Angel Broking Views on Smallcap Autos - Automotive Axles, Subros

AUTOMOTIVE AXLES

The company enjoys superior valuation compared to its peers as it has been consistently achieving high levels of profitability. Given the good long-term growth opportunities, impressive clientele, high-end product portfolio and sustained high OPM of over 14%, Automotive Axles, which caters to the commercial vehicle (CV) segment is a good long term investment pick. Though overall CV industry is under cyclical pressure, in long run the MAV (Multi Axle Vehicle), sub-segment is particularly on high growth trajectory and is fast substituting the MCV (Medium Commercial Vehicle) segment. MAV growth is being driven by better cost economics. MAVs are more profitable than the ICVs and MCVs due to which the truck operators are shifting over to MAVs. Automotive Axles, by far the largest supplier (vis-a-vis competition) of tandom drive axles for the 6X4 MAVs, is expected to be one of the biggest beneficiaries of this structural shift to MAVs.

Subros

Subros prospects are derived largely from demand arising in the Passenger Vehicle (PV) segment, which is currently under pressure due to sluggish demand. This is reflected in Subros valuation too. However, newer growth opportunities are emerging for Subros, owing to increasing customer base on the back of investments by new OEMs entering Indian market. Subros is the market leader in the supply of AC systems to the Automobile OEMs with more than 40% market share. Further with the advent of Tata Nano the market is moving towards producing low-cost high-quality automobiles. As the company enjoys an edge over its peers on back of its strong Order book and technological backing from its two foreign collaborators viz. Denso and Suzuki, the company is all set to grab this opportunity. We estimate Subros to register an EPS of Rs 5.2 in FY2009E and Rs 6.4 in FY2010E.

Stock Views on DLF, Suzlon Energy, Sesa Goa, GAIL

DEUTSCHE Global Markets view on DLF - Ratings Hold

DEUTSCHE Global Markets Research has downgraded its ratings on DLF to “hold” because of weakening demand, falling property prices and tight financial markets. The firm has reduced its revenue forecasts for the company for the next two years to 19% and 25% owing to delay in execution of the projects, lower product prices across verticals, and deterioration in product mix in favour of low-margin mid-end housing. Increase in construction costs and other expenses (staff, SG&A) due to new launches, says Deutsche Global, has lead to significant margin compression. Hence the firm has cut profit estimates of the company by approximately 24% and (approx.) 29% for the next two years. Deutsche has reduced the NAV (net asset value) per share from Rs 700 to Rs 532.

MERRILL Lynch on SUZLON ENERGY - Rating Buy

MERRILL Lynch has maintained its “buy” rating on Suzlon saying the company remains on track for material scale-up in operations across the wind turbine value chain. Suzlon, says the Merrill note, has pre-poned its purchase of Martifer’s 22.48% stake in REpower for a pre-determined price of 270 million pound sterling. “This acquisition shall consolidate Suzlon’s holding in REpower to (approx.) 90%, enough to press for a domination agreement, which is key for integrating REpower and derive synergy benefits from a unified product and market strategy,” the note said. Merrill has valued Suzlon’s wind business at 18.5 times estimated 1-year-forward earnings, at Rs 296 per share. “This is conservative given it is 20% and 25% discount to its current PER (price to earning) and peers respectively. Suzlon’s 71.3% stake in Hansen is valued at Rs 76 per share at 10% discount to the price objective of 330 pence,” the note added.

CITI Investment on SESA GOA - Rating Sell

CITI Investment Research has initiated coverage on Sesa Goa with a “sell” recommendation saying that most positive triggers for the stock are already priced in. The future iron ore price hikes, says Citi, are expected to be substantially lower relative to FY09 and risks of government intervention to contain inflation remain as downside risks for the stock. At the price target of Rs 145, the note says, Sesa Goa would trade at 3.8 times 12-month forward PE (price-to-earning). “The PE multiple is at a discount to global majors (forward PE of around 7-9 times), justified given their relative size, diversified product mix and higher market cap,” the Citi note said. Sesa Goa, says Citi, has significant growth plans and is part of an industry with strong pricing power.

ICICI Securities on GAIL - Rating Buy

ICICI Securities has maintained its “buy” rating on the stock saying the company will benefit from gas grid expansion and improved visibility on gas supply. Post-commencement of NGG (national gas grid) operations, says ICICI Securities, GAIL’s returns may settle below its recent average as the future growth will likely be skewed toward annuity earnings from transmission. “Assuming the absence of growth in the existing business beyond FY11E, GAIL’s RoCE (return on capital employed) is likely to be 16.4% in FY16E versus 14.8% in FY09E,” the note said. ICICI Securities expects GAIL’s EBITDA CAGR (compound annual growth rate) at 12.3% and net income CAGR at 8.6% over FY08-11E, driven by gas transmission business, expected to grow at 16% revenue CAGR through FY08-11E (estimated).

Stock Views on Larsen Toubro, Container Corp Of India, Areva TD, HCL Technologis, Ansal Properties

MORGAN STANLEY on LARSEN & TOUBRO - RATING: OVERWEIGHT


MORGAN Stanley believes that fears of the impact of a slowdown in the capex cycle in India on Larsen & Toubro (L&T) are exaggerated. It expects L&T to gain market share during the slowdown, so the risk-to-growth estimates will remain low. Morgan Stanley believes L&T is the lowest risk play in the sector and strongly recommends buying into any weakness. However, despite the upgrade, Morgan Stanley estimates a CAGR of 25% for L&T’s standalone earnings over FY08-10E against 57% over FY06-08E. L&T will be cushioned from the slowdown due to its propensity to gain market share in slowdowns, its entry into newer verticals and its exposure to the Middle East. On a bottom-up basis, healthy capex trends in verticals (E&P and metals) further increase the company’s ability to weather the slowdown.


