UBS Investment on ADANI ENTERPRISES

Adani Enterprises is expected to get a fillip from the power business. We believe its power business earnings will grow rapidly (from our estimated PAT of Rs4.8bn in FY10 to Rs60.5bn in FY14), which would be a big positive. In addition to commissioned/under-execution 6,600 MW of capacity, Adani Power (APL) has 3,300 MW under development and 5,280 MW under planning. Given that the additional developments are largely at the same sites and its execution capabilities, we expect newsflow to remain robust. Moreover, the company has developed a large contract-mining portfolio with peak mining capacity of 70mtpa. There are many upcoming opportunities in the sector as other state electricity boards (SEBs) adopt the route of private sector contract mining and existing SEBs offer more contracts. We view it as more as a conglomerate as compared to the other holding companies. We set the twelve month’s price target at Rs 550 per share.

Stock Views on ONGC, Shree Renuka Sugars, Suzlon Energy, Tata Power, ESSEL Propack

CITIGROUP on ONGC

CITIGROUP maintains ‘buy’ rating on Oil & Natural Gas Corporation (ONGC) with a target price of Rs 850. Citigroup has adjusted its estimates for ONGC on the back of a revision in its global oil forecasts to $101/bbl ($105/bbl earlier) for ’08E, $65/bbl ($90/bbl) for ’09E, $75/bbl ($90/bbl) for ’10E, $80/bbl ($95/bbl) for ’11E, and long-term crude assumption (’12E onwards) at $85/bbl ($100/bbl). Despite significant weakening in crude prices recently, FY09E net realisations are unchanged at $52.5, given lack of clarity on subsidy-sharing for the rest of FY09 (assumed at Rs 47,000 crore, higher than the cap). However, the continued weakness in the rupee offers some cushion to FY09 estimates. The target price is based on price-to-earnings (P/E) multiple of 7x FY09E. This is at the lower end of ONGC’s historical trading band of 7-12x, which adequately captures: (i) Lack of clarity on subsidy-sharing for the rest of FY09 and FY10-11; (ii) The government’s attitude towards retail price cuts in the next three months; and (iii) Likely policy direction of the next government in FY10.

MERRILL Lynch on Shree Renuka Sugars

MERRILL Lynch has cut its target price for Shree Renuka Sugars by 56% to Rs 71 per share. The reduction is due to: (1) 20% cut in FY09E earnings per share (EPS) on account of higher interest and sugarcane costs; and (2) Cut in price objective (PO) basis to 6x FY09E EV/EBITDA, equivalent to the long-term average of the sector since 1996. The key driver for ‘buy’ rating is the likelihood of 117% growth in FY09E EPS. Merrill Lynch expects FY09 EPS to double on: (1) 54% increase in sugar sales to 0.9 million tonnes, including 0.35 million tonnes from the Haldia sugar refinery; (2) 35% increase in sale of power; (3) Doubling of ethanol sales to 120 million litres; and (4) Jump in cane crushing capacity by 49%. However, Merrill Lynch has cut FY09E EPS by 20%, driven by the likely rise in sugarcane cost to Rs 1,500/tonne in FY09E, compared to the previous assumption of Rs 1,400/tonne. Shree Renuka Sugars may go slow in setting up its proposed Rs 350-crore white sugar refinery at Mundra to avoid a cash crunch following refinancing of Rs 120 crore worth of longterm loans. This could also mean no dilution in equity in FY09E from conversion of 20 million warrants issued to promoters at Rs114 per share, contrary to Merrill Lynch’s earlier assumption.

MORGAN STANLEY on SUZLON ENERGY

WITH the massive downturn in oil prices, delay in renewal of permit to construct (PTC) in the US, and difficulty in financing wind power projects, Morgan Stanley has lowered its growth forecast for the wind energy sector to 5% for ’09E. On the back of low visibility in a slowing market, Morgan Stanley has cut its volume estimate for Suzlon Energy by 17% and 24% in FY09 and FY10, respectively, resulting in a 29% and 40% drop in EPS in that order. Suzlon has decided not to try to exercise the domination and profit transfer agreement with REpower, due to opposition from lenders who will be financing the next rounds of growth for REpower. However, with Suzlon struggling to bag any orders in the past six months, Morgan Stanley believes that the next stage of growth in Suzlon will be powered by REpower’s technology (3-mw, 5-mw and 6-mw turbines), which looks unlikely in the short term. With the cancellation of the rights issue, debt will become the primary source of funding Suzlon’s growth. Morgan Stanley believes that Suzlon is correct in trying to delay the purchase of Martifer’s stake in REpower and cutting back on capital expenditure (capex).

