Stock Views on Rcom, Mahindra & Mahindra, Sun Pharma

Sharekhan on Sun Pharma - Target of Rs 1295

Sharekhan has recommended a buy rating on Sun Pharma, with price target of Rs 1295, in its report.

"Sun Pharmaceutical Industries (Sun Pharma)’ Q4FY2009 performance was above our expectations. The revenues for the quarter declined by 9.8% to Rs 1,134.4 crore due to lower sales in the US market (as against the high base of the nonrecurring sales of Pantaprazole in Q4FY2008), voluntary product recalls (Digoxin and associated write-offs) initiated by Caraco Pharmaceuticals (Caraco) and currency related losses."

"With Rs 3,000 crore of cash on books and with the global financial meltdown resulting in more attractive valuations for generic drug companies, Sun Pharma is scouting for other acquisition opportunities (possibly a mid-sized generic company in the USA). At the current market price of Rs 1,219, Sun Pharma is valued at 16x FY2010E fully diluted earnings. We shall review our estimates and follow this with a detailed note soon, Buy, target of Rs 1295," says Sharekhan's report.

Motilal Oswal on Mahindra & Mahindra - Target of Rs 756

Motilal Oswal has maintained its buy rating on Mahindra & Mahindra with a target price of Rs 756 in its research report.

"M&M’s operational performance for 4QFY09 was significantly better than we had expected, driven by merger of PTL and cost savings, with EBITDA margins at 11.5% and adjusted PAT at Rs 2.8 billion. The management guided 5-8% volume growth in both UVs and tractors, coupled with full benefit of raw material cost savings. We are upgrading our standalone EPS estimate for FY10 by 11.7% to Rs 37.9 and consolidated EPS estimate by 1.2% to Rs 62.6 (despite ~8% dilution related to PTL merger) to factor in benefits of PTL merger, higher volumes and cost savings. The stock trades at 10.8x FY10E consolidated EPS and an EV of 9.7x FY10E consolidated EBITDA."

"We remain positive on the core business of M&M and the accretion to its share value from its subsidiaries. The IPO of Mahindra Holidays will result in further value unlocking for the stock. The stock trades at 10.8x FY10E consolidated EPS and an EV of 9.7x FY10E consolidated EBITDA. We maintain 'Buy' with an SOTP-based target price of Rs 756," says Motilal Oswal's research report.

Motilal Oswal on Rcom - Target of Rs 350

Motilal Oswal has maintained its buy rating on Reliance Communications with a target price of Rs 350 in its research report.

"RCOM is seeking shareholders’ approval to raise funds through equity/equity-linked instruments which could result in potential equity dilution of up to 25%. As per the company, the funds would enable it to strengthen its balance sheet and equip it to participate in the upcoming 3G/Wi-Max auctions. RCOM’s shareholders have approved the scheme of arrangement for demerger of RCOM’s optic fiber division to Reliance Infratel. RCOM and its subsidiaries hold 94.5% stake in Reliance Infratel, financial investors hold 5%, while employee welfare trust holds 0.5% stake. As per RCOM’s notice convened for shareholders’ meeting, net consideration for the transfer of optic fiber assets would be Rs 67.2 billion."

"We are upgrading our March 10 target price to Rs 350 which now reflects nil discount to DCF (v/s 10% earlier) and incorporates a lower WACC of 12.8% v/s 13.5% earlier given reduced leverage concerns. Maintain 'Buy' on likely operational turnaround post recent GSM launch, and abating concerns on high leverage," says Motilal Oswal's research report.

Stock views on Larsen & Toubro, Ranbaxy, Allied Digital Services, Piramal Healthcare, Infosys, Mahindra & Mahindra

MOTILAL OSWAL on M&M
MOTILAL OSWAL maintains its 'Buy' rating on Mahindra & Mahindra. M&M had earlier mentioned in its post-2QFY09 results that it would be reviewing the Rs7,000-crore capex plan over FY09-12 for a possible reduction. After a review of the capex plans, management has now decided to go ahead with the original capex plan of Rs 7,000 crore without any cuts. Out of the Rs 7,000 crore over FY09-12, Rs 5,000 crore will be invested in the automotive business and Rs 2,000 crore in the non-auto business. In auto business, investment will be made in the Chakan plant (~Rs2,500 crore), product development (Rs 2,000 crore for Xylo, Scorpio's successor, light transport vehicles and lobal product) and further equity contribution in Mahindra Navistar JV (Rs 350 crore). In the non-auto business, it is investing Rs 500 crore in tractors business, Rs 700 crore in logistics business and defence business and Rs 750 crore for setting up world-class research facility at Chennai. Motilal Oswal has downgraded the consolidated earnings estimates by 11.7% for FY09 to Rs 58.7 and by 12.9% for FY10 to Rs 70.6, to factor in lower volumes and downgrade in subsidiary / associate earnings. Notwithstanding short-term challenges, valuations at 4.6x FY09E and 3.9x FY10E consolidated EPS are attractive.


