JP Morgan on IDFC

JP Morgan initiates coverage on IDFC with an `Overweight’ rating. JP Morgan believes that IDFC will be a strong beneficiary of India’s infrastructure boom, helped by regulatory tailwinds and strong markets. They expect the strong rerating to continue. The cliché suits IDFC well. Its strong investments in developing domain expertise in infrastructure are now expected to pay off. Not only is it the leading specialist in infrastructure financing, but its product suite is all encompassing, which gives it a competitive edge as well as strong long-term RoEs. The downgrade by CRISIL in July ‘09 was a setback, but the special status as an infrastructure lender (being contemplated by the RBI) could negate that problem. JP Morgan now factors in tier 1 CAR (capital adequacy ratio) reaching 16%. IDFC is not cheap at 2.6x P/BV (FY11E), but this still underestimates the long-term growth potential of the company. JP Morgan thinks that IDFC can grow its balance sheet at about 25% for five years or more, and that this is not fully captured in the current valuations.

Pantaloon Retail

JP Morgan reiterates `Overweight’ rating on Pantaloon Retail (PRIL). Pantaloon reported net sales of Rs 1,660 crore (+20% y-o-y), EBITDA of Rs 180 crore (+30% y-o-y) and PAT of Rs 36.5 crore (+12% y-o-y) for Q4FY09 on a standalone basis. PRIL reported FY09 consolidated sales of Rs 7,670 crore (+31% y-o-y), EBITDA of Rs 500 crore (+71% y-o-y) and PAT of Rs 11.7 crore. Earnings were depressed primarily due to insurance and telecom business related losses. Most of the subsidiaries have achieved significant scale and are expected to break even next year. Incremental funding requirements for subsidiaries will be largely met by an equity stake sale with reduced investments by the parent company. Catalysts that could affect stock performance in the near term are:

1) Operating performance of subsidiaries and extent of investments being made by parent company in them,

2) Extent of equity dilution and de-leveraging, and

3) Any strategic alliances/partnerships.

JP Morgan believes PRIL, with its multi-format and multi-category strategy, reliable supply chain infrastructure and significant location advantage is a key beneficiary of the improving economic climate. They anticipate standalone earnings growth for Pantaloon to accelerate driven by improving sales growth trends, cost containment focus and benign competitive environment.

Stock Views on HDFC, Bajaj Auto, Tata Steel

BNP Paribas on HDFC

BROKING house BNP Paribas Securities has reiterated its ‘buy’ rating on mortgage lender HDFC, but slashed price target to Rs 1,600 from Rs 2,250. “We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads,” the outfit said in a note to clients. “The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10,” the note added.

MERRILL Lynch on Bajaj Auto

MERRILL Lynch has retained its‘neutral’ rating on Bajaj Auto, but raised price target by 11% as it expects the stock’s valuation multiples to expand on improved earnings visibility. “Following positive customer response to XCD 135 cc motorcycle, we have greater confidence for four upcoming launches by September. We raise domestic two-wheeler sales estimates to 1.36 million units in FY10 (5% growth, earlier 5% decline), and retain 5% growth on higher base in FY11,” the Merrill note to clients said.

JP Morgan on Tata Steel

JP Morgan has retained its ‘neutral’ rating on Tata Steel, citing bleak outlook on the sector. “With European steel environment remaining challenging, end demand visibility low, term debt at $10 billion and FY10 (estimated) adjusted net debt equity at 2.3 times, we remain ‘neutral’ on the stock. Working capital release at Corus and the company’s intention to pre pay $450 million at Corus from asset sales at Teesside are key positives and while adjusted FY10E price/book at 0.9 times provides support, we would wait for some improvement in end demand in Europe before stepping in,” the JP Morgan note said.