JP MORGAN on CONTAINER CORP OF INDIA - RATING: OVERWEIGHT


JP Morgan has assigned an ‘overweight’ rating on Container Corporation of India (Concor) with a March ’09 price target of Rs 1,010. The price target implies a 16% potential share price upside from current levels. Concor is India’s largest railway container freight operator with an over 90% market share. By that estimate, Concor will have an earnings CAGR of 16% over FY08-10 driven by growth in containerised cargo traffic. Given sustained growth in India’s foreign trade, JP Morgan expects container traffic to grow at 14% over FY08-10E. It expects Concor to be a key beneficiary of this growth, given its unparalleled infrastructure network with 58 inland container depots (ICDs) and over 150 rakes and established customer relationship. The company’s revenue growth is likely to accelerate to 18% CAGR over FY08-10E (versus 10% in FY08), given a sharp increase in customer tariffs. The March ’09 price target is based on discounted cash flows (DCF) and implies 13x oneyear forward P/E on FY10E EPS (which is at a 10% discount to its average historical three-year multiple). The multiple looks justified, given rising competition and moderation in earnings growth. Downside risks to the price target and view are a challenging macro environment, given high crude oil prices and rising inflation, which can slow down India’s foreign trade; and a sharper-than-expected increase in competitive intensity.


CITIGROUP on AREVA T&D - RATING: HOLD


CITIGROUP has initiated a ‘hold’ recommendation on Areva T&D India with a target price of Rs 1,809. Areva T&D’s EPS has witnessed a CAGR of 117% over CY04-07 and expanded return on equity (RoE) from 11.4% to 46.5%, aided by a focus on higher-margin national grid/selected orders for the Accelerated Power Development and Reform Programme (APDRP) and growth off a lower base. Further, the company’s EPS is expected to witness a CAGR of 32% over CY07-10E, versus that of ABB at 25%, with higher RoEs of ~40% versus ABB at ~30%. Discussions with the management suggest that any foray into the nuclear power equipment business in India will be through a separate entity. Globally, Areva is at No 3 after ABB and Siemens in power T&D. ABB has historically been the market leader in India. However, Areva T&D India has edged past ABB in H1 CY08 with a market share of 22.4% vs 19% for ABB and 12% for Siemens. These are strong end markets and low-cost manufacturing centres. Areva T&D Global has a clear strategy of making these two countries global sourcing hubs. Currently, exports contribute 14% to Areva T&D India’s sales and are expected to jump to 25% by CY12E. The stock trades at a P/E of 19.7x CY09E and provides limited upside to the target price of Rs 1,809. The target price is based on a P/E of 23x December ’09 set at a 9.5% premium to historical average P/Es and is in line with that of ABB’s. Order inflow momentum, execution and commodity price movements can drive share price movements.


INDIABULLS SECURITIES on HCL TECHNOLOGIES - RATING: BUY


INDIABULLS Securities has maintained its ‘buy’ rating on the stock because the company witnessed a strong deal inflow during Q4 ’08 ($310 million) and signed a total contract worth $1 billion during the year. HCL Technologies reported strong results for the quarter and the year ended June ’08. Its topline recorded a sequential growth of 11.5% to Rs 2,170 crore, driven by an appreciating dollar and a modest volume growth. EBITDA margin increased by 117 bps q-o-q to 23.4%, led by an improved operational efficiency and a decrease in the cost of revenue, which helped offset the increase in SG&A expenses. Although in a weak macro-economic environment, pricing will continue to remain under pressure, Indiabulls expects the company’s revenues to grow at ~21.4% in dollar terms for FY09, driven by volumes. Besides, gain from the appreciating dollar against the rupee will also help improve revenues to grow at 27.2% in rupee terms for FY09E. Despite a slowdown, the US remained the highest revenue contributor and showed a decent growth throughout the year. Besides, the company steadily improved its utilisation rate from 69.2% in Q1 ’08 to 73.9% in Q4 ’08, which helped improve margins. Despite having stable fundamentals, the stock is trading at a discount of 29% to the average industry multiple. Moreover, valuation gives a fair value of Rs 316. The stock has an upside of around 37%.


MACQUARIE on ANSAL PROPERTIES - RATING: NEUTRAL


ANSAL Property and Infrastructure (APIL)’s leverage ratios are stretched. Its net debt-to-equity ratio (incorporating the impact of outstanding land payments) stands at 165%. This does not include any impact of off-balance sheet financing. APIL’s stretched balance sheet and the general scenario of tight liquidity are primary concerns. Macquarie has a limited visibility on sources of capital which will be used to generate profits from this land bank. Investors are unlikely to (and should not) attribute any value to profits earned over and above the replacement cost of the land bank. Macquarie has cut its NAV estimates to reflect this change in opinion. Its ~240 million sq ft of land in North India provides APIL the scale to enjoy preferred supplier relationships. Margins are likely to be supported by the low average cost of land acquisition (Rs 121/sq ft). Projects in North India account for 100% of APIL’s NAV and land bank. This concentrated land bank limits its ability to focus elsewhere if this market experiences a slowdown. North India has seen rapid price rises and even more rapid project launches in the past 2-3 years. Incrementally, this scenario is likely to be exacerbated by a surge in secondary market supply, as speculators try to exit properties bought in the past two years. The target price of Rs 100 based on a 25% discount on NAV remains unchanged. APIL is trading at a 24% discount to liquidation value and below its book value. This provides downside support. Nevertheless, Macquarie has downgraded the stock to ‘neutral’ from ‘outperform’ as the stock lacks triggers, which may keep the share price at depressed levels.