Stock views on NTPC, Aban Offshore, Everest Kanto Cylinder,

CITIGROUP on EVEREST KANTO CYLINDER

EVEREST Kanto Cylinder (EKC) is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. Citigroup believes EKC is uniquely positioned to capture the significant growth potential in India for high-pressure gas cylinders, driven largely by increasing CNG penetration, both in India and abroad. While the CNG segment in India is still at a relatively nascent stage, cost economics, improving refuelling infrastructure, visibility of gas supplies and clarity on regulations should accelerate the trajectory for city gas distribution and consequently, CNG penetration, thereby boosting demand for CNG cylinders. The 12-month target price for EKC of Rs 280, based on 15x September ’09E consolidated earnings — which includes contribution from India, Dubai, US-based CP Industries and the China plant — is in line with the fair value multiple range for its manufacturing/engineering peers in India. Citigroup prefers comparing EKC with capital goods companies that manufacture industrial goods and have a similar growth profile.


EDELWEISS on ABAN OFFSHORE

EDELWEISS initiates coverage on Aban Offshore with a ‘reduce’ recommendation. Day rates for Aban Offshore’s rigs that are on short-term contracts are likely to ease, in line with Edelweiss’ lacklustre jack-up industry outlook. Jack-up day rates are expected to ease 18-19% year-on-year (y-oy) in both CY09E and CY10E and test industry return on average capital employed (RoACE) of 8%. This is based on expectations of a lower jack-up demand (down 14.5% and 5.3% y-o-y in CY09E and CY10E, respectively) and a significant supply coming on stream in CY08-10E. Weak demand is likely due to low commodity prices, revision/deferment of small company and exploratory spend, and weak global outlook. Lacklustre industry outlook, a weak rupee (impacting debt) and short-term contracts/uncontracted Singapore assets are expected to be an overhang on the stock. This renders low fair value of Rs 685. Global drillers’ comparative multiples like EV/EBITDA (at 3.2x two-year forward), price/earnings (at 3.4x two-year forward), and price/book value (at 0.7x two-year forward) have shrunk on the back of low crude prices and economic weakness.


JP MORGAN on NTPC

JP MORGAN upgrades its rating on NTPC to ‘overweight’. The key risks to the target price of Rs 185 include major execution delays and a shortage of coal. NTPC’s size, strong balance sheet and assured-return structure put it in a strong position to achieve its growth plans. JP Morgan advises investors to use share price corrections due to hiccups in execution, if any, to buy the stock, as near-term delays do not affect its valuation much. Apart from execution, customers’ ability to absorb the rise in tariffs and the impact of coal shortages on incentives are the key concerns. With coal prices declining, the cost of debt is the main inflationary factor — power tariff can rise 6-7% per annum if interest costs rise by 500 bps. Access to KG Basin gas is an important potential catalyst to improve gas stations’ PLF and incentives. NTPC is trading at 15.6x FY10 P/E, 2.2x FY10 P/BV and is close to the March ’10 target price of Rs 185. This includes Rs 11/share value for NTPC’s 2 billion tonnes mineable coal reserves. Any positive news flow when coal production commences can improve this valuation. A replacement value-based approach for current capacities suggests a fair value of Rs 140, indicating the market is paying a reasonable premium for 2x capacities in the pipeline.

Stock Views on Hero Honda, Canara Bank, Ahok Layland

EMKAY on Hero Honda

EMKAY maintains a ‘buy’ rating on Hero Honda. The company’s Q2 FY09 results were in line with expectations. While net sales, at Rs 3,200 crore (yo-y growth of 36%), were in line with estimates, EBIDTA at Rs 440 crore (yo-y growth of 49%) was ahead of expectations by around 4%. However, significantly higher tax provision (Q2 FY09 tax rate was 32%, against expectation of 24%) resulted in net profit of Rs 310 crore (y-o-y growth of 51%), which was below expectation by 2%. The higher tax rate is due to reduction in target production at the company’s Haridwar plant from 750,000 to 600,000 units. The required residual growth in FY09 and declining raw material prices warrant volumes/earnings upgrade in FY09, as well as FY10. However, considering the cautious stand adopted by the management, Emkay is leaving its estimates unchanged as of now.

CLAS on Canara Bank

CLSA maintains ‘underperform’ rating on Canara Bank as the RoE is likely to be capped at ~12% for FY09-10 due to the sharp increase in loan loss provisioning costs. Canara Bank reported a 46% y-o-y growth in topline, led by 26% y-o-y loan growth and margin expansion of 24 basis points to 2.7%. Margin expansion was a reflection of: a) improving pricing power and increase in lending rates; and b) repayment of high cost deposits by Canara Bank in the previous year, which reduced cost of deposits from 6.8% in Q2 FY08 to 6.6% in Q2 FY09. Despite loan growth being sustained at +20% and margins likely to expand further, earnings growth in coming quarters and in FY10 will remain muted as Canara Bank will need to provide for: a) higher wage costs under the new wage settlement; and b) loan loss provisions as delinquencies pick up, since the bank has no cushion due to its dismal coverage levels. As a result, RoE is likely to remain at ~12%, justifying Canara Bank’s low price-to-book multiple of 0.7x FY10 book.

Citigroup on Ahok Layland

CITIGROUP maintains ‘sell’ rating on Ashok Leyland and revises the risk rating to ‘medium’ because growth prospects for the company appear limited, and a rising capital outlay poses risks. Fundamentally, the key reasons for a healthy growth outlook in commercial vehicles include a sustained pick-up in economic activity, focus on infrastructure spending and a strong replacement cycle. Moreover, growth in agriculture, infrastructure and manufacturing sectors — all of which have positive linkages to the freight business — should remain positive over the long term. However, the near term looks challenging for Ashok Leyland due to sharp increase in interest rates, which will affect demand. A slowdown in the economy will also lead to a slowdown in the investment cycle, which will impact Ashok Leyland’s profitability. The 12-month target price of Rs 19 for the company is based on 4x March 10E consolidated EPS, based on trough valuation multiples to reflect slower-than-expected earnings growth.