Stock Views on Infosys, Punj Lloyd, Suzlon Energy

CLSA on INFOSYS

Infosys reported its lowest y-o-y revenue and volume growth in the decade, but its highest margin in six years. The stock has outperformed the markets 16% YTD as the Satyam debacle has shifted investor preference to India’s corporate governance stars, where Infosys enjoys iconic status. With currency providing all of the margin upside in Q3, and like to like pricing down 1.8% q-to-q in December ‘08, volume recovery will come after margin headwinds, the latter beginning in the March ‘09 quarter itself, as per Infosys’ guidance. Six-year high EBITDA margins of 35% were backed by double digit INR/USD depreciation, which negated headwinds from lower utilisation and cross currency effects. CLSA expects pricing to weaken further ahead as more negotiations reach a decisive stage. Every 1% of pricing cuts 70 bps from EBITDA. With cost metrics touching all-time lows in overhead line items, it is debatable if Infosys has any more juice to squeeze out of its operations. CLSA’s call that margins are more and sooner at risk, compared to the recovery hope in volumes, drives the earnings 6% below consensus for FY10. This limits absolute upsides for the stock, and from here to the full year guidance in April.

BNP Paribas on PUNJ LLYOD

The company has disclosed new orders of approximately Rs 1,880 crore in 3QFY09, down 56% y-o-y. Additionally, international orders declined 57% y-o-y. BNP estimates a decline of 22.4% y-o-y for new orders in FY10. There is also further evidence of a global slowdown in the petrochemical industry. Their FY09E and FY10E EPS estimates have declined by 9% and 41%, respectively, due to lower order inflow assumptions. SABIC has terminated its contract with Punj Lloyd (Punj) and is seeking liquidation of the performance bond and advance payment bond for a total of GBP28.5m. Punj may incur additional cash charges of GBP28.5m (Rs 210 crore) if SABIC succeeds in its claims. BNP has not included this claim in the estimates; however, now it includes the provision for a Rs 300-crore loss (before tax) that should have been included in the FY08 results. This loss reduces the FY09E EPS estimate by 55%.

JP Morgan on SUZLON ENERGY

JP Morgan remains `Neutral’ on Suzlon Energy with a March 10 price target of Rs 80. Suzlon’s recent initiatives provide breathing space to tide over the funds crunch:

1) sale of 10% stake in Hansen Transmission - estimated cash inflow of Rs 520 crore;
2) securing a six-month payment window from Martifer for acquiring the latter’s 22.4% stake in REpower; and
3) the sale of a 17.1% stake in SE Forge to IDFC, bringing in Rs 400 crore.

With these measures, Suzlon will end FY09 with net consolidated DER (debt equity ratio) of 0.83x and net debt to EBITDA of 4.3x. In FY10E, Suzlon would end with consolidated DER of 0.81x and net debt to EBITDA of 4.3x. Suzlon has loan repayment of Rs 1,100 crore for the remainder of FY09, Rs 1,000 crore in FY10 and another Rs 1,000 crore in FY11. As operating cash flows may be insufficient for these repayments, Suzlon may have to borrow afresh. October ‘08 OB, at 2,505 MW, is not sufficient to meet FY10 volume estimate of 2,950 MW. Additional orders are necessary to meet FY10 estimates. There have been considerable delays in securing orders due to weak sentiment for renewable energy investments, coupled with a possible quality perception of Suzlon’s products. The key risk is further earnings cuts if strong order flows, necessary to lend credence to FY10 and FY11 earnings estimates, do not materialise. The FY10 estimates have seen a marginal upward revision of 2.6% due to the translation of REpower earnings at a higher Rs/ of Rs 64, compared to Rs 56 used previously.

Stock views on Infosys Technologies, Simplex Infrastructures

PINC Research on SIMPLEX INFRA
PINC Research has initiated coverage on Simplex Infrastructures (SIL) with a ‘buy’ rating. According to PINC, SIL has exhibited a strong growth metrics over the past five years. The company’s revenues have grown at a compounded annual growth rate of roughly 45% over FY04-08, while its net profits have grown around 75% during the same period. “We believe the company having garnered proficiency in technical know-how and execution skills across diverse sectors, is presently in the midst of a steep growth trajectory. Further, a robust & diversified order book of approximately Rs 20,700 crore (2.5 times FY09 estimated revenues) provides earnings visibility over the next 18-20 months,” Pinc Research said in its report. The broking house believes that the SIL stock is largely undervalued and doesn’t capture the fair value of its extensive execution capabilities and new business initiatives.


