HINDUSTAN ZINC

Our commodities team has upgraded its zinc price forecasts, but believe that current zinc spot price has overshot the fundamentals and has downside risks. We downgrade the stock to Underperform from Outperform, even though we increase our target price to Rs1,029 from Rs996. Sterlite, the parent company, already owns a 65% stake and is very keen to exercise its option to buy an additional 30% stake from the government. While this should support a higher value, it is uncertain how the listing requirement of a minimum 10% free float is met. Moreover, the company has net cash of more than US$2bn. This is depressing the return on equity (ROE) to below 20%, in spite of the healthy operating margin of 60%+. Secondly, with management not very keen to distribute it as dividends, we see it as both risky and suboptimal use of funds. While we continue to like the low-cost assets, but believe that the risks are to the downside. Also, the uncertainty of the minority shareholders’ fate after the government stake purchase demands prudence at high valuations.

Hindustan Zinc

Falling cost of production, new capacity addition and huge cash reserve makes Hindustan Zinc a good medium-term bet
BASE metal prices have picked up over last six months, thanks to the improved optimism worldwide about a speedy economic recovery. But the road to recovery is paved with caution, and hence investors should cherry pick a stock from the base metal sector which offers good growth potential but with limited downside risk.

Hindustan Zinc is one such stock, which we recommended and predicted the bottoming out of zinc prices at that time. Since then, the stock price has more than doubled. Recently, the company reported a good quarterly result and is on track with its expansion plans. Its lower cost of production and huge cash and liquid investment reserve on its balance sheet makes it an attractive investment bet. Its new smelting capacity of 3 lakh tons, expected to be commissioned by mid-2010, is well timed with demand recovery. Mediumterm investors with a horizon of 2-3 years can add this stock to their portfolio.

BUSINESS

Hindustan Zinc is the largest zinc-lead producer in India with a market share of more than 80%. It is fully integrated having its own mines and power plants. The company’s total mining reserve and resources is estimated at around 272 million tonnes which contain different grades of zinc and lead content ranging from 5-13% and 1.5-3% respectively. It mines nearly 7 million tonnes of zinclead ore every year. Similarly, the company has smelting capacity of 0.75 million tonnes which operated at a capacity utilization of 80% in FY ‘09. In addition to these non-ferrous metals, it also produced around 105 tons of silver, which is a by-product of the core operation. It also sold around 1 million ton of sulphuric acid, a by-product, during same time period.

FINANCIALS

The company is one of the lowest cost zinc producers in the world, thanks to its raw material integration plan and better operating efficiency. Its operating margin, even in current market scenario, stands at more than 50%. Its average return on capital employed (ROCE) for last five years is close to 50%, much higher than many companies across different sectors. Hindustan Zinc has a target to bring down the cost of production to $550 per ton from the current sub $700 per ton level and that would further improve its operating margin substantially. It has a cash and cash equivalents of more than Rs 10,000 crore and zero debt on its balance sheet as on 31st March, 2009.

FUTURE GROWTH PLANS

The company plans to be one million tonne integrated lead-zinc producer in next two year time period. To achieve this target, the company is also expanding the capacities of different inputs like power and zinc-lead ore. It is setting up a power plant with a capacity of 160 MW and also increasing the mining capacity close to 10 million tonnes per annum. The silver production capacity would also increase to 500 tons per annum, from the current 150 tons per annum, boosting the profitability further since it is doesn’t add any further cost to main production process. The total investment required for this purpose is estimated at around Rs 3,600 crore which would be financed from internal accruals.

VALUATION

The company’s profitability in next two years would significantly increase because of lower cost of operation, higher volume and increase in realization. The impact of its additional 3 lakh tonnes capacity will be visible partly in FY ’11 and fully in FY ’12. The earning per share for FY ’11 and FY ’12 are worked out to be Rs 105 and Rs 135 respectively. At the current price level, this translates into forward price-earning (P/E) multiple of 6.9 and 5.4 respectively. This provides a significant upside potential for a stock, which traditionally trades at a P/E band of 10-14. Also its huge cash and cash equivalent on balance sheet translates into Rs 237 per share and limits the downward risk. Investors with a time horizon of 2-3 years can consider this stock for their portfolio.

