market with a share of 55%. Marico's flagship brand, Parachute, holds 48% market share and Nihar and Oil Of Malabar account for 7%. Other prominent players in the category include Shalimar (~8%) and Dabur (5%). Regional brands like Panchratna and Kera account for the rest of the market. Motilal Oswal estimates that branded pure coconut oil accounts for 32% of Marico's sales but contributes more than 50% of its profits. Growth of the branded coconut oil market is expected to accelerate (12-14%) led by category expansion and upgrades from loose oil (40% of the category). Price-led competition among national brands has been minimal after the exit of HUL in FY06 (Marico acquired Nihar). Regional players' prices are at an 8-10% discount to Marico's. Its focus has been to expand the category size of coconut oil rather than to aggressively capture market share as its share is 7x more than its nearest rival. Motilal estimates PAT CAGR of 21% over FY10-12. The stock trades at 22.9x FY11E EPS of Rs 4.7 and 18.7x FY12E EPS of Rs 5.7.

MARUTI SUZUKI

RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: RS 1587

Over the near term, Morgan Stanley views the Volkswagen (VW)- Suzuki deal as having a neutral impact on Maruti (MSIL) as the company is running at full capacity and is at par with local peers on technology. Further, as per the company, both MSIL and VW will maintain their separate brands and dealerships in India, thus not changing anything for MSIL. Over the longer term, as MSIL's capacity comes up, the partnership may give MSIL access to the EU and the US small car markets via Volkswagen's network. According to the announcement, Volkswagen will purchase 19.9% of Suzuki's shares for $2.5 bn and in turn, Suzuki intends to invest up to one-half of the amount received from Volkswagen in shares of Volkswagen. The companies will form a longterm strategic partnership and while VW will benefit from Suzuki's small car technology and strong presence in emerging markets (India), Suzuki will benefit from the middle to large car technology of VW and VW's strong presence in Europe and the US. The product profile currently is complimentary, but when VW launches the hatchback Polo, it will start competing with the Maruti Swift range.