MERRILL LYNCH view on Raymond - RATING: UNDERPERFORMMERRILL 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 : BUYINDIA 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: SELLDEUTSCHE 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 : BUYEDELWEISS 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.
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