Morgan Stanley on Titan Industries

Morgan Stanley raises the target price of Titan Industries to Rs 2,032 implying 12% upside. They have also raised the earnings estimates by 6%, 5% and 5% for F2010, F2011 and F2012 respectively.

Interestingly, despite fewer wedding dates this quarter, consumer off take in the jewellery business remains strong driven by strong consumer confidence, successful promotion in studded jewellery, lower gold prices compared to Q3F2010 and low base effect. Similarly, the watches division is also demonstrating strong growth due to strong retail off take, new store openings and low base effect of Sonata watches. Titan plans to add around 50,000 sq ft p.a. in its jewellery business in F2011, implying around 15-20% space growth. This will be led by a combination of large and small format stores. Similarly, in the watches division, along with expansion with multi-format stores, the company plans to add around 30-40 new “World of Titan” stores in F2011 translating into 12% space growth in the watches division. Morgan Stanley reiterates `Overweight’ rating on:

1) Good business model (high RoE with strong cash flows).

2) High growth potential due to under penetration levels.

3) Proactive and dynamic management., and

4) good quality financials.

Aban Offshore

The stock of India’s largest offshore oil services company, Aban Offshore has been on the upswing since May. The stock touched a peak of Rs 1,144 in June giving investors nearly three times their investment in just one month. Though the stock came off nearly 50 per cent from the highs subsequently, it has since then recovered most of the lost ground and is currently trading around Rs 1,000 levels. The heightened activity in the stock is the result of newsflow indicating that the company has been able to restructure its $3.2 billion (Rs 16,000 crore) of foreign currency debt. Last Friday, the company also announced its intention to raise funds through global depository receipts or placement of equity to institutional investors.

The acquisition of Sinvest, a Norwegian oil drilling investment company three years ago, for an enterprise value of $2.2 billion has led to a large amount of debt on Aban’s books. High day rates for oil rigs in 2007 and first half of 2008 on the back of rising oil prices meant robust profit margins and cash flows. With the oil prices coming off from their $145 per barrel highs in July 2008 to under $40, and now to around $65, has resulted in lower demand for offshore vessels and idle assets for Aban. Of the total debt, the company is due to pay about $435 million (Rs 2,175 crore) in 2009-10. A third of this ($142 million, Rs 710 crore) is to be paid by the end of this calendar year. Considering that the company is expected to generate cash of around $250 million (Rs 1,250 crore), it will still be short by about Rs 1,000 crore. The company has reportedly been in talks with Indian banks, which own three quarters of Aban’s debt, for a two year moratorium on principal payment. Analysts believe that the repayment flexibility is likely to come with stiffer interest rates. Little wonder, the company is considering options like fully convertible bonds, ADRs, GDRs and qualified institutional placement of equity, or even listing of its Singapore subsidiary, to raise long-term funds and to make good the shortfall.


Idle assets The Sinvest acquisition expanded Aban Offshore’s fleet and the company currently has 20 drilling rigs and one floating production unit. While its entire Indian fleet of seven rigs is deployed, an equivalent number belonging to its Singapore subsidiary is lying idle. Although there has been some improvement in demand for rigs in the last 2-3 months, the day rates of offshore (Jack up) oil rigs have tumbled by half to around $100,000 currently from a year ago indicating that demand for jack up rigs (15 of the 20 rig fleet) is still weak. Analysts say that the company is likely to place its two deepwater assets on contract over the next two months which should ease the pressure on cash flows as they fetch about $400,000 per day. The outlook in the short term, however, does not look too good. The world rig count at 1,987 is down 42 per cent from year ago levels. With the fortunes of the sector linked closely with crude oil prices, any sustained improvement in the prices which are hovering at around the $60-$70 mark would help improve utilisation rates, and hence profitability.

