Stock Views on Federal Bank, NTPC, Nalco

GOLDMAN SACHS on NTPC

Goldman Sachs maintains its earning estimates of NTPC and `Buy’ rating on the stock. The 12-month target price of Rs 208 is the value of its FY2010E financial assets (Rs 37/share) plus the value of its operating assets using a residual income (RI) model (Rs 171/share). India’s central electricity regulator (CERC) has announced the final tariff norms for generation and transmission projects for FY2010-14. Takeaways for NTPC -
[1] Minimum regulated post-tax ROE (return on equity) raised from 14% to 15.5% (16% in case of new projects completed within prescribed time).
[2] Benefit of tax holidays to be retained, but tax on incentives will not be a pass-through.
[3] Fixed-cost recovery linked to ‘plant availability’ and not utilisation rate (PLF or plant load factor).
[4] Option to avail R&M (repairs and maintenance) allowance for more than 25-year-old units. [5] Normative levels for operational and working capital parameters have been tightened.
[6] Depreciation rate for tariff setting largely aligned with accounting norms.

Prima facie, CERC’s final tariff norms for FY10-14 are neutral-to-positive for NTPC’s earnings outlook; consensus expected them to be neutral-to-negative. We maintain that
[1] effective tax rate and,
[2] economic life of projects, are critical parameters to assess NTPC’s profitability during FY10-14.

CITIGROUP on FEDERAL BANK

Citigroup maintains `Buy’ rating on Federal Bank. However, it revises the price target down to Rs 215 from Rs 270. Federal Bank reported a strong P&L quarter in 3Q09, with high NIMs (net interest margins) of over 450 bps, core fee income growth over 90%, trading and bond portfolio gains, and relative cost moderation (excluding one-offs). However, the balance sheet was under pressure, with high asset deterioration and loan-loss provisions. Overall, a mixed quarter - a resilient P&L but marked by increasing asset risks. Federal Bank’s loan book comprises 36% SMEs (small and medium enterprises) and 32% retail, both of which have seen significant pressures over the last couple of quarters, and contribute to the bulk of the deterioration in asset quality. Incremental slippages increased to about 1.4% of loans in 3Q09, meaningfully above its larger peers. Citigroup increases FY09E earnings by 28%, to incorporate gains on the bond portfolio, but reduces FY10E and FY11E earnings by 21% and 31% respectively, reflecting significantly higher loan-loss provisioning costs.

DEUTSCHE BANK on NALCO

Deutsche maintains `Sell’ rating on Nalco with a price target of Rs 126. Nalco’s latest alumina sale tender, which is used as a benchmark for the spot market globally, has been closed at US$194/MT. The new contracted price is down 58% from a high of US$458/MT which Nalco got for a 30,000-tonne shipment in July ‘08. Outlook for alumina remains negative as brought out by the bidding range. Apart from the winning bid of US$194/MT, the majority of bids from traders ranged between US$153-US$176/MT, which provides an indication of market expectations of future alumina price movement. Nalco is averse to any production cuts despite the global demand weakness. Consequently, its aluminum inventory situation is expected to get worse. According to the news flow, inventory is hovering around 15 Kt which is already double of the normal levels of 8 Kt. The inventory situation is expected to get even worse with average inventory increasing to 30 Kt by the year-end. Deutsche remains negative on alumina/aluminium demand and pricing outlook in 2009

Stock Views on Power Grid, Karnataka Bank, Bharti Airtel

INDIABULLS SECURITIES on Power Grid

INDIABULLS Securities initiates coverage on Power Grid Corporation with a ‘buy’ rating. Power Grid is a central transmission utility engaged in inter-state and inter-regional power transmission business. Over a period of 16 years, it has emerged as one of the largest and best-managed transmission utilities in the world. Currently, it operates around 67,000 circuit km of transmission lines, along with 111 sub-stations and transmits 40-45% of the power generated in the country. The company has around 45 projects in hand, which will drive its revenues and earnings in the medium term. Indiabulls estimates that Power Grid’s net sales and net profit will witness a CAGR of 20.5% and 19.5%, respectively, by ’10 on the back of significant investment opportunities. At the current market price (CMP), the stock is trading at a price-to-book (P/B) multiple of 2.7x. Based on the valuations, the target P/B multiple of the stock is 3.29x, resulting in a fair value price of Rs 110. This implies a potential upside of 21% from the CMP.

