Lupin

Citigroup maintains `Buy’ rating on Lupin and raises the target price to Rs 1,415, as they raise EPS estimates (FY10E/11E up 1%/14%) and roll over to 15x FY11E EPS. Citigroup believes Antara strengthens Lupin’s US branded franchise and acts as a growth and margin driver ahead of the oral contraceptives launches in the US (late FY11). Lupin acquired the rights for Antara (fenofibrate 130mg and 43mg capsules) from Oscient (bankruptcy proceedings) for $38.6 million. Oscient had licensed the rights from Ethypharm and also had a deal with Paul Capital. Lupin will pay royalties to Etypharm but has no obligation to Paul Capital. Lupin has sold its ANDA (FTF P-IV) on Antara to DRL and settled the litigation. While Paddock has also challenged the Antara patent in May ‘09, it can only launch after DRL’s exclusivity runs out - which, in turn, will only be triggered if Paddock prevails in the district and appeals courts. Antara had sales of about $70m in CY08 and has grown without much promotion of late. Citigroup raises the FY10/11 EPS estimates by 1%/14%. This deal also lowers the potential impact of two key risk factors: a) imminent generic competition in Suprax - Antara’s sales to help maintain US branded sales at healthy levels, and b) potential escalation of FDA issues at Mandideep - post the Antara acquisition.

Stock views on KEC International, Thermax, Info Edge, IVRCL Infrastructure, DLF

HSBC on KEC International

HSBC maintains its `underweight’ rating on KEC International with a target price of Rs 130. The company has reported sales growth of 25% y-o-y to Rs 870 crore in the quarter. EBITDA margin was lower by 625 bps at 8.2% due to forex losses of Rs 16.6 crore and high raw material cost. The company also reported 67% y-o-y increase in interest cost due to debt raised for capex and working capital. Due to working capital and capex requirements, KEC has increased debt to Rs 900 crore while depreciation is lower because part of its assets have been transferred to the books of developers and new assets will be capitalised in FY10E. The stock is trading at FY10E PE multiple of 4.4x and PB of 1x. This compares with peer Jyoti Structures trading at 4.1x/1x and Kalpataru Power trading at 3.8x/0.7x. KEC has higher gearing and lower return ratios, which makes it more expensive than peers. The target price of Rs 130 is the mid-point of a PE fair value of Rs 125 and a PB fair value of Rs 135.


Citigroup on Thermax


Thermax’s revenues declined by 6% y-o-y, led by a decline of 9% y-o-y in the energy segment. Environment segment grew by 14% y-o-y. Margins (adjusted for forex loss) have improved by 137 bps, driven by cost-cutting initiatives. Order book of Rs 4,100 crore is up 40% y-o-y; however, the pace of order book growth has moderated. Management suggested there is “substantial resistance” from clients to finalise orders, especially large-size projects. Some clients have cancelled/slowed execution. According to Thermax, cement and metals sectors’ capex is expected to slow down while the power sector will continue to invest, albeit at a lower level than before. But there are some positives -
1) While risks to order inflows remain, increased power sector exposure should help provide some support to growth.
2) Management has been ahead of the curve and seems geared to handle the downturn; ~293 bps margin improvement for 9MFY09 is commendable, especially since it was against the backdrop of rising input costs and no pass through clauses.
3) The company has no debt and one of the highest RoEs in the sector. Citigroup cuts the target price to Rs 211 from Rs 480 based on 8x FY10E (15x Dec09E earlier). Historically, Thermax has traded on par with BHEL, but in the recent past, has been trading at a widening discount.


CLSA on Info Edge

Revenue growth in Info Edge’s flagship recruitment solutions is down to 1.5% y-o-y from 30%+ at the start of the year as the slump in hiring across all industries has taken its toll. With the customary March quarter budget flush unlikely to happen this year, March 2009 outlook for Naukri looks even weaker. Meanwhile, Info Edge’s realty business continues to face headwinds from the slowing real estate market. A course correction in the matrimony space with establishment of brick and mortar Jeevansathi centres is still in the investment phase and any positive surprises on this front are unlikely in the near term. With over Rs 330 crore of cash and continued leadership of Naukri, Info Edge remains better positioned compared to competitors in a difficult environment. With the slowdown becoming homogeneous, online traffic from recruiters has gone down significantly and recruitment solutions grew only 1.5% y-o-y in the December 2008 quarter. Info Edge’s leadership position in the online recruitment segment and Rs 330 crore of cash pile should help it encounter the economic downturn better than competitors. Also, new initiatives in education and professional networking have long-term potential. However, Info Edge’s valuations (21.5x March 2009) cannot be defended with a 2.3% FY09-11CL EPS CAGR. With visibility for even March 2009 severely constrained, risk to FY10 earnings is high.


