JP Morgan on IDFC

JP Morgan initiates coverage on IDFC with an `Overweight’ rating. JP Morgan believes that IDFC will be a strong beneficiary of India’s infrastructure boom, helped by regulatory tailwinds and strong markets. They expect the strong rerating to continue. The cliché suits IDFC well. Its strong investments in developing domain expertise in infrastructure are now expected to pay off. Not only is it the leading specialist in infrastructure financing, but its product suite is all encompassing, which gives it a competitive edge as well as strong long-term RoEs. The downgrade by CRISIL in July ‘09 was a setback, but the special status as an infrastructure lender (being contemplated by the RBI) could negate that problem. JP Morgan now factors in tier 1 CAR (capital adequacy ratio) reaching 16%. IDFC is not cheap at 2.6x P/BV (FY11E), but this still underestimates the long-term growth potential of the company. JP Morgan thinks that IDFC can grow its balance sheet at about 25% for five years or more, and that this is not fully captured in the current valuations.

ICRA

ICRA’s rich valuations don’t look expensive considering the high growth trajectory and robust fundamentals
CREDIT ratings agency ICRA has grown by leaps and bounds in the last three years. Though much smaller than the market leader, Crisil, the company is a prominent player in the rating industry. Since it is in the services industry, which does not require huge investment in fixed assets, its return on capital employed (RoCE) at 31% for FY 2009 is quite high.

BUSINESS:

Apart from credit rating, which accounts for a major part of the company’s revenues, ICRA is also into consulting and outsourcing services. There is great scope for growth in the ratings business in India for several reasons. Corporate bond market is highly underdeveloped in India. There are entry barriers in the form of brand name and expertise. And finally, there are just four big players in the industry—Crisil, ICRA, CARE and Fitch (India). The recent regulations of the Reserve Bank of India (RBI), according to which any company borrowing more than Rs 10 crore from a bank has to be rated, has given a fillip to ICRA.

Already its rating business is growing fast. ICRA’s rating revenues grew by 28% in June ’09 quarter. Indian companies require huge investments in projects and need to raise funds from various classes of investors to meet their needs. This will increase their dependence on the bond market. Through its subsidiary, ICRA Management Consulting Services (IMAcS), the company has also entered into consulting, wherein it provides services to companies in various industries such as banks, automotive, health and retail. Though last year the consulting business was affected by slowdown, it is set for a revival this year after the improvement in sentiment and increase in investments.

The company also has a presence in outsourcing services as well. In brief, the company has presence in a whole gamut of rating, consulting and BPO related businesses, which are the growth drivers of future.

FINANCIALS:

The company can grow its profits without substantial investments in fixed assets. For instance, its revenue has grown at a compounded annual growth rate (CAGR) of 40% in last three financial years. In the similar time frame the balance sheet grew at a CAGR of 25%. This is typical of companies, which are not asset heavy, wherein more returns can be earned from little investment. For this reason, RoCE has improved from 16% in FY 2006 to 31% in FY 2009. Moreover, the company has always been debt free, which results in better cash flows.

VALUATIONS:

The stock is trading at a price-to-earnings (P/E) multiple of 19.5 times.

Though, the valuations don’t look cheap, but factoring a high RoCE, it would look modest. The company is growing at a very fast rate — its profit jumped 73% in June ’09 quarter. Definitely, the valuation doesn’t look expensive in the context of growth trajectory. Historically, the stock has traded at very high valuations. For instance, in June 2007, the stock was trading at 45 P/E and then in December ’07, it was trading at a P/E of 40. This shows that the stock still has scope to catch up at current valuation.

CRISIL

Bank loan rating, customised research products and growing international advisory business has benefited Crisil. Tightening international liquidity acts as a windfall gain

CRISIL is the market leader in research, rating and advisory businesses. It has posted impressive results for 2008 (it follows Jan-Dec FY). Its performance got a fillip from the Reserve Bank of India (RBI) too, because as per one of its directive, companies borrowing more than Rs 10 crore from the banks have to be rated. Investors can consider an exposure in the stock for the long term.

BUSINESS:

Crisil’s business can be broadly divided in three segments:

• Research,
• Rating and
• Advisory.

Crisil Research provides products related to research on several industries. The last few years witnessed a large number of new entrants in different industries thus boosting the company’s research business.

It has also tapped the market of outsourced research through its subsidiary, Irevna, which provides support to financial institutions worldwide. Crisil Rating is the largest agency in its business in India. It rates a wide spectrum of organisations, like insurance companies, mutual funds, state government, urban bodies, small and medium enterprises (SME) and non banking financial companies (NBFC).

Crisil Risk and Infrastructure Solutions take care of the advisory part of the business. It acts as an advisor to various agencies on policy, infrastructure and energy. The financial institutions have realised the importance of adequate measures to ascertain and manage risk. Crisil has tried to tap this market by providing risk solutions in the form of risk management services, consulting and software products.

Crisil is the market leader in its business segments. Its market share in bank loan rating is 50%, while its share in other bonds stands at 65%-70%. Even in research space, it is the biggest player as it offers reports across wide spectrum of industries. The sector expertise and the subject knowledge help it in factoring a premium in pricing.


FINANCIALS:

For the year ending December 2008, Crisil’s total income increased 30.5%, while profit after tax grew by 68% over last year. Another interesting trend was that the manufacturing companies are again using bond ratings to raise finance through debt. This is because the liquidity in the international market has been squeezed making the route of external commercial borrowings and foreign currency convertible bond extremely tough.