JP Morgan on INFOSYS TECHNOLOGIES

JP Morgan has assigned an ‘overweight’ rating to Infosys Technologies, following its third quarter numbers, which the brooking house has termed as ‘decent’. The Bungler-based company’s FY09 guidance was largely unchanged in rupee and constant currency terms but reduced by 1-2% in US dollar terms due to currency movements. The broking house said the software bellwether’s Q4FY09 (January-April) guidance was weak as expected with US dollar revenue growth of -4-0% quarter-on-quarter and EPS decline of 2%. “We believe that Infosys results are largely in line with expectations. While business might remain weak near term, offshoring trend remains on track in our view and we expect acceleration in H22009 as IT budgets get closed,” the report said. The outfit remains fundamentally positive on Infosys, given offshoring trend, strong execution track record and high corporate governance standards.

Stock views on Larsen & Toubro, Ranbaxy, Allied Digital Services, Piramal Healthcare, Infosys, Mahindra & Mahindra

MOTILAL OSWAL on M&M
MOTILAL OSWAL maintains its 'Buy' rating on Mahindra & Mahindra. M&M had earlier mentioned in its post-2QFY09 results that it would be reviewing the Rs7,000-crore capex plan over FY09-12 for a possible reduction. After a review of the capex plans, management has now decided to go ahead with the original capex plan of Rs 7,000 crore without any cuts. Out of the Rs 7,000 crore over FY09-12, Rs 5,000 crore will be invested in the automotive business and Rs 2,000 crore in the non-auto business. In auto business, investment will be made in the Chakan plant (~Rs2,500 crore), product development (Rs 2,000 crore for Xylo, Scorpio's successor, light transport vehicles and lobal product) and further equity contribution in Mahindra Navistar JV (Rs 350 crore). In the non-auto business, it is investing Rs 500 crore in tractors business, Rs 700 crore in logistics business and defence business and Rs 750 crore for setting up world-class research facility at Chennai. Motilal Oswal has downgraded the consolidated earnings estimates by 11.7% for FY09 to Rs 58.7 and by 12.9% for FY10 to Rs 70.6, to factor in lower volumes and downgrade in subsidiary / associate earnings. Notwithstanding short-term challenges, valuations at 4.6x FY09E and 3.9x FY10E consolidated EPS are attractive.


CITIGROUP on INFOSYS

CITIGROUP EXPECTS Infosys' revenues at $1,167m, down ~4% qoq. This assumes marginal decline in volumes, stable pricing and ~4% impact of cross currency. EBIT margins are expected to fall ~150bps qoq. Citigroup forecast basic EPS of Rs 26.63 in line with guidance. Volumes continue to be under pressure with clients cutting back on discretionary projects and Q3 being also impacted due to "holiday project closures". Citigroup has lowered its FY10-11E estimates by ~6% on the back of lower volume/pricing assumptions and cross currency impact in Q3. While the stock price witnessed ~37% erosion in CY08, expected numbers are ~6% below consensus, and consensus is to be revised down further. This could put further pressure on the stock in the near term. The EPS numbers benefit from ~5% INR depreciation assumed in FY09 - in other words, Citigroup is modelling an EPS decline in constant currency terms. With a likely result disappointment and further EPS cuts, the stock could underperform in the near term.