Maquarie on IVRCL Infrastructure

IVRCL reported a 22% topline growth but decline in PAT in 3Q09 results. Company reported 22% revenue growth thus translating into strong 39% y-o-y growth for 9MFY09. However, margins came in significantly lower by 230 points in the quarter and have now declined by 100 bps y-o-y in 9MFY09 driven by a higher mix of lower margin projects. PAT declined significantly by 27% y-o-y in the quarter driven partly by margins and partly by very high interest costs of Rs 41.9 crore versus Rs 17.7 crore last year. For 9MFY09, PAT growth has come in at 7% versus our expectations of 4% growth for full year. Interest expense grew to Rs 41.9 crore in the quarter, highest ever for IVRCL, given that debt levels have increased to Rs 1500 crore, resulting in net debt/equity ratio of around 0.8x, which is on the higher side. IVRCL has an order book of Rs1,4300 crore at the end of 3Q09 which provides strong revenue visibility of 3-4 years, highest in the mid-cap construction space. The company has received robust order inflows of Rs 6600 crore in 9MFY09 (+100% y-o-y). Maquarie estimates are at the lowend of the management’s guidance with a 35% topline growth in FY09 and a lower net income growth of 4% due to interest cost pressures.


Morgan Stanley on DLF


Morgan Stanley maintains `underweight’ rating on DLF in view of an extremely weak physical property market, modest stock of on-going projects and, now, prospects of slow improvement in balance sheet (in view of the sharp fall in internal accruals). DLF’s construction starts across biz verticals in F9M09 total upto just 5-6 msf, which is a leading indicator of poor earnings trajectory ahead. Management believes that the current business environment is fluid and uncertain, and therefore, it targets to conserve capital and customize products to suit ongoing economic slowdown. Near term mid-income housing and scale up in rentals will be the areas of focus, whereas, luxury housing and commercial complexes will be slowed. To weather the current credit squeeze, DLF targets to change the maturity profile of its debt portfolio to long term by mid-2009, such that there will be no re-payment obligation for 24-36 months. Out of Rs14800 crore debt, Rs 9000 crore is already long term, with commitments for another Rs 3000 crore.. DLF will restrict its sales to DAL to 12 msf (million square feet), of which 9.5 msf will be completed shortly. It targets to raise roughly $450 million PE capital to part fund the pending receivable (Rs 5400 crore). Valuations don’t appear inexpensive at roughly 1.1x F09 P/B with increasingly slower pace of value unlocking in the land bank. Stock is at a 40% discount to the F09NAV

Stock views on Cummins, Sun Pharma, Infosys

CITIGROUP on INFOSYS TECH
CITIGROUP has cut its price target for Infosys to Rs 1,350 from Rs 1,420 while maintaining a ‘buy’ rating, citing likely disappointments in the company’s third, or October-December, quarter earnings on Monday. “We have lowered our FY10-11E estimates by 6% on the back on lower volume/pricing assumptions and cross-currency impact in Q3,” the bank said in a report. “With a likely disappointment in Q3 numbers and further EPS cuts, the stock could underperform near term,” it added.


BNP Paribas on SUN PHARMA

BNP Paribas has maintained its ‘buy’ rating on Sun Pharma and also its price target of Rs 1,695 after the company initiated an out-of-court settlement with the promoters of Taro to acquire it. “We believe that an increase in consideration by 16-23% for the residual stake doesn’t alter the appeal of the Taro transaction for Sun Pharma,” the bank said in a report. BNP expects Taro’s acquisition to be accretive to Sun’s earnings per share and have a “15% positive impact” on FY10 earnings. “Taro’s operational history has been marred by accounting issues and cash flow problems. Despite these problems, we believe Taro represents a significant synergistic opportunity for Sun Pharma,” it added.


Kotak Securities on CUMMINS

Kotak Securities’ private client research has maintained its ‘accumulate’ rating on Cummins, citing likely strong earnings in the October-December quarter, or the third quarter. But the brokerage expects the growth to taper off in the fourth quarter. “Due to factors like product price hikes, some softening of material prices, depreciation in rupee and continuing value engineering exercises, we believe there is a strong case for margin expansion in Q3 FY09,” Kotak said in a report.

Stock Views on Federal Bank, NTPC, Nalco

GOLDMAN SACHS on NTPC

Goldman Sachs maintains its earning estimates of NTPC and `Buy’ rating on the stock. The 12-month target price of Rs 208 is the value of its FY2010E financial assets (Rs 37/share) plus the value of its operating assets using a residual income (RI) model (Rs 171/share). India’s central electricity regulator (CERC) has announced the final tariff norms for generation and transmission projects for FY2010-14. Takeaways for NTPC -
[1] Minimum regulated post-tax ROE (return on equity) raised from 14% to 15.5% (16% in case of new projects completed within prescribed time).
[2] Benefit of tax holidays to be retained, but tax on incentives will not be a pass-through.
[3] Fixed-cost recovery linked to ‘plant availability’ and not utilisation rate (PLF or plant load factor).
[4] Option to avail R&M (repairs and maintenance) allowance for more than 25-year-old units. [5] Normative levels for operational and working capital parameters have been tightened.
[6] Depreciation rate for tariff setting largely aligned with accounting norms.

Prima facie, CERC’s final tariff norms for FY10-14 are neutral-to-positive for NTPC’s earnings outlook; consensus expected them to be neutral-to-negative. We maintain that
[1] effective tax rate and,
[2] economic life of projects, are critical parameters to assess NTPC’s profitability during FY10-14.

