TRANSPORT CORPORATION OF INDIA

Transport Corporation of India (TCI) has formed a strategy to cross sell its services through its five divisions. Each division would cross market services and provide single point logistics solutions to its clients. This is expected to increase business for TCI, going ahead. Based on its JV experience with Mitsui (Transystem Logistics International), TCI has been able to replicate the model and deliver efficient supply chain solutions (SCS) to industries like FMCG, retail and automobiles. SCS is expected to grow at 30-35 per cent and the segment’s profitability is better than the overall business. TCI plans to increase its warehouse space from 8 MSF currently to 10 MSF by March 2011. About 15 per cent of the warehouse space is owned by TCI and rest is leased. In the real estate business, it is looking at jointly developing properties (at Delhi, Chennai, Bangalore, etc) for construction of residential and commercial space.

The implementation of GST could also bring in additional business through higher outsourcing of logistics activities to the third party logistics players like TCI. At Rs 90, the stock is trading at 1.7 times book value, 12.8 times earnings and 7.3 times cash earnings based on 2010-11 estimated numbers earnings. Maintain ‘accumulate’.

Sector View on Indian pharmaceutical industry

Kotak Securities on PIRAMAL HEALTHCARE

Piramal Healthcare is increasing its focus on profitability in the customs manufacturing business. The company had strengthened its critical care business in 1QFY09 by buying PlasmaSelect’s polygeline-based blood plasma products for Euro7.7mn. We expect domestic branded formulation business to grow at 20% in FY09 and 15% in FY10 driven by sales from new acquired brands and increasing geographic reach.

Kotak Securities on LUPIN

Lupin is witnessing strong sales growth led by Kyowa acquisition and strong growth in branded and generic formulations across geographies. We expect Kyowa to contribute Rs3.9bn to consolidated revenue in FY09. Lupin has strengthened its CRAMS capabilities with the acquisition of Novodigm which is largely engaged in the manufacturing of advanced intermediates for APIs under CRAMS model.

Asit C Mehta Investment Intermediates on DISHMAN PHARMACEUTICALS

Dishman’s focus in contract manufacturing for high margin patented drugs and Active Pharmaceutical Ingredients (API) for products under patent/R&D distinguishes its business model from its peers (concentrating on manufacturing old generics) in the segment. The company’s acquisition of Carbogen Amcis has strengthened its capabilities and presence in contract research.

ICICI Securities on FORTIS HEALTHCARE

Fortis Healthcare came out with the positive Q2 FY09 results with net profit of Rs 10.06 crore led by better revenue growth, better cost management and exceptional income. With the huge expected demand in the tertiary care segment, along with the changes in demography, we expect Fortis to benefit in the long-term from its metro-focused multi-speciality facilities with expertise in cardiac care.

Prabhudas Lilladher on ANKUR DRUGS & PHARMA

Ankur Drugs is one of the largest contract manufacturers of pharma formulations. Major clients include: Ranbaxy Labs, Cipla, Novartis, and Lyka. It is also manufacturing six products for Novartis, Switzerland. The company has plans to introduce patented products of Labtec, Germany. The stock is attractively valued at 2.3x FY09E EPS of Rs41.3.

Angel Broking on ELDER PHARMACEUTICALS

It is one of the fastest growing companies in the Indian pharmaceutical industry. Elder’s operating profit registered CAGR of 37.4% during FY2005-08 on the back of strong revenue CAGR of 25% and expansion of operating margins by 480bp during the mentioned period. Domestic sales grew at a CAGR of 24.0% from Rs276cr to Rs528cr while exports clocked CAGR of 49.1% from Rs7cr to Rs23cr over FY2005-08.

Stock views on Excel Crop Care, Bank of India, HDFC, Rolta

BNP Paribas on ROLTA

BNP Paribas Securities has maintained its ‘buy’ rating on Rolta and price target of Rs 220, after its acquisition of Piocon, a move that is expected to generate revenues of $100 million over the next three to four years. “While the deal size itself is small and is unlikely to have an immediate material financial impact on Rolta, we are impressed by the company’s current strategic direction,” the foreign bank said in a report. “We remain positive on Rolta because the company stands out within its peer group with its niche market leadership, defensive-end market exposure, and high-revenue visibility,” it added.