MERRILL LYNCH on PIRAMAL HEALTHCARE


Merrill Lynch reiterates 'Neutral' rating on Piramal Healthcare (PHL). However it revises estimates to factor higher interest cost and lower target price to Rs 280 based on 12x FY10E EPS. PHL's proposed acquisition of Minrad comprises equity consideration (US$6mn), convertible debt redemption (US$30mn) and existing debt (~US2mn). Apart from this, PHL would infuse US$12mn in Minrad for working capital requirement. Post-completion of this acquisition (5th in 2008), PHL's D/E would be ~0.9x which is higher than the industry average. Minrad's acquisition bolsters the US$20mn inhalation anaesthetics business of PHL and broadens its portfolio from two products currently to five (halothane, isoflurane, enflurane, desflurane and sevoflurane). PHL-Minrad combine would be the 3rd largest player in US inhalation anaesthetics market addressing a US$1bn+ opportunity worldwide. Merrill Lynch is relatively conservative and expects the deal to be EPS neutral in FY10. The deal is expected to be closed by FY09-end. PHL's CMO business has mid-teens EBITDA margin which is the lowest among that of its peers.


INDIAINFOLINE on ALLIED DIGITAL SERVICES

Allied Digital Services (ADSL)'s pan-India presence, direct support model, established remote infrastructure and significant price competitiveness provide an edge against competition in the domestic IMS market. Its marquee clientele includes large customers won from leading Indian offshore vendors. The recent En Pointe Global Services LLC (EPGS) acquisition would significantly increase international IMS revenues apart from driving domestic revenues through offshoring. Further, the SOC services are expected to register exceptional growth driven by increasing compliance requirements globally. The company expects a hefty ~US$100-million revenue contribution from EPGS in FY10. ADSL's operating margin is likely to improve by 150-200bps in FY10 driven by lower solutions revenue share and improving profitability within IMS through offshore shift. IndiaInfoline expect revenues and net profit of ADSL to record a robust CAGR of 61% and 82% respectively over FY08-10E. Higher growth in earnings would be driven by OPM expansion. Given the strong fundamentals, current valuations of 4.7x FY10 P/E and 1.4x FY10 P/BV appear inexpensive.


JP MORGAN on RANBAXY LABORATORIES

GIVEN THE twin uncertainties of the continued US FDA import ban and potential currency exchange losses, JP Morgan remains 'Neutral' on Ranbaxy even though valuations remain attractive for longer-term investors. Ranbaxy, which has a 180-day exclusivity on generic Imitrex (Sumatriptan), has not yet been able to launch the drug in the US as the FDA approval has not yet come through. Sumatriptan First to File is approximately Rs 5/share of the target price. Brand sales of Imitrex were US$1.29 billion in 2007. Given that the generic filing is not from the manufacturing sites where the US FDA had issued warning letters, the launch approval from the US FDA for Sumatriptan is key to see if it is business as usual for Ranbaxy in the US beyond the products in the import ban. Given the large FTF (first to file) pipeline for Ranbaxy, any delay in approvals for Sumatriptan would be negative for the remaining FTF pipeline.


HSBC on LARSEN & TOUBRO

HSBC has downgraded the rating of Larsen & Toubro to 'Negative' over the Satyam stake purchase. HSBC believes this investment is a portfolio investment rather than a strategic one and views this as a negative for L&T. It thinks that the stake is not positive for L&T's subsidiary, L&T Infotech, given that it has a smaller operation versus Satyam's 53,000 employee base. The integration will be a significant issue given L&T Infotech's smaller size. Also, after allegations of misappropriation regarding Satyam's former chairman, integration could expose L&T to litigation. Moreover, there is a lot of uncertainty in terms of any liability for Satyam. HSBC reduces its FY10E PAT estimate by 8%, driven by a lower 4% change in sales and expects a 25.7% revenue CAGR over FY09-11E, driven by the existing order backlog and new orders from infrastructure, power and new verticals. HSBC is reducing its valuation of L&T subsidiaries to Rs 131 per share.