Voltas

A recovery in demand and robust order book augur well for Voltas

For now, the worries haven’t vanished totally and some concerns still exists, which pertain to the slowdown in the international operations (contributes 60 per cent to the project business); largely the gulf countries. For instance, during 2008-09, there was a 40 per cent contraction in flow of new orders from international markets, which analysts attributed to slow down in capital expenditure, particularly by crude oil producing countries due to lower oil prices.

In comfort zone

But, given the company’s current order book of Rs 4,700 crore, the same is good enough for the company to maintain a revenue growth at about 20 per cent this year. And, for the next year and beyond, if the recent improvement in the economic environment is sustained (including the rise in crude oil prices, which have crossed to $70 per barrel), then expect Voltas’ order book to swell further. Notably, the management, too, has guided for robust order inflows from countries like Qatar, from 20.5 per cent in 2007-08 to 11.6 per cent in 2008-09. While a meaningful recovery could take another 2-3 quarters, analysts believe that the company’s move to cut down its inventory levels coupled with the recovery in industrial activity and winning of an Rs 210 crore order for mining equipment from Hindustan Zinc, are all good signs. Nevertheless, the segment holds good long-term prospects.

Evolving opportunities

Meanwhile, the company’s second largest revenue contributor (22.5 per cent of sales) is the unitary cooling systems division, which includes residential and commercial ACs, commercial refrigeration and water coolers. This business is expected to report stable 10-12 per cent revenue growth on a sustainable basis. During 2008-09, revenues grew by 11.3 per cent, while operating profit margins were up at 7.4 per cent, albeit marginally. Although this is a highly competitive segment, the company is among the leading players (second in AC segment). In light of the rising income levels of individuals, increasing affordability, higher availability of electricity and demand from the commercial office and retail segments, the long-term prospects of this business too are good.

Outlook

The company operates in three growing segments, where the penetration levels are still low in India compared to some of the international markets. Its leadership in these segments and increasing focus on expansion into foreign markets should help it sustain healthy growth. Attributes like consistent revenue track record, regular dividend payments and negligible capex needs put the stock in better light. The stock trades at 16 times and 13 times its estimated 2009-10 and 2010-11 earnings.

Synonymous with air-conditioning, Voltas once again proved its mettle in the electromechanical project business when it bagged two larger orders worth Rs 300 crore pertaining to the Chennai and Kolkata airports. This comes immediately on the back of a good set of results declared on May 29. These events have led to the stock rising 35 per cent as against the BSE Sensex’s four per cent gain since then. For those who think they might have missed the bus, don’t lose hope as there is scope to make healthy returns in the long-run. Larger than perception

Many people view Voltas as an air conditioning (AC) company. Yes, it is a dominant player in the commercial and residential AC segment, but there’s a lot more to it. Post it’s restructuring in 2003, Voltas increased its focus on the engineering segment to emerge as a niche player in the electro-mechanical projects (MEP) and services business. This segment includes complete turnkey solutions for work related to central air-conditioning (airports, malls, offices, etc), refrigeration and solutions for water treatment and management.

The move helped Voltas de-risk its revenues as well as reduce its dependence on the low margin business, where stiff competition and seasonality were among concerns. It has also helped the company reach higher scale and tap upcoming opportunities in the projects business, where profit margins are relatively better.

The recently won orders worth Rs 300 crore for electro-mechanical work at the Kolkata and Chennai international airports is in addition to similar orders won in the past. For instance, while Voltas completed the project for the new Hyderabad international airport last year, it has completed similar projects for the worlds largest passenger terminus of Hong Kong International Airport as well as the Mumbai airport. Going by the various estimates, the opportunities in this segment is huge as the government is also planning to invest in over 30 new non-metro airports besides, modernising existing airports of the country.