Kotak Securities on HDFC

Kotak Securities’ private client research has downgraded HDFC to ‘accumulate’ from buy while trimming its price target to Rs 1,908 from Rs 2,061 earlier, citing the recent slowdown in housing loan demand. “We also believe that HDFC’s disbursement growth is likely to slow down during H2FY09 and FY10 moreover due to present unfavourable macro-economic conditions,” the broking house said in a note, after meeting the management. “Of late, retail demand for real estate that has slowed down significantly is largely on the back of a combined ef-fect of high real estate prices and higher interest rate. This has impacted the real estate affordability for retail consumers. Correction in property prices would be essential to boost real estate demand going forward,” it added.


India Infoline on BANK OF INDIA

India Infoline has upgraded Bank of India’s rating to ‘add’, citing higher earnings visibility and relative stability in turbulent times. “Bank of India is confident of maintaining high-quality earnings growth with a strong focus on key operating ratios. BoI expects loan growth of 24% in FY09, driven by strong demand for rupee funds by domestic corporates,” the broking outfit said. “The cut in deposit rates, along with a BPLR cut, should enable it to keep its net interest margins intact. Its AFS investment portfolio would benefit from falling bond yields, and we expect its fee income to grow in sync with loan growth,” it added.


LKP Shares on EXCEL CROP CARE


LKP Shares has rated Excel Crop Care a ‘buy’, with a 12-month price target of Rs 180. “We expect ECCL to grow its revenues and profits at a CAGR (compounded annual growth rate) of 43% and 26% over FY07-09 and the stock trading at 3 times FY09E (estimated) earnings, with a dividend yield of 6% is a good bet in the agrochemical space,” the broking house said in a client note. “We believe that the farm loan waiver would raise the farmers’ ability to purchase agrochemicals, which coupled with growing food needs and expectations of higher productivity from crops would push the demand for agrochemicals in India,” it added.

Stocke views on Provogue, Vishal Retail

Angel Broking on VISHAL RETAIL

Vishal Retail (VRPL) is the fastest growing Retail player in India clocking CAGR of around 89% over FY2005-08. It is a niche player with strong focus on the value retailing and caters to consumers in Tier-II and III cities. The company is set to grow its top-line and bottom-line at a CAGR of 40% and 8% over FY2008-10E.


Kotak Securities on PROVOGUE INDIA

Management expects operating margin to remain in the range of 13-14%. It had raised funds to the tune of Rs 9,900cr through stake sale in its step down subsidiary Prozone as well as through convertible warrants and preferential issue to be used for expansion. We like the business model but in near term concerns still exist regarding slowdown in retail and real estate.

Kotak Securities views on Infosys Technologies, Wipro Technologies

WIPRO TECHNOLOGIES

Wipro is sanguine about pricing being stable. The company’s integrated service model and account management ability should help it to tide over the medium term uncertainty in the demand environment. It has shown an in-line operating performance. With the acquisition of Citi Technology Services for an all-cash consideration of $127mn, it can leverage for other customers in financial services vertical.


INFOSYS TECHNOLOGIES

According to the management, a few competitors of Infosys Technologies are turning aggressive on pricing but the pricing is stable for Infosys as yet. However, Infosys may have to cut prices. It has won two deals during 3QFY09. We expect the company to achieve a volume growth of 17.5% in FY09 and continue to rate Infosys as our top pick in the sector.

Stock views on Cummins, Sun Pharma, Infosys

CITIGROUP on INFOSYS TECH
CITIGROUP has cut its price target for Infosys to Rs 1,350 from Rs 1,420 while maintaining a ‘buy’ rating, citing likely disappointments in the company’s third, or October-December, quarter earnings on Monday. “We have lowered our FY10-11E estimates by 6% on the back on lower volume/pricing assumptions and cross-currency impact in Q3,” the bank said in a report. “With a likely disappointment in Q3 numbers and further EPS cuts, the stock could underperform near term,” it added.


BNP Paribas on SUN PHARMA

BNP Paribas has maintained its ‘buy’ rating on Sun Pharma and also its price target of Rs 1,695 after the company initiated an out-of-court settlement with the promoters of Taro to acquire it. “We believe that an increase in consideration by 16-23% for the residual stake doesn’t alter the appeal of the Taro transaction for Sun Pharma,” the bank said in a report. BNP expects Taro’s acquisition to be accretive to Sun’s earnings per share and have a “15% positive impact” on FY10 earnings. “Taro’s operational history has been marred by accounting issues and cash flow problems. Despite these problems, we believe Taro represents a significant synergistic opportunity for Sun Pharma,” it added.