Corporate India did not do all that well in 2008, however, the performance of Crisil’s research business was unfazed. This is because the company has a large base of subscription-based products. Moreover, it released timely reports on current issues like the impact of global meltdown in India. Similarly, advisory business also continued to do well. Despite rising government deficit, the company’s domestic advisory business was not affected as most of the projects are in urban areas, where the funds are committed for long term. The company has seen growing proportion of international business and projects with agencies like Asian Development Bank.

In the short run, the company is expected to face headwinds in the form of lesser outsourced business for Irevna due to global financial crisis. Moreover, the retail loan market is witnessing slowdown thereby impacting the securitisation, which in turn has affected the structured finance business. However, in the long term the outsourced research part of business is expected to do well especially after the dust settles down around the ownership of financial institutions worldwide.

VALUATION:

The stock is trading at a price to earning multiple of 12.1 times. The earning growth has been much higher than the valuation. This shows that the stock is available at attractive valuations. Moreover, its nearest competitor ICRA is trading at a P/E of 13.1 times. Crisil’s stock is available at lower valuation despite of being the market leader in the industry, which further shows that the market is not factoring the fundamentals entirely into the price.

Emkay Global views on Lupin, CRISIL, Sintex Industries

Emkay Global on Lupin - Target of Rs 789
Emkay Global Financial Services has recommended a buy rating on Lupin with a price target of Rs 789 in its research report.

"Lupin deserves a re-rating in valuations given its strong presence across the entire pharmaceutical gamut, outperformance of peers and just mid cap valuations. Lupin has attained sizable revenues across markets, pushing it into the league of big pharma companies. We initiate coverage on the stock with a buy rating with a price target of Rs 789," says Emkay Global Financial Services' research report.


Emkay Global on CRISIL - Target of Rs 3650

Emkay Global Financial Services has recommended a buy rating on CRISIL with a price target of Rs 3,650 in its research report.

"CRISIL’s CY08 numbers were in line with our expectations. The operating revenues have grown by 31%yoy to Rs 5.3 billion. The reported net profit at Rs 1.4 billion has grown by 67.7% yoy. However Q4CY08 performance was moderate on account of slower growth in advisory business, Forex losses and one-time expenditure. The reported operating margins contracted by 266bps yoy and 1,630bps sequentially to 27.4% during the quarter on account of higher employee expenses, goodwill write off and Forex loss during the quarter."

"The stock is currently quoting at 9.3x CY09E EPS, The company has declared a total dividend of Rs70 per share (including Rs 35 per share interim) reflecting a dividend yield of 3.3%. We maintain our BUY recommendation with price target of Rs 3650," says Emkay Global Financial Services' report.


Emkay Global on Sintex Industries - Target of Rs 112

Emkay Global Financial Services has maintained its buy rating on Sintex Industries with a target price of Rs 112 in its research report.

"The current economic situation has prompted us to re-visit our earnings estimates for Sintex. We expect stumbling blocks in key business interests including monolithic construction, important growth driver for Sintex. Consequently, we have revised our assumptions for FY08-FY11E and factored-

1) lower revenue CAGR of 68% in the monolithic construction vertical versus earlier CAGR of 93%,

2) 8% revenue CAGR in standalone custom molding vertical versus 30% CAGR earlier,

3) 25% revenue CAGR in standalone prefabs vertical versus 36% CAGR earlier and 4) 29% decline in net profit of subsidiaries versus 64% CAGR earlier. The overall impact on consolidated earnings is 13% (Rs 23.7), -19% (Rs 24.8) and -26% (Rs 29.6) for FY09E, FY10E and FY11E respectively."

"We expect revised earnings CAGR of 23% during FY08-FY11E. At CMP of Rs 88, the stock is trading at a valuation of 3.5x FY10E earnings and 0.5x FY10E book value - attractive valuations for growth business. Thus in light of strong growth prospects, healthy balance sheet, excellent track record and ROIC of 13%, we maintain ‘BUY’ with a revised target price of Rs 112," says Emkay Global Financial Services' research report.

Emkay Global Views on CRISIL, ICRA, Sterlite Industries

Emkay Global Financial Services on CRISIL - Target of Rs 4150

Emkay Global Financial Services has recommended a buy rating on Credit Rating Information Services of India (CRISIL) with a target of Rs 4150 in its September 26, 2008 research report. "At CMP, the stock trades at 14.4x CY09E EPs. With strong earnings growth of 41% over CY07-09E and core RoE of 42%, we believe that CRISIL is an excellent investment opportunity. We have valued CRISIL at 18x CY09E EPS, giving a target price of Rs 4150, Buy," Emkay Global Financial Services' research report.

Emkay Global Financial Services on ICRA - Target of Rs 750

Emkay Global Financial Services has recommended a buy rating on ICRA with a target of Rs 750 in its September 26, 2008 research report. "At CMP, stock trades at 14.1x FY09E and 10.4x FY10 EPS. We expect its core RoE to improve to 27% in FY10 from 24% in Fy08. We therefore assign a target P/E multiple of 14.2x, over the company's FY10 EPS. Based on this multiple, we value ICRA stock at Rs 750, Buy," says Emkay Global Financial Services' research report.

Emkay Global Financial Services on Sterlite Industries - Target of Rs 637

Emkay Global Financial Services has maintained its buy rating on Sterlite Industries (India) with a target of Rs 637 in its September 26, 2008 research report. "Currently Sterlite is trading at EV/EBITDA of 2.4x our FY10 estimates, which includes assumptions of buyout of HZL and BALCO stake. At our target price, Sterlite will trade at EV/EBITDA of 3.2x FY10 estimates, a discount of almost 15% to the global base metal companies. We maintain BUY on the stock with revised target price of Rs 637 with an upside of 34% from the current level," says Emkay Global Financial Services' research report.