Stock views on HDIL, LIC HOUSING FINANCE, LARSEN & TOUBRO, RELIANCE INDUSTRIES

CITIGROUP on RELIANCE INDUSTRIES

Citigroup maintain Buy rating on Reliance Industries. RIL has signed agreements for sale of ~60 mmscmd of D6 gas for 5 yrs. In addition, the current EGoM-approved gas pricing formula is valid for D6 vols up to 80 mmscmd. Hence, it is likely that a higher gas price would be valid only for incremental D6 production beyond 60/80 mmscmd, limiting near-term (FY12/13E) EPS impact to 3-5%. However, more importantly, E&P value could see higher upside driven by: (1) increase in D6 NAV and (2) higher premium to NAV as all gas produced from other blocks could be priced higher. In a scenario where RIL gets US$5.2 for incremental D6 production beyond 80 mmscmd till FY14, and for entire production thereafter, E&P value could go up by ~Rs60-120/sh based on: Scenario I – E&P value of Rs522 at 9x FY12E EV/Ebitda, or Scenario II – E&P value of Rs581 at 8x FY13E EV/Ebitda discounted back. Any indications of a price increase for KG gas, which is quite possible given recent developments in the Indian gas sector, could be a positive surprise and a much-needed driver of stock performance. The gov't has recently raised gas prices for ONGC's new fields to US$4.75-5.25, leaving KG gas price of US$4.2 at the lower end of prices from various sources in India.

RELIGARE  on LARSEN & TOUBRO

L&T IDPL, L&T's 86.5% subsidiary and infrastructure arm is set to expand aggressively backed by a strong presence across all infrastructure verticals and a large portfolio of Rs 402 bn of assets. The company is foreseeing huge opportunities for private players in roads, railways and water sectors and intends to expand its project portfolio through the greenfield route. The company is also in the process of buying out minority stake holdings (~13.5%) and will plan an IPO depending on its funding requirements and growth in its project portfolio. L&T IDPL has a strong infrastructure portfolio worth Rs 402 bn. The company sees huge opportunities in road projects, railways and the water sector. Going ahead it expects an increase in the share of private sector in India's total infrastructure investments. The company also believes that the road sector would have higher proportion of EPC projects than that estimated by NHAI. For the port sector, L&T IDPL is currently focusing on the Dharma project and intends to expand its presence through the Greenfield route. The company plans to infuse Rs 10-12 bn per annum as equity in L&T IDPL for the next five years. L&T is in process of acquiring the 13.5% holding in IDPL in the next few months. There is also a likelihood of an IPO, possibly in FY12, depending on the company's funding requirements and growth in its project portfolio.

MORGAN STANLEY on LIC HOUSING FINANCE

Morgan Stanley initiates Overweight rating on LIC Housing Finance with a target price of Rs 1,500. Despite LICHF's strong run year to date, Morgan Stanley still find the stock attractive at 14x F2011e earnings and 11x F2012e, as they expect 22% average EPS growth, 26% core pre-provision growth and 23% ROE in F2011-12. Mortgage affordability in India has improved in the past three years – while income levels have gone up, home prices and mortgage penetration levels have been broadly stable through this period. Improving asset quality and operating costs have lifted ROA from 1.3% in F2005 to an estimated 1.9% in F2011. SBI and other SOE banks have been aggressive in the mortgage space in the past year, and ICICI Bank is likely to return. This should put pressure on lending yields just as LICHF's cost of funds increases amid rising short rates. Morgan Stanley look for its margins to compress from 3% in QE Jun-10 to 2.6% by QE Mar-11. The main driver of stock performance at LICHF is loan growth, which is to be robust at a 30% CAGR over the next three years. Indeed, even with this strong growth, LICHF's market share will probably increase by just 300 basis points, to 11%.

HSBC  on HDIL

HSBC reiterating Overweight rating on HDIL, and lowering 12-month target price to INR396 from INR419. Given the current backdrop of weak investor interest in public issues of real estate companies, HDIL's successful fund raising, as per media reports, of USD250m came as a surprise. HDIL management has board approval for raising a total of USD650m, of which the company raised USD250m in the current issue. However, this is despite net-debt equity of 0.47x (at end Q1 FY11). Land payments of INR4bn for incremental land for the airport project could have been managed through internal cash accruals and fresh debt accretion. Hence, the equity dilution was not necessary at the current price. HDIL's second phase of the airport project has been a slow starter due to unavailability of adequate land in the past six months. However, with the majority of the land for the second phase acquired, HDIL to use fresh funds raised to accelerate construction of rehabilitation units. HDIL is trading at a steep discount of 30% to its FY12e NAV and at a FY12e PB of 1.0x. The stock has historically traded between a 50% discount and a 10% premium to its NAV.