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.

Stock Views on Infrastructure Development Finance Corp, Exide Industries

MERRILL LYNCH on EXIDE INDUSTRIES

Merrill Lynch maintains `Buy’ rating on Exide Industries, however, it has cut the target price to Rs 62 on a weak Q3. Exide Industries reported 30% below estimated PAT in 3QFY09 largely due to Rs 20 crore FX loss and in small part due to weaker sales. Merrill Lynch has cut EPS on slower demand, however, it maintains `Buy’ as

(1) FY10E EPS to grow 22% on falling cost and

(2) FY10E PE of 9.9x is close to trough valuation.

Exide Industries, the largest lead acid battery manufacturer of India, reported a net profit of Rs 56.1 crore, a growth of only 1.8% y-o-y in 3QFY09. This was the slowest growth in the last 15 quarters and is driven by

(1) volume growth of only 11% and

(2) foreign exchange loss of Rs 20 crore that reduced profit by 23%. Volume growth weakened considerably from the recent trend of over 15% growth due to slowdown in automobile demand. With FX loss accrued due to unhedged payables of over Rs 450 crore, Merrill Lynch still expects strong EPS growth of 220% in FY10E driven by

(1) lower cost of lead along with rupee appreciation could help expand EBITDA margin by 200 bps and

(2) demand growth of over 12% driven by market share gain in the relative secular segment of the automotive after market.

Thus far, FX loss on account of sharp depreciation of the rupee has been negating the impact of decline in lead cost.

GOLDMAN SACHS on IDFC

Goldman Sachs maintains a `Sell’ rating on Infrastructure Development Finance Corp (IDFC), despite a significant fall in price as lack of growth drivers over the medium term. Infrastructure lending should likely remain constrained by the need to maintain high capitalisation ratios; and capital market-driven revenues should likely remain depressed. A subdued contribution from capital market-related revenues will erode ROA from 3.1% in 2007 to 2.8% in 2008E and 2.4% in 2009E and 2010E, in our view. The constraint for IDFC in growing its balance sheet without additional equity capital infusion due to higher capitalisation requirement is well-known to the market. However, expectations, as implied by consensus estimates, remain high and could be driven by many factors including expectations of lower capitalisation requirement or a possible change in the structure of the company (although we note that the company has not stated any intention of a potential change in structure/form) over the medium term, in our view. Expectations of lower capitalisation requirements are unlikely to fructify until macroeconomic conditions improve.

Stock Views on Infosys, Punj Lloyd, Suzlon Energy

CLSA on INFOSYS

Infosys reported its lowest y-o-y revenue and volume growth in the decade, but its highest margin in six years. The stock has outperformed the markets 16% YTD as the Satyam debacle has shifted investor preference to India’s corporate governance stars, where Infosys enjoys iconic status. With currency providing all of the margin upside in Q3, and like to like pricing down 1.8% q-to-q in December ‘08, volume recovery will come after margin headwinds, the latter beginning in the March ‘09 quarter itself, as per Infosys’ guidance. Six-year high EBITDA margins of 35% were backed by double digit INR/USD depreciation, which negated headwinds from lower utilisation and cross currency effects. CLSA expects pricing to weaken further ahead as more negotiations reach a decisive stage. Every 1% of pricing cuts 70 bps from EBITDA. With cost metrics touching all-time lows in overhead line items, it is debatable if Infosys has any more juice to squeeze out of its operations. CLSA’s call that margins are more and sooner at risk, compared to the recovery hope in volumes, drives the earnings 6% below consensus for FY10. This limits absolute upsides for the stock, and from here to the full year guidance in April.

BNP Paribas on PUNJ LLYOD

The company has disclosed new orders of approximately Rs 1,880 crore in 3QFY09, down 56% y-o-y. Additionally, international orders declined 57% y-o-y. BNP estimates a decline of 22.4% y-o-y for new orders in FY10. There is also further evidence of a global slowdown in the petrochemical industry. Their FY09E and FY10E EPS estimates have declined by 9% and 41%, respectively, due to lower order inflow assumptions. SABIC has terminated its contract with Punj Lloyd (Punj) and is seeking liquidation of the performance bond and advance payment bond for a total of GBP28.5m. Punj may incur additional cash charges of GBP28.5m (Rs 210 crore) if SABIC succeeds in its claims. BNP has not included this claim in the estimates; however, now it includes the provision for a Rs 300-crore loss (before tax) that should have been included in the FY08 results. This loss reduces the FY09E EPS estimate by 55%.

