Goldman Sachs on IVRCL

Goldman Sachs retains the `Buy’ rating on an existing strong pipeline of road projects and raises the 12-month price target to Rs 326 to reflect some value from potential future projects that the company can win over the next 24 months. IVRCL and IRB currently trade at FY11E P/E of 14.2x and 19.2x versus the historical median 12-month forward P/E of 15x and 17.2x respectively. Goldman Sachs considers these multiples attractive, given their outlook of stronger growth and expanding returns over the next 12-24 months. Apart from faster approvals, the key drivers of this improvement have been numerous structural reforms and urgency in resolving pending issues. Goldman Sachs adds IVRCL to the regional conviction list on:

(1) increasing traction in order inflows,

(2) a stronger balance sheet after restructuring that enhances IVRCL’s ability to win BOT (build, operate and transfer) projects, and

(3) relatively cheaper current valuations that do not adequately reflect the company’s improving margins and returns profile.

Goldman Sachs values the stock at Rs 502, implying a 28% upside from the current levels.

Stock Views on Tata Chemicals, HPCL, GODREJ Consumer Products

GOLDMAN SACHS on TATA CHEMICALS

GOLDMAN Sachs downgrades Tata Chemicals to ‘neutral’ from ‘buy’ with a 12-month P/BV-based target price of Rs 140, implying downside potential of 12% from here. With a weakening global economy and consequent correction in agri commodity prices, Goldman Sachs now expects downside risk to Tata Chemicals earnings from its soda ash and fertiliser businesses. It forecasts soda ash prices to decline by 20-25% globally in FY10E, primarily due to:

(1) soda ash producers not having the necessary pricing power to retain the benefit of low energy prices;

(2) softening demand due to a slowdown in the global economy; and

(3) a surge in Chinese soda ash capacity of about 4 million tonnes over the next two years, which may have a material impact on Asia’s soda ash margins.

The 12-month target price of Rs 140 is based on a trough P/BV multiple of 0.8x. Key risks to the target price include:

(1) renewal of soda ash prices at prices higher than estimates;

(2) further depreciation of the rupee against the dollar; and

(3) a rebound in international urea prices.

MERRILL LYNCH on GODREJ CONSUMER PRODUCTS

GODREJ Consumer Products’ (GCPL) margins are expected to be the best ever in FY10E, driven by a sharp fall in palm oil prices and product price increases effective September ’08. Recent excise duty cuts should further reduce input costs. The management’s focus is on driving category sales growth, rather than market share gains. The latter may not be easy to achieve, given that GCPL is the market leader. The share of international sales may go up from the current 25% in the long term. No impact of the economic slowdown has been witnessed on the FMCG sector so far, and sales growth has picked up in the past two months. Merrill Lynch believes GCPL can benefit from a tightening consumer wallet as its product portfolio is skewed towards economy brands. At 13x FY10E P/E, GCPL is trading at a discount to its FMCG peer group and the historic average. Merrill Lynch expects the discount to narrow as earnings momentum picks up.

HSBC on HPCL

HSBC has cut the target price on HPCL to Rs 271 and downgraded its ratings to ‘neutral’ from ‘overweight’. HPCL incurred a loss of Rs 4,100 crore in H1 FY09, and the recent fuel price cut has limited its ability to recoup a portion of this loss. With the possibility of a second fiscal stimulus package, there is also the risk of further price cuts. While the government has initiated discussions for reforms in auto fuel pricing, HSBC remains cautious on its implementation as this can result in higher diesel prices. Based on oil price assumption of $90/bbl for FY09 and $71/bbl for FY10, HSBC estimates sector under-recoveries of Rs 138,000 crore and Rs 55,000 crore, respectively, and 50% compensation in the form of oil bonds and 33% in the form of discounts from upstream players. Based on a combination of P/E and P/BV approaches, HSBC has cut its target price after accounting for the recent derating of the market and HPCL’s refining peers. Any reform in the subsidy mechanism allowing HPCL to bear lower levels of under-recoveries will be a key catalyst for the stock.