Stock Views on JSW Steel, Hindalco Industries,

Citigroup on JSW STEEL

Citigroup has maintained its ‘sell’ rating on JSW Steel while cutting its target price to Rs 185 from Rs 190. “We are revising our estimates to account for lower raw material prices, domestic realisation, revised volumes and capex, and weaker performance by the US subsidiary,” the investment bank said in a report. “The benefit of lower raw material prices is largely offset by weaker prices,” it said. “We expect total net debtequity ratio by March 2009 to be approximately 2x (times), making JSTL (JSW Steel) riskier in a downturn,” Citi added.

JP Morgan on HINDALCO

JP Morgan is reviewing its earnings estimates for Hindalco amid concerns over the outlook of US-based Novelis, which the Aditya Birla Group has acquired a couple of years back. Novelis reported a sharp decline in earnings in the December quarter. The brokerage has a 'neutral' rating on the stock. " On the operating front, we are negatively surprised by the sharp decline in shipments (-13% y/y) While there is a strong element of de-stocking (similar to steel), given Novelis' large exposure to Europe and North America, we expect shipments to remain weak well into the second half of financial year 2009-10 (estimated)," the investment bank said in a report.

Stock views on NTPC, Aban Offshore, Everest Kanto Cylinder,

CITIGROUP on EVEREST KANTO CYLINDER

EVEREST Kanto Cylinder (EKC) is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. Citigroup believes EKC is uniquely positioned to capture the significant growth potential in India for high-pressure gas cylinders, driven largely by increasing CNG penetration, both in India and abroad. While the CNG segment in India is still at a relatively nascent stage, cost economics, improving refuelling infrastructure, visibility of gas supplies and clarity on regulations should accelerate the trajectory for city gas distribution and consequently, CNG penetration, thereby boosting demand for CNG cylinders. The 12-month target price for EKC of Rs 280, based on 15x September ’09E consolidated earnings — which includes contribution from India, Dubai, US-based CP Industries and the China plant — is in line with the fair value multiple range for its manufacturing/engineering peers in India. Citigroup prefers comparing EKC with capital goods companies that manufacture industrial goods and have a similar growth profile.


EDELWEISS on ABAN OFFSHORE

EDELWEISS initiates coverage on Aban Offshore with a ‘reduce’ recommendation. Day rates for Aban Offshore’s rigs that are on short-term contracts are likely to ease, in line with Edelweiss’ lacklustre jack-up industry outlook. Jack-up day rates are expected to ease 18-19% year-on-year (y-oy) in both CY09E and CY10E and test industry return on average capital employed (RoACE) of 8%. This is based on expectations of a lower jack-up demand (down 14.5% and 5.3% y-o-y in CY09E and CY10E, respectively) and a significant supply coming on stream in CY08-10E. Weak demand is likely due to low commodity prices, revision/deferment of small company and exploratory spend, and weak global outlook. Lacklustre industry outlook, a weak rupee (impacting debt) and short-term contracts/uncontracted Singapore assets are expected to be an overhang on the stock. This renders low fair value of Rs 685. Global drillers’ comparative multiples like EV/EBITDA (at 3.2x two-year forward), price/earnings (at 3.4x two-year forward), and price/book value (at 0.7x two-year forward) have shrunk on the back of low crude prices and economic weakness.


JP MORGAN on NTPC

JP MORGAN upgrades its rating on NTPC to ‘overweight’. The key risks to the target price of Rs 185 include major execution delays and a shortage of coal. NTPC’s size, strong balance sheet and assured-return structure put it in a strong position to achieve its growth plans. JP Morgan advises investors to use share price corrections due to hiccups in execution, if any, to buy the stock, as near-term delays do not affect its valuation much. Apart from execution, customers’ ability to absorb the rise in tariffs and the impact of coal shortages on incentives are the key concerns. With coal prices declining, the cost of debt is the main inflationary factor — power tariff can rise 6-7% per annum if interest costs rise by 500 bps. Access to KG Basin gas is an important potential catalyst to improve gas stations’ PLF and incentives. NTPC is trading at 15.6x FY10 P/E, 2.2x FY10 P/BV and is close to the March ’10 target price of Rs 185. This includes Rs 11/share value for NTPC’s 2 billion tonnes mineable coal reserves. Any positive news flow when coal production commences can improve this valuation. A replacement value-based approach for current capacities suggests a fair value of Rs 140, indicating the market is paying a reasonable premium for 2x capacities in the pipeline.