There are equally large long-term opportunities in segments like metro railways (stations), shopping malls, hospitals, hotels, education institutes, corporate buildings, high rise towers, multiplexes and cold storage. The company has already has a successful track record of having executed several projects in these segments. However, over the last one year, analysts were worried about the slowdown in these segments and the impact of high raw material prices on the company’s profit margins. But, the MEP segment, which accounted for 62 per cent of total sales, reported a revenue growth of 53.7 %

Stock Views on Yes Bank, Hindustan Zinc

KRChoksey on Hindustan Zinc - Target Rs 754

KRChoksey has recommended a buy rating on Hindustan Zinc, with price target of Rs 754, in its report.

"FY10 and FY11 EV/EBITDA is at 5.2 and 3.5 respectively. We value the firm at FY10E EV/EBITDA of 6.5 which gives us a value of Rs 754 per share and recommend a ‘buy’ on the stock," says KRChoksey's report.


ULJK Securities on Yes Bank - Target Rs 165

ULJK Securities has recommended a hold rating on Yes Bank with a target price of Rs 165 in its research report.

"Yes Bank has reported a better than expected performance for the Q1FY10. The net profit for the quarter stands at Rs 1000 million, a YoY growth of 84% and a QoQ growth of 24.9%. We recommend a hold on the stock with a target price of Rs.165. At our target price, the stock will discount the FY10E book value by 2.5 P/BV and the FY11E adjusted book value by 2.15P/ABV," says ULJK's research report.

ICICIdirect.com on Yes Bank - Target Rs 162

ICICIdirect.com has recommended a hold rating on Yes Bank with a target price of Rs 162 in its research report.

"Yes bank’s Q1FY10 results were ahead of our and street estimates. The bank registered loan book and investment book growth of 26% YoY to Rs 12671 crore and Rs 6409 crore respectively; deposits went up by 22% YoY to Rs 15342 crore (de growth of 5.1% QoQ) which lead to balance sheet growth of 25% YoY to Rs 21669 crore. The bank is likely to maintain RoA of above 1.5%, RoE of above 20% and NIM’s of 3-3.1% for FY11E. So we value the bank at 2x FY11E ABV and arrive at fair value of Rs 162 and rate the stock as hold," says ICICIdirect.com's research report.

BDV-541729-BDV

STERLITE INDUSTRIES

Beta 1.21
Institutional Holding 13.6%
Dividend Yield 1.4%
P/E 14.3
M Cap Rs 19,355 cr.

Sterlite Industries is the most diversified non-ferrous conglomerate in India. Its subsidiary, Hindustan Zinc, which is also a listed entity, is the largest domestic integrated zinc producer. It has an annual zinc production capacity of more than half million tonnes. In fact, it is one of the lowest cost producers of zinc in the world. Besides zinc, the company also has other lines of business, which includes aluminium, copper and energy among others. In aluminium, it is partially integrated and has a production capacity of 0.36 million tonnes per annum. The company has taken a number of steps to increase its aluminium production and make it more integrated. In copper, it makes most of the profit from treatment and refining (TC/RC) margins. This is why copper contributes only 10-15% towards the operating profit even if its contribution towards the top line is more than 50%.

FINANCIALS

The company's net sales more than tripled over last three years to Rs 26,400 crore. The net profit increased by seven times during the same period. Like its other peers, including Hindalco, it has not made a loss during the last fourteen years. Zinc & lead is the most profitable business segment of the company and accounts for around half of the operating profit. Even after the sharp fall in zinc prices (it has more than halved to year-ago levels), the operating margin in zinc & lead business is still a whopping 50-55%. Aluminium is the second-most profitable business and contributes around 20% to the company's net sales. It has an operating margin of around 25% in aluminium business. This would further go up once the company starts getting its raw material (bauxite) from the newly allotted mines. Copper is the least profitable of all the three and has an operating margin of around 15%. The company's overall operating margin stands at around 25%, slightly better than its peers. The company has adopted both inorganic and organic route for its growth. However, the company has not leveraged itself so much for such growth plans. Its consolidated debt-equity ratio stands at a comfortable level of 0.23.

