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.

Indiabulls Securities on Hindustan Petroleum, Bharat Forge

Hindustan Petroleum
Indiabulls Securities Research has upgraded its rating on Hindustan Petroleum Corporation to buy in its November 21, 2008 research report. "HPCL’s net sales for Q2’09 increased 42.7% yoy to Rs 312.1 billion. For Q2’09, Hindustan Petroleum Corporation Limited (HPCL) reported a net loss of Rs 32.2 billion. We have revised our estimates to consider the current macroeconomic and political environment."

"At the current price of Rs 228.5, HPCL’s stock trades at a forward P/E of 14.4x and 6.5x for FY09E and FY10E, respectively. Based on our valuation, we have arrived at a fair price value of Rs 265, implying an upside potential of 16.2%. Thus, we upgrade our rating on the stock to Buy," says Indiabulls Securities' research report.

Bharat Forge - Target of Rs 130

Indiabulls Securities Research has maintained its buy rating on Bharat Forge with a target of Rs 130 in its November 21, 2008 research report. "Bharat Forge (BFL)’s stock has plunged 63%. At the current market price (CMP) of Rs 92.40, the stock is trading at a forward P/E of 8.3x and 8.1x for its FY09E and FY10E earnings, respectively. We have valued BFL by using the DCF valuation methodology, assuming a WACC of 13.1% and a terminal growth rate of 5%."
"Our valuation suggests a target price of Rs 130, which provides a potential upside of more than 40% from the CMP. At the current levels, we believe that BFL is a compelling long-term investment. Hence, we maintain our Buy rating on the stock," says Indiabulls Securities' research report.

Stock Views on RCOM, HPCL, OPTO CIRCUITS

RCOM

CMP: RS 442.25
TARGET PRICE: RS 501

Merrill Lynch has downgraded Reliance Communications from‘buy’ to ‘neutral’on lower than expected earnings due to weak revenues from its fixed wireless division. “The size of PCO (fixed wireless public call offices) revenues comes as a surprise to us,” says Merrill Lynch, adding that the topline and EBITDA was 8% and 11% below its expectations. The foreign brokerage has cut EBITDA forecasts by 10% for the current financial year and by 20% for FY10E “owing to unlikely pick-up in PCO revenues, continuing weak elasticity in mobile min-utes and lower global-biz EBITDA margins, post-Vanco acquisition.” In the first quarter of FY09, RCOM’s overall EBITDA fell 3% QoQ against 8% QoQ EBITDA growth for Bharti, says the report. According to ML, it would be difficult for RCOM to list its tower subsidiary (R-Infratel) and its global business (R-Globalcom) in the current volatile equity environment, owing to complex revenue forecasting and difficult valuation benchmarking. Merrill Lynch has lowered its target price from Rs 725 to Rs 501.


HPCL

ICICI Securities has maintained a ‘buy’ rating on HPCL even after the company reported a recurring loss of Rs 880 crore in the first quarter of the current financial year due to lower than expected subsidy sup-port from the government and upstream companies. The brokerage expects subsidy support to increase over the year as the government has not yet accounted for the Rs 40,000 crore unallocated burden. “Though we continue to believe that the stock may remain subdued in the short term till the government decides the final subsidy burden sharing formula, the company is trading at a significant discount to the replacement value of its asset,” says the report. The brokerage also highlights the fact that risks of further increase in interest costs along with expectations of a fall in refining margins could potentially impact earnings. Positive surprise, however, on higher subsidy sharing by upstream companies and oil bonds could be a boost to stock prices, it adds. Positive news on the E&P front and implementation of subsidy reforms recommended by the Rangarajan Committee could trigger re-rating in the stock, says the report.


OPTO CIRCUITS

CMP: RS 338.35
TARGET PRICE: RS 509

India Infoline has maintained a ‘buy’ rating on Opto Circuits after it reported better than expected results for the first quarter of the current financial year. According to the brokerage, the revenue of the company surpassed its estimate and grew 84% year-on-year. “Even better was the EBITDA margin expansion of 60bps YoY and 284bps QoQ, despite the inclusion of the significantly lower margin Criticare business,” says the report. This, it goes on to add, suggests that the management was able to realise synergies faster than expected. The brokerage has raised its FY09 earnings estimate by 10%. According to the brokerage, the international healthcare business of the company grew 97% in the first three months of the current financial year.