Stock views on Tata Power, ICICI Bank, Siemens India,

MERILL Lynch on RELIANCE INDUSTRIES

MERILL Lynch has cut its price objective on Reliance Industries (RIL) by 15% from Rs 1,825 to Rs 1,555 based on sum of the parts valuation. However, it continues to retain its ‘buy’ on the stock. The brokerage says that the cut is due to cut in the value of its refining business and value of its investment in RPL. The former has been cut by 56% to Rs 168 per share and the latter by 39% to Rs 137 per share. “We have steeply cut Singapore complex refining margins forecast for financial year (FY) 2010 and 2011 (expected). Consequently, refining margins of Reliance Industries (RIL) and refining subsidiary Reliance Petroleum (RPL), too, have been steeply cut,” the report said. The cut is relatively modest assuming a weaker rupee, it adds. RIL’s presence in E&P and petrochemicals also helped dilute impact of refining margin cut on RIL. The report says that the key risks include failure in the retail business, and changes in government policies like withdrawal of the tax holiday which may have a direct impact on the business, cash flow and profit, among other things.


Enam Securities on SIEMENS INDIA

Enam Securities has put an ‘underperformer’ on Siemens India on lower-than-expected results and poor performance by its subsidiaries. The brokerage says that Siemens’ continuing engineering businesses — power, industry and transportation are showing signs of slowing. The IT business is unlikely to create value for the shareholders. “We are revising our earnings estimates downward by 31% to Rs 18.5 to account for slowing business traction. We downgrade the stock to sector underperformer,” the report says. It adds that the management of the company has hinted at delays in contract finalisation and contract renegotiations at lower prices by customers due to the decline in commodity prices. The management believes that the power division will be a key growth driver, driven by strong growth in domestic market and huge opportunity in the Middle East. “Going forward, the management would be focusing on the quality and profitability of order rather than size and volume of the project,” says the report.


BNP Paribas Securities on ICICI BANK


BNP Paribas Securities has maintained its ‘buy’ rating on ICICI Banks on account of bank’s strategy of consciously slowing down on growth in riskier categories. The brokerage house says, “Our analysis of incremental advances — broken into mortgage, non-collateralised retail and corporate loans — vis-`-vis the incremental gross nonperforming loans (NPLs) additions indicates that bank’s strategy of consciously slowing down on growth in riskier categories has started yielding results.” It expects a slowdown in rate of growth of non-collateralised NPLs over the next two quarters, although in absolute terms, incremental NPLs will continue in the Rs 3-4-billion-perquarter range as at present. The brokerage says that the bank trades at one time its financial year 2010 (expected) book value at its target price of Rs 620. “We use a three-stage residual income valuation to arrive at our core bank target price of Rs 475 and a sum-of-the-parts approach to arrive at Rs 145 per share for subsidiaries. Our aggregate target price for ICICI Bank is Rs 620.”


Indiabulls on TATA POWER


Indiabulls has upgraded its rating on private power sector major Tata Power from ‘hold’ to ‘buy’. The brokerage is upbeat about the company’s future on the back of its upcoming projects. It believes that the existing power generation and distribution businesses and stable revenue-generating subsidiaries provide stability to the company. “Based on our SOTP valuation, we have arrived at a target price of Rs 872. It says that stock price has corrected sharply since our last quarterly report, and it is undervalued at the current market price. It, however, adds that the company may find it difficult to finance its other expansion plans. But due to its experienced management team, it is expected to tide over the current crisis. It adds that any delay in completion of the Maithon and Mundra power projects would adversely affect company’s rating

Stock Views on Titan, Cipla, Petronet LNG

HSBC on Titan Industries

HSBC reiterates ‘overweight’ rating on Titan Industries. The company’s second-quarter FY09 results were quite good. It reported a 53% increase in sales and 88% net profit growth. Moreover, both the watches and jewellery divisions posted satisfactory sales growth and handsome margin expansion. HSBC expects that the effects of the slowdown will be reflected in Titan’s results from Q3 onwards. Nevertheless, the risks to FY09E estimates are more to the upside than the downside. However, HSBC has cut the company’s EPS estimate for FY10E by 3.5% to factor in slower demand next year. HSBC has identified the following growth drivers for Titan: 1) The company has recently forayed into the eyewear business with 30 stores, which may cross 150 stores by FY11E; 2) New designs and innovation across products should take wallet share; 3) Increase in charges for making jewellery; and 4) Increased preference of consumers for branded jewellery. HSBC values Titan at 20x FY10E EPS, with a target price of Rs 1,100 per share. The target price gives a potential total return of 31%.

INDIA Infoline on Petronet LNG

INDIA Infoline upgrades Petronet LNG from a ‘market performer’ to a ‘buy’, with a target price of Rs 48 and upside of 22.8%. The company reported a flat sales growth, despite a near 10% fall in sales volumes to 75 TBTUs as one high-pressure pump was de-commissioned for repair. The fall in volumes was higher than expected as the repair work stretched over a period of 3.5 months. However, the volume decline was offset to some extent on account of higher realisations aided by depreciation in the rupee. Going ahead, the 5 mmt expansion at Dahej terminal is scheduled to commence operations in Q4 FY09, while the Kochi project is likely to go on stream in ’12. With domestic gas supplies expected to increase, Petronet will find it tough to market the costlier regasified LNG. Further, with tightness in the international market, sourcing long-term LNG at affordable prices is difficult. However, the 35% correction in the company’s stock price over the past couple of months is unwarranted and is steeper than the perceived risks.