RISK

The company's diversified product portfolio within non-ferrous metals space reduces its business risk. However, it is subject to the overall risk related to commodity cycle. Further, its lower debt-equity ratio and high liquid investments (of around Rs 7,000 crore) relatively insulates it from the current credit crisis.

GROWTH POTENTIAL

The company is planning to increase its zinc and aluminium production capacity significantly. In zinc, its capacity would increase to one million tonne by 2010. In aluminium, smelting capacity in Korba will expand by 0.32 million tonnes, almost doubling the current capacity. Post expansion, the aluminium production capacity at Jharsuguda and Lanjigarh, which falls under Vedanta Alumina (VAL) would also increase by 1.25 million tonnes. Sterlite Industries hold 29.5% in VAL and would benefit to that extent. Its parent company, Vedanta Resources has recently got the clearance for mining the bauxite reserve in Orissa and that would help it lower the cost of aluminium production. Another growth driver for the company would come from commercial power generation business. The first phase of a 2,400-MW power plant is expected to get commissioned by the end of calendar year 2009-10.

To Sum It Up

Sterlite Industries has a diversified portfolio and two of its business segments (zinc and aluminium) are extremely profitable. It has successfully acquired and managed some of the government owned companies. Its lower debt position, higher liquid investment, integrated expansion plan and diversified portfolio makes it an attractive bet for the riskaverse investors.

Stock Views on Hero Honda, Jet Airways, HDFC, Hindustan Zinc

Centrum Broking on HINDUSTAN ZINC

Centrum Broking has cut earnings estimates of Hindustan Zinc following disappointing quarterly results, but upgraded its rating on the stock from ‘reduce’ to ‘hold.’ The company has hefty cash on books of Rs 9310 crore and its capex requirement for next two years is only about Rs 2600 crore, which translates into Rs 220/share. “We believe a part of the cash would be given back to investors in the form of dividend as the outlook for core business looks gloomy,” the Centrum note to clients said. Centrum has cut earnings estimates for FY09 by 21.5% to Rs 66.1 (earlier Rs 84.2) and for FY10 by 24.5%. We believe the stock is cheap on valuation parameters. Besides, company has indicated that it would maintain volume growth and also cost would decline by about 5-7% going forward. This along with the imposition of 5% import duty on zinc would help improve margins going forward.

Deutsche Equities on HDFC

Deutsche Equities has retained its ‘buy’ rating on HDFC, post its third quarter earnings, but slashed price target of the stock. “The exceptionally difficult environment of Q3FY09 for both demand and cost of funds has already started improving. We have pared our earnings estimates, reflecting lower treasury profits and mark-to-market on foreign currency bonds,” the Deutsche Equities note to clients said. “The sharp sell-off post announcement of results appears excessive as we believe that in such an environment, keeping margins reasonable is more important than growth. Key risks are continued high property prices hurting mortgage demand and high capital needs of subsidiaries putting pressure on HDFC’s balance sheet,” the note added.

Prabhudas Lilladher on JET AIRWAYS

Prabhudas Lilladher has retained its accumulate rating on Jet Airways, saying the company’s earnings could be under pressure for some more time, despite the price of aviation turbine fuel coming down by half. “Benefit of this (lower ATF price) has been passed on to consumers as the company announced around 40% cut in basic fares effective January 2009. This should allow the airliner to operate closer or even above the break-even load factors for the subsequent quarters,” the Prabhudas Lilladher note to clients said. “Correction in the ATF prices has provided pricing flexibility, which in turn, should drive passenger volume growth. However, this is not enough as high interest burden and depreciation expenses will result in the company reporting losses for at least for next two years,” the note added.

