Srock views on MTNL, Titan Industries, SIEMENS, Yes Bank, Colgate Palmolive, GREAT Offshore

HSBC on COLGATE PALMOLIVE

HSBC has initiated an ‘overweight’ rating on Colgate-Palmolive with a potential return of 25.8%. The oral care category in India has a penetration rate of 78% and a per-capita usage of toothpaste, which is half that of China. Increased usage and penetration, along with a shift from toothpowder to toothpaste, are likely to drive volume growth of 8-9% for the next several years. Colgate is the undisputed market leader in all the sub-categories of oral care and has a diversified product portfolio covering all price points and an excellent distribution network. Colgate is poised for steady growth. It has increased gross margins by changing its raw material mix, reducing complexity, and increasing in-sourcing with minimal price increases, protecting volume growth. HSBC values Colgate on a price-earnings (P/E) and a direct cash flow (DCF) basis. The P/E valuation, at 18x FY10E earnings per share (EPS), comes to Rs 424. The target price of Rs 470 is an average of the two. Colgate is currently trading at a 12-month forward P/E of 17.1x, the lowest forward P/E in three-and-a-half years.


DEUTSCHE BANK on YES BANK

DEUTSCHE Bank believes that Yes Bank’s recent severe underperformance relative to the market and the banking index has factored in most of the concerns about its asset quality, margins and fee income growth and has upgraded the stock to ‘hold’. However, it has reduced the target price to Rs 55 and cut earnings by 11-17% for FY09-11. The major concerns are: asset quality due to large exposure to mid-corporate group and commercial real estate; margins due to weak funding franchise; and a sharp slowdown in non-interest income growth due to relatively high dependence on capital market-linked activities. The target price of Rs 55 is based on a single-stage Gordon growth model with a price-to-book value (P/BV) of 1.0x, arrived by using a blended return on equity (RoE) of 15.5%. The key upside risk to Deutsche Bank’s hypothesis is a sharp recovery in loan growth accompanied by a rise in margins. The key downside risks are higher-than-expected deterioration in asset quality and stagnation of branch network due to unavailability of branch licenses, which can pose a challenge for Yes Bank.


JP MORGAN on SIEMENS

SIEMENS reported a standalone net profit of Rs 225 crore in Q4, substantially below the estimate of Rs 360 crore. Operating profit margin was down 300 basis points (bps) year-on-year (y-o-y) to 12.5%. Markto-market (MTM) losses on short positions in foreign exchange (forex) derivatives contracts, in a quarter where the rupee depreciated 10% visà-vis the dollar, can be responsible for a large part of the margin decline. With the underlying hedged being of longer maturity, JP Morgan can expect gains on the underlying in coming quarters. The performance of the company’s subsidiaries is a drag on results: Siemens’ FY08 consolidated revenue of Rs 9,680 crore was in line with estimates, while its profit after tax (PAT) of Rs 470 crore was 30% below full-year estimates. The company’s 100%-owned principal subsidiary, SISL, performed poorly in FY08. Siemens’ standalone revenue growth from continuing operations is higher at 15%, but power (which contributes 49% to the topline), posted a growth of 3.2% y-o-y. There has been little incremental visibility in the power segment, as the Qatar order has neared completion. All other segments have shown strong revenue growth.

JM FINANCIAL on TITAN INDUSTRIES


TITAN benefits from the presence of extremely strong brands in largely unorganised segments. The domestic jewellery market is pegged at Rs 75,000 crore, less than 5% of which is ‘branded’ and Titan controls 65% thereof. With extremely low penetration level, there is huge scope for the ‘democratisation of luxury’ in India. With Titan now partially linking jewellery-making charges to gold value, profitability may not be so susceptible to the movement in gold prices, going forward. In the watches segment, JM has projected a compounded annual growth rate (CAGR) of 13% in sales between FY08 and FY11E. Viewed in the context of India being an attractive retail market (more so in the luxury segment, in which India is still at the nascent stage), Titan emerges superior among retail players in terms of profitability, as well as return on capital employed (30%-plus). Also, y-o-y generation of free cash flow is a source of distinct advantage for Titan. In light of a slowing economy where future growth potential is a key concern, the P/E to growth (PEG) method of valuation appropriately recognises future growth rate and adjusts the P/E multiple accordingly.


