Stock views on GAIL, BAJAJ HINDUSTHAN, INFOSYS TECHNOLOGIES, JUBILANT ORGANOSYS, NESTLE INDIA

Ambit Capital on GAIL

Commencement of KG-D6 gas, concomitant with the Rs 30,000 crore network expansion plan encompassing the addition of 7,000 km of gas pipelines, should result in a 37 per cent CAGR volume growth for GAIL over FY09-FY12. Aided by volume expansion, EBITDA of the transmission business is likely to exhibit 20 per cent CAGR over this period. However, the 3 per cent CAGR of the petrochemical/LPG division is expected to dampen overall performance, given a weak environment.

The brokerage models a flat HVJ tariff based on the assumption of expansion-related capex of Rs 11,000 crore. The brokerage says that its earnings estimates for GAIL would decline by 4 per cent for a 10 per cent reduction in HVJ tariffs. Their subsidy model factors in two-thirds of the upstream share of auto-fuel under-recovery for 2009-10 and 2010-11, a sharing scenario which favour upstream companies.

GAIL is currently trading at 17 times one-year forward PE, almost double of its 5-year historical average. While this valuation premium factors in expectation of robust gas volume growth outlook and higher existing tariffs, earnings growth of 4 per cent CAGR over FY09-FY12 could make it difficult to sustain. The petrochemical/LHC business outlook, too, continues to be grim. The brokerage has initiated a 'Sell' rating with a target price of Rs 370.

Religare Hichens, Harrison on BAJAJ HINDUSTHAN

For year ending September 2009, Bajaj Hindusthan's sugar volumes dropped 27 per cent year-on-year to 6.7 MT, primarily due to lower cane crushing and a depleted sugar inventory. Nevertheless, a steep increase in sugar realisations aided a 1.7 per cent year-on-year growth in sugar revenues to Rs 1,870 crore for the full year.

The company crushed 5.4 MT of cane during the year, as against 10 MT last year. On account of such paucity of raw material (molasses and bagasse), both alcohol and co-gen (power) segments recorded a sharp drop in revenues and operating profits for the year.

Bajaj Hindusthan recorded an EBITDA margin of 22.5 per cent in September 2009 quarter as against 7.3 per cent in the quarter of last year. It recorded a currency swap gain of around Rs 70 crore, leading to a more than five-fold rise in its other income during the quarter. This, along with lower interest outgo, enabled the company to make a net profit of Rs 69 crore in September 2009 quarter as against a net loss of Rs 87.5 crore in year ago quarter.

Despite concerns on relatively higher cane procurement cost of around Rs 205-210 per quintal, buoyant sugar realisations of Rs 33-33.5 per kg have surprised the brokerage positively. 

Angel Broking on INFOSYS TECHNOLOGIES

New engagement models (NEM) are expected to be the key growth drivers for Infosys' overall business, going forward. Infosys currently has 84 clients in NEM model with deal size of around $165 million and is looking at NEM opportunities, which would be greater than $500 million to be executed, going forward. The companys efforts on the non-linear front are expected to contribute around 33 per cent to its overall revenues, up from the current 5 per cent. The Consulting and Package Implementation services is also expected to register robust growth, contributing around 30 per cent to the companys revenues, with the balance expected to be contributed by the core ADM services in the next five years time frame.

As per the company, interactions with its clientele indicates that IT budgets for CY10 are expected to be flat or marginally lower as there still exists some uncertainty with respect to economic revival. However, Infosys' increasing focus on non-linear initiatives along with its strategy to focus on newer geographies and services are positive. At Rs 2,545, Infosys trades at 21.7 times its estimated 2010-11 EPS, leaving room for further upside.

Edelweiss Securities JUBILANT ORGANOSYS

Healthy order book and new contracts in Jubilant Organosys' Pharma and Life Sciences Products and Services (PLSPS) business is expected to deliver 15 per cent overall revenue growth in 2009-10, after a healthy organic growth of 31 per cent in PLSPS in 2008-09. In FY10, Jubilant revised upwards its EBITDA guidance to 45 per cent year-on-year growth from 30 per cent earlier, based primarily on recent wins in the contract manufacturing operations that offer better margins. Debt repayment that includes FCCBs, amounting to Rs 1,800 crore over FY1012 is challenging. Projected cash flows are likely to cover almost 70-80 per cent of these repayments, with de-leveraging and likely asset sale of non-core assets bridging the gap. Post above repayments, Jubilant's debt-equity will reduce substantially to around 1.1 from current 2.2 levels, accordingly.

From a peak of 17-18 times one-year forward earnings in 2007, Jubilant suffered a sharp valuation de-rating in late 2008, with market concerns on the company's ability to finance its FCCBs. Current earnings trajectory, strength of PLSPS and cash flows suggest that concerns may be overplayed. The stock is currently trading at 11 times and 8 times its estimated 2010-11 and 2011-12 consensus earnings, respectively a sharp discount to its historical valuations.

India Infoline on NESTLE INDIA

With the healthy growth in the domestic business and revival in exports, expect Nestle to witness 17.7 per cent CAGR in revenues and 24.6 per cent in profit over CY09-11. Milk products and prepared dishes segments will be the key growth drivers for the company. The introduction of SKUs at low price points has helped to widen the consumer base and increase penetration of its brands. The improvement in exports from CY10 onwards is expected to fuel beverage sales that declined in the first nine months of CY09. The growth in the chocolates' segment, that reported a muted volume growth due to sharp price hikes, is also expected to be back on track during CY10.

The strong pricing power and robust brand portfolio would help Nestle maintain operating margins despite firm raw material prices. With the increasing production from the Pant Nagar plant, Nestle would be able to save heavily on excise and tax front. Given the strong growth potential in the domestic market, the brokerage has revised its earnings estimates upwards by 3 per cent for CY09 and around 4 per cent for CY10. At Rs 2,568, the stock is trading at 29.4 times its estimated CY10 EPS of Rs 88.3 and 24 times estimated CY11 EPS of Rs 107.2. Maintain buy.