Stock Views on Infrastructure Development Finance Corp, Exide Industries

MERRILL LYNCH on EXIDE INDUSTRIES

Merrill Lynch maintains `Buy’ rating on Exide Industries, however, it has cut the target price to Rs 62 on a weak Q3. Exide Industries reported 30% below estimated PAT in 3QFY09 largely due to Rs 20 crore FX loss and in small part due to weaker sales. Merrill Lynch has cut EPS on slower demand, however, it maintains `Buy’ as

(1) FY10E EPS to grow 22% on falling cost and

(2) FY10E PE of 9.9x is close to trough valuation.

Exide Industries, the largest lead acid battery manufacturer of India, reported a net profit of Rs 56.1 crore, a growth of only 1.8% y-o-y in 3QFY09. This was the slowest growth in the last 15 quarters and is driven by

(1) volume growth of only 11% and

(2) foreign exchange loss of Rs 20 crore that reduced profit by 23%. Volume growth weakened considerably from the recent trend of over 15% growth due to slowdown in automobile demand. With FX loss accrued due to unhedged payables of over Rs 450 crore, Merrill Lynch still expects strong EPS growth of 220% in FY10E driven by

(1) lower cost of lead along with rupee appreciation could help expand EBITDA margin by 200 bps and

(2) demand growth of over 12% driven by market share gain in the relative secular segment of the automotive after market.

Thus far, FX loss on account of sharp depreciation of the rupee has been negating the impact of decline in lead cost.

GOLDMAN SACHS on IDFC

Goldman Sachs maintains a `Sell’ rating on Infrastructure Development Finance Corp (IDFC), despite a significant fall in price as lack of growth drivers over the medium term. Infrastructure lending should likely remain constrained by the need to maintain high capitalisation ratios; and capital market-driven revenues should likely remain depressed. A subdued contribution from capital market-related revenues will erode ROA from 3.1% in 2007 to 2.8% in 2008E and 2.4% in 2009E and 2010E, in our view. The constraint for IDFC in growing its balance sheet without additional equity capital infusion due to higher capitalisation requirement is well-known to the market. However, expectations, as implied by consensus estimates, remain high and could be driven by many factors including expectations of lower capitalisation requirement or a possible change in the structure of the company (although we note that the company has not stated any intention of a potential change in structure/form) over the medium term, in our view. Expectations of lower capitalisation requirements are unlikely to fructify until macroeconomic conditions improve.

Stock views on NTPC, Bank of India, Inox Leisure

Ambit Capital on INOX LEISURE

AMBIT Capital has downgraded its rating on Inox Leisure from ‘buy’ to ‘sell’ citing disappointing quarterly numbers as one of the reasons. “Despite strong performance of key movies during the quarter, the company reported poor numbers that were way below our estimates. In our opinion, the company has failed to capitalise on an otherwise strong content supply,” said a brokerage note to clients. The brokerage says that it expects company’s earnings to be under pressure for some time. “Weak macro environment has taken a toll on the occupancies. Moreover, supply of content and screen space is not likely to improve in the forthcoming quarters. Consequently, we expect Inox to report a muted topline growth, going forward,” the note added.


Centrum Broking on BANK OF INDIA

Domestic brokerage house Centrum Broking has maintained its ‘buy’ rating on Bank of India, but lowered target price to Rs 330. According to brokerage’s estimates, the stock is trading at 0.9 times FY10 (estimated) adjusted book value. “We believe BoI would continue to command premium versus its peer PSU banks, primarily due to its strong returns ratios, better asset quality and higher profitability,” a Centrum note to clients said. BoI’s profit after tax for the quarter ended December rose 70% Y-o-Y to Rs 870 crore. “BoI continues to witness strong financial performance on the back of steady Net interest income (NII) and strong non-interest income growth and lower opex. We have raised our PAT estimates for FY09 by 29% and for FY10 by about 28% factoring in higher NII and other income growth.