CITIGROUP on FEDERAL BANK

Citigroup maintains `Buy’ rating on Federal Bank. However, it revises the price target down to Rs 215 from Rs 270. Federal Bank reported a strong P&L quarter in 3Q09, with high NIMs (net interest margins) of over 450 bps, core fee income growth over 90%, trading and bond portfolio gains, and relative cost moderation (excluding one-offs). However, the balance sheet was under pressure, with high asset deterioration and loan-loss provisions. Overall, a mixed quarter - a resilient P&L but marked by increasing asset risks. Federal Bank’s loan book comprises 36% SMEs (small and medium enterprises) and 32% retail, both of which have seen significant pressures over the last couple of quarters, and contribute to the bulk of the deterioration in asset quality. Incremental slippages increased to about 1.4% of loans in 3Q09, meaningfully above its larger peers. Citigroup increases FY09E earnings by 28%, to incorporate gains on the bond portfolio, but reduces FY10E and FY11E earnings by 21% and 31% respectively, reflecting significantly higher loan-loss provisioning costs.

DEUTSCHE BANK on NALCO

Deutsche maintains `Sell’ rating on Nalco with a price target of Rs 126. Nalco’s latest alumina sale tender, which is used as a benchmark for the spot market globally, has been closed at US$194/MT. The new contracted price is down 58% from a high of US$458/MT which Nalco got for a 30,000-tonne shipment in July ‘08. Outlook for alumina remains negative as brought out by the bidding range. Apart from the winning bid of US$194/MT, the majority of bids from traders ranged between US$153-US$176/MT, which provides an indication of market expectations of future alumina price movement. Nalco is averse to any production cuts despite the global demand weakness. Consequently, its aluminum inventory situation is expected to get worse. According to the news flow, inventory is hovering around 15 Kt which is already double of the normal levels of 8 Kt. The inventory situation is expected to get even worse with average inventory increasing to 30 Kt by the year-end. Deutsche remains negative on alumina/aluminium demand and pricing outlook in 2009

Stock views on ACC, Mundra Port, Idea Cellular, Ambuja Cements, GMR Infrastructure

HSBC on GMR Infrastructure
HSBC maintains the `Underweight' rating on GMR Infrastructure with a target price of Rs 53. There has been no respite in GMR's existing business. GMR's airport business faces: a) continuing decline in air traffic b) continuing delays in real estate development at Delhi airport, impacting fund availability, and c) inability to raise tariff at the Delhi and Hyderabad airports, impacting overall profitability. However, there has been some relief in the power business due to fresh gas supply and lower naptha prices. GMR runs a refinancing risk on the loan at the end of the two-year period. HSBC expects that in order to complete the Delhi airport in time, the government will have to provide incentives to GMR. These incentives might be in the form of allowing it to charge higher user fees or a higher equity contribution to meet the fund requirement. However, given the current financial condition of the airline industry, it would be difficult for the government to increase the charges without opposition from the airline industry. The outlook for the company remains weak given: a) no signs of recovery in airport traffic growth b) the ability to increase airport charges remains dependent on the government's approval c) no improvement in real estate outlook d) potential difficulties in refinancing its acquisition.

Merrill Lynch on Ambuja Cements

Merrill Lynch maintains `Underperform' rating on Ambuja Cements due to lack of upside triggers. Ambuja's CY09 earnings decline will likely be modest versus other majors due to a tad better supply-demand outlook for west India. Ambuja sells ~30-40% of volumes in the west, which is forecast to witness fewer capacity additions versus other regions. However, exposure to the north will likely hurt. Ambuja's CY08 EBITDA stood at ~Rs 1,770 crore, down ~13% y-o-y due to cost-led margin pressures. The company indicated that high-cost coal inventories, greater use of imported coal and year-end adjustments/provisions dragged 4Q results. 4Q realisations were up 1% y-o-y and 3% q-o-q; cost increase was sharper at ~10-12%. Volumes grew 5% y-o-y and 16% q-o-q. In its 4Q press release Ambuja said the industry's demand growth in CY09 will range between 6-8%. This compares with 11-12% volume growth witnessed in November-December 2008, likely led by pre-election government spending. Reflecting the pattern of previous election years, we worry that the recent demand impetus will ease in 3-4 months as elections draw closer.

Indiabulls Securities on Idea Cellular

Indiabulls Securities has reiterated the `Hold' rating on Idea Cellular, however, it has downgraded the target price to Rs 49. Idea ended the third quarter with a handsome topline growth of 13.1% q-o-q, backed by a robust 13% share in the all-India net additions of 38 lakh and a 3.7% improved realisation of 65 paise per minute. Idea's market share (excluding Spice) is to inflate beyond 11% by March 2010 from the current 9.9%. The company's share of the market net additions is likely to peak at 14-15% in FY10, given the upcoming roll-outs in five new circles and the overwhelming response received for the roll-out in Bihar and the re-branding in Punjab. Moreover, Idea's brand, which has all-India recognition, renders it a competitive edge over the other entrants in the new circles. The operating margin will likely remain under pressure in FY10E-11E and is expected to come down to ~11% as Idea opts for higher opex rather than capex for network expansion. In addition, intensifying competition and penetration in Class C circles calls for competitive pricing, which would further bring down ARPUs to around Rs 250 and Rs 210 for FY09E and FY10E respectively. While the company's business model points towards a strong longer-term growth trajectory, the upcoming congestion in the telecom market would exert significant strain on its key operating and financial parameters, thereby limiting major upsides in the stock price.

Citigroup on Mundra Port

Citigroup initiates `Sell' rating on Mundra Port and Special Economic Zone (MPSEZ) as the stock looks expensive. MPSEZ is a private port (capacity ~55 mtpa) on India's west coast:
1) Strategically located for north-bound cargo;
2) Handles more container volumes than all major ports, except JNPT and Chennai;
3) Has one of the deepest drafts;
4) ~40% of projected volumes are under long-term contracts; and
5) SEZ over ~32,000 acres should support volume growth.