Financials

High day rates in 2008-09 helped Aban record a 350 per cent increase y-o-y in net profits to Rs 554 crore. The topline also grew by a hefty 50 per cent to Rs 3,183 crore. The 2008-09 performance was marred by an impairment charge of Rs 151 crore in Q4, leading to higher depreciation and losses of Rs 130 crore for the period. Considering that the company has a debt to equity ratio of around 11 and a squeeze on cashflows, the going could get tougher. Analysts say that the restructuring of debt where the company gets favourable terms would hinge on improvement in cashflows. Unless there is a turnaround in operational parameters (higher day rates and full utilisation of fleet) and macroeconomic factors (price of crude oil), it would be difficult to place equity, and even if it does, Aban will have to contend with asignificant dilution. Due to idle ships, analysts estimate that the company is likely to post losses in the first half of the current fiscal. A Morgan Stanley report says that the company will make losses in the first half of 2009-10 of Rs 286 crore on revenues of Rs 671 crore. The company made net profits of Rs 111 crore in the same period in FY09 with revenues at Rs 749 crore.

Conclusion

At current price, the stock is trading at 7.65 times its estimated 2009-10 earnings of Rs 130. Considering that the stock has made considerable gains over the last couple of months and the difficult operating environment in the shortterm, investments can only be considered on sharp corrections.

Stock Views on oriental bank of commerce, Colgate-Palmolive, ABB

Morgan Stanley on oriental bank of commerce

OBC is now trading at a huge discount to other state-owned enterprise (SOE) banks. OBC has corrected sharply in the last few days. The stock is now trading at 0.4x book. The stock is mispriced compared with other SOE banks, which are trading close to 0.9x book, on an average. Morgan Stanley remains negative on OBC’s fundamentals, but that’s for all the SOE banks. The valuation gap is huge and some of this is likely to get bridged. OBC is now a most preferred stock among SOE banks. Earnings will be under pressure. Morgan Stanley is expecting the revenues to fall by 31% in F2010. This will be driven by a continued weakness in NIMs (net interest margins) and a sharp pick-up in credit costs. But, even on those earnings, the stock is trading at 4x. Morgan Stanley agrees things can be much worse in terms of asset quality, but OBC will not be the only one to be affected. Other banks (which are trading at significant premiums) will also be affected in equal measure. Hence, this is the stock to buy in the SOE universe. There is no change in the negative view on Indian banks. Morgan Stanley expects core earnings for Indian banks to remain weak in F2010 driven by increased credit costs and weak revenues. Plus, Indian banks still remain among the most expensive banks in the region.

HSBC on Colgate-Palmolive

HSBC maintains `Overweight’ rating on Colgate-Palmolive with a price target of Rs 470. The company’s sales growth volume for the first three quarters of this year has averaged 12%, with Q3 spiking up to 14%. However, the average over the last three years has been 9%. There are three factors responsible for this high growth rate:

(1) market share gains - Colgate has moved up from 47.8% in FY06 to nearly 50% currently (crossed 50% for the first time in several years for the month of January 2009)

(2) Price stability - Colgate has not taken any price increases in the year till date

(3) price point rationalisation - price of Cibaca 20g pack was reduced from Rs 6 to Rs 5, which has greatly boosted volumes.

Although Colgate is in staples category and is relatively immune to recession, it is possible that there may be a slight impact on the sales and volume growth may return to the three-year average in high single digits, from the current 12%+ which is probably above trend. The probability of a price increase, however, seems low given the softening commodity cost scenario.

Motilal Oswal on ABB

Motilal Oswal has reiterated `Neutral’ rating on ABB with a target price of Rs 382, which implies a downside of 4% from current levels. ABB India reported in-line performance for 4QCY08, with revenues up 18% y-o-y to Rs 2,170 crore, EBITDA up 3% y-o-y to Rs 270 crore, and net profit up 6.8% y-o-y to Rs 190 crore. While 4QCY08/CY08 results are largely in line with the estimates, order intake witnessed sharper than anticipated decline (- 37% y-o-y, -33% q-o-q), as projects got deferred. Order backlog as of December 2008 stands at Rs 6,160 crore (up 22.6% y-o-y), and book to bill ratio is at 0.9x CY08 revenues. EBITDA margin declined 100 bps to 11.2% in CY08, in line with our estimates. EBIT margins for power systems declined 190 bps to 8.6% in CY08 from 10.5% in CY07, largely due to business restructuring (reduced focus on APDRP and RGGVY) and possibly higher costs in certain projects. Business headwinds on the industrial side (47% of CY08 EBIT) are getting stronger, particularly in the project segment, given delays in terms of financial closure. Metals and cement (~30% of industrial order book) are witnessing demand slowdown. Also, segments like hydrocarbons, paper/pulp and real estate constitute a sizeable part of the order book, where order intake would be impacted. Motilal Oswal is downgrading its earnings estimates by 9.8% for CY09 and by 11.6% for CY10 to factor in the business headwinds. The stock trades at 15.7x CY09E and 16x CY10E earnings.