Goldman Sachs on NTPC

Goldman Sachs has maintained its ‘buy’ rating on NTPC, saying that Central Electricity Regulatory Commission’s final tariff norms for FY10-14 are neutral to positive for NTPC’s earnings outlook, relative to the draft norms announced in September 2008. “We maintain that effective tax rate and economic life of projects are critical

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 DLF, Idea Cellular, Glaxo Smithkline Pharma

Goldman Sachs on DLF

Goldman Sachs has maintained its ‘sell’ rating on DLF while reiterating its cautious outlook on the real estate sector. According to the investment bank, New Delhi-based realty major’s third-quarter results have confirmed a significant slowdown in property sales and construction activity in India. “We push back our medium-term develop-ment pipeline projections and lower our property price assumptions,” Goldman Sachs said in a report. The investment bank has lowered its earnings per share (EPS) estimates for FY2009-FY2011 by 29-62% and cut its 12-month target price to Rs 124 from Rs 203.

CLSA on IDEA CELLULAR

CLSA has maintained its ‘outperformer’ rating on Idea, with price a target of Rs 53, as it feels the company’s stronger balance sheet would support valuations. “Idea’s balance sheet has improved significantly with Telekom Malaysia’s Rs 73 billion cash injection (a 15% preferential placement) and another Rs 21 billion from its stake sale in ABTL (Aditya Birla Telecom), with 3QFY09 net debt/equity of 0.18 times (against 1.8x in 1QFY09),” the investment bank said in a report. “The company’s aggressive expansion strategy and inferior margins for its Spice Communications business have compressed margins, but the big improvement in its balance sheet and strong valuation benchmarks from recent deals for start-ups, will support the stock,” the report added.

India Infoline on GLAXO SMITHKLINE

India Infoline has assigned an ‘add’ rating to Glaxo Smithkline Pharma, citing stable growth, zero debt and strong cash balance as the key positives. According to the brokerage, the company has more than $300 million cash on its books. “We believe that new product launches under patent protection will help Glaxo maintain its growth rates in the foreseeable future. Glaxo has a lean asset base, with most of manufacturing being outsourced,” the brokerage said in a note to its clients. “Hence, the company also stands to gain from falling prices of intermediates and APIs. This, we believe, will help the company maintain its EBITDA margin at CY08 levels, even in the event of a slow-down in the domestic market,” the note added.

Stock Views on GAIL, HDFC, Ananth Raj Industries

HSBC GLOBAL RESEARCH on ANANT RAJ INDUSTRIES

HSBC Global Research initiates an ‘underweight’ rating on Anant Raj Industries (ARIL) with a target price of Rs 50, which is at a 50% discount to ’09E NAV of Rs 100. ARILs owns residential land parcels in upmarket locations in Delhi, and has four hotel properties near Delhi airport. Its land bank of 61 million square feet has been aggregated at a cheap value of Rs 200 per share. Execution has faltered, despite a healthy balance sheet. With consistent capital raising, ARIL has maintained a healthy balance sheet with marginal debt and has a net cash position of Rs 500 crore. Also, 90% of its land is paid for, so the carrying cost of land on its balance sheet is not a cause for concern. Despite these factors, its execution track record does not inspire confidence. There have been delays on its major projects, and only two projects have been delivered in the past 24 months. ARIL faces the daunting task of increasing the pace of execution in the wake of strong cash availability. However, with the demand outlook getting bleaker, HSBC expects there to be limited room for ARIL to accelerate its project development.


GOLDMAN SACHS on HDFC

GOLDMAN Sachs reiterates ‘buy’ rating on HDFC, but it has cut the 12-month target price to Rs 1,890 from Rs 2,070. Investors have expressed concerns about HDFC’s ability to meet growth expectations due to two reasons: 1) Lending spreads can be narrowed by higher borrowing costs due to tighter credit conditions and HDFC’s reliance on wholesale funding; and 2) Non-performing assets on HDFC’s exposure to property developers can rise due to a marked downturn in the property market. However, Goldman Sachs feels HDFC has sufficient financing flexibility, including the ability to raise deposits and fund growth if conditions warrant. HDFC’s investment appeal rests on three factors: 1) Demonstrated resilience in its earnings through market cycles; 2) The long-term potential for growth in an underpenetrated market, and the strong and long-term sustainable return metrics that HDFC currently enjoys; and 3) A well-capitalised balance sheet that should enable fund growth through internal accruals without requiring additional equity capital over the next 3-5 years. Goldman Sachs values the core mortgage business using the mid-point of Camelot-derived P/BV and its ex-growth value. HDFC currently trades at or below historical P/BV and P/E multiples, making the valuation appear attractive.