Cargo/profits growth has been impressive at 53%/132% CAGR over FY04-08. Citigroup expects cargo, revenues and profits to grow at 17%, 25% and 47% respectively over FY09-11E, and RoEs to improve to 24% by FY11E from 11% in FY08. While Citigroup forecasts healthy cargo growth at MPSEZ, they see risks in the medium term given the deteriorating global environment. Volumes at major ports grew only by 4% y-o-y in April-November 2008 and fell 28% y-o-y in December 2008 at the DP World-operated container terminal at Mundra. A pullback in investments would hit development of the SEZ, a growth driver for the port. We value: 1) the port at Rs 262/sh; 2) SEZ at Rs 22/sh; 3) investments in subs at Rs7/sh. MPSEZ trades at 24x FY10E PE, a premium of ~85% to Asian ports' average of ~13x, which we find excessive despite EPS growth of 47% over FY09-11E versus the Asian average of -1%. Upside risks include better-than-expected traffic growth and demand for land at the SEZ.

Macquarie on ACC

Macquarie lowers the rating on ACC from `Neutral' to `Underperform' in the absence of cost-reduction levers and the stock lacks any positive catalyst except for cement prices. It believes that the current rally in the stock along with an improved business outlook is a good opportunity to book profits. ACC declared its CY08 results, which were about 11% below the estimates at the operating level due mainly to lower volumes and higher costs. Macquarie reduces the target price by 2% to Rs 452 to factor in lower volumes for the next year and also reducing CY09 and CY10 estimates to account for lower volume expectations because it foresees some delays to expansion plans. ACC has already exhausted the easy ways to reduce costs because most of its production is based on domestic subsidised coal. It already has coal-based captive power plants and it is reaching saturation in blending. The only major avenue is a merger with its sister concern, Ambuja Cements. The majority of 7 mtpa of further expansion will not be completed until CY10. ACC will, at best, grow in line with the industry.

Stock Views on ACC, Power Grid, Bank of Baroda, Steel Authority of India, Hindustan Construction, Reliance Industries

ABN Amro on ACC

ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So, demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industry much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-core businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply.

HSBC on Hindustan Construction

HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation

CITIGROUP on Power Grid Corporation

CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs.

Indiabulls Securities on Bank of Baroda

INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM.

MERRILL Lynch on Reliance Industries
MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations.

EDELWEISS on Steel Authority of India

SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.

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 IVRCL, Suzlon Energy

Citigroup on Suzlon Energy

Citigroup Global Markets has maintained its ‘sell’ rating on the stock saying the company’s international expansion drive has taken its toll in the form of supply delays; tower shortages in the international markets; key component shortages; and negative effects of foreign currency movements and nacelle custom duty changes in the US. According to Citi, mediumterm like commodity price increases; delays in Suzlon’s WTG capacity ramp-up; the possibility of PTC not being extended; and further provisions for blade damage problems may weigh heavily on the stock’s performance. “The target price is based on 17 times December ’09E EPS (earnings per share), the low end of Suzlon’s 05-08 P/E (price to earnings) range of 17-47 times, given concerns about Suzlon’s S88 WTG,” said Citi in a note to its clients. “The recent EME (Edison Mission Energy) order cancellations and availability issues have taken the stock to its trough valuation of 17 times oneyear forward earnings,” the note said.

Prabhudas Lilladher on IVRCL

Broking house Prabhudas Lilladher has maintained its ‘buy’ rating on the stock saying stock is attractively valued at 14.5 times FY09 (estimated) earnings and 11.2 times FY10E earnings at the current market price. “We expect the company to register a CAGR (compound annual growth rate) of 32% and 25% in revenues and PAT (profit af-ter tax), respectively, for FY08-10(estimated),” said the broking house in a note to its clients. According to the broking outfit, a substantial order book growth would be the primary driver of revenues for the company. “The order book as on May 2008 stood at Rs 12,200 crore (year on year growth of 71%) as against Rs 7100 crore. On account of focus on cash contracts, IVRCL enjoys a healthy order book position amongst the peers,” the note said. IVRCL has improved upon its Sales/WC (working capital) ratio at 1.9 times as against 1.7 times in FY07 and is expected to maintain the same, says the broking house.

Stock Views on Tata Steel, Idea Cellular, Tata Chemicals, Lupin, ONGC

CLSA on Tata Steel - RATING: OUTPERFORM



CLSA 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: BUY



IDEA 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: BUY



CMP: 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: BUY



LUPIN’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: BUY



THE 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.

Stock Views on Areva TD, ONGC, Aditya Birla Nuvo, Ultratech Cement, Allied Digital

CITIGROUP on AREVA T&D INDIA - TARGET PRICE: RS 1,809

CITIGROUP Global Markets has assigned a ‘hold’ rating to Areva saying despite the company’s strong fundamentals, the stock is fairly priced. “The stock trades at a P/E multiple of 19.7 times 2009 (estimated) earnings and provides limited upside to our target price of Rs 1,809. Our target price is based on a P/E multiple of 23 times December 2009 set at a 9.5% premium to historical average P/E multiples and in line with ABB,” the Citigroup note to clients said. Citigroup expects Areva’s earnings per share to grow at a compounded annual rate of 32% over 2007-10 (estimated), with a return of equity of around 40%. In comparison, ABB’s EPS is expected to grow at a compounded annual rate of 25% with a RoE of roughly 30%.