DEUTSCHE BANK on karnataka Bank

DEUTSCHE Bank has a ‘sell’ rating on Karnataka Bank with a target price of Rs 115. The ‘sell’ call is based on the following parameters: (i) Frequent equity dilution by the bank in its pursuit of maintaining higher Tier-I ratio, resulting in lower normalised leverage and return on equity (RoE); (ii) Consistently deteriorating asset quality, as higher exposure to retail and small & mid-corporate segments makes it vulnerable to any significant downturn in the asset quality cycle; (iii) Large proportion of the investment portfolio in available for sale category exposes the bank to higher mark to market risk; (iv) Unsatisfactory traction on the fee income front; and (v) Absence of consolidation as a trigger after FY09, as the Reserve Bank of India (RBI) is unlikely to allow foreign banks to acquire private sector banks.

HSBC on Bharti Airtel

HSBC retains ‘overweight’ rating on Bharti Airtel with a target price of Rs 1,002. The investment thesis expects sharp growth in the domestic wireless market, outstanding execution of a low-leverage, low-cost business model with high return on invested capital, and continued alignment of majority and minority shareholder interests. Principal risks will be upward revision of subscriber-based criteria for additional spectrum, hike in spectrum charges, aggressive international expansion and higher capital expenditure (capex) than HSBC’s estimates. Receipt of 3G spectrum should aid Bharti in consolidating market leadership. If the new entrants are able to manage roll-outs, players like Tata Teleservices, Reliance Communications and BSNL will be more vulnerable. The impact on Bharti will be the least. Bharti was willing to pay the government an additional Rs 2,600 crore for 4.4 MHz to start up 2G spectrum.

Stock Views on Union Bank of India,

Mafatlal Securities on Union Bank of India - Buy Target Rs 205
Mafatlal Securities has recommended a buy rating on Union Bank of India with a target of Rs 205 in its September 11, 2008 research report. "At the current price of Rs 147.60 the scrip discounts its estimated EPS of FY09 and FY10 by 5.28x and 3.91x respectively. The scrip is currently trading at a PE ratio of 5.37x (TTM) which is at a discount of 39% to the industry PE of 7.45x. The scrip is trading at 1.10x and 0.88x of estimated BV of FY09 and FY10. We recommend a “BUY” on UNBK with a target price of Rs 205 and an investment horizon of one year," Mafatlal Securities' research report.

Anand Rathi on Punjab National Bank - Buy Target of Rs 515

Anand Rathi Securities has recommended to buy Punjab National Bank (PNB) between Rs 490 and Rs 495 with a stoploss of Rs 485 and a target of Rs 515 in its September 12, 2008 research report.

ICICIdirect.com on Tata Motors - Buy above 424

ICICIdirect.com has recommended to buy Tata Motors above Rs 425 with a stoploss of Rs 424 and target of Rs 427/435/higher in its September 12, 2008 report.

Deutsche Bank on Kotak Mahindra Bank - Target of Rs 600

Deutsche Bank has downgraded its rating on Kotak Mahindra Bank to Hold with a target of Rs 600

Stock Views on DLF, Suzlon Energy, Sesa Goa, GAIL

DEUTSCHE Global Markets view on DLF - Ratings Hold

DEUTSCHE Global Markets Research has downgraded its ratings on DLF to “hold” because of weakening demand, falling property prices and tight financial markets. The firm has reduced its revenue forecasts for the company for the next two years to 19% and 25% owing to delay in execution of the projects, lower product prices across verticals, and deterioration in product mix in favour of low-margin mid-end housing. Increase in construction costs and other expenses (staff, SG&A) due to new launches, says Deutsche Global, has lead to significant margin compression. Hence the firm has cut profit estimates of the company by approximately 24% and (approx.) 29% for the next two years. Deutsche has reduced the NAV (net asset value) per share from Rs 700 to Rs 532.