JP Morgan on SUZLON ENERGY

JP Morgan remains `Neutral’ on Suzlon Energy with a March 10 price target of Rs 80. Suzlon’s recent initiatives provide breathing space to tide over the funds crunch:

1) sale of 10% stake in Hansen Transmission - estimated cash inflow of Rs 520 crore;
2) securing a six-month payment window from Martifer for acquiring the latter’s 22.4% stake in REpower; and
3) the sale of a 17.1% stake in SE Forge to IDFC, bringing in Rs 400 crore.

With these measures, Suzlon will end FY09 with net consolidated DER (debt equity ratio) of 0.83x and net debt to EBITDA of 4.3x. In FY10E, Suzlon would end with consolidated DER of 0.81x and net debt to EBITDA of 4.3x. Suzlon has loan repayment of Rs 1,100 crore for the remainder of FY09, Rs 1,000 crore in FY10 and another Rs 1,000 crore in FY11. As operating cash flows may be insufficient for these repayments, Suzlon may have to borrow afresh. October ‘08 OB, at 2,505 MW, is not sufficient to meet FY10 volume estimate of 2,950 MW. Additional orders are necessary to meet FY10 estimates. There have been considerable delays in securing orders due to weak sentiment for renewable energy investments, coupled with a possible quality perception of Suzlon’s products. The key risk is further earnings cuts if strong order flows, necessary to lend credence to FY10 and FY11 earnings estimates, do not materialise. The FY10 estimates have seen a marginal upward revision of 2.6% due to the translation of REpower earnings at a higher Rs/ of Rs 64, compared to Rs 56 used previously.

SBICAP Securities Views on IDFC, Patel Engineering, Piramal Healthcare

Piramal Healthcare - Target 360
SBICAP Securities has maintained its buy rating on Piramal Healthcare with a target of Rs 360 in its September 16, 2008 research report. "We value PIHC using a range of approaches including DCF and relative approaches. We use relatives to set our target valuation of Rs 360 based on a sum-of-parts PE approach on weighted average EPS of Rs 22.10 (FY09-10); implying an exit PE multiple of 17.4x and 14.9x over the FY09 and FY10 EPS of Rs 20.64 and Rs 24.13 respectively, Buy," says SBICAP Securities' research report.

Patel Engineering - Target 490

SBICAP Securities has recommended a buy rating on Patel Engineering Company with a target of Rs 490 in its September 17, 2008 research report. "At the current price of Rs 370, assuming full tax rate of 33%, the stock trades at a P/E multiple of 17.4x its FY09E consolidated EPS of Rs 21.2 and at 14.3x its FY10E consolidated EPS of Rs 25.9. On an EV/EBIDTA basis, it trades at 8.8x FY09E and 7.7x FY10E. We value the real estate subsidiary at Rs 185 per share, BOT subsidiaries at Rs 13 per share and assign a conservative 12x P/E multiple to its core construction business's standalone FY10EEPS of Rs 24.4. Thus,arriving at an SOTP value of Rs 490 per share (an upside of 32% from the current level),we recommend a BUY on the stock," says SBICAP Securities' research report.

IDFC - Target 360

SBICAP Securities has maintained its buy rating on Infrastructure Development Finance Company (IDFC) with a target of Rs 104 in its September 16, 2008 research report. "IDFC has evolved as a diversified financial institution in the infrastructure finance segment with two major acquisitions of SSKI Securities (79.8%) and the Standard Chartered Mutual Fund (100%). IDFC's private equity business continues to scale up rapidly with assets under management expected to triple to USD 2.3 bn. by the end of this fiscal."

