NOMURA on Tata Steel

We expect Tata Steel India to see significant earnings expansion on account of new capacity, lower raw material costs and an improving price cycle. We believe that Tata Steel’s domestic value is worth Rs 735 per share based on 9x FY12 standalone EPS of Rs 92.3. Tata Steel is also augmenting the capacity of its coal mines along with its 3mn tonne expansion. After the 1.8mn tonne expansion completed earlier this year, the company’s dependency on imported coking coal has gone up from 30% previously to 50% now. However, with the expansion of coal mines, Tata Steel expects to meet 60% of its overall requirements through domestic coal. We believe the company can save significantly from it. With the European operations improving rapidly, we believe the negative contribution from Corus would turn positive as earnings turn around. This, we believe, makes Tata Steel one of the most attractive plays in the Indian steel sector.

BPCL

Nomura downgrades BPCL’s rating to `Reduce’ from `Neutral’ with a revised price target of Rs 450, down from Rs 525. BPCL has outperformed the BSE Sensex by 15% and 38% over the past three month and twelve months respectively. The stock is building in too much hope on de-regulation/low subsidy sharing, in our view. Apart from several positive statements of intent, OMCs (oil marketing companies) have been seen as defensive. At the revised oil price assumption and subsidy sharing estimates, the earnings estimate for BPCL declines by 36% for FY10E, 38% for FY11E and 44% for FY12E. Subsidy concerns significantly increase at higher oil prices.

With lots of hope already built in, we believe risk-reward is becoming increasingly unfavourable. Nomura has decreased the EPS estimates by 36%, 38% and 44% for FY10E, FY11E and FY12E respectively, due mainly to higher subsidy at higher oil price assumptions. Nomura continues to believe that for OMCs to emerge as a longterm investment idea, concrete steps to remove ad hocism and bring transparency on subsidy sharing are a must.

Stock Views on Tata Power, Union Bank of India, Reliance Capital

NOMURA on TATA POWER

NOMURA initiates coverage on Tata Power with a ‘buy’ rating and a 12-month target price of Rs 854, representing 17% potential upside from the current level. Nomura believes a strong project pipeline, adequate fuel security, global expansion plans and high earnings visibility are key positives for the stock. Tata Power’s capacity will rise to 13,611 mw by FY14, representing a CAGR of 33% over FY08-14E — significantly higher than the targeted 10% CAGR under India’s 11th Five-Year Plan. Nomura expects its EPS to rise from Rs 47.5 in FY08, at a CAGR of 28%, to Rs 209.4 by FY14E, due to stable cash flows from businesses in Mumbai, North Delhi Power, Mundra UMPP and Indonesian coal mines. The target price translates into a 14.2x FY09E EPS of Rs 60 and 12.9x FY10E EPS of Rs 66.4 — a significant discount to NTPC’s 20.9x FY09E P/E and 18.8x FY10E P/E.

MOTILAL OSWAL on UNION BANK OF INDIA

MOTILAL Oswal maintains ‘buy’ rating on Union Bank of India. The bank is confident of achieving its FY09 targets of stable margins (2.85% vs 2.8% in H1 FY09), loan growth of over 22%, deposit growth of 23%, and slippage ratio of <1.25%.>

(1) technology and process transformation;

(2) fast growing retail deposits, branch network and customer base; and

(3) achieving profitable business growth.

Motilal has upgraded FY09 estimates by 9% to factor in the bond gains and has downgraded the FY10 estimates by 3% to factor in higher NPA charges. Motilal expects the bank to report an EPS of Rs 33 in FY09 and Rs 35 in FY10. The stock trades at 4.7x FY09E EPS and 1.1x FY09E book value. RoA and RoE will remain strong at 1.1%+ and 23%+, respectively, over the next two years.

CITIGROUP on RELIANCE CAPITAL

CITIGROUP has a ‘sell’ recommendation on Reliance Capital with a target price of Rs 500. Reliance Capital has corrected sharply since September ’08, and is now close to its bare bones valuation. But Citigroup believes its businesses will continue to face challenges due to:

a) uncertainty in the capital market;

b) tight funding environment; and

c) slower economic and savings growth.

It values the life insurance business at Rs 294; AMC at Rs 124; consumer finance at Rs 42; non-life insurance at Rs 21 and broking at Rs 22, at 10x one-year forward EPS. Also, it does not attribute any value to unrealised portfolio gains due to sharp correction in the capital market. Key pressure points are:

a) earnings linked to the equity market;

b) non-banking platform;

c) growth in life insurance and consumer finance can slow meaningfully; and

d) vulnerability of consumer finance asset quality.

An easing of any/some of these concerns can lead to a change in the view on the stock.