BNP PARIBAS on GAIL

BNP Paribas initiates research coverage on Gail, India’s largest gas transmission utility, with a ‘reduce’ rating and a target price of Rs 176 per share. The low estimates factor in a steep decline in profitability of Gail’s petrochemicals, LPG and liquid hydrocarbons segments in the wake of a cyclical downturn. These business segments together accounted for 51.8% of Gail’s FY08 EBITDA. Gas transmission tariffs are likely to fall on new regulation. The Petroleum and Natural Gas Regulatory Board (PNGRB) proposes to use the depreciated asset value of Gail’s existing pipelines to determine tariffs. Starting FY10, BNP Paribas will model tariffs of Gail’s existing pipelines as per PNGRB’s proposals. BNP Paribas uses a sum-of-the-parts approach to arrive at target price of Rs 176 per share. It values the petrochemicals and LPG/LHC business segments at 10-year trough EV/EBITDA multiple of 2.6x, Gail’s unlisted investments at book value, and its investments in listed securities at 30% discount to current market prices.

Wish you all Happy New Year 2009

Year 2008 has been an action packed one in all respects. It started off with stock market correction in mid January, later it turned out to be a bear market and eroded Billons of dollars of investor money.

By then sleeping giant was awaken, the sub prime. It had cascading effect all walks of the economy only in US nut all across the world. Then came the big investment bank failures. Fed has to Bail out leading mortgage lenders of the country Fannie Me, Freddie Mac. But, worst was yet to come, Lemon Brothers, a hundred year old investment bank went bankrupt.

It was the situation with Merrill Lynch and Morgan Stanley as well. Goldman Sachs was also taken a beating but was slightly better off. Merrill Lynch was acquired by Bank of America. Wachovia acquired by Wells Fargo, Washington Mutual (WaMu ) acquired by JP Morgan. Both Goldman and Morgan were converted to conventional banks. Meanwhile, Warren Buffet, greatest investor that the world has seen also showed confidence in Goldman.

On the other side Worlds largest insurance company AIG (American Insurance Group), has become the victim of sub prime. Stock price was as low as to $1. To life the ailing economy and overcome the sub prime problem US government came up with $700 Billon package. Later it found that it was short by couple of hundreds of Billon dollars. So second bail out package followed soon. Fed was cutting rate to give stimulus to ailing economy.

Mean while across the world there was severe liquidity problem. Credit Tsunami had hit the world and whole world was in shock. Central banks had to cut interest rate to inject liquidity. There was a fear of global recession all central Governments and banks were trying their best to hold situation under control. Central Governments of Germany, France, UK, Switzerland, were coming out with bailout/stimulus package to save the economy. Some of the biggest name like UBS, Credit Suisse, Barclays, HSBC all have become victims of sub prime and credit crunch. Meanwhile, surprisingly China was out with $560 Billion stimulus package to economy. Stock markets were falling day after day.

Metal prices was cooling off, Crude oil price was coming down on the fears of slow down in the global economy and hence the lower consumption. All these lead to lower inflation. With US interest rates going near zero, Deflation worries were looming large.

Stepping into New Year worldwide consumer confidence is multi decade low, Job less claims are at 26 years high, fear of deflation.

What lies ahead in 2009? Hope. Hope of recovery, Hope of job Security, Hope of Peace, Hope of Good life.

New Year is the time to unfold new horizons & realize new dreams, to rediscover the strength & faith within, to rejoice in simple pleasures & gear up for new challenges. Wish all our readers a very happy new year. Wishing you a truly fulfilling 2009. Let year 2009 be filled with Joy, Happiness, Prosperity, Safety & Security.

Have a great New Year ahead & happy investing. Thank you for all your Co-operation and Support.