" Despite the diversification, much of IDFC's revenues continue to flow from the project finance business. We believe that except for the mutual fund business, the other businesses are more or less likely to grow at similar rates. We value IDFC using the SOTP methodology and arrive at a target price of 104. We initiate coverage with a BUY rating.," says SBICAP Securities' research report.

Ten stocks worth investing in – Part II

IDFC

The country's infrastructure needs should only rise as the economy grows bigger. Even at current projections, the opportunity is huge. The proof: the Eleventh Five Year Plan indicates that $500 billion worth of investment will be required for creation of new infrastructure space, which in turn is positive for companies like Infrastructure Development Finance Company, a leading infrastructure financing institution.
The company's infrastructure lending business is expected to grow at CAGR of 37 per cent during FY08-FY10. While interest spreads could see some pressure, better fund management should help offset some of this.
Additionally, non-interest income should continue to contribute about 47 per cent of total income during FY08-FY10, driven by consistent increase in asset management fee, income from its principle investment book and growth in IDFC-SSKI (broking and investment banking) business.
IDFC has also entered into an agreement to acquire 100 per cent stake in Standard Chartered AMC.
Overall, the net interest income is expected to grow at CAGR of 28 per cent during FY08-FY10, with net interest margin expected to hover at 3 per cent.
Looking at its business growth and expertise in infrastructure financing, we believe the stock is undervalued and provides an investment opportunity for decent return in medium term.
At Rs 105, the stock is trading at 16 times its FY09 estimated earnings and 12.5 times FY10 earnings. The research house has puts a price target of Rs 160 per share.

L&T

Thanks to the slower growth in industrial production and capital goods output in the recent past, Larsen & Toubro (L&T), too, has seen its share price being hammered down. This offers an opportunity to buy into the country's largest engineering and construction player, which is among the best plays on India's infrastructure and industrial capital expenditure (capex) boom.
Also, the benefits of its diversification into power equipment, shipbuilding, defence equipment and railways are yet to pay, and help sustain growth in the long-run.
Flush with cash flows from high oil prices, the Middle East region is likely to achieve infrastructure spend of $1,000 billion. L&T has not fully exploited the opportunity in the region due to constraints of resources. In case of slowdown in India, the company can derive more growth in Middle East.
These factors and a strong order book of Rs 52,700 crore, the company is expected to maintain its growth at about 35 per cent over the next two years. Any value unlocking from its IT and Finance subsidiaries (expected to be listed separately) would further add to the shareholders wealth.
Regards valuation, at Rs 2,357, the stock is trading at 22 times its estimated FY09 consolidated earnings and 17 times FY10 earnings, which is not very expensive historically.
On SOTP basis (factoring valuations of different businesses and subsidiaries), analysts have estimated a fair value of Rs 3,000-3,200 per share.

Maruti Suzuki

India's leading passenger car company, Maruti Suzuki is available at half the price compared to its 52-week high of Rs 1,252 per share seen in October 2007.
Historically, the share price of Maruti has been trading in the PE band of 13-17 times. But, thanks to the market turmoil, it is now trading at just eight times its FY09 estimated earnings.
The correction was partly on account of concerns over the rising input cost (for the company) and, high crude oil prices and interest rates (for its customers).
Analysts believe that though concerns remain in the near term, the stock should get rerated in the long run on account of benefit accruing from new launches, including WagonR Duo, Zen Estilo, Diesel Swift and SX4.
Also, with the ongoing expansion at Manesar plant, exports are expected to go up. The company will manufacture small cars for supply to its parent's customers in global markets.
Estimates indicate that Maruti will be exporting about 100,000 units to its parent, Suzuki Motor Company of Japan, while another 50,000 units would be supplied to Nissan Motor Company. The expansion of its capacities should also help company to maintain its margins, helped by economies of scale.
Along with the benefits of new launches and the expansion, the company's target of selling one million cars in the domestic market by FY2011, translates into a volume growth (for domestic market) of 12 per cent over next three years.
Overall, the company is expected to grow at decent pace. Investors can use the current market conditions to gain from the stock's re-rating once the macro concerns ease out in the future.