Srock views on MTNL, Titan Industries, SIEMENS, Yes Bank, Colgate Palmolive, GREAT Offshore

HSBC on COLGATE PALMOLIVE

HSBC has initiated an ‘overweight’ rating on Colgate-Palmolive with a potential return of 25.8%. The oral care category in India has a penetration rate of 78% and a per-capita usage of toothpaste, which is half that of China. Increased usage and penetration, along with a shift from toothpowder to toothpaste, are likely to drive volume growth of 8-9% for the next several years. Colgate is the undisputed market leader in all the sub-categories of oral care and has a diversified product portfolio covering all price points and an excellent distribution network. Colgate is poised for steady growth. It has increased gross margins by changing its raw material mix, reducing complexity, and increasing in-sourcing with minimal price increases, protecting volume growth. HSBC values Colgate on a price-earnings (P/E) and a direct cash flow (DCF) basis. The P/E valuation, at 18x FY10E earnings per share (EPS), comes to Rs 424. The target price of Rs 470 is an average of the two. Colgate is currently trading at a 12-month forward P/E of 17.1x, the lowest forward P/E in three-and-a-half years.


DEUTSCHE BANK on YES BANK

DEUTSCHE Bank believes that Yes Bank’s recent severe underperformance relative to the market and the banking index has factored in most of the concerns about its asset quality, margins and fee income growth and has upgraded the stock to ‘hold’. However, it has reduced the target price to Rs 55 and cut earnings by 11-17% for FY09-11. The major concerns are: asset quality due to large exposure to mid-corporate group and commercial real estate; margins due to weak funding franchise; and a sharp slowdown in non-interest income growth due to relatively high dependence on capital market-linked activities. The target price of Rs 55 is based on a single-stage Gordon growth model with a price-to-book value (P/BV) of 1.0x, arrived by using a blended return on equity (RoE) of 15.5%. The key upside risk to Deutsche Bank’s hypothesis is a sharp recovery in loan growth accompanied by a rise in margins. The key downside risks are higher-than-expected deterioration in asset quality and stagnation of branch network due to unavailability of branch licenses, which can pose a challenge for Yes Bank.


JP MORGAN on SIEMENS

SIEMENS reported a standalone net profit of Rs 225 crore in Q4, substantially below the estimate of Rs 360 crore. Operating profit margin was down 300 basis points (bps) year-on-year (y-o-y) to 12.5%. Markto-market (MTM) losses on short positions in foreign exchange (forex) derivatives contracts, in a quarter where the rupee depreciated 10% visà-vis the dollar, can be responsible for a large part of the margin decline. With the underlying hedged being of longer maturity, JP Morgan can expect gains on the underlying in coming quarters. The performance of the company’s subsidiaries is a drag on results: Siemens’ FY08 consolidated revenue of Rs 9,680 crore was in line with estimates, while its profit after tax (PAT) of Rs 470 crore was 30% below full-year estimates. The company’s 100%-owned principal subsidiary, SISL, performed poorly in FY08. Siemens’ standalone revenue growth from continuing operations is higher at 15%, but power (which contributes 49% to the topline), posted a growth of 3.2% y-o-y. There has been little incremental visibility in the power segment, as the Qatar order has neared completion. All other segments have shown strong revenue growth.