MERRILL Lynch on Cipla

MERRILL Lynch maintains ‘underperform’ rating on Merrill Lynch, despite stable margin outlook, given rich valuations and lack of upside triggers. Cipla’s Q2 net income was 7% lower than Merrill Lynch’s estimates due to higher-than-expected forex loss (Rs 100 crore) despite 23% growth in topline and stable margins of 23.3%. Cipla trades at 21x FY09E and 16x FY10E earnings — over 25% premium to the average of the domestic generics sector. The stock has corrected in the past few weeks and it is expected to be range-bound, given lack of visibility on big product upsides. Within inhalers, Cipla has developed eight HFA inhalers for the European Union market, and six products have been submitted, which can involve a long clinical trial process. The company is setting up capacities at different places (four plants in Indore SEZ coming up in February ’09); the full impact of this will be seen later. Work on the Goa SEZ remains stalled (Rs 150 crore has been invested so far). Cipla faces the risk of fluctuating margins in the coming quarters, given high contribution from low-margin HIV products (>30% of revenues) and pricing pressure in developed markets.

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.

Stock Views on Balaji Telefilms, Ranbaxy, Jyothi Structures, Hindalco Industries

MERILL Lynch on Balaji Telefilms - TARGET PRICE: RS 177

MERILL Lynch has maintained its “underperform” ratings on Balaji Telefilms. Recently, the STAR Group (STAR) had said it would sell 25.99% stake in BTL to the promoters or parties nominated by it at Rs 190 per share in 240 days. This implies that Balaji would be free to do programming for STAR’s rivals in certain time slots. “However, given the dominance of STAR Plus in the Hindi general entertainment (GE) space, we believe that the incremental opportunity could have lower ratings and higher costs. We think it is fraught with lower margins, lower RoE, and therefore, not positive for Balaji,” the Merrill note to clients said. “We believe earnings in Balaji’s core content business is set to slow — 12% CAGR (FY08-10 estimated) against a robust 27% (FY05-07),” the note added, citing limited prime time slots left for programming in the Hindi GE space, weak ratings on STAR Plus, entry into lower margin movies and higher costs on political intervention in labour matters as the reasons.

UBS on Ranbaxy - TARGET PRICE: RS 511

UBS has downgraded its ratings on Ranbaxy from “neutral” to “sell” , citing the ongoing investigation by the US Food and Drug Administration as a major concern. “We believe the ongoing US investigation is unlikely to be resolved in the short term and that negative publicity and heightened scrutiny are likely to result in slower product approvals in the US and other markets. We, therefore, now value Ranbaxy’s core business in line with tier-II Indian generic companies at 18 times adjusted forward earnings,” the UBS note to clients said. UBS has slashed its price target for Ranbaxy to Rs 511 from Rs 593 earlier and lowered its earlier earning per share estimate for 2008 by nearly 33% to Rs 12.78. “Our lower 2008 forecast is primarily due to FX translation loss on FCCBs,” the UBS note to clients added, also mentioning that the business outlook for the company remained “challenging”. “We believe Ranbaxy continues to face challenges in the EU market and that 10-12% year-on-year (Y-o-Y) represents the best case organic revenue growth for the company,” the note said.

MF Global on Jyothi Structures - TARGET PRICE: RS 192

MF Global has recommended a “buy” on Jyoti Structures, citing strong order flows, and an export focused business model which exposes the company to fewer operational risks. The brokerage expects JSL to report a 41% compounded annual growth in revenues between FY08-10 (estimated) and a 39% CAGR in earnings. According to MF Global, the company plans to invest more than Rs 600 million (FY09E) to strengthen its export presence in areas like the Middle-East and Africa. “The capex would mainly be towards buying construction equipment and CNC machines,” the MF Global note to clients says. MF Global expects the company to outperform its peers in a rising input cost scenario. It expects an inflow growth of 25% each during FY09E and FY10E and any positive surprise with respect to inflows would lead to a further increase in profit after tax for JSL.

ENAM Securities on Hindalco Industries - TARGET PRICE: RS 182

ENAM Securities has assigned an “underperformer” ratings to Hindalco as it feels the company’s proposed rights issue is diluting the growth of the company Hindalco is planning a rights issuance of three shares for seven existing shares at Rs 96 per share. “This is in contrast to the earlier envisaged one share for every three shares around Rs 120 per share and is round 30% discount to FY08 book value per share. The issuance hints at a sense of urgency for fund raising, given tight capital market conditions, to retire $3-billion bridge debt that expires in November 2008,” the Enam note to clients said. “We reduce our FY09 and FY10 earnings per share estimate to Rs 17.5 (Rs 19.9 earlier) and Rs 22.7 (Rs 24.4 earlier), respectively, to reflect more-than-anticipated rights dilution at lower price and attendant net interest impact,” the note added.