UBS INVESTMENT on TATA POWER

UBS Investment has downgraded Tata Power to ‘neutral’ rating with a target price of Rs 825. UBS has cut its target price by 36% as Tata Power’s stake in two Indonesian coal mines is not value-accretive at the current market price (CMP) of Bumi Resources. In the past three months, Tata Power has corrected 30% and UBS still doesn’t think the valuations are attractive enough in the absence of a clear driver for the stock. In UBS’ view, a long-term coal price of $65/tonne, which is a reasonable assumption, will imply a fair value of Rs 1,300 for Tata Power. However, UBS has arrived at a target price of Rs 825 if it uses Bumi’s CMP of Rs 1,450. The fair value for Tata Power is Rs 1,015, if it uses UBS’ target price on Bumi (Rs 3,000). Bumi’s covering analyst at UBS, Andreas Bokkenheuser, has cut his coal price estimates to $75/79/80 per tonne from $79/112/125 per tonne for CY08/09/10, respectively. After incorporating these changes in UBS’ Tata Power estimates, the company’s revenues are lower by 2-10% over FY09-11E and EPS by 19-46% to Rs 57.6/62.7/84.6 for FY09/10/11E, respectively.

GOLDMAN SACHS on ESSEL PROPACK

ESSEL Propack recorded a net loss of Rs 26.6 crore on a consolidated basis for the first three quarters of ’08, mainly due to operational inefficiencies at its plastic tube operations in Europe and the US, compounded by slower growth in its target markets. A steep increase in polymer prices in H108 had a significant impact on the company’s margins. However, polymer prices have reduced by more than 40% since their July ’08 peaks and the company is set to benefit from this in subsequent quarters. Goldman Sachs foresees the company returning to profitability only in the second half of ’09, driven by a decrease in raw material prices and improved efficiency levels at its overseas subsidiaries. Given the pressure on margins, Goldman Sachs is lowering its 12-month target price to Rs 19 (from Rs 40), which implies a potential upside of 41% from current levels. The target price is derived using a discounted cash flow (DCF) methodology with a cross-check against three shorter duration ratios. The stock currently trades at a ’09 P/E multiple of 7.5x. Goldman Sachs believes current valuations adequately reflect the business prospects of the company and maintains ‘neutral’ rating on the stock.

Stock Views on State Bank of India, Lanco Infra, Titan Industries

MOTILAL Oswal on SBI

MOTILAL Oswal maintains ‘buy’ rating on State Bank of India (SBI). The bank’s rural and agri-business unit comprises: (1) all the business done at its rural and semi-urban branches; and (2) agriculture business done at any branch. SBI has 7,100 branches in rural and semi-urban areas which account for ~70% of its total branch network strength. About 50% of its employees work in the agri-rural business (ARB) division. The bank’s ARB loan book is currently more than Rs 1 trillion; this accounts for ~23% of SBI’s total loan book and ~28% of its domestic loan book. About 45% of these are farm loans. ARB deposits stand at ~Rs 1.7 trillion and account for ~30% of SBI’s deposits. SBI’s ARB loan and deposits account for 21-22% of the industry, while its ARB branch network accounts for 13% of the industry. SBI is consistently gaining market share in this segment. Motilal expects the bank to report consolidated earnings per share (EPS) of Rs 155 in FY09E and Rs 187 in FY10E. Consolidated book value (BV) will be Rs 1,110 in FY09E and Rs 1,282 in FY10E. Return on assets (RoA) and return on equity (RoE) are expected to be ~1% and 15-16%, respectively, over the next two years. Adjusted for value of SBI Life at Rs 205/share, the stock trades at 1x FY10E consolidated BV.

UBS Investment on Lanco Infratech

UBS Investment has upgraded its rating on Lanco Infratech to ‘buy’, but has reduced the target price by 28% to Rs 250. It has also cut its EPS estimates by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution. It has factored in a 10% discount to power, EPC (engineering, procurement & construction) and infrastructure valuations. The contributions to value are from power (44%), EPC (40%) and real estate (15%). The stock is trading at 9.5x FY09E EPS, which is a good buying opportunity. The key risks are fuel availability, execution and a further slowdown in the real estate sector.

JP Morgan on Titan Industries

JP MORGAN maintains ‘overweight’ rating on Titan Industries with a March ’09 target price of Rs 1,475 based on a forward price-to-earnings (P/E) multiple of 23x. The company has seen a revival in demand for its watches and jewellery, post-June ’08. It continues to maintain its previous guidance of 33% growth in revenue to Rs 4,000 crore and similar profit growth for FY09. Specialty and lifestyle retailing will remain the company’s core focus as there are many organic growth opportunities in a nascent market like India. Titan aims to add 750 stores over the next five years, but it has no immediate plans to expand its international business. Several initiatives in the jewellery and watch businesses should help to sustain good growth over the next 1-2 years. Goldplus, Golden Harvest Scheme and innovative collections such as ‘Jodhaa Akbar’ should support double-digit volume growth in the jewellery business. The company has planned exciting new launches in the watch segment, such as a new children’s brand and automatic watches, over the next 6-9 months. Prospects of the eyewear business look encouraging and the company plans to add 60 stores in the next one year and 200 stores over the next three years. It is targeting sales growth of 50% through its own brands to improve margins. JP Morgan feels Titan is the best proxy for attractive growth opportunities in the specialty retail space.