Merrill Lynch on HERO HONDA

Merrill Lynch has retained its buy rating on Hero Honda citing better than expected third quarter earnings. “Margins expanded 50 basis points year-on-year and 90 basis points quarter-onquarter at 14.5%, mainly driven by lower raw material costs. We expect margins to improve further as the full benefit of softening commodity prices will be reflected hereon,” the Merrill note to clients said. “We expect the industry to end the fiscal year with low-single digit growth, constrained by lack of financing. However, we expect Hero Honda to stay ahead on the strength of its brand, and new launches. We maintain our 9% and 6% volume growth assumptions for FY09 and FY10 respectively,” the note added.

Hindustan Zinc (HZL)

Low-cost production, higher liquid investments, cash & bank balance and strong operational cash flows make HZL an attractive buy

Beta 0.73
Institutional Holding 33.14%
Dividend Yield 1.4%
P/E 3.8
M Cap Rs 14,750 Cr

The prices of almost all nonferrous metals have declined to their multi-year low levels. At current prices, many global producers are either making losses or have shut down production. As per reports, the world’s zinc production has declined 30% and stock prices of these metal producers have also taken a hit. Though it is very difficult to find the exact bottom, prices of these commodities are close to their sustainable historic average of $1,000 (please refer the chart for detail). This is why we believe that the downside for zinc from here onwards is limited.

Hindustan Zinc (HZL), the largest integrated producer of the metal in the country, is one of the low-cost zinc producers, at around $750 a tonne, in the world. Such low-cost production, almost zero debt and high liquid investment, makes the stock, which has been more than halved from its peak, a very attractive buy. Long-term investors with a horizon of 2-3 years can add this stock to their portfolio.

BUSINESS:

HZL has its own mines, smelting capacity and power plants. The company’s total mining reserve and resources is estimated at around 225 million tones (MT), which contain 5-12% of zinc and 1.5-2% of lead. The company produces around 7 MT zinc and lead mine metal from its mines in Rajastan. Similarly, it has a smelting capacity of 0.75 MT and last year, the company operated at a capacity utilisation of around 65-70%. HZL also produces around 100-120 tonnes of silver, which is a by-product of the core operation. The company exports around 20-30% of its products to overseas destinations.

FINANCIALS:

Industries in 2002. Net sales of the company have more than tripled over last three years, whereas net profit increased by more than seven times during the same time period. Its backward integration plan puts it on the top decimal of the lowcost zinc producers in the world. And, this has translated into superior operating margin. Its core operating margin rose to 75% in the financial year 2007, when the zinc prices were at their peaks. With the commodity prices falling, current operating margin has come down to around 50-55% level. Even if the prices fall by 20-30%, its operating margin will be maintained at around 30% much higher than many companies across industries. Its cash flow from operations is in sync with the movement in net profit over the last five years. HZL has very little debt outstanding, and hence, a very low debt-equity ratio of close to zero.

FUTURE GROWTH PLANS:

HZL aims to be the largest integrated zinc producer in the world and plans to augment its zinc and lead production capacity to around 1 MT by 2010. The company also plans to set up a 160 MW power plant and increase its mining capacity to 10 MT a year. Once, its production capacity increased, silver production would also rise to 500 tonnes a year, boosting its top line. The total investment required for this is estimated at around Rs 3,600 crore, which would be financed through internal accruals.

RISK:

The company bears less business and operational risk owing to the low-cost production, negligible debt and higher liquid investment and cash/bank balance. However, any drastic fall in zinc prices below $750 would significantly affect the company’s operating performance.

VALUATION:

HZL has huge liquid investments in debt funds, at around Rs 6,700 crore and cash/bank balance of around Rs 1,360 crore. The discounted cash flow from operations for the next four years and the sum-of-parts from investment and cash and bank balances yield a value of around Rs 14,000 crore, very close to current market capitalisation. We have taken into account of lower zinc prices and new capacities from mid-2010 while arriving at the future cash flows. However, we have not included the terminal cash flow, which would definitely add much more to it. Even in 2002-03 when the zinc prices were at the lowest level, the stock was trading at around 6-7 times of price-earning multiple compared to current P/E of 4. We believe the stock has good upside potential and investors with 2-3 years of horizon are advised to add it to their portfolio.

