BPCL

Nomura downgrades BPCL’s rating to `Reduce’ from `Neutral’ with a revised price target of Rs 450, down from Rs 525. BPCL has outperformed the BSE Sensex by 15% and 38% over the past three month and twelve months respectively. The stock is building in too much hope on de-regulation/low subsidy sharing, in our view. Apart from several positive statements of intent, OMCs (oil marketing companies) have been seen as defensive. At the revised oil price assumption and subsidy sharing estimates, the earnings estimate for BPCL declines by 36% for FY10E, 38% for FY11E and 44% for FY12E. Subsidy concerns significantly increase at higher oil prices.

With lots of hope already built in, we believe risk-reward is becoming increasingly unfavourable. Nomura has decreased the EPS estimates by 36%, 38% and 44% for FY10E, FY11E and FY12E respectively, due mainly to higher subsidy at higher oil price assumptions. Nomura continues to believe that for OMCs to emerge as a longterm investment idea, concrete steps to remove ad hocism and bring transparency on subsidy sharing are a must.

Stock Views on Bharat Petroleum Corporation, Bharti Airtel, India Cements

Indiabulls Securities on BPCL - Target Rs 526

Indiabulls Securities Research has recommended a buy rating on Bharat Petroleum Corporation (BPCL), with price target of Rs 526, in its report.

"With crude oil prices hovering at around $ 70 per barrel levels, we expect the under-recoveries for PDS kerosene and domestic LPG to escalate further. However, the recent price hike in petrol and diesel prices should provide some respite to the Company. At its current market price (CMP), the stock trades at a forward P/E of 8.6x and 8.3x for FY10E and FY11E, respectively. We have revised our estimates to consider the recent developments in the sector. Based on our valuation, we have arrived at a target fair value of Rs 526, which provides an upside potential of 15.9% from the CMP. Thus, we upgrade our rating for the stock to Buy," says Indiabulls Securities' research report.

IIFL on Bharti Airtel - Target Rs 866

IIFL has maintained its buy rating on Bharti Airtel with a target of Rs 866 in its report.
"In our view, the Bharti–MTN deal is driven more by strategic considerations than by synergies. In a world where giants such as Apple and Google are invading the telco space, size will be key. Nevertheless, an analysis of savings / synergy opportunities in the proposed Bharti–MTN deal suggests that Bharti can have a gain of almost USD 3 billion. Our key assumptions are based on measures attributable to Bharti’s involvement, over and above MTN’s own cost reduction measures. These include estimates of opex and capex savings in MTN and capex savings in Bharti. We consider opex savings in Bharti attributable to this deal unlikely. The proposed deal (as the terms stand now) is not significantly earnings dilutive for Bharti even without considering synergies. Hence, we are in no hurry to reduce our TP (Rs 866); we retain 'BUY', " says IIFL's research report.

Sharekhan on India Cements - Target Rs 160

Sharekhan has maintained its hold rating on India Cements with a price target of Rs 160 in its report.

"India Cements has announced its Q4FY2009 results. For the quarter, the adjusted net profit came in at Rs 104.2 crore as against our estimate of Rs 107.8 crore. The adjusted net profit declined by 22.5% year on year (yoy). The net sales increased by 3.6% yoy to Rs 888.5 crore. The figure includes revenues from Indian Premier League (IPL), wind power and shipping businesses. The cement dispatches for the quarter fell by 5.3% yoy at 2.32 million metric tonne (MMT). The dispatches dipped mainly on account of unscheduled breakdown at Vishnupuram, Chilamkur and Yerraguntla facilities along with planned stoppage at one of the kilns at Vishnupuram facility. We maintain Hold recommendation on stock as the stock could underperform in the near term due to seasonal weakness in monsoon. We are rolling over our valuation on FY2011 and have arrived at a price target of Rs 160 (valued at EV/tonne of $72 on FY2011 capacity), " says Sharekhan's research report.

Stock views on BPCL, Bharti Airtel, Glenmark Pharma

Indiabulls Securities on BPCL, target of Rs 526

"With crude oil prices hovering at around $ 70 per barrel levels, we expect the under-recoveries for PDS kerosene and domestic LPG to escalate further. However, the recent price hike in petrol and diesel prices should provide some respite to the Company. At its current market price the stock trades at a forward P/E of 8.6x and 8.3x for FY10E and FY11E, respectively. We have revised our estimates to consider the recent developments in the sector. Based on our valuation, we have arrived at a target fair value of Rs 526, which provides an upside potential of 15.9% from the CMP. Thus, we upgrade our rating for the stock to Buy," says Indiabulls Securities' research report.