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 NTPC, Cairn India, Lanco Infra

GOLDMAN Sachs on NTPC - TARGET PRICE: RS 208

GOLDMAN Sachs Research has initiated coverage on the stock with a ‘buy’rating, saying NTPC’s business model entails a high degree of earnings visibility with core business consistently yielding 20% plus return on equity(RoE). “NTPC scores well as a defensive growth op-tion. It has the lowest risk to funding amongst its peers, competitive cost of generation, RBI guarantee for payment realisation from its customers (financially-constrained SEBs) up to FY2016 and inexpen-sive valuations,” said Goldman Sachs Research in a note to its clients. The firm expects the company’s net profit to grow at a compounded annual rate of 7.3% between FY2008 and FY2011E (estimated).

Macquarie on Cairn India - TARGET PRICE: RS 276

Macquarie Research has reaffirmed its ‘outperform’ rating on the stock, but has cut the target price by 1.4% to Rs 276 due to the change in 2008 West Texas Intermediate (WTI) forecast. “We have revised down the WTI crude oil price forecast by 6.3% for 2008. Our new forecast has the 2008 figure adjusted down to reflect the recent weakness in prices and the risk that slowing demand growth keeps prices in a range of $100-110/bbl (blue barrel),” said Macquarie in a note to its clients.

UBS Securities on TARGET PRICE: RS 250

UBS Securities has upgraded its rating on the stock to ‘buy’from ‘sell’, but has trimmed the price target to Rs 250. The firm has cut its earnings per share(EPS) estimates for the stock by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution. It has also made of 10% discount to the power, engineering procurement and construction (EPC) business and infrastructure valuation for the company. “

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.

Investment tips on HDFC BANK, ITC, UNITED SPIRITS, HINDUSTAN CONSTRUCTION, ADHUNIK METALIKS

GOLDMAN SACHS on HDFC BANK RATING: NEUTRAL

GOLDMAN Sachs maintains its ‘neutral’ rating on HDFC Bank with a target price of Rs 1,260. The bank reported 44% growth in net profit to Rs 460 crore in Q1 FY09, which was ahead of the consensus expectation of Rs 440 crore. Strong revenue growth, mainly NII growth, and a modest rise in credit costs are the key drivers of this positive surprise in consensus expectations. Sluggish growth in non-interest income will surprise expectations negatively. CASA deposits declined to 44.9% from 51.5% in Q1 FY08. But efficiency improvements in CBoP franchise should help HDFC Bank improve this ratio during the current financial year. The key metrics for asset quality have held steady, even after the merger of CBoP’s balance sheet with HDFC Bank, but the management continues to maintain a cautious stance. An upside to NII growth is likely, based on the reported performance, but non-interest income growth may remain sluggish. Goldman Sachs believes the upside to NII growth expectations may be offset by sluggish fee income growth. Realisation of benefit ahead of expectations presents the upside risk to the stock, while downside risks arise from delays in realising the merger synergies.

CLSA on ITC RATING: BUY

CLSA continues to remain positive on ITC and a potential weakness in the stock on the back of lower-than-expected earnings will present a ‘buy’ opportunity. For the first time, ITC reported a y-o-y decline of 4.4% in earnings during Q1 FY09. This 15% lower-than-expected profit was due to higher losses in the company’s new FMCG business, which is a cause for worry. Moreover, the company booked one-time expenses related to certain write offs, due to discontinuation of its non-filter cigarettes business, as well as additional point-of-purchase expenditure incurred in upgrading consumers to the filter category. On the positive side, ITC’s overall volume drop in the cigarette business was only 3%, driven by 20% volume growth in filter cigarette volumes, which was much better than expected. After a negative surprise in Q4 FY08, the losses recorded by ITC’s new FMCG business further increased to Rs 122 crore during Q1, against expectations of Rs 50 crore. This is attributable to a sharp rise in input costs and higher ad spend to support new product launches. The company will hike prices in Q2, but the impact of this will be felt only from Q3. The impact of higher losses in ITC’s FMCG business gets neutralised with its lower cigarette volume drop assumption. CLSA maintains its earnings forecast and positive view on the stock.