KRChoksey Views on Bharat Electronics, NALCO, Hindustan Zinc, Ashok Leyland

Bharat Electronics - Target of Rs 770


KRChoksey Research has recommended a buy Bharat Electronics with a target price of Rs 770 in its November 26, 2008 research report. "The revenue of Bharat Electronics increased by 10% (YoY) to Rs 787.72 crore (including other operative income of Rs 7.02 crore) for quarter ended September 2008. On back of rich cash reserves (Rs 307 per share), capacity expansion plans and diversified product portfolio, we give a BUY rating on the stock with target price of Rs 770," says KRChoksey's research report.


NALCO - Target of Rs 225


KRChoksey Research has recommended a buy rating on National Aluminium Company (NALCO) with a target price of Rs 225 in its November 26, 2008 research report. "Going forward, we believe the company is expected to perform better as commodities prices recover. The company is debt free company. It one of the Navratna company and has strong backward integration. Due to strong fundamentals of the company we give a buy with a target price of Rs 225," says KRChoksey's research report.


Hindustan Zinc - Target of Rs 504


KRChoksey Research has recommended a buy rating on Hindustan Zinc with a target price of Rs 504 in its November 26, 2008 research report. "Going forward, we believe the company is expected to perform better as commodities prices recover. HZL is the lowest cost producer of zinc in the world. It is sitting on huge cash and is a debt free company. It is slated to become the largest producer of zinc. Due to strong fundamentals of the company we give a buy with a target price of Rs 504," says KRChoksey's research report.


Mansukh Securities on Ashok Leyland - Target of Rs 25


Mansukh Securities and Finance has maintained its buy rating on Ashok Leyland with a target of Rs 25 in its research report. "Commercial vehicles sales have shown a downward trend in recent past. Moreover, in days to come, Ashok Leyland seems to have a tough stance to match its volumes in the segment."


"The company has recently increased its capacity and has similar plans for future, keeping this in view, the company is expected to carry excess capacity till the time the volumes are not increased. Also the demand for CV is expected to be dependent on factors such as growth in GDP and IIP, trends in interest rates, and availability of bank credit. Considering, the above factors we maintain our BUY rating on the stock by lowering our price target to Rs 25. Higher dividend yield should provide downside protection from current levels," says Mansukh Securities and Finance's research report.

KRChoksey views on Hindustan Zinc, Nava Bharat Ventures, Sanwaria Agro Oils

Sanwaria Agro Oils - Target of Rs 45

KRChoksey has recommended a buy rating on Sanwaria Agro Oils with a target of Rs 45 in its report. The geographical benefits which the company enjoys on account of all its plants being located in the state of MP (largest producer of soybean seeds) is a key advantage over its peers. Further, SAOL will benefit from setting up of wind turbine generators which will bring down the operating cost and thus enhance margins by 230bps. We expect the profit margins to improve going forward as interest rates cool down."

"At CMP of Rs 32, the stock is trading at 6.4x FY08 earnings of Rs 4.98. We recommend a “BUY” rating on the stock with a price target of Rs 45 based on our P/E valuation, with an upside potential of 41% from current levels. At the target price, the stock would be valued at 6.6x FY09 EPS of 6.8," says KRChoksey's research report.

Nava Bharat Ventures - Target of Rs 247

KRChoksey Research has maintained its buy rating on Nava Bharat Ventures with a target price of Rs 247 in its November 7, 2008 research report. "Net sales surged by 157.0%(YoY) to Rs 398.3 crore in Q2FY09 against Rs 151.3 crore in Q2FY08. On back of company’s diversified business model, power business initiatives, substantial land value holding at Hyderabad & Secundrabad and improving sugar prices, we maintain our BUY rating on the stock with the target price of Rs 247. Though we are cautious of ferro alloys business slow down, but we believe the concerns are already been discounted heavily in the stock prices," says KRChoksey's research report.