IIFL on Bharti Airtel, target of Rs 866

"In our view, the Bharti–MTN deal is driven more by strategic considerations than by synergies. In a world where giants such as Apple and Google are invading the telco space, size will be key. Nevertheless, an analysis of savings / synergy opportunities in the proposed Bharti–MTN deal suggests that Bharti can have a gain of almost USD 3 billion. Our key assumptions are based on measures attributable to Bharti’s involvement, over and above MTN’s own cost reduction measures. These include estimates of opex and capex savings in MTN and capex savings in Bharti. We consider opex savings in Bharti attributable to this deal unlikely. The proposed deal (as the terms stand now) is not significantly earnings dilutive for Bharti even without considering synergies. Hence, we are in no hurry to reduce our TP (Rs 866); we retain 'BUY', " says IIFL's research report.

KRChoksey on Glenmark Pharma; target of Rs 252

"The topline of the company has shown a decline of 10% y-o-y to Rs 491.1 crore whereas on q-o-q basis the company reported a decline of 11%. The fall in sales was due to absence of licensing income during the quarter as compared to Rs 61.0 crore in the corresponding pervious period. Excluding licensing income, the base business declined by 4%. Dip in the base business is due to factors like fewer ANDA approval, destocking in the regions like Latin America & Russia, currency impact in Latin America & Russia and price erosion of Glyptal. Going forward, we expect the revenues to improve on back of improved performance from Glenmark generics, specialty formulation and Indian formulation business."

"We maintain our optimistic view on the company supported by the consolidation from the acquisitions (like Actavis), revenue contribution from the new launches and increasing number of approvals from USFDA which would strengthen the earnings visibility of the company, Buy, target of Rs 252.2," says KRChoksey's report.

Stock Views on Petronet LNG, SKF India, Piramal Healthcare

PINC Research on Petronet LNG, target of Rs 66

PINC Research has recommended a buy rating on Petronet LNG Ltd with a price target of Rs 66 in its research report.

"Petronet LNG Ltd. (PLL) accounts for 23% of natural gas supply of India and boasts of a sovereign parentage of GAIL, IOCL, ONGC and BPCL. Considered as an Indian pioneer in import distribution, it regasifies 6.5 million mtpa of imported LNG from its facility in Dahej, Gujarat and is a major supplier to GAIL’s HVJ gas pipeline. The capacity expansions at Dahej should enable PLL volume growth by 13% in FY10 to 7.4 million mt and 24% in FY11 to 9.2 million mt garnering scale in earnings. Hence we initiate coverage on the stock with a ‘BUY’ recommendation and a price target of Rs 66 on a 24 month investment perspective," says PINC's research report.


LKP Shares on SKF India, target of Rs 190

LKP Shares has recommended a buy rating on SKF India with an 18-month price target of Rs 190 in its research report.

"SKF India is the 53.5% subsidiary of the Swedish bearing giant and is the largest bearing producer in India. It derives 90% of its revenues from bearings comprising of ball and hub bearings, deep groove ball bearings, cylindrical roller bearings and tapered roller bearings. The balance 10% of revenues comes from its four new technology platforms like seals, lubrication systems, mechatronics and services. SKF India being the industry leader controls a 30% share in the Rs 50 billion bearing market in India."

"SKF India with a strong balance sheet trades at 7xCY'09E and 5.7xCY'10E and we believe that a 15% correction in the stock price from current levels would be a good opportunity for gaining an entry into the stock with an 18-month price target of Rs 190. Over a longer time frame a revival in its key user industries could propel the stock to Rs 240 over a two-year time frame. 'Buy'," says LKP Shares' report.


Sharekhan on Piramal Healthcare, target of Rs 358

Sharekhan has maintained its buy rating on Piramal Healthcare with a price target of Rs 358 in its research report.

"In an effort to reduce costs and restructure its assets in a more efficient manner, Piramal Healthcare (Piramal) has decided to shut down its custom manufacturing facility at Huddersfield, UK (a part of Avecia) and consolidate its custom manufacturing operations at its other sites at Ennore (near Chennai), Digwal (near Ahmedabad) and Morpeth, UK. Even though the closure of the UK site would lead to a onetime hit in the FY2009 financials of the company, the move is in the long-term interest of the company, as it would result in the elimination of redundancies, cost savings, efficiency in operations and an overall improvement in profitability."

