CLSA on Tata Steel - RATING: OUTPERFORMCLSA maintains ‘outperform’ rating on Tata Steel, but lowers its target price to Rs 745. Steel prices have recently corrected by $30-40/tonne across regions, with parallel declines in spot iron ore and scrap prices. A correction in steel prices in H2 CY08 was imminent, as the price hike had overshot the rise in costs. Prices have also weakened due to the seasonally weak period and rise in Chinese exports. Moreover, steel prices have remained strong, despite weak global macroeconomic indicators. While CLSA expects steel prices to decline against the backdrop of a weakening global economy, prices are unlikely to fall below $900/tonne, as marginal producers are currently operating at $850-950/tonne. CLSA’s regional steel team believes that the recent spike in Chinese exports was due to exploitation of export regulation loopholes by smaller mills. CLSA remains confident that the Chinese government will soon clamp down on exports, either by hiking export taxes, or by implementing a quota system, which should support steel prices. With 70% of its sales on a spot basis, Corus’ earnings are highly geared to spot European steel prices. Though Q1 FY09 results will benefit from the lag in re-pricing of raw material contracts, Q2 EBITDA/tonne faces a risk due to weakening steel prices, higher raw material costs and appreciation of the US dollar versus the pound and euro. While CLSA sees higher predictability for standalone earnings, Corus adds volatility in the near term for consolidated earnings, which will be reflected in the multiples. Global steel majors’ multiples have corrected since their May-June peaks.
MERRILL LYNCH on Idea Cellular - RATING: BUYIDEA launched its mobile services in Mumbai last week. At its launch event, the company underscored Idea’s market leadership in Maharashtra and emphasised its brand values. There were no major references to pricing differentiation; the company said Idea is not a discount brand. Idea’s tariffs on launch seem broadly comparable with prevailing tariffs of other operators, barring some product innovations like unlimited on-net night speak, postpaid-cum-prepaid service etc. Potential delivery of strongerthan-consensus subscriber market share in a relatively mature market like Mumbai can boost investors’ sentiment on Idea, even though profits from its Mumbai operations can take longer to filter through. Idea aims to have ~0.8 million subscribers in Mumbai over the next 12 months and expects around 20% share of net additions in the circle. The company expects the Mumbai operations to break even in about four years and the capital expenditure (capex) for Mumbai is expected to total Rs 800 crore by March ’09. Idea’s Mumbai network encompasses 1,000 cell sites and has the capacity to accommodate 1.5 million subscribers (roughly 10% of Mumbai’s current wireless subscriber base). The company said its core network is 3Gready and has scalable IP-based transport. Ericsson is Idea’s equipment vendor for Mumbai. Merrill Lynch has a ‘buy’ rating on Idea due to the company’s improving competitive position in the domestic market and it feels Idea’s strategic efforts are in the right direction.
GOLDMAN SACHS on TATA CHEMICALS - RATING: BUYCMP: Rs 311 GOLDMAN Sachs initiates a ‘buy’ recommendation on Tata Chemicals with a target price of Rs 435, implying 29% potential upside. With its soda ash assets spread across geographies serving key consumption regions and an improving regulatory environment in the fertiliser industry, the market has not yet fully factored in Tata Chemicals’ earnings capability. Goldman Sachs expects 49% EBITDA CAGR over FY08-FY10E, on the back of earnings accretion from its US soda ash facility and improving margins in the soda ash and fertiliser segments. Tata Chemicals is trading at 4.9x FY10E EV/EBITDA, against its historical trading band of 6-8x forward EV/EBITDA. The company’s key catalysts include: 1) Q2 FY09 results, which should provide insight into Tata Chemicals’ soda ash realisations across geographies; 2) Sustained strength in global urea and di-ammonium phosphate (DAP) prices that lead to improvement in fertiliser margins; and 3) Potential greenfield expansion plans in the urea segment. Goldman Sachs’ values Tata Chemicals’ core business using EV/EBITDA methodology and the investments in its group companies at 25% holding company discount to market value. Goldman Sachs values the fertiliser/soda ash/other chemical segments at 6x/5.5x/6x FY10E EV/EBITDA, respectively. The 12-month target price of Rs 435 implies FY10E EV/EBITDA of 6x.
CITIGROUP on Lupin - RATING: BUYLUPIN’S deal to market Forest Labs’ AeroChamber Plus line of products to US paediatricians will allow it to leverage its branded field force and strengthen its franchise in the paediatrics segment. While the upside may not be on the same scale as Suprax, this will be accretive, given the lack of incremental spend on development or at the front end. Lupin has entered into a multiyear agreement with Forest to promote the latter’s value holding chamber (VHC) product AeroChamber Plus to paediatricians. AeroChamber Plus is the most prescribed holding chamber for use with inhaled asthma medications in the US. As per IMS ’07 data, two-thirds of all prescriptions for the product are written by paediatricians. Lupin’s 50-strong sales force in the US currently promotes only Suprax and has room to add two more products, thus implying no incremental spend for this deal. Lupin will make an undisclosed marketing margin up to a certain threshold level of sales, beyond which, the upside will increase. Citigroup expects margins to be in the range of 10-15% — while this is lower than Lupin’s core business margins, the lack of incremental regulatory, development or front-end spend makes this an accretive deal. Citigroup believes this deal — besides being a small step towards offsetting the impact of a potential generic threat to Suprax — highlights the scope for multiple growth drivers within Lupin’s business model.
MOTILAL OSWAL on ONGC - RATING: BUYTHE government had indicated that subsidy-sharing in FY09 will be fixed at Rs 45,000 crore for upstream companies (ONGC shares ~86%), Rs 20,000 crore for OMCs and oil bonds issuance at Rs 94,600 crore. Motilal Oswal estimates the net shortfall in under-recovery sharing (post upstream, OMC and oil bonds sharing) for FY09 to be below average Brent price of $118/bbl (Rs 42 per dollar). If oil prices remain below $118/bbl, the announced subsidy-sharing will sufficiently cover under-recoveries and thus, reduce the risk of higher sharing by ONGC. Brent price has fallen by 23% from its peak in July and if the trend continues, ONGC (with fixed subsidy burden) will be adversely affected. Assuming the subsidy burden at Rs 38,700 crore for FY09, ONGC’s EPS can reduce by 21% to Rs 98.2 if average FY09 Brent price declines from $110/bbl to $100/bbl. However, at fixed subsidy burden, ONGC’s EPS will rise by 21% to Rs 150 at Brent price of $120/bbl. The Chaturvedi committee has recommended capping ONGC’s realisation at $75/bbl (100% special oil tax on realisation above $75/bbl). The recommendations are unlikely to be fully implemented, given other harsh measures like frequent hike in retail fuel prices. Motilal Oswal remains positive on ONGC with a long-term perspective, as the bulk of its NELP acreage is yet to be explored, and thus, has huge potential for oil & gas discoveries. But in the near term, the stock performance will reflect movement in oil prices. At current oil prices, a movement either ways will pose a risk to earnings. The stock trades at 8.6x FY09E consolidated EPS of Rs 124.
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