Stock views on KEC International, Thermax, Info Edge, IVRCL Infrastructure, DLF

HSBC on KEC International

HSBC maintains its `underweight’ rating on KEC International with a target price of Rs 130. The company has reported sales growth of 25% y-o-y to Rs 870 crore in the quarter. EBITDA margin was lower by 625 bps at 8.2% due to forex losses of Rs 16.6 crore and high raw material cost. The company also reported 67% y-o-y increase in interest cost due to debt raised for capex and working capital. Due to working capital and capex requirements, KEC has increased debt to Rs 900 crore while depreciation is lower because part of its assets have been transferred to the books of developers and new assets will be capitalised in FY10E. The stock is trading at FY10E PE multiple of 4.4x and PB of 1x. This compares with peer Jyoti Structures trading at 4.1x/1x and Kalpataru Power trading at 3.8x/0.7x. KEC has higher gearing and lower return ratios, which makes it more expensive than peers. The target price of Rs 130 is the mid-point of a PE fair value of Rs 125 and a PB fair value of Rs 135.


Citigroup on Thermax


Thermax’s revenues declined by 6% y-o-y, led by a decline of 9% y-o-y in the energy segment. Environment segment grew by 14% y-o-y. Margins (adjusted for forex loss) have improved by 137 bps, driven by cost-cutting initiatives. Order book of Rs 4,100 crore is up 40% y-o-y; however, the pace of order book growth has moderated. Management suggested there is “substantial resistance” from clients to finalise orders, especially large-size projects. Some clients have cancelled/slowed execution. According to Thermax, cement and metals sectors’ capex is expected to slow down while the power sector will continue to invest, albeit at a lower level than before. But there are some positives -
1) While risks to order inflows remain, increased power sector exposure should help provide some support to growth.
2) Management has been ahead of the curve and seems geared to handle the downturn; ~293 bps margin improvement for 9MFY09 is commendable, especially since it was against the backdrop of rising input costs and no pass through clauses.
3) The company has no debt and one of the highest RoEs in the sector. Citigroup cuts the target price to Rs 211 from Rs 480 based on 8x FY10E (15x Dec09E earlier). Historically, Thermax has traded on par with BHEL, but in the recent past, has been trading at a widening discount.


CLSA on Info Edge

Revenue growth in Info Edge’s flagship recruitment solutions is down to 1.5% y-o-y from 30%+ at the start of the year as the slump in hiring across all industries has taken its toll. With the customary March quarter budget flush unlikely to happen this year, March 2009 outlook for Naukri looks even weaker. Meanwhile, Info Edge’s realty business continues to face headwinds from the slowing real estate market. A course correction in the matrimony space with establishment of brick and mortar Jeevansathi centres is still in the investment phase and any positive surprises on this front are unlikely in the near term. With over Rs 330 crore of cash and continued leadership of Naukri, Info Edge remains better positioned compared to competitors in a difficult environment. With the slowdown becoming homogeneous, online traffic from recruiters has gone down significantly and recruitment solutions grew only 1.5% y-o-y in the December 2008 quarter. Info Edge’s leadership position in the online recruitment segment and Rs 330 crore of cash pile should help it encounter the economic downturn better than competitors. Also, new initiatives in education and professional networking have long-term potential. However, Info Edge’s valuations (21.5x March 2009) cannot be defended with a 2.3% FY09-11CL EPS CAGR. With visibility for even March 2009 severely constrained, risk to FY10 earnings is high.