CITIGROUP on INFOSYS

CITIGROUP EXPECTS Infosys' revenues at $1,167m, down ~4% qoq. This assumes marginal decline in volumes, stable pricing and ~4% impact of cross currency. EBIT margins are expected to fall ~150bps qoq. Citigroup forecast basic EPS of Rs 26.63 in line with guidance. Volumes continue to be under pressure with clients cutting back on discretionary projects and Q3 being also impacted due to "holiday project closures". Citigroup has lowered its FY10-11E estimates by ~6% on the back of lower volume/pricing assumptions and cross currency impact in Q3. While the stock price witnessed ~37% erosion in CY08, expected numbers are ~6% below consensus, and consensus is to be revised down further. This could put further pressure on the stock in the near term. The EPS numbers benefit from ~5% INR depreciation assumed in FY09 - in other words, Citigroup is modelling an EPS decline in constant currency terms. With a likely result disappointment and further EPS cuts, the stock could underperform in the near term.


MERRILL LYNCH on PIRAMAL HEALTHCARE


Merrill Lynch reiterates 'Neutral' rating on Piramal Healthcare (PHL). However it revises estimates to factor higher interest cost and lower target price to Rs 280 based on 12x FY10E EPS. PHL's proposed acquisition of Minrad comprises equity consideration (US$6mn), convertible debt redemption (US$30mn) and existing debt (~US2mn). Apart from this, PHL would infuse US$12mn in Minrad for working capital requirement. Post-completion of this acquisition (5th in 2008), PHL's D/E would be ~0.9x which is higher than the industry average. Minrad's acquisition bolsters the US$20mn inhalation anaesthetics business of PHL and broadens its portfolio from two products currently to five (halothane, isoflurane, enflurane, desflurane and sevoflurane). PHL-Minrad combine would be the 3rd largest player in US inhalation anaesthetics market addressing a US$1bn+ opportunity worldwide. Merrill Lynch is relatively conservative and expects the deal to be EPS neutral in FY10. The deal is expected to be closed by FY09-end. PHL's CMO business has mid-teens EBITDA margin which is the lowest among that of its peers.


INDIAINFOLINE on ALLIED DIGITAL SERVICES

Allied Digital Services (ADSL)'s pan-India presence, direct support model, established remote infrastructure and significant price competitiveness provide an edge against competition in the domestic IMS market. Its marquee clientele includes large customers won from leading Indian offshore vendors. The recent En Pointe Global Services LLC (EPGS) acquisition would significantly increase international IMS revenues apart from driving domestic revenues through offshoring. Further, the SOC services are expected to register exceptional growth driven by increasing compliance requirements globally. The company expects a hefty ~US$100-million revenue contribution from EPGS in FY10. ADSL's operating margin is likely to improve by 150-200bps in FY10 driven by lower solutions revenue share and improving profitability within IMS through offshore shift. IndiaInfoline expect revenues and net profit of ADSL to record a robust CAGR of 61% and 82% respectively over FY08-10E. Higher growth in earnings would be driven by OPM expansion. Given the strong fundamentals, current valuations of 4.7x FY10 P/E and 1.4x FY10 P/BV appear inexpensive.


JP MORGAN on RANBAXY LABORATORIES

GIVEN THE twin uncertainties of the continued US FDA import ban and potential currency exchange losses, JP Morgan remains 'Neutral' on Ranbaxy even though valuations remain attractive for longer-term investors. Ranbaxy, which has a 180-day exclusivity on generic Imitrex (Sumatriptan), has not yet been able to launch the drug in the US as the FDA approval has not yet come through. Sumatriptan First to File is approximately Rs 5/share of the target price. Brand sales of Imitrex were US$1.29 billion in 2007. Given that the generic filing is not from the manufacturing sites where the US FDA had issued warning letters, the launch approval from the US FDA for Sumatriptan is key to see if it is business as usual for Ranbaxy in the US beyond the products in the import ban. Given the large FTF (first to file) pipeline for Ranbaxy, any delay in approvals for Sumatriptan would be negative for the remaining FTF pipeline.