Kotak Securities on CUMMINS

Kotak Securities’ private client research has maintained its ‘accumulate’ rating on Cummins, citing likely strong earnings in the October-December quarter, or the third quarter. But the brokerage expects the growth to taper off in the fourth quarter. “Due to factors like product price hikes, some softening of material prices, depreciation in rupee and continuing value engineering exercises, we believe there is a strong case for margin expansion in Q3 FY09,” Kotak said in a report.

Stock views on Britannia, Piramal Healthcare, Gwalior Chemicals,

ICICI SECURITIES on EDUCOMP


ICICI SECURITIES has recommended a buy rating on Educomp, citing the increasing education spend by the government. “In the current economic slowdown, we believe that education spend will be the least affected given the increasing importance to education by the government and the private sector. Education spend is the last item to be cut by private households in the current slowdown as it forms a mere 7-8% of the total consumption expenditure,” the brokerage said in a not to its clients. “US-based education companies have considerably outperformed the domestic education-focussed companies in the past one year. We expect the valuation-gap to narrow down and expect Indian education companies to catch up soon,” it added.


ANTIQUE STOCKBROKING on BRITANNIA INDS

ANTIQUE STOCK BROKING has rated Britannia a buy, citing improvement in sales, profits and operating profit margins over the next couple of years. “In view of the expected outperformance of the biscuit industry in a scenario of slowdown and given the company’s consistent value-market share over the last two years, we believe that the stock would trade at a one-year forward PE (price to earnings) of 14x (times),” the brokerage said in its report. The broking firm is of the view that going ahead, Britannia’s sales would be driven by Good Day, which has been growing at 25-30% in the premium category and Tiger brand, which has been growing at 18-20% in the value for money category.


KOTAK SECURITIES on PIRAMAL HEALTHCARE

KOTAK SECURITIES’ private client research has maintained an accumulate rating on Piramal Healthcare, post the acquisition of Minrad International. “We view the acquisition as strategically fit with the PHL’s anaesthetics business model and is reasonably valued at price to sales (2008) of 1.5x,” the brokerage said in a report. After the acquisition, PHL will have products portfolio with all five known inhalation anaesthetics gases, which will help address all global markets along with manufacturing foot print across the US and India. PHL management expects acquisition to be earning accretive (additional EPS Re1/share in FY10) with the revenue of $65 million from Minrad in FY10E.


LKP SHARES on GWALIOR CHEMICAL

LKP SHARES has downgraded Gwalior Chemical Industries to sell from neutral, citing weak profit outlook. “We believe that although the topline growth could be achieved, as it has already done ~60% of estimated sales till Q2FY09, bottom line would falter owing to unstable demand and the losses on account of diminution in raw material values,” the brokerage said in a report.

Stock View on Reliance Capital, Sesa Goa

MOTILAL Oswal on Reliance Capital

MOTILAL Oswal downgrades Reliance Capital to ‘neutral’ with a revised target price of Rs 1,340. Reliance Capital’s management has reiterated its objective to emerge as one of the leaders in all business verticals of financial services. The strategy is to create ‘a difficult-to-replicate’ distribution reach across the country, a mass retail customer base and exploit cross-sell opportunities. However, the larger businesses are linked to capital markets, which pose growth uncertainty in the current environment. Life insurance premiums are growing rapidly and Reliance Capital is fast gaining market share. The company has rapidly built its consumer finance book, which stood at Rs 8,100 crore as of June ’08. Motilal expect profits and return ratios to remain low in this business. The general insurance business witnessed strong topline growth in FY08, but is likely to continue reporting losses in FY09. Profitability is expected only in FY10. The broking and distribution venture is scaling up fast and has gained ~3.5% market share in the first year of operation from purely retail business. Motilal has reduced its fair valuations for general insurance, broking and consumer finance businesses due to bleak outlook on either business growth and/or profit growth.