Maquarie on IVRCL Infrastructure

IVRCL reported a 22% topline growth but decline in PAT in 3Q09 results. Company reported 22% revenue growth thus translating into strong 39% y-o-y growth for 9MFY09. However, margins came in significantly lower by 230 points in the quarter and have now declined by 100 bps y-o-y in 9MFY09 driven by a higher mix of lower margin projects. PAT declined significantly by 27% y-o-y in the quarter driven partly by margins and partly by very high interest costs of Rs 41.9 crore versus Rs 17.7 crore last year. For 9MFY09, PAT growth has come in at 7% versus our expectations of 4% growth for full year. Interest expense grew to Rs 41.9 crore in the quarter, highest ever for IVRCL, given that debt levels have increased to Rs 1500 crore, resulting in net debt/equity ratio of around 0.8x, which is on the higher side. IVRCL has an order book of Rs1,4300 crore at the end of 3Q09 which provides strong revenue visibility of 3-4 years, highest in the mid-cap construction space. The company has received robust order inflows of Rs 6600 crore in 9MFY09 (+100% y-o-y). Maquarie estimates are at the lowend of the management’s guidance with a 35% topline growth in FY09 and a lower net income growth of 4% due to interest cost pressures.


Morgan Stanley on DLF


Morgan Stanley maintains `underweight’ rating on DLF in view of an extremely weak physical property market, modest stock of on-going projects and, now, prospects of slow improvement in balance sheet (in view of the sharp fall in internal accruals). DLF’s construction starts across biz verticals in F9M09 total upto just 5-6 msf, which is a leading indicator of poor earnings trajectory ahead. Management believes that the current business environment is fluid and uncertain, and therefore, it targets to conserve capital and customize products to suit ongoing economic slowdown. Near term mid-income housing and scale up in rentals will be the areas of focus, whereas, luxury housing and commercial complexes will be slowed. To weather the current credit squeeze, DLF targets to change the maturity profile of its debt portfolio to long term by mid-2009, such that there will be no re-payment obligation for 24-36 months. Out of Rs14800 crore debt, Rs 9000 crore is already long term, with commitments for another Rs 3000 crore.. DLF will restrict its sales to DAL to 12 msf (million square feet), of which 9.5 msf will be completed shortly. It targets to raise roughly $450 million PE capital to part fund the pending receivable (Rs 5400 crore). Valuations don’t appear inexpensive at roughly 1.1x F09 P/B with increasingly slower pace of value unlocking in the land bank. Stock is at a 40% discount to the F09NAV

Stock views on ONGC, Hindustan Unilever

MORGAN STANLEY on HINDUSTAN UNILEVER

MORGAN Stanley reiterates ‘overweight’ rating on HUL as it believes that investors are likely to be positively surprised by the company’s structural growth story and turnaround in business fundamentals. The FMCG sector is at an inflection point and a sharp reduction in input costs is likely to benefit consumers as well as companies. HUL is not witnessing any exceptional uptrading or downtrading across its product portfolio. Industry volume growth in soaps and laundry is flat due to steep price hikes, but consumers have still been resilient. Revenue growth in FY10 is likely to be lower as it will be largely volume-led. HUL has geared up to respond to volatility in input costs and has shortened its response time and planning cycle.

INDIABULLS on ONGC

INDIABULLS has recommended a ‘hold’ rating on ONGC. During Q2 FY09, the company’s standalone net sales increased 12.9% y-o-y to Rs 17,410 crore. While the surge in global crude oil prices and the weakening rupee were expected to drive ONGC’s financials, its performance was dented by the excessive subsidy burden (Rs 12,670 crore) it had to shoulder in order to limit the losses of OMCs. As a result, ONGC’s standalone adjusted net profit declined 5.7% y-o-y to Rs 4,810 crore. Due to the global economic crisis, oil prices have fallen by more than 60% from their peak of $147/bbl in mid-July to the current lows of $50/bbl. This is mainly due to dampening fuel demand from the major consuming nations. The IEA has lowered its oil demand forecasts by 500,000 bopd for the second half of ’08 and by 400,000 bopd for ’09. Thus, with reducing demand, Indiabulls expects oil prices to be under pressure till FY10, thereby adversely affecting the company’s net realisations. However, Indiabulls believes that once the global economy revives, demand for crude oil and natural gas will recover, mainly due to increased demand from developing economies such as India and China.