"With a presence across the entire contract research and manufacturing services (CRAMS) value chain, strong customer relationships and a favourable operating environment characterised by increased outsourcing, we expect Piramal’s custom manufacturing business to perform robustly in the future. We maintain our Buy recommendation on the stock with a price target of Rs 358, " says Sharekhan's research report.

Castrol India

A high dividend yield, stable business and sound financials make Castrol an attractive pick for long-term investors. It’s a must-have defensive bet during tough times

Beta: 0.41
Institutional Holding: 13.5%
Dividend Yield: 4.6%
P/E: 13.7
M-Cap: Rs 3,739.5 cr

AROBUST balance sheet, sound business model and strong brand equity of its products is enabling Castrol India to churn out good cash flows year after year. Even amidst a slump in the automobile sector, the company’s lubricants will still have a large potential market to tap.

In the past five years, there has been a dramatic increase in the number of cars and commercial vehicles on India’s roads. This aftermarket is likely to be a big growth driver for the lubricant industry in general and Castrol in particular, over the next few years. With a year-on-year outperformance of 10%, Castrol is a must-have defensive stock during difficult times.

BUSINESS:

Castrol India is the Indian subsidiary of UK-based Burma Castrol and is engaged in manufacturing and marketing of automotive and industrial lubricants and specialty products. It operates in the automotive as well as nonautomotive segments. The former includes oils for heavy-duty vehicles, cars, motorcycles and bikes, while the latter includes industrial lubricants, marine and energy lubricants and the services segment.

Public sector players like IndianOil, Bharat Petroleum (BPCL) and Castrol account for around 70% of the domestic lubricants market. Several other players, including global majors, account for the balance share, resulting in a highly competitive market. Besides having technologically superior products, Castrol also has strong distribution network and brand recall. The company is the market leader in the retail segment with a share of around 21% in the total automotive lubricants market.

GROWTH STRATEGY:

Castrol has gained market share in a declining lubricants market. The entry of new original equipment manufacturers (OEMs) offering new technology vehicles will provide additional opportunities for the company’s products. Lube consumption is projected to grow strongly in cars, fourstroke bikes, as well as building and construction equipment segments.

Gradual growth in personal mobility, as well as corresponding growth in demand for automotive services, are positive factors for the company in the long term. Castrol seeks revenue and value growth through higher dependence on superior technology products relevant to new generation of vehicles, as well as focus on volume growth in the key growth sectors which it has identified. Rather than a broad volume growth strategy, the company is looking at building on profitability.

FINANCIALS:

The company’s balance sheet size has only doubled in the past one-and-a-half decades, while its topline has quadrupled. This shows that the business is not capital-intensive and is earning high returns. The company’s return on capital employed (RoCE) for CY07 stood at 80%. Like a typical multinational company, Castrol adopts conservative financing by being debtfree and distributing the bulk of its profits in the form of dividends.

The company’s net sales have witnessed a compound annual growth rate (CAGR) of 10.8% over the fiveyear period ended December ’07 to Rs 1,966 crore. Its net profit has recorded a lower CAGR of 7.4% to Rs 218.4 crore. At an average payout of 85% of its profits, the company’s dividend payout has broadly grown in line with the corresponding growth in profit during the past five years.

Castrol posted a smart recovery in its operating and net profit margins in ’07. This was fuelled by certain factors like price hikes, exit from low-margin segments that have been commoditised, new product launches, and re-launch of old products with new identity, packaging and strong consumer propositions.

Rising crude oil prices have been a concern for the company since the past two years as oil is a critical raw material for lubricants. However, the company is expected to benefit from the recent crash in crude prices.

CONCERNS:

The growth in use of longer drain lubricants, especially in the commercial vehicle segment, is expected to significantly reduce consumption of lubricant per vehicle. This is expected to reduce volume growth significantly over the next 3-5 years.

Price undercutting by low-cost competitors in an attempt to gain volume share is another threat for this premium-category lubricant manufacturer. A long-drawn slump in the automobile segment may hamper future volume growth of the company’s products. Curtail in infrastructure spend due to the general economic slowdown is also likely to curb the market for lubricants. With an industrial slowdown, the company’s business in the non-automotive segment may also take a hit.

VALUATIONS:

Castrol’s current price-earnings (P/E) multiple is 13.7. This is fairly in line with the 12.8% growth in profit registered by the company over a period of 15 years. The stock is fairly valued at current multiples. Besides, a high dividend yield, stable business and sound financials make the stock an attractive pick for the long term.