HSBC on LARSEN & TOUBRO

HSBC has downgraded the rating of Larsen & Toubro to 'Negative' over the Satyam stake purchase. HSBC believes this investment is a portfolio investment rather than a strategic one and views this as a negative for L&T. It thinks that the stake is not positive for L&T's subsidiary, L&T Infotech, given that it has a smaller operation versus Satyam's 53,000 employee base. The integration will be a significant issue given L&T Infotech's smaller size. Also, after allegations of misappropriation regarding Satyam's former chairman, integration could expose L&T to litigation. Moreover, there is a lot of uncertainty in terms of any liability for Satyam. HSBC reduces its FY10E PAT estimate by 8%, driven by a lower 4% change in sales and expects a 25.7% revenue CAGR over FY09-11E, driven by the existing order backlog and new orders from infrastructure, power and new verticals. HSBC is reducing its valuation of L&T subsidiaries to Rs 131 per share.

Stock Views on Mahindra & Mahindra, Dabur, Reliance Power

Merrill Lynch on Mahindra & Mahindra

WHILE Merrill Lynch has reiterated its ‘underperform’ rating on Mahindra & Mahindra (M&M), it has revised the price target to Rs 536 from Rs 499 due to additional value of listed subsidiaries, and a 4% lower dilution on assumed non-conversion of foreign currency convertible bonds (FCCBs). Merrill Lynch has the following concerns: Unexciting overall prospects of core business, restricted by highly competitive and margineroding utility vehicles segment, as well as substantial investments, which will dilute earnings and return parameters. Over the next three years, capital outlay is estimated at Rs 9,000 crore on an existing base of Rs 7,000 crore. Around 50% of the company’s investments are expected to be related to acquisitions/joint ventures, possibly in new forays, or where the management’s capability is yet to be proven, for example two-wheelers, auto parts etc. Standalone capital expenditure (capex) surge will sharply increase fixed overheads, and therefore, drag down mediumterm profitability, as well as the return ratio.

HSBC on Dabur

HSBC has assigned an ‘overweight’ rating to Dabur India with a price target of Rs 110. The recent sluggishness in the share price can be attributed to the slowdown in growth for foods from 20%+ earlier to around 15% in the past few quarters. However, since the integration with the consumer care division (CCD) has been completed, and supply chain issues have been sorted out, the foods segment is set to return to 20%+ growth in the next quarter. This may be the trigger that the market seeks to re-rate the stock. HSBC has valued Dabur at 21x FY10E earnings per share (EPS) of Rs 5.25 to get a target price of Rs 110. Dabur has averaged a 12-month forward price-earnings (P/E) multiple of 24.6x over the past two years with minimum and maximum P/Es of 17.1x and 29.9x, respectively. The stock is currently trading at 21.1x FY09E EPS. Given its robust business model, which is well-diversified over a large number of segments, with brands targeted at each category of consumers, Dabur is currently trading below its deserved multiple.

BNP Paribas on Reliance Power

BNP Paribas has initiated coverage on Reliance Power by assigning a ‘reduce’ rating. Reliance Power is a power utility at an early stage of development with revenue expected to start only in FY10, when its first power project becomes operational. The company has an ambitious plan to become the second-largest power generator in India by adding ~31 gigawatts (gw) of capacity by FY16. However, the company faces significant headwinds as only one project has attained financial closure. Further, 66% of the land required for its projects is yet to be acquired. Its hydroelectric projects are in very early stages of development with the risk of being shelved. BNP Paribas believes that Reliance Power will find it difficult to prevent project cost escalations on rising equipment and construction costs. Rising interest rates and a global credit crunch can increase debt costs above the company’s estimates.

Motilal Oswal View on Mahindra, Maruti Suzuki, Hero Honda

Buy Mahindra & Mahindra

Motilal Oswal has maintained buy rating on Mahindra & Mahindra, in its report dated September 2, 2008.

"Overall volumes improved by 7.9% YoY to 26808 units and 12.6% YTD growth. Tractor sales increased by 15.6% YoY to 7597 units (16% domestic growth and 6% export growth), and YTD growth of 10.6%. We estimate 10.7% volume growth in FY09E, implying residual growth of 9.7%. There is a strong possibility of volume upgrade in tractors and 3-wheelers, whereas we would revise downwards our volume estimates for Logan. On our current estimates, the stock trades at 8.6x FY09E EPS of Rs 68.6 and 7x FY10E EPS of Rs 84.3. Maintain Buy," says Motilal Oswal's research report.

Buy Maruti Suzuki

Motilal Oswal has maintained buy rating on Maruti Suzuki, in its report dated September 2, 2008.