MERRILL Lynch on SUZLON ENERGY - Rating Buy

MERRILL Lynch has maintained its “buy” rating on Suzlon saying the company remains on track for material scale-up in operations across the wind turbine value chain. Suzlon, says the Merrill note, has pre-poned its purchase of Martifer’s 22.48% stake in REpower for a pre-determined price of 270 million pound sterling. “This acquisition shall consolidate Suzlon’s holding in REpower to (approx.) 90%, enough to press for a domination agreement, which is key for integrating REpower and derive synergy benefits from a unified product and market strategy,” the note said. Merrill has valued Suzlon’s wind business at 18.5 times estimated 1-year-forward earnings, at Rs 296 per share. “This is conservative given it is 20% and 25% discount to its current PER (price to earning) and peers respectively. Suzlon’s 71.3% stake in Hansen is valued at Rs 76 per share at 10% discount to the price objective of 330 pence,” the note added.

CITI Investment on SESA GOA - Rating Sell

CITI Investment Research has initiated coverage on Sesa Goa with a “sell” recommendation saying that most positive triggers for the stock are already priced in. The future iron ore price hikes, says Citi, are expected to be substantially lower relative to FY09 and risks of government intervention to contain inflation remain as downside risks for the stock. At the price target of Rs 145, the note says, Sesa Goa would trade at 3.8 times 12-month forward PE (price-to-earning). “The PE multiple is at a discount to global majors (forward PE of around 7-9 times), justified given their relative size, diversified product mix and higher market cap,” the Citi note said. Sesa Goa, says Citi, has significant growth plans and is part of an industry with strong pricing power.

ICICI Securities on GAIL - Rating Buy

ICICI Securities has maintained its “buy” rating on the stock saying the company will benefit from gas grid expansion and improved visibility on gas supply. Post-commencement of NGG (national gas grid) operations, says ICICI Securities, GAIL’s returns may settle below its recent average as the future growth will likely be skewed toward annuity earnings from transmission. “Assuming the absence of growth in the existing business beyond FY11E, GAIL’s RoCE (return on capital employed) is likely to be 16.4% in FY16E versus 14.8% in FY09E,” the note said. ICICI Securities expects GAIL’s EBITDA CAGR (compound annual growth rate) at 12.3% and net income CAGR at 8.6% over FY08-11E, driven by gas transmission business, expected to grow at 16% revenue CAGR through FY08-11E (estimated).

Stock View on Raymond, GAIL, Puravankara Projects, Jaiprakash Associates

MERRILL LYNCH view on Raymond - RATING: UNDERPERFORM

MERRILL Lynch has maintained its ‘underperform’ rating on Raymond as the near-term earnings will remain subdued with denim continuing to be a huge drag on overall performance. The management has indicated that it may reduce its involvement in the denim business — this can be a time-consuming process. Raymond’s 50:50 denim joint venture with Belgian denim major UCO NV continues to pile losses (Q1 ’09 loss Rs 40 crore, FY08 loss Rs 120 crore). Losses are driven by suboptimal capacity utilisation in overseas facilities, continued poor denim market and rising cotton prices. Worsted capacity expansion by 7 million metres at Vapi is on track. This will take the total capacity to 38 million by March ’09 and can potentially help free up about 140 acres at Thane, where a part of its worsted capacity is currently located. Merrill Lynch estimates that this land may be worth over Rs 200 per share. However, the Thane closure is unlikely to be taken up before elections next year. Worsted fabric performance is likely to improve in the current fiscal. Merrill Lynch has assumed a 4% year-on-year (y-o-y) rise in realisations driven by price increases and a richer mix. This, together with slightly weaker wool prices, should drive EBIDTA margin expansion by 150 bps. FY09 will be a year of consolidation and streamlining of businesses. The management intends to entirely focus resources on 4-5 key brands. To this end, it aims to expand its retail network judiciously, with a larger proportion of stores through the franchise route in tier-III and IV towns. Raymond added 31 stores in Q1, to reach 518 stores.

