Stock views on Siemens, Aditya Birla Nuvo, SAIL

Anand Rathi on SAIL - Target Rs 291

Anand Rathi Securities has recommended a buy rating on SAIL, with price target of Rs 291, in its report.

"We initiate coverage on SAIL with a Buy rating and a target price of Rs 291. SAIL is one of our top picks owing to its Indiafocused operations, aggressive capacity expansion, modernization and strong balance sheet," says Anand Rathi Securities report.


IndiaInfoline on Aditya Birla Nuvo - Target Rs 975

IndiaInfoline is bullish on Aditya Birla Nuvo and has recommended buy rating on the stock with a target of Rs 975, in its research report.

"Aditya Birla Nuvo has seen a sharp rally from the support zone of around Rs 870 and has managed to cross the critical resistance levels of Rs 910-915 with impressive volumes. It has formed a medium term bottom around the above mentioned levels. Volumes accompanying the breakout are encouraging, thereby adding confirmation to the bullish outlook. MACD is in positive zone and has given a bullish crossover. The weekly RSI is exhibiting positive divergence. Based on the above-mentioned technical evidences, we recommend traders with high risk appetite to buy the stock in the range of Rs 910-930 for a target of Rs 975. A stop loss of Rs 895 should be maintained on all long positions."


Indiainfoline on Siemens - Target Rs 655

Indiainfoline is bullish on Siemens and has recommended buy rating on the stock with a target of Rs 655, in its research report.

"On the daily chart, Siemens has given a bullish breakout. It suggests that its short-term trend has turned up. Over the last eight weeks, the stock was consolidating in the range of Rs605-540. On Thursday, the stock crossed above the upper end of this trading band. The upmove was well supported by healthy volumes. Further, supportive technical oscillators are also positive. We recommend traders to buy the stock at current levels and on declines to the levels of Rs 610 for an initial target of Rs 655. It is advisable to maintain a stop loss of Rs 597," says Indiainfoline research report.

Bhushan Steel

Company's Fundamentals Have Changed & Warrant A Higher Valuation Than Current P/E Of 11.8
BHUSHAN Steel, a major secondary steel producer in the country, saw its scrip outperforming the Sensex as well as the Metal Index in the past six months besides other blue-chip stocks such as Steel Authority (SAIL) and Tata Steel.

Bhushan Steel’s backward integration plan has been critical to its performance. The company has already completed phase I of its expansion plan and phase II is expected to get completed by this year-end. The partial impact of its integration plan is clearly visible in its operating margin. During the September 2009 quarter, Bhushan Steel reported more than a 300-basis point sequential improvement in its operating margin. The margin will improve further when the company starts commissioning different projects in phases. The recent run-up in its stock price seems to be in anticipation of future improvement in margin as well as topline.

The last time when the Sensex was close to 17,000, Bhushan Steel’s stock was trading at a trailing price-earnings multiple of 11. Now, when the Sensex is again hovering close to the 17,000-mark, the stock is trading at around 11.8. This is despite the fact that the fundamentals of the company changed significantly during the time period. It has reported strong numbers in the first half of FY10. The half-year earnings per share (EPS) stands at Rs 85 and we expect this to be higher for the second half. Assuming a conservative growth of 10% in EPS in second half, the stock is currently trading at a forward price-earnings multiple of around 7.5. This appears to be low considering the fact that the stock has always been traded at a P/E multiple of 13-17 in good times.

SAIL

Beta: 1.13
Institutional Holding: 11.4%
Dividend Yield: 4.7%
P/E: 4.1
M-Cap: Rs 33,000 cr

STEEL Authority of India (SAIL) is the second-largest steel producer in the country, next only to Tata Steel. Unlike the latter, SAIL has grown organically and has a current annual capacity of 13 mt. The company mainly focuses on the domestic market. It is completely integrated for its iron ore requirements. However, it depends on external suppliers for its coking coal requirements. SAIL imports more than 70% of its coking coal requirements from countries like Australia and New Zealand.

The company has paid back a significant portion of its debt over the past five years. This is evident from the fact that its debt was seven times its equity in ’02, whereas currently, its debt accounts for only 16% of its equity. And this has been made possible due to the company’s strong operating cash flows since the past several years.

FINANCIALS:

SAIL’s net sales have almost doubled over the past four years to around Rs 40,000 crore. It has significantly improved its operating margin from 17% to 28% during the same period. At a time when companies are grappling with the credit crisis, SAIL has one of the lowest DER of 0.12 within the industry. High operating profit and low interest expenses have kept the company’s ICR at a very high level of more than 50. The company has also generated good returns on capital employed (RoCE), which have been more than 45% for the past three years. SAIL’s operating margin has come down to around 25% in recent quarters from the earlier 30%. This decline is mainly on account of higher salary expenses arising out of the Sixth Pay Commission recommendations.

