Stock Views on BAJAJ FINANCE, KIRLOSKAR OIL ENGINE, ABB

CITIGROUP on ABB

Citigroup maintains `Sell' rating on ABB with a target price of 517. CY10 PAT at 632 million was down 82% Y-o-Y on account of:

(1) lower price realisation,

(2) relatively lesser revenues, and

(3) continued costs on exit from rural electrification.

 

At 1,390 crore due to cancellation of certain orders, backlog at the end of CY10 at 8,440 crore is flat Y-o-Y. If we average the numbers over the last four years ABB would have delivered PAT margins of 5.8% and not the high about 8% of CY07/ CY08. If that were the case, would ABB have traded at high P/E multiples of 35-45x historically, which is what investors extrapolate for ABB into the future? Delays in ordering of both state and central utilities have led to the Korean and Chinese suppliers once again starting to quote very aggressive prices for transformers in H2CY10. This has created strong price pressure in the last few quarters, with the price correction yet to be seen.

 

The target price is cut to 517 to factor in:

(1) 22-29% EPS cut over CY11E-12E and

(2) increase in the target P/E multiple to 25x (24x earlier),

(3) roll forward of the target P/E multiple to June 12E.

CREDIT SUISSE on KIRLOSKAR OIL ENGINE


The management highlighted that demand outlook was not strong given weak ordering from the telecom segment, disruptive competition from the Chinese in low KVA engines and likely switch of one off-highway customer (JCB) to own engines (7-8% of sales). The agri pumps business is also getting impacted by competition from unbranded players (Chinese). KOEL currently operates at 65-70% utilisation and plans 100-crore capex in FY11 and 120 crore in FY12. Sales tax reimbursed is being routed through balance sheet ( 1 billion on accruals). KOEL has 200 crore of cash. Margins have been under pressure due to raw materials price impact, impact of competition and inventory clearance. Despite the cautious view, the management hopes to achieve 10-15% sales growth in FY12 and expand margins. KOEL's exposure to low KVA segment could be the key reason for a relatively cautious outlook.

JM FINANCIAL on BAJAJ FINANCE

Post-induction of the new management team led by Mr. Rajeev Jain, Bajaj Finance (BAF) underwent significant restructuring during FY08-10 which included: a) shift in focus towards the affluent and HNI segment in the consumer business, b) transformation from primarily being a captive business model focussed on 2-wheelers and consumer durables business to a diversified NBFC with full suite of lending products, c) significant improvement in origination and underwriting processes by investing in technology, using information from CIBIL (Credit Information Bureau (India) Ltd.) and creating a risk analytics unit which has enhanced its risk management capabilities. Going ahead, BAF is well-positioned to deliver sustainable and profitable growth which is scalable with lower risk, as it intends to focus on secured business lines. JM Financial expects BAF to report healthy ratios with RoA of 3.1% and RoE of 22% by FY13. BAF is currently trading at a compelling valuation of 5.7x/1.2x based on FY13E earnings and book value respectively.