JM FINANCIAL on TITAN INDUSTRIES


TITAN benefits from the presence of extremely strong brands in largely unorganised segments. The domestic jewellery market is pegged at Rs 75,000 crore, less than 5% of which is ‘branded’ and Titan controls 65% thereof. With extremely low penetration level, there is huge scope for the ‘democratisation of luxury’ in India. With Titan now partially linking jewellery-making charges to gold value, profitability may not be so susceptible to the movement in gold prices, going forward. In the watches segment, JM has projected a compounded annual growth rate (CAGR) of 13% in sales between FY08 and FY11E. Viewed in the context of India being an attractive retail market (more so in the luxury segment, in which India is still at the nascent stage), Titan emerges superior among retail players in terms of profitability, as well as return on capital employed (30%-plus). Also, y-o-y generation of free cash flow is a source of distinct advantage for Titan. In light of a slowing economy where future growth potential is a key concern, the P/E to growth (PEG) method of valuation appropriately recognises future growth rate and adjusts the P/E multiple accordingly.


CITIGROUP on GREAT OFFSHORE

GREAT Offshore has announced a combined contract for two of its assets — Malaviya Thirty Three (a heavy lift vessel) and Gal Ross Sea (an anchor handling tug) — for a total of $22 million for one year in the Khafji oilfields of Saudi Aramco. The assets have been contracted out at a combined day rate of $63,000. Although the exact day-rate split between the two assets is not known, they estimate the heavy lift vessel to fetch ~ $55,000. This contract is a key positive, indicating strength in the offshore services segment, as opposed to the downtrend witnessed in segments such as dry bulk. Citigroup retains a ‘buy’ rating on the stock, given a relatively stable business profile (75% of revenues from ONGC) and good earnings visibility (average contract durations ~2-2.5 years), making it less exposed to a cyclical downturn in the offshore cycle. Though spot rates have declined 10- 15%, the company has only five of its 41 vessels operating on spot. Q3 should see sequential growth in revenues and profits on account of commencement of new contracts, as well as higher dry-docking expenses in Q2.


BNP PARIBAS on MTNL

BNP Paribas initiates coverage on Mahanagar Telephone Nigam (MTNL) with a ‘reduce’ rating and target price of Rs 55, based on cash per share of Rs 39 and a core business valuation of Rs 16 at 2.5x FY09 EBITDA. Historically, MTNL traded close to its book value, but the valuation is now converging towards its cash per share as its return on equity (RoE) has declined to 3.3%, well below its cost of capital. Moreover, one-fourth of its book value is amount recoverable from the Department of Telecom (DoT), which is unconfirmed and outstanding for several years. Cash per share will dip to Rs 39 from Rs 61. BNP believes MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs. MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators, which are reducing tariffs, leveraging scale economies, coupled with superior customer service.

Stock Views on State Bank of India, Lanco Infra, Titan Industries

MOTILAL Oswal on SBI

MOTILAL Oswal maintains ‘buy’ rating on State Bank of India (SBI). The bank’s rural and agri-business unit comprises: (1) all the business done at its rural and semi-urban branches; and (2) agriculture business done at any branch. SBI has 7,100 branches in rural and semi-urban areas which account for ~70% of its total branch network strength. About 50% of its employees work in the agri-rural business (ARB) division. The bank’s ARB loan book is currently more than Rs 1 trillion; this accounts for ~23% of SBI’s total loan book and ~28% of its domestic loan book. About 45% of these are farm loans. ARB deposits stand at ~Rs 1.7 trillion and account for ~30% of SBI’s deposits. SBI’s ARB loan and deposits account for 21-22% of the industry, while its ARB branch network accounts for 13% of the industry. SBI is consistently gaining market share in this segment. Motilal expects the bank to report consolidated earnings per share (EPS) of Rs 155 in FY09E and Rs 187 in FY10E. Consolidated book value (BV) will be Rs 1,110 in FY09E and Rs 1,282 in FY10E. Return on assets (RoA) and return on equity (RoE) are expected to be ~1% and 15-16%, respectively, over the next two years. Adjusted for value of SBI Life at Rs 205/share, the stock trades at 1x FY10E consolidated BV.