GROWTH POTENTIAL:

The company plans to increase its saleable steel production capacity by around 80% in the next 2-3 years to 23 mt. It also plans to set up manufacturing facilities to produce more value-added products like galvanised coils, auto grade cold-rolled products, rails and rail wheels, among others. However, the company will maintain its current raw material strategy of being self-sufficient in iron ore and importing coking coal. The total investment for all these expansion activities is estimated at Rs 54,000 crore, which will be financed such that the company’s overall DER will remain at 1:1. SAIL has cash and cash-equivalents of around Rs 14,000 crore, which can be used for such investment.

RISKS:

The company has not expanded its capacity much during the last commodity boom cycle and is also less leveraged. The fact that its main market for selling its products is India — where the impact of the slowdown is less than that seen in developed countries — makes it less risky. SAIL also has huge cash reserves of around Rs 14,000 crore. The company’s only concern is the import of coking coal as a raw material. The price of this input has not declined as much as steel prices. Overall, the company bears less risk than many of its peers.

TO SUM IT UP:

The above-mentioned factors (less debt, cash reserves and domestic focus) make the stock relatively less risky. However, the second half of FY09 will be challenging for the company. The estimated EPS for FY09 works out to slightly above Rs 17 and translates into a P/E of 4.6. Though it doesn’t provide much upside in the short term, there doesn’t seem to be much downside either from the current level. The stock is a safe bet in the steel sector for risk-averse investors.

Sector View on Indian Steel Industry

KRChoksey Shares & Securities on TATA STEEL

The company’s EBITDA has increased by 43.68% Y-o-Y from Rs 2,733.4 cr to Rs 3,075.9 cr. While PAT has increased to 50.13% from Rs 1,488.4 cr to Rs 1787.8 cr. Other income has also increased by 152.72% which has led to increase in the profit margins. We recommend a buy on the stock despite the growth concerns purely on the basis of attractive valuations.

KRChoksey Shares & Securities on SAIL

SAIL’s net sales increased 34% Y-o-Y to Rs 12,238.59 crore in Q2FY09 as against Rs 916 3.49 crore during Q2Y08. EBITDAof the company registered a growth of 17% Y-o-Y to Rs 3,433.92 crore & PAT rose by 18% Y-o-Y to Rs 2,009.6 crore. The second half of FY09 is expected to present significant challenges in the metals sector, though the long term fundamentals of the company remains strong.

Geojit Financial Services on JSW STEEL

The company is among the largest Indian steel companies. It has now tied up with UK based Severfield Rowen to float an equal stake joint venture company for manufacturing construction steel. The net profit of the company has grown 44.72% from the June quarter to this September quarter. The P/E of the stock is 3.43 and the EPS (TTM) is at 70.89.

Geojit Financial Services on WELSPUN GUJARAT STAHL

Welspun Gujarat Stahl Rohren is the flagship company of Welspun Group. It is all set to be positioned as the world’s largest pipe company with an increase in capacity from 1 million ton pa to 1.75 million ton by March 2009. The debt-equity ratio at 1.21 shows that most of the assets are financed and it must set aside more money to pay the cost of borrowed money.

Emkay Global Financial Services on HEG

HEG will become number one manufacturer of graphite electrodes in India after its expansion from 60000 tpa to 80000 tpa by Q4FY09. We expect topline and PAT to have CAGR of 37% and 25% respectively for next two years. It is trading at 5.9x FY09E FDEPS of Rs21.2 and at 2.6x FY10E FDEPS of Rs48.8.

Emkay Global Financial Services on GODAWARI POWER AND ISPAT

Godawari Power’s iron ore pelletisation will commence in 2HFY10 while the iron ore mining will start from Q4FY09 which will translate into tremendous savings. PAT is expected to grow at CAGR of 47% GPIL trading at 1.6x FY09E FDEPS of Rs40.2 and at 0.8x FY10E FDEPS of Rs76.6, while on EV/EBITDA basis it is trading at 2.4x FY09E EV/EBITDA and at 1.2x FY10E EV/EBITDA.

Stock views on Nestle, Sun Pharma, Glaxo smithkline Pharmaceuticals, Castrol, BOC India, Godrej Consumer Products, Hindustan Unilever, Hero Honda

CADILA HEALTHCARE


Cadila Healthcare, one of the five largest drug makers in India, may have been the top performer (64.51%) during the bear run, but analysts are cautious on this low volume stock at current market valuation. They believe though the stock is a safe bet in the current environment, and has good domestic business, technically it looks weak below Rs 225.


HERO HONDA MOTORS


In the last nine months, two-wheeler maker Hero Honda has outperformed market expectations with volume growth of 11.1% year-on-year, against a flat growth of 1.9% for the rest of the two wheeler industry. The key reason for the over-achievement has been the company’s strong rural franchise, lower input costs, and lower discount offerings. In fact, the share of volumes from rural India has gone up from 40% a year ago to more than 50% at present. Though concerns remain over — less correlation to broader markets, falling interest rates and raw material cost — a major section of brokers are bullish on the scrip. What makes the stock attractive is the company’s significantly reduced dependence on financing with only 15% of the vehicles sold on finance. This protects the company against the current tight credit cycle.