Stock views on HDFC, Bharti Airtel, Hero Honda

BANK OF AMERICA / MERRILL LYNCH on HDFC

Bank of America cuts HDFC’s target price to Rs 1,980 from Rs 2,450 owing to lower sum of parts value and factoring in moderation in growth. However, the stock can still trade at 2.5-3.0x FY10E given the comfort in asset quality; earnings growth of 16-17% through FY10-11E and ROE (return on equity) of 29% on its core business. HDFC’s 3QFY09 earnings were down 2% y-o-y and 4-5% lower than market estimates. This was primarily due to the absence of Rs 100 crore of high investment gains and extraordinary income and Rs 50 crore of exchange losses booked by HDFC in its convertible bond. Adjusting for these factors, both topline and pre-tax earnings grew by about 19% y-o-y. The other disconcerting feature was the 8% contraction in approvals - which appears to be a more conscious decision, as HDFC had been reluctant to lend in October-November ‘08 as conditions worsened. Bank of America has cut the FY09-10 reported earnings by 6-11% to capture the lower investment gains.

HSBC on BHARTI AIRTEL

HSBC reiterates `Overweight’ rating on Bharti Airtel. The 15% fall in Bharti’s share price since the launch of RCOM’s GSM service in December is an overreaction. Instead, investors should focus on Bharti’s market leadership strengths and RCOM’s longer-term structural limitations of operations in 1,800 MHz which require additional base stations. HSBC believes the combination of low revenue yields and bloated cost structure will reduce the scope for disruptive pricing and competitive intensity will become more rational. HSBC estimates FY10E traffic growth of 32% against the historical average of about 70% and cuts FY10-11E EPS by 7% and 4% respectively to factor in increasing competition and the slowing economy. The core business is valued at Rs 645 on 13.7x FY10E core earnings based on a 15% premium to HSBC’s Sensex target of 11.9x. The tower business is valued at Rs 141, which reflects a 36% discount to recent transaction multiples. Risks are early implementation of MNP (mobile number portability), rollout of flat rate plans, higher than estimated slowdown in usage, higher than estimated decline in margins on the back of rural penetration, lower termination charges and higher spectrum charges.

MORGAN STANLEY on HERO HONDA MOTORS

Hero Honda posted a decent set of 3Q09 numbers with net income 7% higher than the expected and in line with Street expectations. Despite a volume decline of 5%, an 11% y-o-y improvement in realisations helped the company to report revenue of Rs 2,880 crore (up 5% y-o-y). Margin came in at 14.5%, 50 bps above last year, primarily due to softening raw material commodity prices. This was on the back of an 11% y-o-y realisation improvement, improving product mix, and ramp up of capacity at the excise duty-exempt Haridwar facility. Net income of Rs 300 crore, improved 9% y-o-y, and came in 7% above estimate on the back of an improvement at the operating level and a lower tax rate as the company increased production in tax-free zones such as Haridwar. Hero Honda is on course to achieve 2009 growth estimate of 9% given its year to-date volume growth of 10.4%, and an improvement in market share of 5.5% to 58.5% in the fiscal year to date in the domestic motorcycle category.

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 ING Vysa Bank, Suzlon Energy, Balrampur Chini, Shobha Developers

ENAM Securities on ING Vysa Bank - Target RS 240

ENAM Securities has retained its “outperformer” rating on the stock with a price target of Rs 240, following robust second quarter numbers. “ING Vysya registered a 43% year-on-year growth in net interest income to Rs 1.56 billion driven by 26% growth in advance and 43-basis point improvement in NIM to 2.87%. The bank has shown a strong growth in NII over the past few quarters and the fee income growth is also impressive,” the Enam note to clients said. “While the tier-1 capital at 7% is bit of a constraint, the bank can still do well this year, even without raising any additional capital. The stock quotes at one time FY09(estimated) book value and 6.9 times FY09 earnings and is attractively valued,” the note added. While the stock has corrected significantly, given the multiple uncertainties, we believe it is best to stay away at this point, it goes on to add.

