CLSA on IRB Infra

CLSA initiates coverage on IRB Infra with a `Buy’ rating. As one of India’s largest integrated players in the space with in-house EPC complementing its BOT (build, operate and transfer) developments, IRB is a natural beneficiary. CLSA expect IRB to add to its existing BOT portfolio over the next few years, therefore, anticipates EPS rising at a about 20% CAGR over FY10-20CL. Road highway project activity is to intensify manifold. The recent changes to improve financial viability of road-highway projects, increase land acquisition thresholds before award to cut delays, make eligibility norms pragmatic and streamline procedural bottlenecks. Increased access financing have largely removed the key hurdles holding back investments in India’s road sector.

Consequently, over 34,000 km of new highway projects is to be awarded in the next four years - 1.7x that in the last decade. This opens up a $60-billion project award opportunity by FY14. With six projects aggregating Rs 67 billion already in the execution phase, EPC will drive earnings growth over FY10-13 with BOT earnings driving growth thereafter as projects get completed. Even without the new wins, EPS will still grow at a 16% CAGR over the next decade. New project wins are to be the key catalyst; five projects aggregating 576 km where IRB is on the final shortlist, will be awarded in the next quarter while it is in the pre-qualification stages for another 1,925 km. Lower than expected traffic and slower than expected awards are key risks.

CLSA on Adani Power

CLSA initiates coverage on Adani Power with an `Underperform’ rating. Adani Power is setting up a 6,600-MW power capacity, which will make it one of the largest private sector players by FY13. It has 70% power tied up in Case 1 bids and the balance 30% will be sold on merchant basis. Additional merchant sales before the start of long term PPAs are contingent on timely commissioning of projects.

With strong capacity addition over the next three years, Adani Power has 6,600-MW capacity under development which is targetted to be fully commissioned by FY13. This will make Adani one of the largest private sector players in power generation. The company has plans to add more capacity in Gujarat at Dahej (1,980MW) and in Rajasthan at Kawai (1,320MW) and expand its Tiroda project to 3,300MW. CLSA believes the capacity ramp up/ risks associated with coal supplies from Indonesia/ merchant tariffs are going to be the key for the stock performance. CLSA has given the company the benefit of doubt regarding the budget proposal of imposing a duty on power imported from SEZs to DTA (domestic tariff area), however, there is a MAT rate for taxation for the company even though the company’s assessment is that it will have zero tax liability for the initial 10 years under the SEZ Act.

Stock Views on Bartronics, Onmobile Global, PG CIL, HDFC

HDFC Securities on BARTRONICS INDIA - Target RS 234
HDFC Securities has initiated coverage on the stock with a ‘buy’rating saying the fast growing AIDC (Automatic Identification and Data Capture) technology in India will further boost the company’s order book and topline. “The company’s market share of around 90-95% in smart card and RFID (radiofrequency identification) segments offers all AIDC solutions under one roof. The company’s early entry into smart card manufacturing, will help retain its dominance in the area,” said HDFC in a note to its clients. It expects the revenues and profits of the company to grow at CAGR of 72% and 78% over FY08 to FY10E (estimated). “The stock is trading at 6.5 times and 3.8 times its FY09 (estimated) and FY10 (estimated) FDEPS (fully diluted earnings per share),” said the note.

MACQUARIE Research on Onmobile Global - TARGET PRICE: RS 650

MACQUARIE Research has initiated coverage on OnMobile Global with an ‘outperform’ rating saying the stock has a 42% upside from current levels. “We are excited about the opportunities in the Indian mobile value-added service (VAS) sector as well as in emerging markets. OnMobile is India’s No 1 mobile VAS provider, with around 30% share of India’s VAS market (ex-SMS),” said Macquarie in a note to its clients. The brokerage expects a 2 year FY3/08–10E EPS CAGR of 42.5% for the company, led by topline CAGR of 58%, marginally offset by one-time dip in margin in FY3/09E. According to Macquarie, recent M&A transactions have opened the door for OnMobile to tap the potential offered by the international VAS market. “OnMobile’s international revenues are likely to grow at a faster pace (FY3/08–13E CAGR of 63%) than growth of its domestic revenue (35.5%),” said the note. The brokerage feels that change in business model and large premiums for future acquisitions could result in value destruction for On-Mobile.

CITIGROUP on PG CIL - TARGET PRICE: RS 86

CITIGROUP Global Markets has initiated coverage on the stock with a ‘sell’ rating saying PGCIL will be FCF (free cash flow) negative until FY12E (and potentially beyond) and will not offer much dividend yield. “Investors consider dividend yield as a reason to invest in utilities with regulated earnings streams. We think PGCIL would be very compelling the day growth capex stops,” said Citi in a note to its clients. Citigroup expects PGCIL’s earnings to grow at a 15% CAGR over FY08-11E with RoE of 13-15%. If compared with the peers, PGCIL has traded at a premium to NTPC post listing, says Citi. “We note that PGCIL’s listing happened prior to the Reliance Power IPO and the associated lofty valuations for all Indian Electric Utility stocks during that time, and thus its valuations have been further propped up. And we feel the premium is not sustainable,” the note said. Citigroup has set its target price for PGCIL at a P/BV (price to book value) of 2.2x FY10E, which is at a around 10% discount to the implied ‘ceiling’ multiple for NTPC.

CLSA Research on HDFC - TARGET PRICE: RS 2,330

CLSA Research has maintained a ‘buy’ rating on the stock saying HDFC has not seen deterioration in asset quality due to rise in rates and its plans to list a couple of subsidiaries in CY09 may act as a catalyst. “HDFC expects its growth to sustain at +20% for next three years, as housing affordability remains high and it continues to gain market share from banks. Spreads might contract in short term due to liquidity crunch, however estimated to remain around 2.2%,” said CLSA in a note to its clients. According to CLSA, most of HDFC subsidiaries continue to scale up with better profitability amongst their competitors. “HDFC standard life (HDFC’s life insurance subsidiary) has a persistency rate of +85% which is the highest amongst all players; HDFC Mutual funds have much higher net margins than any other asset manager in India (2nd largest player) and HDFC bank is the most profitable banking franchise in India,” the note said. “Adjusting for the value of subsidiaries, HDFC is trading at 4.2x FY09CL (calendar year), with an estimated ROE of 25% in FY09CL,” the note added.