KOTAK SECURITIES on Sesa Goa

KOTAK Securities reiterates a ‘buy’ rating on Sesa Goa with a target price of Rs 300 per share for an investment horizon of eight months. The stock price has been tumbling continuously over the past few weeks. It has now fallen more than 50% from its peak and is even trading at a discount to the price Vedanta paid last year to acquire the company from Mitsui. At that time: (i) iron ore prices were half that of the present levels;
(ii) sales volumes were considerably lower,
(iii) cash levels were also much lower; and
(iv) other competitors had shied away from bidding due to imposition of Rs 300/tonne export duty on iron ore just before the process.

Several factors have collectively led to this fall. The key negatives are:
(i) seasonal weakness;
(ii) lower import demand from China, given curtailed steel production due to Olympics and Paralympics;
(iii) global commodities sell-off as financial institutions pull out funds to enhance liquidity amidst the global financial crisis; and
(iv) higher coke prices in China causing weakness in low-grade iron ore prices.

However, these negatives are fading away and this will result in a dramatic shift in sentiment, going forward.

Stock View on Lupin, Opto Circutes

CITIGROUP on Lupin - TARGET PRICE: RS 938

CITIGROUP Global Markets has maintained its ‘buy’recommendation on the stock saying the company’s initiative to build a global presence through small acquisitions and the buyout of a majority stake in Pharma Dynamics of South Africa would boost inorganic growth. “This is the company’s third acquisition in FY09 after Hormosan (Germany) and a minority stake in Generic Health (Australia). We believe the small size has kept valuations reasonable & expect all deals to be EPS and RoI accretive from FY10,” said Citi in a note to its clients. Citi has rated Lupin as ‘medium risk’ citing generic competition in Suprax (around 5% & 16% of sales & PBT) as the key reason. According to Citi, rising input costs due to Chinese government’s crackdown on environmentally unfriendly plants could hurt profitability. “Inability to effectively integrate the Kyowa acquisition could take a heavy toll on profitability as well as return ratios,” added the Citi note.

KOTAK Securities on - TARGET PRICE: RS.463

KOTAK Securities has maintained a ‘buy’rating on the stock saying the valuations are very attractive considering the strong market positioning, potential introduction of new products, front end R&D set up (with the Criticare acquisition) and strong management. The brokerage expects OCIL to register a 56.7% and 43.7% compounded growth in revenues and earnings, respectively over the next two years. It expects revenue growth of 73.9% to Rs 8.1 billion and net profit growth of 43.5% to Rs 1.9 billion in FY09. “The key growth drivers for topline would likely to be stents business which is expected to grow at about 80% while non-invasive segment is expected to grow at 77%, mainly due to Criticare acquisition,” said the Kotak note. According to Kotak, net profit margin is likely to decline to 23.8% in FY10 as against 28.3% in FY08 mainly due to higher interest cost. “The company has raised $52 million debt to fund the Criticare acquisition. We expect 43% and 44% growth in EPS in FY09 and FY10, respectively. In FY09, we expect EPS of Rs.20.2 while in FY10 we expect EPS of Rs.29,” the note added.

Stock View on AIA Engineering, Container Corp, Kamat Hotels, Bajaj Hindustan

KOTAK Securities on AIA Engineering - TARGET PRICE: RS 1,870

KOTAK Securities has maintained its “buy” recommendation on the stock saying the stock is attractively valued at current levels, in the context of its growth prospects. The brokerage says that despite sharp increases in raw material prices and sharp rupee-dollar movements the company has been able to effectively maintain its operating margins, as it has been able to pass on price hikes. “Going forward, the management is confident of maintaining the margins in the 23-25% range. We maintain our earnings estimates for AIA and expect it to report an EPS (earnings par share) of Rs 98.1 in FY09E (estimated),” the Kotak Securities note to clients said. “The current market price, said the Kotak note, discounts FY09E earnings at 16.1, which we believe is attractive considering the growth prospects for the company going forward due to capacity expansion and strong demand for the products of the company,” the note added.