INDIA INFOLINE view on GAIL - RATING : BUY

INDIA Infoline has maintained its long-term ‘buy’ rating on Gas Authority of India (Gail) with a target price of Rs 450. In its annual report, the company has emphasised on clean fuel industrialisation by creating green energy corridors. This is in line with its ongoing capacity expansion plan, which is focused on developing a countrywide gas grid and setting up city gas projects in 28 cities within the next five years. Gail registered net sales growth of 12.2% y-o-y to Rs 18,000 crore in FY08. This was driven by a robust growth of 52.6% y-o-y in LPG sales and 17.8% y-o-y growth in polymer sales. LPG volumes remained flat, but realisations were up by 52.2% y-o-y as sharing of under-recoveries declined 11.7% y-o-y. Petrochemicals volumes rose by 12.8% y-o-y, whereas realisations for the segment rose by 4.5% y-o-y. Gas trading volumes grew by 2.5% y-o-y to 23.3 billion scm and transmission volumes increased from 77.29 mmscmd in FY07 to 82.1 mmscmd in FY08. The profit and loss statement was a mixed bag with robust topline expansion and increase in operating margins being offset by a higher effective tax rate and one-time write-back of Rs 340 crore in the previous year. The balance sheet continues to remain strong with a fourth consecutive year of decline in the debt-equity ratio and a sharp improvement in return on capital employed (RoCE) in FY08.

DEUTSCHE BANK view on Puravankara Projects - RATING: SELL

DEUTSCHE Bank has initiated coverage on Puravankara Projects with a ‘sell’ rating. Its asset-light business model, strong balance sheet and good financial disclosures make Puravankara an excellent developer. However, high floor space index (FSI) on its landbank, coupled with over-concentration in the residential vertical and in Bangalore, are threats in the current environment of weakening demand and tight financial markets. Given its net worth, Puravankara has an asset-light model with a smaller land bank and at a lower cost (unlike peers). Furthermore, its land bank is largely paid for, implying less time and risk in securing clear land titles. The low gearing of 48% should enable it to replenish its land bank during cyclical slowdowns. Deutsche Bank believes that financials will be driven by scaling-up operations, coupled with moving up the value chain. The high FSI (~3.1x vis-à-vis ~1.2x for peers) on its land bank in the current environment of strong headwind can make marketing a challenge. Though Puravankara has been around for nearly two decades, its completions to date are lower than its peers in Bangalore. Concentration in residential (~80% of land bank) and Bangalore (63%), which is seeing significant oversupply, are other concerns. The trading price of Rs 165 is at a 30% discount to discounted cash flow (DCF)-based NAV of Rs 236. With a 19% downside potential to the target price, Deutsche Bank recommends a ‘sell’ rating.

EDELWEISS on Jaiprakash Associates - RATING : BUY

EDELWEISS Securities has maintained a ‘buy’ rating on Jaiprakash Associates (JPA) . Since November ’07, of the total 4.7 million sq ft that it owns, JPA has been able to sell 2.9 million sq ft in Greater Noida and 3.6 million sq ft in Noida, till date. Supported by its low land acquisition cost, the company is offering properties at various price points to ensure offtake. Accordingly, sales price varies from ~Rs 5,500-10,000/sq ft in Greater Noida and Rs 4,800-6,400/sq ft in Noida. The company has received Rs 900 crore in cash at Greater Noida and Rs 590 crore at Noida. JPA has completed sub-contracting for the project and has finalised 24 sub-contractors. The management has guided that the expressway will be available for commuting in time for the Commonwealth Games. JPA will retain project planning, equipment ordering and raw material procurement. Financial closure for the project is complete and land and forest clearances have been secured. The management has highlighted its intent to bring all the power entities under one fold. It indicated the need for infusing $500 million by September ’09, for which, it is considering various options like securitising operational power plants. The company reiterated its intent to convert first warrant issue (~Rs 1,985 crore at Rs 397/share; Rs 400 crore put in till date). To tackle concerns of the open offer, following the second warrant conversion (~10% dilution), it plans to defer shareholders meeting to extend conversion window till FY11E. After factoring in concerns over further cement price correction this year in the northern market, Edelweiss has lowered its EPS by 18.6% in FY09E and 23.3% in FY10E. While earnings growth is likely to remain moderate in the near term, long-term value remains in the stock.