MACQUARIE Research on ONGC - TARGET PRICE: RS 995

MACQUARIE Research Equities has given a ‘neutral’ rating to ONGC, as it feels that attractive valuations are offset by lack of earnings growth. “ONGC is trading at undemanding valuations of 7.7 times FY3/09 (estimated), but it also lacks growth, as a corresponding rise in subsidy burden wipes out a bulk of its gain from a rise in oil price re-alisations,” the Macquarie note to clients said. Earlier this week, ONGC Videsh (OVL), the wholly-owned subsidiary of ONGC, had an-nounced a recommended preconditional cash offer to acquire Imperial Energy Corp, an oil E&P (exploration and production) company with assets in Russia and Kazakhstan for £1.4 billion.

Sharekhan on ADITYA BIRLA NUVO - TARGET PRICE: RS 2,035

BROKERAGE firm Sharekhan maintained its ‘buy’ rating on Aditya Birla Nuvo even though it feels that the firm may have overpaid for its acquisition of Apollo Sindhoori Capital investments Ltd. “We believe ABN has paid substantial premium for the buy, considering the valuations at which the listed peers are trading and the bleak near-term outlook for the broking industry. Nevertheless, the acquisition provides ABN entry into broking business and may hold value in the long term,” the Sharekhan note said. “We remain positive on ABN on account of its presence across diversified businesses. In the near term, the stock would have the trigger on account of the insurance bill that is expected to allow higher foreign direct investment in the sector,” it added.

CLSA on ULTRATECH CEMENT - TARGET PRICE: RS 791

CLSA has resumed coverage on UltraTech Cement with a ‘buy’ rating and price target of Rs 791. It feels that while domestic prices should drop over the next 9-18 months due to an adverse demandsupply regime, UltraTech’s improving sales mix should keep blended realisations flat over FY08-11CL. “EBIDTA margin is set to fall due to higher cost but it will be the most moderate decline. Its 9% volume CAGR over FY08-11CL should help drive a 4% cash-earnings CAGR. At 5.8 times price/cash flow, downside is limited,” said the CLSA note.

Alchemy Share on ALLIED DIGITAL - TARGET PRICE: RS 1050

Alchemy Share and Stock Brokers has rated Mahashtra Seamless a ‘buy’with a price target of Rs 873. “With increasing activity E&P (exploration & production) in the oil & gas sector in India, demand for seamless pipes is expected to rise over 10% in the next five years. MSL, being the leader, the company will be the major beneficiary of this demand,” the Alchemy note to clients said. “Further, implementation of city gas distribution network (CGD) in 200 cities as planned by Gail will improve the outlook for ERW pipes. MSL, being one the two key players in ERW segment, is set to benefit from increased demand,” the note added.

Stock Views on Larsen Toubro, Container Corp Of India, Areva TD, HCL Technologis, Ansal Properties

MORGAN STANLEY on LARSEN & TOUBRO - RATING: OVERWEIGHT


MORGAN Stanley believes that fears of the impact of a slowdown in the capex cycle in India on Larsen & Toubro (L&T) are exaggerated. It expects L&T to gain market share during the slowdown, so the risk-to-growth estimates will remain low. Morgan Stanley believes L&T is the lowest risk play in the sector and strongly recommends buying into any weakness. However, despite the upgrade, Morgan Stanley estimates a CAGR of 25% for L&T’s standalone earnings over FY08-10E against 57% over FY06-08E. L&T will be cushioned from the slowdown due to its propensity to gain market share in slowdowns, its entry into newer verticals and its exposure to the Middle East. On a bottom-up basis, healthy capex trends in verticals (E&P and metals) further increase the company’s ability to weather the slowdown.


JP MORGAN on CONTAINER CORP OF INDIA - RATING: OVERWEIGHT


JP Morgan has assigned an ‘overweight’ rating on Container Corporation of India (Concor) with a March ’09 price target of Rs 1,010. The price target implies a 16% potential share price upside from current levels. Concor is India’s largest railway container freight operator with an over 90% market share. By that estimate, Concor will have an earnings CAGR of 16% over FY08-10 driven by growth in containerised cargo traffic. Given sustained growth in India’s foreign trade, JP Morgan expects container traffic to grow at 14% over FY08-10E. It expects Concor to be a key beneficiary of this growth, given its unparalleled infrastructure network with 58 inland container depots (ICDs) and over 150 rakes and established customer relationship. The company’s revenue growth is likely to accelerate to 18% CAGR over FY08-10E (versus 10% in FY08), given a sharp increase in customer tariffs. The March ’09 price target is based on discounted cash flows (DCF) and implies 13x oneyear forward P/E on FY10E EPS (which is at a 10% discount to its average historical three-year multiple). The multiple looks justified, given rising competition and moderation in earnings growth. Downside risks to the price target and view are a challenging macro environment, given high crude oil prices and rising inflation, which can slow down India’s foreign trade; and a sharper-than-expected increase in competitive intensity.