"Domestic volume de-grew by 10% YoY to 54113 units, first significant contraction in a long time. Exports grew by 1% to 5795 units. Our current estimate is FY09 volume growth of 11.6% (8% domestic & 60% export growth), implying residual growth of 15% v/s YTD growth of 6%. We would be revising our volume estimates downwards. The stock trades at 10.6x FY09E EPS of Rs 62.8 and 9.3x FY10E EPS of Rs 71.2. Maintain Buy," says Motilal Oswal's research report.

Buy Hero Honda

Motilal Oswal has maintained its buy rating on Hero Honda in its September 2, 2008 research report. "Hero Honda volumes increase 26.8% YoY to 305,516 units, in-line with our estimates and the strongest growth among all two-wheeler companies. YTD volumes grew by 19% to 1,481,077 units. Motorcycle volumes grew by 28% YoY to about 293,000 units and YTD growth of 19%. Also, scooters registered about 4% volume growth to about 12,000 units and YTD growth of 30.5% to about 49,800 units. Our FY09 estimates factor in a 8.1% volume growth, implying a 1.7% residual growth. We are in the process of reviewing our volume estimates. Based on our current estimates, the stock trades at 15.1x FY09E EPS of Rs 56.6 and 13.4x FY10E EPS of Rs 64. Maintain Buy." According to Motilal Oswal report.

Stock views on RELIANCE COMM, BANK OF INDIA, AEGIS LOGISTICS, M&M, YES BANK

CITIGROUP on RELIANCE COMM

TARGET PRICE: RS 530

CITIGROUP has downgraded Reliance Communications to ‘hold’, citing subdued first quarter and falling capital productivity. Its new target is Rs 530. Essentially, it has cut its FY09-10E EBITDA estimates by 13% and EPS by 14-18% to reflect a host of factors. Chief among them are lower revenue per minute in-line with peers, lower elasticity, staggered rollout of GSM and higher net debt. It notes that the company registered a weak first quarter EBITDA, as wireless was hit by continued lack of elasticity. It expects this trend of low CDMA elasticity to continue to dominate RCOM’s rations till GSM launch. It also says that the company’s $5.5 billion capex (FY09) and $4 billion (FY10) would lead to a net debt of Rs 170 billion in end-2009 (Rs 130 billion on June-2008). It signs off saying no triggers in the near term. “RCOM’s wholehearted participation in wireless growth is contingent on consumer mix change through the GSM foray, key for rerating, but some time away and not without risks,” said Citi in a note to its clients.

MACQUARIE on BANK OF INDIA

TARGET PRICE: RS 336

MACQUARIE believes that Bank of India’s strong results show its relative resilience among government-owned banks to the tough macro environment. The bank remains its top pick among state-owned banks and the broking house maintains ‘outperform’ rating with a revised target price of Rs 336 from the previous Rs 299. It says that the key earnings surprise was strong growth in fees to 58% Y-o-Y driving the 49% Y-o-Y growth in non-interest income. It infers that the bank has been aggressively pushing for fees business, focusing on products such as letters of credit and guarantees.

KR CHOKSEY on AEGIS LOGISTICS

TARGET PRICE: RS 207

KR CHOKSEY Shares & Securities has assigned a ‘buy’ on Aegis Logistics with a one-year price target of Rs 207, citing growing domestic consumption of the company’s services. Aegis Logistics mainly concentrates on port handling of liquid petroleum or chemicals and gas storage and distribution. “Given the growing domestic consumption of petroleum and gas in the recent years, Aegis Logistics (ALL) is well placed to grab the increasing opportunities in this sector. As a result of favourable cost, economics of auto gas over petrol and the increasing new entrants of LPG variants of cars in the market, the company is all set to scale up auto gas stations from the current 22 to 100 in the next two years,” the report said.

EDELWEISS Capital on M&M

EDELWEISS Capital has initiated coverage on Mahindra & Mahindra (M&M) with a ‘buy’ rating. The brokerage expects the operating divisions of M&M to perform well over the medium term, in terms of growth and profitability. “We expect significant expansion in M&M’s addressable market through its entry into the passenger car. The company has significant value embedded in its investments, covering information technology (Tech Mahindra), real estate & infrastructure (Mahindra Gesco), hospitality (Mahindra Holidays), financial services (Mahindra & Mahindra Financial Services), and auto-component (Mahindra Ugine Steel and Mahindra Forgings) sectors,” the report said.

IDBI Capital on YES BANK

IDBI Capital has maintained a ‘buy’ rating on YES Bank, on expectations of higher growth. happen. The brokerage expects the bank to log strong income growth in the long term. Despite mark-to-market (MTM) depreciation, net provisions have been lower owing to reversals equivalent to MTM depreciation done on investment provisions, the IDBI report noted. The bank has increased its lending and deposit rates recently.