UBS Investment on Lanco Infratech

UBS Investment has upgraded its rating on Lanco Infratech to ‘buy’, but has reduced the target price by 28% to Rs 250. It has also cut its EPS estimates by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution. It has factored in a 10% discount to power, EPC (engineering, procurement & construction) and infrastructure valuations. The contributions to value are from power (44%), EPC (40%) and real estate (15%). The stock is trading at 9.5x FY09E EPS, which is a good buying opportunity. The key risks are fuel availability, execution and a further slowdown in the real estate sector.

JP Morgan on Titan Industries

JP MORGAN maintains ‘overweight’ rating on Titan Industries with a March ’09 target price of Rs 1,475 based on a forward price-to-earnings (P/E) multiple of 23x. The company has seen a revival in demand for its watches and jewellery, post-June ’08. It continues to maintain its previous guidance of 33% growth in revenue to Rs 4,000 crore and similar profit growth for FY09. Specialty and lifestyle retailing will remain the company’s core focus as there are many organic growth opportunities in a nascent market like India. Titan aims to add 750 stores over the next five years, but it has no immediate plans to expand its international business. Several initiatives in the jewellery and watch businesses should help to sustain good growth over the next 1-2 years. Goldplus, Golden Harvest Scheme and innovative collections such as ‘Jodhaa Akbar’ should support double-digit volume growth in the jewellery business. The company has planned exciting new launches in the watch segment, such as a new children’s brand and automatic watches, over the next 6-9 months. Prospects of the eyewear business look encouraging and the company plans to add 60 stores in the next one year and 200 stores over the next three years. It is targeting sales growth of 50% through its own brands to improve margins. JP Morgan feels Titan is the best proxy for attractive growth opportunities in the specialty retail space.

Stock Views on Infosys, Gail, ICICI Bank

JP Morgan on Infosys - TARGET PRICE: RS 1,825

JP Morgan Research has assigned an ‘overweight’ rating to the stock saying Infosys has reported good 2QFY09 results ahead of consensus. “We have a positive view on the sector, given our belief in secular offshoring trend but do accept that weak guidance would put pressure on Infosys and the sector near-term,” said the research firm in a note to its clients. According to the research firm, the weak guidance will raise fears about FY10E (estimated) rather than the next couple of quarters as the Indian IT sector might face a lot more pressure in 2009/FY10 from customers. “While consensus numbers might not change for FY09 (due to continued rupee/US$ depreciation), FY10 estimates might be cut. We believe that any panic sell-off on back of this guidance remains a good entry point,” the note said.

Morgan Stanley on Gail - TARGET PRICE: RS 347

Morgan Stanley has given an ‘overweight’ rating to the stock saying it is trading at 9.8 times F2009E (estimated) EPS (earnings per share) and 8.8 times F2010E EPS, which is a 30-35% discount to global peers. “We rate Gail a mustown stock in today’s environment — it has high quality assets, which are not easily replicable giving it a virtual mo-nopoly. It is net cash positive equal to 35% of its asset base; and its earnings are reasonably defensive, especially from its transmission business,” said Morgan Stanley in a note to its clients. According to Morgan Stanley, the company is best positioned to take advantage of higher supply of natural gas, which is expected to increase by 150% over the next four years.

Edelweiss Securities on ICICI Bank - TARGET PRICE: 779

Broking house Edelweiss Securities has reiterated a ‘strong buy’ on the stock saying it has corrected 26% vs 18% for Bankex and the general market correction of 16%. “Current prices seem to be completely ignoring value of subsidiary and moreover implying wild assumptions about asset quality (which appears highly improbable),” said Edelweiss in a note to its clients. “Even if we make a worse case assumption on all the various possible parameters (none of which is probable), the stock offers substantial value at these levels,” the note said. The broking house asserts that book value (BV) of Rs 417 does not take into account any valuations for the subsidiaries. “If we add subsidiary valuations (of Rs 220 per share in FY09E) to the adjusted BV, the fair value will be 50-75% higher than the current price. This represents a strong return to investors in the short-term itself,” the Edelweiss note said.

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.