CITIGROUP on GREAT OFFSHORE

GREAT Offshore has announced a combined contract for two of its assets — Malaviya Thirty Three (a heavy lift vessel) and Gal Ross Sea (an anchor handling tug) — for a total of $22 million for one year in the Khafji oilfields of Saudi Aramco. The assets have been contracted out at a combined day rate of $63,000. Although the exact day-rate split between the two assets is not known, they estimate the heavy lift vessel to fetch ~ $55,000. This contract is a key positive, indicating strength in the offshore services segment, as opposed to the downtrend witnessed in segments such as dry bulk. Citigroup retains a ‘buy’ rating on the stock, given a relatively stable business profile (75% of revenues from ONGC) and good earnings visibility (average contract durations ~2-2.5 years), making it less exposed to a cyclical downturn in the offshore cycle. Though spot rates have declined 10- 15%, the company has only five of its 41 vessels operating on spot. Q3 should see sequential growth in revenues and profits on account of commencement of new contracts, as well as higher dry-docking expenses in Q2.


BNP PARIBAS on MTNL

BNP Paribas initiates coverage on Mahanagar Telephone Nigam (MTNL) with a ‘reduce’ rating and target price of Rs 55, based on cash per share of Rs 39 and a core business valuation of Rs 16 at 2.5x FY09 EBITDA. Historically, MTNL traded close to its book value, but the valuation is now converging towards its cash per share as its return on equity (RoE) has declined to 3.3%, well below its cost of capital. Moreover, one-fourth of its book value is amount recoverable from the Department of Telecom (DoT), which is unconfirmed and outstanding for several years. Cash per share will dip to Rs 39 from Rs 61. BNP believes MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs. MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators, which are reducing tariffs, leveraging scale economies, coupled with superior customer service.

Stock Views on VOLTAS, CORPORATION BANK, STERLITE INDUSTRIES, INDIA CEMENTS, IRB INFRASTRUCTURE

CITIGROUP on VOLTAS - RATING: SELL

CITIGROUP rates Voltas as ‘sell/medium risk’ with a target price of Rs 121. Voltas, a Tata group company, is the market leader in India’s heating, ventilation and air-conditioning (HVAC) segment, having 28% market share in electromechanical projects. But domestic demand is decelerating across all its divisions. Citigroup sees increased risk to the company’s earnings if the market environment worsens. It expects overall margins to be in the range of 7.5-8.3% over the next three years. Voltas’ target price is set at 15x September ’09E forward EPS and is supported by forecasts of 27% earnings CAGR for FY07-10E and 29-33% return on equity (RoE). At 15x September ’09E, Voltas will trade at a discount to power equipment stocks like Bhel and engineering & construction companies such as L&T. The 15x September 09E multiple is lower than the average one-year forward P/E of 22x over the past three years — reflecting reduced growth outlook. Key downside risks include: international projects risks, termination of principal agent relationships, increasing competition in domestic and international markets, manpower shortages and material prices. Key upside risks include: stronger-than-expected performance driven by the international business, and turnaround of the domestic operating environment.

INDIABULLS SECURITIES on CORPORATION BANK - RATING: BUY

INDIABULLS Securities reaffirms its ‘buy’ rating on Corporation Bank with a target price of Rs 335, which is 21% more than its current market price. The bank’s operating profit grew by a healthy 16.5% y-o-y in Q109. But net profit grew by merely 4.1%, primarily due to mark-to-market (MTM) losses during the quarter. While growth in net interest income (NII) was hit due to compression in net interest margin (NIM), other income, which grew at 14%, supported growth in operating profit. An increase in business productivity reduced operating expenses, further improving profitability. But pressure on NIM may ease in the next few quarters as the bank hiked its benchmark prime lending rate (BPLR) by 50 bps in August. Moreover, the CASA ratio has been improving consistently on the back of an aggressive increase in the number of branches. This should help maintain, if not increase, the bank’s NIM. There has been a sequential reduction in the bank’s net and gross NPAs. The bank is likely to maintain its asset quality, given that it is not aggressively focused on the priority sector.