ENAM Securities on Container Corp - TARGET PRICE: RS 1,035

ENAM Securities has maintained its “outperformer” rating on the stock. Enam believes that despite improving visibility on earnings (19% CAGR over FY07-09E) and sustainability of RoE (return on equities) at around 25%, the stock trades at a 12% discount to the Sensex valuation. “Compared with global peers, admittedly with high barriers to entry, Container Corporation trades at 40% discount,” the Enam note said to its clients. According to Enam, growth in India’s export-import trade and investment in rail, road and ports infrastructure would drive growth for the company. “Steep increase in rail haulage charges had dampened volume growth in the past three years. Current pricing environment remains stable, with IR to hike haulage charges twice a year,” said the note. The brokerage expects Container Corporation EXIM throughput to revert back to long average of 14% per annum. “Lower flat discounts and increase in tariff are expected to drive 244 bps expansion in EBIT margin over the next two years,” the note added.

Sharekhan on Kamat Hotels

SHAREKHANhas initiated coverage on Kamat Hotels and has advised investors to maintain a cautious view on the stock. Though the stock is attractively priced, the inability of the hotel group to fund its expansion plans is a key potential risk to the earnings estimate for FY10, the research note said. “The company’s revenues are heavily dependent on two properties — The Orchid and VITS — in Mumbai. These two properties are like to face stiff competition with incremental supply of rooms from Sahara Star. We believe, the occupancy rate of these properties may remain suppressed due to economic slowdown,” the Sharekhan report added. According to Sharekhan, the hotel group’s growth would be driven by a 37% rise in its room inventory to 773 rooms by FY10. Also, an increase in properties under management contracts will contribute to the topline growth.

MORGAN Stanley on Bajaj Hindustan - TARGET PRICE: RS 240

MORGAN Stanley has assigned an “overweight rating” on Bajaj Hindustan, as it expect the company to do well in coming months. As the largest domestic sugar producer, Bajaj Hindustan seems well positioned to benefit from the favourable domestic sugar outlook, the brokerage said in a report. “As our expectation of a tighter sugar balance unfolds, investors may start discounting the higher sugar and ethanol realisations. BJH has increased crushing and distillery capacity more than three times in three years and seems poised to drive revenue growth in a constructive pricing environment,” said the Morgan note to clients. Aggressive government intervention to control sugar prices and cane cost could be one of the risk factors, according to Morgan. “We expect a sharp rally in Bajaj Hindustan’s stock price as the company reaps the benefits of aggressive capacity expansion in a constructive sugar pricing environment. We estimate the stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data,” the note added.

Stock views on Andra Bank, Honda Motors

Kotak Securities on Andra Bank - TARGET PRICE: RS 81

Kotak Securities has initiated coverage on Andhra Bank with an ‘accumulate’ recommendation, saying the bank has one of the lowest NPAs (non-performing assets) in the industry and hence is better placed vis-à-vis its peers. The fact that the bank has been focusing on high yielding segments like agriculture, infrastructure, SMEs and retail has helped it deliver higher margins as compared to other public sector banks, says Kotak. “The bank’s gross NPA came down from 5.04% in FY04 to 1.07% in FY08 and net NPA declined from 0.93% to 0.17% during the same period,” the Kotak Securities note to clients said. The brokerage expects the bank to post an earnings growth of 1.1% CAGR (compound annual growth rate) for FY08-10E (estimated) as a result of moderate loan growth and lower noninterest income. However, says the note, the noninterest income would contribute less in the banks total income due to subdued equity market as well as increase in bond yields with corresponding fall in bond prices.

BNP Paribas on Honda Motors - TARGET PRICE: RS 884

BNP Paribas has upgraded its rating on two-wheeler major Hero Honda from ‘reduce’ to ‘buy’. The brokerage believes that potential upside on volume and earnings upgrades may act as positive catalysts for the stock. The year-to-date (YTD) growth in retail sales for Hero Honda, says the brokerage, were up 18% y-o-y (year-on-year) versus industry growth of 9.8% and going forward too, the volume growth looks healthy. “We don’t see any risk to our volume estimate, because our FY09 volume growth of 12.9% implies a 10% growth over the next eight months compared to a 17% growth achieved in the first four,” BNP Baribas note said in its note to clients. The brokerage has increased the FY09 EPS (earnings per share) and FY10 EPS estimates by 6.9% and 9.1% respectively. It expects the company’s net margins to be protected by fiscal benefits. “We do not see any threat to Hero Hondas’s net margins because we expect the aggregate 3-3.5% price increase (taken in two parts) coupled with lower tax rate due to fiscal benefits from the Haridwar plant to offset input cost pressure on the EBITDA line,” the note added.