Morgan Stanley on Suzlon Energy - Target RS 52.45

Morgan Stanley has “downgraded” Suzlon Energy from overweight to equal-weight while lowering the price target to Rs 52.45 from the earlier Rs 450, citing slowdown in the global wind turbine market and the unresolved technological issues. “We expect a slowdown in the global wind turbine market in C2009, with growth moving down to only 6% from 25% in C2008,” says the report. Further, the foreign brokerage also does not expects Suzlon “to get access to REpower technology in the short term.” Morgan Stanley also feels that with the cancellation of the rights issue of the company, debt will become the primary source of funding the growth at Suzlon. “We believe that Suzlon is doing the right things... trying to delay the purchase of Martifer’s stake in REpower and cutting back on capex,” says the report. However, on our reduced numbers, we still perceive risk to Suzlon’s debt covenants. If the Martifer stake purchase cannot be pushed back, we expect Suzlon to breach its debt covenants, potentially resulting in punitive action from lenders, it adds.

ICICI Securities on Shobha Developers

ICICI Securities has maintained a “buy” on Sobha Developers after the company’s second quarter results were in line with expectations with revenues and PAT dipping 10% Y-o-Y and 13% Y-o-Y to Rs 2.9 billion and Rs 490 million, respectively. The brokerage, however, has downgraded the company’s NAV owing to sluggish sales and stretched balance sheet. According to the brokerage, the company is facing headwinds in the form of downturn in realty and strained balance sheet. “The debt level has increased three times to Rs 19 billion in one year, and new sales and project launches have slowed down. We lower FY09(estimated) NAV estimate to Rs 282/share (target price at Rs 169/share), assuming 25% drop in selling prices and increased timelines by 8-10 years (reducing development pipeline 55-65%). ICICI Securities has also lowered FY09E & FY10E earnings estimates by 51% and 71%, respectively. Sobha’s balance sheet is stretched and any respite through the proposed rights issue of Rs 3.5 billion will be temporary unless housing demand picks up, it adds.

Merrill Lynch on BALRAMPUR CHINI

Merrill Lynch has maintained an “underperform” rating on Balrampur Chini Mills while lowering the price target from Rs 56 to Rs 43. The brokerage’s revised price target is based six times FY09 (estimated) EV/EBITDA, which is equivalent to the long-term average of the sector since 1996, excluding periods of very low or negative profit. “Our price objective cut is driven by 17% cut in FY09E EPS and 6% cut in our target valuation multiple,” says the report. According to Merrill Lynch, key factors driving the earnings cuts are “4% higher sugarcane costs, 18% higher interest costs and 7% lower sugar sales volumes”. We expect the company’s earnings to remain under pressure due to fall in availability of sugarcane, the key raw material, adds the report.

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 Everest Kanto Cylinder, Amtek Auto, Arvind Mills

CITIGROUP on Everest Kanto Cylinder

CITIGROUP remains positive on Everest Kanto Cylinder (EKC) and has recommended a ‘buy’ rating with a price target of Rs 365 due to its highest leverage to the strong growth that city gas in India is likely to witness over the next few years. EKC is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. EKC’s Q1 FY09 net profit of Rs 35 crore was up 57% year-on-year y-o-y) and well above expectations. The 12-month target price of Rs 365 is based on 19x September ’09E consolidated earnings. Key risks include: 1. Exposure to a single supplier; 2. China — a hitherto unexplored market; 3. Competition — low physical barriers to entry have led to some players entering the market in the recent past; 4. Project risk — EKC is implementing significant expansion plans that are subject to time and cost overruns; 5. CPI — integration and execution risks related to the acquisition of CP Industries; 6. Crude prices.