MERRILL LYNCH on STERLITE INDUSTRIES - RATING: NEUTRAL

MERRILL Lynch remains ‘neutral’ on Sterlite Industries due to weak zinc outlook. The long-pending decision on the Lanjigarh bauxite mines in Orissa finally came through in Sterlite’s favour. This development is more positive for the parent company, Vedanta Resources, than for Sterlite. But it will have a positive impact on Sterlite too. The approval for the mine indicates the promoter group’s ability to execute growth projects in the country, where mining approvals are typically difficult to secure. Vedanta is setting up a 1.1-million tonne (mt) alumina refinery and 500-kt ally smelter in Orissa. Lanjigarh bauxite mines have estimated reserves of 77 mt and are located 5 km from the refinery. Sterlite will mine the bauxite and sell to Vedanta on a transfer pricing basis. The mine development is expected to take around nine months and will make Vedanta a fully integrated low-cost producer of ally. The benefit from this project is relatively small for Sterlite, since it has only a 29.5% stake in this project, and it will account for a mere 5% of Sterlite’s consolidated profit in FY10. Sterlite is trading at 11.1x FY09E. On MTM spot zinc price of $1,733/tonne, it is trading at 13x FY09E. Merrill Lynch believes the sharp year-to-date stock correction already factors in the zinc price crash. Given that zinc prices are now lower than the marginal cost of production, Merrill Lynch believes the probability of supply closures is rising. In addition, speculation on minority stake buyouts in the company’s zinc and aluminum subsidiaries is building up.

JM FINANCIAL on INDIA CEMENTS - RATING: HOLD

JM FINANCIAL recommends ‘hold’ rating on India Cements (ICL) and values the company at a target enterprise value/tonne of $100 to arrive at its June ’09 target price of Rs 168. JM Financial expects 20.3% and 13.2% yo-y growth in revenue for ICL in FY09E and FY10E, respectively. EBITDA is estimated at Rs 1,060 crore and Rs 1,070 crore in FY09E and FY10E, respectively, resulting in EBITDA margins of 29.0% and 25.7% in that order. ICL undertook corporate debt restructuring (CDR) in FY03, when the cement industry was passing through difficult times and ICL had debt:equity of 4.4x. As the cement sector’s prospects improved, ICL repaid most of its debt and its debt:equity stood at 0.5x in FY08. Subsequent to the CDR, the company has done equity issues that have led to a large capital base, thereby lowering sustainable return on capital employed (RoCE) at the corporate level to 11.8%. ICL is the key player in the South, where it enjoys higher realisations and consumption growth of 11.74%, compared to the all-India growth rate of 10% in FY08. ICL currently trades at 5.7x EV/EBITDA, P/E of 8.1x and EV/tonne of $98 for FY10.

LEHMAN BROTHERS on IRB INFRASTRUCTURE - RATING: OVERWEIGHT

LEHMAN Brothers initiates coverage on IRB Infrastructure Developers with an ‘overweight’ rating and a March ’09 price target of Rs 195. IRB is one of the largest road developers in India, and has 14 BOT road projects. The company’s key strength is its in-house construction capability that enables it to capture the entire economic value of road projects, and helps it to address execution risks. Historical projects have yielded substantially high-equity internal rate of return (IRR). IRB has strong cash flows and low leverage compared to other international road developers. Its operating cash flow is strong and will improve further after commissioning of the Bharuch-Surat and Surat-Dahisar stretches. Lehman estimates cash flows before capex at Rs 1,200 crore over FY09-11. The increase in cash flow is driven primarily by a rise in toll revenue. The net debt-to-equity ratio for IRB is only 0.9, and leverage is likely to remain comfortable at 1.3 in FY10. Lehman values IRB at: (1) Road concessions at Rs 129 per share; (2) Rs 36 per share as growth factor to account for potential new projects; (3) Construction business at Rs 26 per share based on a multiple of 10x FY10 earnings estimate of Rs 87 crore; and (4) Real estate at Rs 3 per share. The stock is currently trading at a multiple of 9.4x FY10 earnings estimate of Rs 520.5 crore and 2.1x FY10 book value of Rs 2,372 crore, and at a substantial discount to its global peers. The stock is currently trading at 1.08x concession portfolio NAV of Rs 4,293.8 crore, implying that not much value has been attributed to construction, real estate and future growth opportunities in road concessions.