CITIGROUP on AREVA T&D - RATING: HOLD


CITIGROUP has initiated a ‘hold’ recommendation on Areva T&D India with a target price of Rs 1,809. Areva T&D’s EPS has witnessed a CAGR of 117% over CY04-07 and expanded return on equity (RoE) from 11.4% to 46.5%, aided by a focus on higher-margin national grid/selected orders for the Accelerated Power Development and Reform Programme (APDRP) and growth off a lower base. Further, the company’s EPS is expected to witness a CAGR of 32% over CY07-10E, versus that of ABB at 25%, with higher RoEs of ~40% versus ABB at ~30%. Discussions with the management suggest that any foray into the nuclear power equipment business in India will be through a separate entity. Globally, Areva is at No 3 after ABB and Siemens in power T&D. ABB has historically been the market leader in India. However, Areva T&D India has edged past ABB in H1 CY08 with a market share of 22.4% vs 19% for ABB and 12% for Siemens. These are strong end markets and low-cost manufacturing centres. Areva T&D Global has a clear strategy of making these two countries global sourcing hubs. Currently, exports contribute 14% to Areva T&D India’s sales and are expected to jump to 25% by CY12E. The stock trades at a P/E of 19.7x CY09E and provides limited upside to the target price of Rs 1,809. The target price is based on a P/E of 23x December ’09 set at a 9.5% premium to historical average P/Es and is in line with that of ABB’s. Order inflow momentum, execution and commodity price movements can drive share price movements.


INDIABULLS SECURITIES on HCL TECHNOLOGIES - RATING: BUY


INDIABULLS Securities has maintained its ‘buy’ rating on the stock because the company witnessed a strong deal inflow during Q4 ’08 ($310 million) and signed a total contract worth $1 billion during the year. HCL Technologies reported strong results for the quarter and the year ended June ’08. Its topline recorded a sequential growth of 11.5% to Rs 2,170 crore, driven by an appreciating dollar and a modest volume growth. EBITDA margin increased by 117 bps q-o-q to 23.4%, led by an improved operational efficiency and a decrease in the cost of revenue, which helped offset the increase in SG&A expenses. Although in a weak macro-economic environment, pricing will continue to remain under pressure, Indiabulls expects the company’s revenues to grow at ~21.4% in dollar terms for FY09, driven by volumes. Besides, gain from the appreciating dollar against the rupee will also help improve revenues to grow at 27.2% in rupee terms for FY09E. Despite a slowdown, the US remained the highest revenue contributor and showed a decent growth throughout the year. Besides, the company steadily improved its utilisation rate from 69.2% in Q1 ’08 to 73.9% in Q4 ’08, which helped improve margins. Despite having stable fundamentals, the stock is trading at a discount of 29% to the average industry multiple. Moreover, valuation gives a fair value of Rs 316. The stock has an upside of around 37%.


MACQUARIE on ANSAL PROPERTIES - RATING: NEUTRAL


ANSAL Property and Infrastructure (APIL)’s leverage ratios are stretched. Its net debt-to-equity ratio (incorporating the impact of outstanding land payments) stands at 165%. This does not include any impact of off-balance sheet financing. APIL’s stretched balance sheet and the general scenario of tight liquidity are primary concerns. Macquarie has a limited visibility on sources of capital which will be used to generate profits from this land bank. Investors are unlikely to (and should not) attribute any value to profits earned over and above the replacement cost of the land bank. Macquarie has cut its NAV estimates to reflect this change in opinion. Its ~240 million sq ft of land in North India provides APIL the scale to enjoy preferred supplier relationships. Margins are likely to be supported by the low average cost of land acquisition (Rs 121/sq ft). Projects in North India account for 100% of APIL’s NAV and land bank. This concentrated land bank limits its ability to focus elsewhere if this market experiences a slowdown. North India has seen rapid price rises and even more rapid project launches in the past 2-3 years. Incrementally, this scenario is likely to be exacerbated by a surge in secondary market supply, as speculators try to exit properties bought in the past two years. The target price of Rs 100 based on a 25% discount on NAV remains unchanged. APIL is trading at a 24% discount to liquidation value and below its book value. This provides downside support. Nevertheless, Macquarie has downgraded the stock to ‘neutral’ from ‘outperform’ as the stock lacks triggers, which may keep the share price at depressed levels.

Stock Views on THERMAX, BHEL, BOMBAY RAYON

Kotak Securities on THERMAX - TARGET PRICE: RS 540

Kotak Securities has assigned an ‘accumulate’ rating to Thermax, saying that recent orders will drive the company’s revenue growth in FY10. “The company is witnessing robust order inflows from steel and sponge iron makers. Thermax has also expanded its prequalifications in refineries. The company indicated that orders have been trickling in from sugar distilleries and the polyester sector,” the Kotak note to clients said. “Thermax is currently trading at 17.9 times and 14 times FY09 and FY10 earnings, respectively," the note added, cautioning that near-term growth was likely to be subdued.

Citigroup on BHEL - TARGET PRICE: RS 2,025

Citigroup Global Markets has downgraded its rating on BHEL from ‘buy’ to ‘hold’, citing limited upsides from the current levels with re-spect to the new target price. Citi has revised the target price for BHEL to Rs 2,025 from Rs 1,642 earlier to factor in the increase in the earn-ings estimates over FY10E-12E by 8-9%. “BHEL has hiked its order inflow guidance to Rs 500 billion from Rs 40,000-50,000 crore earlier. It has bagged Rs 192 billion of orders so far in FY09E and is well on course to meet its full-year order inflow guidance,” the Citi note to clients said. It expects BHEL’s earnings per share (EPS) to grow at a com-pounded annual rate of 27% over FY08-11(estimated) with RoE (return on equity) at 28-31% levels.