EDELWEISS on Amtek Auto

EDELWEISS has maintained its ‘accumulate’ rating on Amtek Auto and awaits clear signs of margin improvement. The company has been facing resistance to price revisions from its customers. Over the past three years, the standalone capex was Rs 1,500 crore. The company plans to consolidate its operations now, with incremental capex of only Rs 200 crore over the next two years. This is expected to aid improvement in return ratios, going forward. In addition, the company is looking at inorganic growth opportunities abroad to cement its position in the European and American auto markets. This project is valued at Rs 300 crore, of which, Amtek Auto’s equity contribution will be Rs 75 crore. The joint venture is likely to start operations Q4 FY10E onwards, and is expected to improve the company’s margins, going forward. The merger of group companies and subsidiaries is on track, and is likely to be completed by the end of March ’09. Further, the company is likely to house all its overseas subsidiaries in a Netherlands based holding company to streamline the group structure.

MORGAN Stanley on Arvind Mills

MORGAN Stanley has downgraded Arvind to ‘equal-weight’ and reduced the target price to Rs 34 from Rs 85. It believes that multiple macro headwinds are likely to force Arvind into a loss-making company in FY09. A slowdown in end consumer (US and EU) demand for its denim fabrics business is likely to delay the potential recovery in the denim cycle. A sharp rise in input costs such as cotton, power, fuel and chemicals is likely to impact margins. Huge debt and related financing costs are likely to impact net profit. The company’s forward cover for the dollar at Rs 40 for FY09 is likely to cap the potential benefit due to the current depreciation in the rupee. Although the company is adopting stringent cost-control measures, these may not be sufficient to help it earn a profit in FY09. In the current market environment, investors will be unwilling to pay value for its real estate and joint ventures, which can only be monetised in FY12. The positive catalysts are quick monetisation of its large real estate properties and cost control-driven margin expansion.

Srock Views on Pantaloon Retail, Bartronics, HDIL

MORGAN Stanley on Pantaloon Retail

MORGAN Stanley advises investors to accumulate Pantaloon Retail’s stock at current levels. The company reported stock selection guide (SSG) for value and lifestyle retailing at 14.1% and 8.2% year-on-year, respectively, in August. The average SSG for value retailing for the past three months is 12.2%, while for lifestyle retailing it is 11.5%. There were no store additions in home retail and SSG stood at 25.8% in August. Sales for the value and lifestyle retailing segments grew by 49% and 38% y-o-y, respectively. The ‘5 Din Mahabachat’ from August 13-17 generated sales of Rs 200 crore, and nearly 60 lakh footfalls were generated in Big Bazaar and Food Bazaar stores. The top six cities in revenue terms accounted for nearly 60% of the total ‘5 Din Mahabachat’ sales. The stock is trading at 14x FY09E earnings, adjusting for value of its subsidiaries Future Capital, Home Solutions, Future Media and Future Bazaar. Morgan Stanley expects Pantaloon to deliver an EPS CAGR of 56% for the next five years.

HDFC Securities on Bartronics

HDFC Securities initiates coverage on Bartronics India with a ‘buy’ rating. With 90% and 95% market share in smart card and radio frequency identification (RFID) segments, respectively, the company offers all automatic identification & data capture (AIDC) solutions under one roof. Its early entry into smart card manufacturing will help it to retain its dominance in the area. Bartronics is the only manufacturer of smart cards in the country. Its smart card capacity has already been booked for the next two years. It also has the capability to provide end-to-end AIDC solutions, which will help it to expand its order book and topline. The company’s revenues and profits are expected to witness a CAGR of 72% and 78% over FY08-FY10E. At the current market price, it is trading at 6.5x and 3.8x its FY09E and FY10E forward EPS, respectively. HDFC Securities has arrived at a discounted cash flow (DCF)-based target price of Rs 234 — an upside of 53% from current levels. While the bull case target price is Rs 339 (upside of 122%), the bear case target price is Rs 147 (downside of 4%) from current levels.