Hindustan Zinc - Target of Rs 504

KRChoksey Research has recommended a buy rating on Hindustan Zinc with a target price of Rs 504 in its November 7, 2008 research report. "Net sales of the company declined from Rs 1,984.0 crore to Rs 1,790.5 crore; negative growth of 9.8% (y-o-y). We recommend a BUY on the stock with a target price of Rs 504," says KRChoksey's research report.

Stock Views on Hindustan Zinc, Nestle, Jaiprakash Associates

CITIGROUP on Hindustan Zinc

CITIGROUP has downgraded Hindustan Zinc’s (HZL) rating to ‘sell’ by reducing the target price to Rs 430 on the back of an earnings cut of 22% for FY09 and 27% for FY10. Citigroup’s new estimates incorporate changed zinc and lead forecasts, updated trends in rupee-dollar exchange rates and small changes in volumes based on management feedback. Zinc prices are expected to fall 41% year-on-year (y-o-y) in FY09, further fall 10% y-o-y to reach a bottom in FY10, and recover thereafter in FY11. HZL enhanced its zinc capacity by 88,000 tonnes per annum (tpa) to 669,000 tpa in April ’08 (total zinc-lead capacity to 755,000 tpa). In addition, HZL has announced further capital expenditure (capex) to enhance zinc capacity by 210,000 tpa and lead capacity by 100,000 tpa — taking the total to 1.07 million tpa by ’10, together with additional mining and captive power capacities. Citigroup sees a fall in earnings and EBITDA margins despite positive factors for HZL, such as its status as one of the lowest-cost producers globally, strong zinc volume growth (20% in FY09E and 40% in FY10E), high realisations for by-products like sulphuric acid, and savings from commissioning of captive power.

EDELWEISS on Nestle

EDELWEISS initiates coverage on Nestle with an ‘accumulate’ recommendation. Nestle is expanding into tier-II and III cities by introducing stock-keeping units (SKUs) below Rs 10. Also, its turnover from innovations/renovations, positioned on the health and wellness platform (priced at a substantial premium to existing products) has increased fivefold over the past few years. The turnover is expected to remain at high levels, going forward, on the back of the company’s strong product pipeline. At the current market price, the stock is trading at P/Es of 28.9x and 23.5x to CY08E and CY09E earnings, respectively. Nestlé is trading near the upper end of its recent band of 23-27x forward earnings. Edelweiss believes these levels are sustainable, given Nestlé’s strong growth and defensive nature of its business. Amidst volatile capital market conditions, the stock looks attractive over the long term. Edelweiss has valued Nestle at 26x CY09E earnings, which results in a target price of Rs 1,830. It expects Nestlé’s earnings to witness a compounded annual growth rate (CAGR) of 25.5% over CY07-09E.

MERRILL Lynch on Jaiprakash Associates

MERRILL Lynch has maintained a ‘buy’ rating on Jaiprakash Associates (JPA), but has reduced the target price to Rs 335 from 395. This is because it has reduced the value of Yamuna Expressway due to indefinite delay in the proposed Greater Noida International Airport, higher expressway cost and lower real estate realisations till FY11E. This can impact development of realty at three (3,750 acres) of the five land parcels (6,250 acres) of JPA’s Yamuna Expressway located in and around Noida airport. Hence, Merrill Lynch has removed these parcels from the valuations till visibility emerges. It has also factored in a higher cost of the expressway at Rs 7,400 crore on higher land/construction costs and lower realisation assumptions on the Noida land bank till FY11E on continued weakness in the realty market in National Capital Region (NCR). Key triggers are: a) Improved macro situation — lower inflation/rates; b) Execution of power/infrastructure projects on time; and c) Monetisation of realty land bank.