Stock Views on THERMAX, BHEL, BOMBAY RAYON

Kotak Securities on THERMAX - TARGET PRICE: RS 540

Kotak Securities has assigned an ‘accumulate’ rating to Thermax, saying that recent orders will drive the company’s revenue growth in FY10. “The company is witnessing robust order inflows from steel and sponge iron makers. Thermax has also expanded its prequalifications in refineries. The company indicated that orders have been trickling in from sugar distilleries and the polyester sector,” the Kotak note to clients said. “Thermax is currently trading at 17.9 times and 14 times FY09 and FY10 earnings, respectively," the note added, cautioning that near-term growth was likely to be subdued.

Citigroup on BHEL - TARGET PRICE: RS 2,025

Citigroup Global Markets has downgraded its rating on BHEL from ‘buy’ to ‘hold’, citing limited upsides from the current levels with re-spect to the new target price. Citi has revised the target price for BHEL to Rs 2,025 from Rs 1,642 earlier to factor in the increase in the earn-ings estimates over FY10E-12E by 8-9%. “BHEL has hiked its order inflow guidance to Rs 500 billion from Rs 40,000-50,000 crore earlier. It has bagged Rs 192 billion of orders so far in FY09E and is well on course to meet its full-year order inflow guidance,” the Citi note to clients said. It expects BHEL’s earnings per share (EPS) to grow at a com-pounded annual rate of 27% over FY08-11(estimated) with RoE (return on equity) at 28-31% levels.

Merrill Lynch on BOMBAY RAYON - TARGET PRICE: RS 450

Merrill Lynch has initiated coverage on Bombay Rayon Fashion with a ‘buy’ rating and price target of Rs 450 citing attractive valuations. “Valuations are inexpensive at 9 times FY10 (estimated) earnings, given strong growth outlook and high RoE at 24%,” the Merrill Lynch note to clients said.

Take Your PICK: Part III - SMALLCAP STOCKS

IPCA Laboratories (CMP: Rs 540): The company’s focus on branded formulations business and emerging economies is expected to be its key growth driver. New products launches in domestic and UK markets coupled with supplies to new emerging economies and US markets should lead to a compounded annual growth rate (CAGR) of 17% in revenues and 22% in profits over next two years. It is expected to clock an earning per share (EPS) of Rs 69.7 and Rs 82.6 for FY09 and FY10, respectively. Currently, the stock is trading at 7.5x FY09 and 6.2x FY10 earning estimates.

Numeric Power Systems (CMP: Rs 601): The company, a leading manufacturer of uninterrupted power supply (UPS) systems and power conditioners in India, commands 60% share in IT and 82% share of the ATMs. The strong demand for company’s products (India has peak power deficit of 16.6%), increased focus on high margin equipment servicing and significant international presence make NPSL a fast-growing multinational in the power management solutions. The stock is attractively valued at 6.5x FY09 EPS of Rs 94.2.

Indian Overseas Bank (CMP: Rs 91): The company is a leading South Indiabased bank with a strong balance sheet. IOB has a healthy current and savings account (CASA) ratio of 33.5% and strong return ratios, with a return on assets (RoA) and return on earnings (RoE) of 1.3% and 28%, respectively. The net profit for FY09E and FY10E is expected to be Rs 12.42 billion and Rs 13.91 billion, respectively, resulting in an EPS of Rs 22.8 and Rs 25.5 for FY09E and FY10E, respectively.

LIC Housing Finance (CMP: Rs 306): The company is expected to continue to benefit from the growing demand for housing. A lower mortgage/GDP ratio of 6% offers huge potential. The company expects 22% year-on-year (yoy) business growth to Rs 268 billion and 20% yoy growth in net profit to Rs 4.61 billion for FY09. Improving asset quality and strong return ratios augur well for LICHF.

Bharat Electronics (Rs 1,154): The company is the premier defence contractor for the government. Over the years, the company has developed several competencies in the area of defence electronics. It is expected to benefit from the defence offset clause that the government mandates for import of defence equipment above Rs 3 billion. The order backlog is comfortable at Rs 94.5 billion and equivalent to over two years of FY08 revenues. The modernisation of the Indian defence sector is expected to throw significant opportunities for BEL.

Source: Kotak Securities