Merrill Lynch on BOMBAY RAYON - TARGET PRICE: RS 450

Merrill Lynch has initiated coverage on Bombay Rayon Fashion with a ‘buy’ rating and price target of Rs 450 citing attractive valuations. “Valuations are inexpensive at 9 times FY10 (estimated) earnings, given strong growth outlook and high RoE at 24%,” the Merrill Lynch note to clients said.

Stock Views on VOLTAS, CORPORATION BANK, STERLITE INDUSTRIES, INDIA CEMENTS, IRB INFRASTRUCTURE

CITIGROUP on VOLTAS - RATING: SELL

CITIGROUP rates Voltas as ‘sell/medium risk’ with a target price of Rs 121. Voltas, a Tata group company, is the market leader in India’s heating, ventilation and air-conditioning (HVAC) segment, having 28% market share in electromechanical projects. But domestic demand is decelerating across all its divisions. Citigroup sees increased risk to the company’s earnings if the market environment worsens. It expects overall margins to be in the range of 7.5-8.3% over the next three years. Voltas’ target price is set at 15x September ’09E forward EPS and is supported by forecasts of 27% earnings CAGR for FY07-10E and 29-33% return on equity (RoE). At 15x September ’09E, Voltas will trade at a discount to power equipment stocks like Bhel and engineering & construction companies such as L&T. The 15x September 09E multiple is lower than the average one-year forward P/E of 22x over the past three years — reflecting reduced growth outlook. Key downside risks include: international projects risks, termination of principal agent relationships, increasing competition in domestic and international markets, manpower shortages and material prices. Key upside risks include: stronger-than-expected performance driven by the international business, and turnaround of the domestic operating environment.

INDIABULLS SECURITIES on CORPORATION BANK - RATING: BUY

INDIABULLS Securities reaffirms its ‘buy’ rating on Corporation Bank with a target price of Rs 335, which is 21% more than its current market price. The bank’s operating profit grew by a healthy 16.5% y-o-y in Q109. But net profit grew by merely 4.1%, primarily due to mark-to-market (MTM) losses during the quarter. While growth in net interest income (NII) was hit due to compression in net interest margin (NIM), other income, which grew at 14%, supported growth in operating profit. An increase in business productivity reduced operating expenses, further improving profitability. But pressure on NIM may ease in the next few quarters as the bank hiked its benchmark prime lending rate (BPLR) by 50 bps in August. Moreover, the CASA ratio has been improving consistently on the back of an aggressive increase in the number of branches. This should help maintain, if not increase, the bank’s NIM. There has been a sequential reduction in the bank’s net and gross NPAs. The bank is likely to maintain its asset quality, given that it is not aggressively focused on the priority sector.

MERRILL LYNCH on STERLITE INDUSTRIES - RATING: NEUTRAL

MERRILL Lynch remains ‘neutral’ on Sterlite Industries due to weak zinc outlook. The long-pending decision on the Lanjigarh bauxite mines in Orissa finally came through in Sterlite’s favour. This development is more positive for the parent company, Vedanta Resources, than for Sterlite. But it will have a positive impact on Sterlite too. The approval for the mine indicates the promoter group’s ability to execute growth projects in the country, where mining approvals are typically difficult to secure. Vedanta is setting up a 1.1-million tonne (mt) alumina refinery and 500-kt ally smelter in Orissa. Lanjigarh bauxite mines have estimated reserves of 77 mt and are located 5 km from the refinery. Sterlite will mine the bauxite and sell to Vedanta on a transfer pricing basis. The mine development is expected to take around nine months and will make Vedanta a fully integrated low-cost producer of ally. The benefit from this project is relatively small for Sterlite, since it has only a 29.5% stake in this project, and it will account for a mere 5% of Sterlite’s consolidated profit in FY10. Sterlite is trading at 11.1x FY09E. On MTM spot zinc price of $1,733/tonne, it is trading at 13x FY09E. Merrill Lynch believes the sharp year-to-date stock correction already factors in the zinc price crash. Given that zinc prices are now lower than the marginal cost of production, Merrill Lynch believes the probability of supply closures is rising. In addition, speculation on minority stake buyouts in the company’s zinc and aluminum subsidiaries is building up.

JM FINANCIAL on INDIA CEMENTS - RATING: HOLD

JM FINANCIAL recommends ‘hold’ rating on India Cements (ICL) and values the company at a target enterprise value/tonne of $100 to arrive at its June ’09 target price of Rs 168. JM Financial expects 20.3% and 13.2% yo-y growth in revenue for ICL in FY09E and FY10E, respectively. EBITDA is estimated at Rs 1,060 crore and Rs 1,070 crore in FY09E and FY10E, respectively, resulting in EBITDA margins of 29.0% and 25.7% in that order. ICL undertook corporate debt restructuring (CDR) in FY03, when the cement industry was passing through difficult times and ICL had debt:equity of 4.4x. As the cement sector’s prospects improved, ICL repaid most of its debt and its debt:equity stood at 0.5x in FY08. Subsequent to the CDR, the company has done equity issues that have led to a large capital base, thereby lowering sustainable return on capital employed (RoCE) at the corporate level to 11.8%. ICL is the key player in the South, where it enjoys higher realisations and consumption growth of 11.74%, compared to the all-India growth rate of 10% in FY08. ICL currently trades at 5.7x EV/EBITDA, P/E of 8.1x and EV/tonne of $98 for FY10.