MERRILL LYNCH on UNITED SPIRITS RATING: BUY

UNITED Spirits’ standalone profit grew 34% in the June quarter to Rs 110 crore, led by stronger sales. Merrill Lynch maintains its full-year estimates on the stock, but acknowledges that there is upside risk if retail price hikes begin to come through. At P/E of 18x FY09E and 15x FY10E, the company’s valuations are attractive. Domestic sales grew 25-26% in Q1, led by volume growth of 19%. The company’s key premium brands grew 17%. The management expects key premium brands to grow 12-13% in FY09, but tactical moves to tap low price brands may lead to stronger volume growth. Some evidence of this was witnessed in Q1 as well. June quarter EBITDA grew 27%, while margins fell 90 bps, led by a 55% jump in ad spend. For the full year, the management expects to offset rising molasses and glass prices through price hikes, mix gains, buying power, light weighting of glass bottles and increased share of tetra-packs. Input costs are likely to be higher in the September quarter, but these may be offset by lower advertising costs relative to the June quarter. The company’s Q1 sales grew 40% and EBITDA grew 70%. The management reiterated its full-year EBITDA guidance of 15-20% growth and highlighted that scotch prices will remain strong.

RELIGARE on HINDUSTAN CONSTRUCTION RATING: BUY

RELIGARE retain its ‘buy’ rating on HCC with a target price of Rs 230. The company’s net sales increased by 18.8% y-o-y in Q1 FY09. About 37% of its revenue came from the power segment, 36% from the transport segment, 25% from the water segment and 2% from other segments. EBITDA increased by 15.6% y-o-y. HCC’s interest cost increased by 21% y-o-y, while depreciation rose by 11% y-o-y. Interest cost increased due to higher working capital requirements, capex and investments in real estate. Adjusted PAT rose by 37% y-o-y, mainly due to higher other income and lower tax rate. The company reported forex losses worth Rs 50.6 crore on account of overseas borrowings and a gain of Rs 61.9 crore from the transfer of land to its group company. At its CMP, the stock trades at a P/E of 24x FY09E diluted earnings. Religare is revising its target price downwards to Rs 230 from Rs 280, due to a downward revision in the valuation of Lavasa because of higher discounting rates. It had earlier valued Lavasa based on the discounted rate of 13%, which has now increased to 14.5%. The company is in advanced stages of finalising a stake sale of 5-10% in Lavasa to PE investors. This will set the benchmark for valuing Lavasa, which is the key trigger for the stock.

INDIA INFOLINE on ADHUNIK METALIKS RATING: BUY

INDIA Infoline recommends a ‘buy’ rating on Adhunik Metaliks (AML) with a target price of Rs 244 per share, implying an upside of 121.4%. In Q1 FY09, AML reported strong results. Its trading income fell 8.2% y-oy to Rs 56.3 crore from Rs 65.8 crore in Q1 FY08. The share of trading income to total sales in Q1 FY09 reduced to 15% from 29% in the corresponding quarter last year. The rise in PAT growth was curtailed by a jump in interest and depreciation costs. In the second half of FY08, the company had raised debt to fund its expansion plans. This pushed up its interest cost 77.4% y-o-y to Rs 22.5 crore. With the new steel melting shop operational in Q3 FY08, depreciation for the company increased 49.3% y-oy to Rs 7.4 crore. PAT stood at Rs 23.5 crore in Q1 FY09, compared to Rs 17.8 crore in Q1 FY08, and was a mere 7.5% higher than Rs 21.9 crore in Q4 FY08. During the past two years, AML has been in a major expansion phase. It is not only increasing its steel-making capacity, but is also going up the value chain. AML is doubling its sponge-iron and billet-making capacity. The expansion is being done in two phases. In the first phase, it is increasing its billet-making capacity to 0.45 mtpa, and setting up a rolling mill of 0.1 mtpa and a ferro-chrome plant of 37,760 tpa. India Infoline has valued AML based on the sum-of-parts method, which is primarily based on the EV/EBITDA multiple for its steel and mining business and discounted cash flow for its power business. Based on 4.5x FY10E EV/EBITDA for the Rs 680-crore steel and mining business, India Infoline has arrived at a fair value of Rs 209 per share.