BNP PARIBAS on HINDALCO INDUSTRIES BNP Paribas initiates coverage on Hindalco Industries with a ‘reduce’ rating. Hindalco’s operating performance is leveraged to aluminium prices. Global aluminium consumption growth is likely to slow to about 3% (from 11.6% in ’07), and remain in the range of 3-4% in ’09 and ’10. Weakening global demand will cause aluminium prices to remain subdued at $2,100/tonne in the near term, based on trends witnessed in previous market downturns. BNP Paribas thinks a price level of $2,100/tonne is unsustainable and expects a bounce-back, but overall, a weak pricing environment will persist in the short term. Hindalco will need to raise additional $ 3 billion in debt to spend $ 4.5 billion on capital expenditure (capex) in the next three years. These projects are in initial stages and may be postponed if aluminium prices remain subdued, while copper prices continue to move up due to rising energy and input prices. The target price of Rs 68 is based on an enterprise value (EV) to FY10 EBITDA multiple of 5x. In the past, Hindalco’s valuation has trended towards a 5x EBITDA multiple in an environment of declining prices.
CLSA on TATA MOTORS CLSA maintains ‘underperform’ rating on the stock with a revised target price of Rs 320. It views Tata Motors as a risky bet even after the sharp 60% year-to-date (YTD) correction. Domestic truck sales are weakening. Following the company’s exit from West Bengal, the large ‘Nano’ volumes will flow only in FY11. Jaguar Land Rover (JLR) sales in the western world remain weak and the sales growth in emerging markets may not last long. Moreover, the JLR pension fund and re-financing of JLR acquisition bridge loan remain overhangs on the stock. Tata Motors needs to refinance $3 billion of the JLR acquisition bridge loan by June ’09. This still leaves $1.9 billion, which needs to be raised via a combination of foreign equity issuance ($500 million), sale of stakes in subsidiaries ($670 million) and raising of working capital facilities at JLR ($700 million). Also, the extent of deficit in the JLR pension fund (size ~$8 billion) will be known only by April ’09, when the next actuarial valuation takes place. Till JLR manages to strike a favourable deal with pension trustees, this will remain an overhang on the stock.
CITIGROUP on JET AIRWAYS AIRLINES are trading plays — given the cyclical nature of their business, high operational and financial leverage, and an earnings profile that is excessively volatile and sensitive to macro variables like oil prices and currency movements. The target price of Rs 440 is a simple average of two methodologies — current equity value (based on residual cost) and oneyear forward price/book of 1x (in line with regional peers). The ‘medium risk’ rating on Jet Airways is also in line with the risk ratings on regional peers. Citigroup believes that Jet merits a ‘medium risk’ rating, given: a) the competitive scenario in the domestic market; b) its international operations are still at a relatively embryonic phase and should take at least 2-3 years to stabilise; and c) turnaround of the Air Sahara acquisition.
MERRILL LYNCH on AXIS BANK MERRILL Lynch reiterates a ‘buy’ rating on Axis Bank with a target price of Rs 890. Axis Bank’s Q2 FY09 results were almost 30% ahead of estimates, with its net profit surging 77% to Rs 403 crore. The bank continues to reap the benefits of its increasing customer base, enhanced product penetration and geography arising from its expanded distribution. Axis Bank’s gross and net non-performing loans (NPLs) grew by 11% and 3% quarter-on-quarter (q-o-q) and 44% and 36% YTD, respectively. The spike in NPLs can result in higher loan loss provision, though NPLs remain manageable. Merrill Lynch raises its earnings estimates by 3-6% for FY09-10 to factor in higher fee revenue and topline, as the bank further expands and leverages distribution. Merrill Lynch believes the stock, trading at 2.5-2.6x FY09 book, can continue to trade at 2.8-3.0x book, one-year forward (lower end of its historic trading multiples of 2.5-4.0x), given the +38% CAGR earnings growth through FY08-10 and return on equity (RoE) bouncing back to +18.5%.
JM FINANCIAL on ITCJM FINANCIAL reiterates a ‘buy’ rating on ITC with a target price of Rs 230. Despite defensive stocks being the flavour of the season, the market has ignored ITC this time. JM Financial forecasts a 19.7% growth in the cigarette segment’s earnings before interest and tax (EBIT) in FY09E — one of the highest in recent times. JM Financial has increased its FY09E ‘FMCG-others’ segment loss to Rs 400 crore (earlier Rs 300 crore) and also deferred the break-even projection for the segment to FY12E (earlier FY11E). While extension into related categories is on the cards, oral care looks unlikely in the immediate future. Most of the increase in FMCG losses is likely to be offset by improved earnings in the cigarettes segment. JM Financial has introduced marginal cuts in its overall FY09E (-0.3%) and FY10E (-1.1%) earning per share (EPS) estimates and prices in higher projected losses from ‘FMCG-others’ segment. Accordingly, it has reduced the sales multiple for the segment from 2.4x to 1.5x. The target price stands at Rs 230 (Rs 238 earlier). The price also reflects the discounted cash flow (DCF) value and implies an FY10E price/earnings growth (PEG) of 1.5 — in line with the past three years’ average.
EDELWEISS on MARUTI SUZUKI EDELWEISS maintains ‘accumulate’ recommendation on Maruti Suzuki. The company is India’s largest passenger vehicle manufacturer with a market share of more than 50%. It has an installed production capacity of 870,000 units per annum and is expected to increase this to 1 million units by the end of H1 FY09. The company is likely to face intense competition from several global players, most of which plan to enter the Maruti-dominated compact segment for the first time. In recent times, higher input costs have adverse affected the company’s operating margins. Going forward, Edelweiss expects Maruti’s margins to remain under pressure due to higher costs associated with new model launches and exposure to yen-denominated component imports. On the positive side, the company is likely to get a major boost in sales from exports and leverage its market leader position in the growing domestic market. Increasing input costs and higher product launch costs may hit margins significantly. A slowdown in growth in the compact segment can hit Maruti, as it is substantially dependent on this segment. Further, intense competition is likely to ensue over the next few quarters, as more players enter the market with new products. The near-term outlook for the company remains subdued, given modest domestic sales and expectations of low margins for the second quarter in a row.
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