LEHMAN BROTHERS on IRB INFRASTRUCTURE - RATING: OVERWEIGHT

LEHMAN Brothers initiates coverage on IRB Infrastructure Developers with an ‘overweight’ rating and a March ’09 price target of Rs 195. IRB is one of the largest road developers in India, and has 14 BOT road projects. The company’s key strength is its in-house construction capability that enables it to capture the entire economic value of road projects, and helps it to address execution risks. Historical projects have yielded substantially high-equity internal rate of return (IRR). IRB has strong cash flows and low leverage compared to other international road developers. Its operating cash flow is strong and will improve further after commissioning of the Bharuch-Surat and Surat-Dahisar stretches. Lehman estimates cash flows before capex at Rs 1,200 crore over FY09-11. The increase in cash flow is driven primarily by a rise in toll revenue. The net debt-to-equity ratio for IRB is only 0.9, and leverage is likely to remain comfortable at 1.3 in FY10. Lehman values IRB at: (1) Road concessions at Rs 129 per share; (2) Rs 36 per share as growth factor to account for potential new projects; (3) Construction business at Rs 26 per share based on a multiple of 10x FY10 earnings estimate of Rs 87 crore; and (4) Real estate at Rs 3 per share. The stock is currently trading at a multiple of 9.4x FY10 earnings estimate of Rs 520.5 crore and 2.1x FY10 book value of Rs 2,372 crore, and at a substantial discount to its global peers. The stock is currently trading at 1.08x concession portfolio NAV of Rs 4,293.8 crore, implying that not much value has been attributed to construction, real estate and future growth opportunities in road concessions.

Stock views on RELIANCE COMM, BANK OF INDIA, AEGIS LOGISTICS, M&M, YES BANK

CITIGROUP on RELIANCE COMM

TARGET PRICE: RS 530

CITIGROUP has downgraded Reliance Communications to ‘hold’, citing subdued first quarter and falling capital productivity. Its new target is Rs 530. Essentially, it has cut its FY09-10E EBITDA estimates by 13% and EPS by 14-18% to reflect a host of factors. Chief among them are lower revenue per minute in-line with peers, lower elasticity, staggered rollout of GSM and higher net debt. It notes that the company registered a weak first quarter EBITDA, as wireless was hit by continued lack of elasticity. It expects this trend of low CDMA elasticity to continue to dominate RCOM’s rations till GSM launch. It also says that the company’s $5.5 billion capex (FY09) and $4 billion (FY10) would lead to a net debt of Rs 170 billion in end-2009 (Rs 130 billion on June-2008). It signs off saying no triggers in the near term. “RCOM’s wholehearted participation in wireless growth is contingent on consumer mix change through the GSM foray, key for rerating, but some time away and not without risks,” said Citi in a note to its clients.

MACQUARIE on BANK OF INDIA

TARGET PRICE: RS 336

MACQUARIE believes that Bank of India’s strong results show its relative resilience among government-owned banks to the tough macro environment. The bank remains its top pick among state-owned banks and the broking house maintains ‘outperform’ rating with a revised target price of Rs 336 from the previous Rs 299. It says that the key earnings surprise was strong growth in fees to 58% Y-o-Y driving the 49% Y-o-Y growth in non-interest income. It infers that the bank has been aggressively pushing for fees business, focusing on products such as letters of credit and guarantees.

KR CHOKSEY on AEGIS LOGISTICS

TARGET PRICE: RS 207

KR CHOKSEY Shares & Securities has assigned a ‘buy’ on Aegis Logistics with a one-year price target of Rs 207, citing growing domestic consumption of the company’s services. Aegis Logistics mainly concentrates on port handling of liquid petroleum or chemicals and gas storage and distribution. “Given the growing domestic consumption of petroleum and gas in the recent years, Aegis Logistics (ALL) is well placed to grab the increasing opportunities in this sector. As a result of favourable cost, economics of auto gas over petrol and the increasing new entrants of LPG variants of cars in the market, the company is all set to scale up auto gas stations from the current 22 to 100 in the next two years,” the report said.

EDELWEISS Capital on M&M

EDELWEISS Capital has initiated coverage on Mahindra & Mahindra (M&M) with a ‘buy’ rating. The brokerage expects the operating divisions of M&M to perform well over the medium term, in terms of growth and profitability. “We expect significant expansion in M&M’s addressable market through its entry into the passenger car. The company has significant value embedded in its investments, covering information technology (Tech Mahindra), real estate & infrastructure (Mahindra Gesco), hospitality (Mahindra Holidays), financial services (Mahindra & Mahindra Financial Services), and auto-component (Mahindra Ugine Steel and Mahindra Forgings) sectors,” the report said.

IDBI Capital on YES BANK

IDBI Capital has maintained a ‘buy’ rating on YES Bank, on expectations of higher growth. happen. The brokerage expects the bank to log strong income growth in the long term. Despite mark-to-market (MTM) depreciation, net provisions have been lower owing to reversals equivalent to MTM depreciation done on investment provisions, the IDBI report noted. The bank has increased its lending and deposit rates recently.