BNP Paribas on HDIL

BNP Paribas initiates coverage on Housing Development & Infrastructure (HDIL) with a counter-consensus ‘reduce’ rating. HDIL focuses on the lucrative Mumbai slum rehabilitation segment, which is characterised by high margins and high entry barriers. Slum rehabilitation projects account for 34.5% of its land bank. However, funding constraints and delays due to state elections next year are likely to slow its progress. The company’s target of rehabilitating 15,000 slum tenements annually starting in FY09 is ambitious, since the best it has done so far is 3,000 tenements annually. BNP Paribas’ channel checks with slum dwellers indicate that the company is likely to face several roadblocks, especially in the Mumbai airport slum redevelopment project. HDIL’s earnings stream is highly volatile and there are significant risks in achieving the estimates of the market, which is yet to factor in execution delays. BNP Paribas would like to gain more comfort on the company’s ability to scale up its operations and execution before turning positive.

Stock View on AIA Engineering, Container Corp, Kamat Hotels, Bajaj Hindustan

KOTAK Securities on AIA Engineering - TARGET PRICE: RS 1,870

KOTAK Securities has maintained its “buy” recommendation on the stock saying the stock is attractively valued at current levels, in the context of its growth prospects. The brokerage says that despite sharp increases in raw material prices and sharp rupee-dollar movements the company has been able to effectively maintain its operating margins, as it has been able to pass on price hikes. “Going forward, the management is confident of maintaining the margins in the 23-25% range. We maintain our earnings estimates for AIA and expect it to report an EPS (earnings par share) of Rs 98.1 in FY09E (estimated),” the Kotak Securities note to clients said. “The current market price, said the Kotak note, discounts FY09E earnings at 16.1, which we believe is attractive considering the growth prospects for the company going forward due to capacity expansion and strong demand for the products of the company,” the note added.

ENAM Securities on Container Corp - TARGET PRICE: RS 1,035

ENAM Securities has maintained its “outperformer” rating on the stock. Enam believes that despite improving visibility on earnings (19% CAGR over FY07-09E) and sustainability of RoE (return on equities) at around 25%, the stock trades at a 12% discount to the Sensex valuation. “Compared with global peers, admittedly with high barriers to entry, Container Corporation trades at 40% discount,” the Enam note said to its clients. According to Enam, growth in India’s export-import trade and investment in rail, road and ports infrastructure would drive growth for the company. “Steep increase in rail haulage charges had dampened volume growth in the past three years. Current pricing environment remains stable, with IR to hike haulage charges twice a year,” said the note. The brokerage expects Container Corporation EXIM throughput to revert back to long average of 14% per annum. “Lower flat discounts and increase in tariff are expected to drive 244 bps expansion in EBIT margin over the next two years,” the note added.

Sharekhan on Kamat Hotels

SHAREKHANhas initiated coverage on Kamat Hotels and has advised investors to maintain a cautious view on the stock. Though the stock is attractively priced, the inability of the hotel group to fund its expansion plans is a key potential risk to the earnings estimate for FY10, the research note said. “The company’s revenues are heavily dependent on two properties — The Orchid and VITS — in Mumbai. These two properties are like to face stiff competition with incremental supply of rooms from Sahara Star. We believe, the occupancy rate of these properties may remain suppressed due to economic slowdown,” the Sharekhan report added. According to Sharekhan, the hotel group’s growth would be driven by a 37% rise in its room inventory to 773 rooms by FY10. Also, an increase in properties under management contracts will contribute to the topline growth.

MORGAN Stanley on Bajaj Hindustan - TARGET PRICE: RS 240

MORGAN Stanley has assigned an “overweight rating” on Bajaj Hindustan, as it expect the company to do well in coming months. As the largest domestic sugar producer, Bajaj Hindustan seems well positioned to benefit from the favourable domestic sugar outlook, the brokerage said in a report. “As our expectation of a tighter sugar balance unfolds, investors may start discounting the higher sugar and ethanol realisations. BJH has increased crushing and distillery capacity more than three times in three years and seems poised to drive revenue growth in a constructive pricing environment,” said the Morgan note to clients. Aggressive government intervention to control sugar prices and cane cost could be one of the risk factors, according to Morgan. “We expect a sharp rally in Bajaj Hindustan’s stock price as the company reaps the benefits of aggressive capacity expansion in a constructive sugar pricing environment. We estimate the stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data,” the note added.

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.