HINDUSTAN UNILEVER


India’s leading fast moving consumer goods company, Hindustan Unilever (HUL) is expected to benefit from the sharp drop in commodity prices this year. HUL has been formidable in this space in the last nine months. The company, in fact, recorded its fastest growth in 10 years, growing volumes despite aggressive price increases. Currently, rural areas contribute 45% of HUL’s sales, which analysts feel will remain a strong growth driver in FY10. Although the stock is a defensive bet and has limited upside, analysts are positive on the business. The operating margin for the company is expected to improve in the quarters ahead as the benefits of lower material prices kick in. Even though the pace is expected to decelerate, HUL’s revenue will grow 15.6% y-o-y in the current financial year.


GODREJ CONSUMER PRODUCTS


Analysts count on Godrej Consumer Products to ride on its strong brand image in new markets following its acquisition of five companies in the hair care and personal care space. The sharp fall in palm oil prices, a key raw material in soap manufacturing, coupled with price hikes at the start of the year, believe analysts, will lead to margin expansion. A strong balance sheet is expected to enable organic as well as inorganic growth. The stock has low volumes, but looks technically strong.


BOC INDIA

BOC India, the arm of BOC Group, the second largest industrial gases company in the world, has recently won a 15-year gas supply contract from SAIL. The company plans to invest around Rs 500 crore in a new air separation plant and ancillary equipment to meet the growing demand for liquid products in eastern India. The stock, one of the star performers during last year, lies low on the wish list of analysts. Falling global demand of the product coupled with low volumes doesn’t make it a winning stock. Further, it looks technically weak and we will suggest investors to sell at every rally.


CASTROL INDIA


One of the best dividend paying stock, Castrol India has good numbers to boast of due to high volumes and improved price realisations. Analysts are neutral on this oil lubricant firm, though it can turn out to be a dark horse in 2009. The company’s sound business model and stable financials make it an attractive long term investment. Strong brand equity of Castrol products has enabled it to churn out good cash flows year after year. Even amid a decline in the automobile sector, analysts say the company’s lubricants will have a large potential market to tap.



GLAXOSMITHKLINE PHARMACEUTICALS


Analysts have a favourable recommendation for Glaxo smithkline Pharmaceuticals, which is one of the fastest growing players in this segment over the past few years. Better cost-effectiveness over the years have reflected in the company’s improved net profit margins. The margins have increased from 16.5% in 2003 to 25.3% in 2007. The pharma company has clocked a 10% growth in revenues at Rs 473.9 crore for the September 2008 quarter, as compared with Rs 428.7 crore in the previous corresponding quarter. Aggressive product launches this year, sitting on huge cash amount on books, strong domestic presence and attractive valuations makes it a company to watch out for.



SUN PHARMACEUTICAL INDUSTRIES


Sun Pharma has one of the low-risk business models among the Indian peers with a strong presence in central nervous system, pain management, ophthalmology, cardiovascular and respiratory segments. It is one of the fastest-growing companies in the domestic pharmaceutical market. Having facilities approved by the United States Food and Drug Agency for controlled substances in regulated markets, analysts feel the company has an edge in the niche controlled substances market. The high margin, strong earnings growth, low risk revenue model and strong balance sheet make it a good defensive bet. With no significant forex hedges, Sun is likely to reap major benefits of the sharp depreciation of the rupee against the US dollar.



NESTLE INDIA


Changing consumer preferences from unpacked/ unbranded foods to branded packaged foods is expected to provide the $70 bn Indian food processing industry a robust growth opportunity. According to analysts, Nestle, with its strong presence in milk and milk-based products, beverages, prepared dishes, chocolates and confectionery and baby foods segment, is the best play as it garners more than 90% of its revenues from domestic business. Nestle has a strong product portfolio with some of the best-known brands globally, such as Nescafe, Maggi, KitKat, Polo and Milo, which are amongst the top 50 brands in India. The company will also benefit from the sharp drop in commodity prices. The operating margin of the company is expected to improve in FY10 as benefits of lower raw material prices set in.

KRChoksey views on Sterlite Industries, Dishman Pharma, Mahindra Lifespaces, SAIL

Sterlite Industries - Target Rs 455
KRChoksey Research has recommended a buy rating on Sterlite Industries, with price target of Rs 455, in its report dated October 24, 2008. "At the CMP of Rs 208,65, Sterlite is trading at 3x based on TTM EPS of Rs 67.5. We expect Sterlite to continue to be impacted by lower EBITDA margins due to fall in base metal prices. However, the highly integrated business models in all the commodities and huge cash balances (Standalone cash level : Rs 7800 crore). Hindustan zinc is completely debt free company with Rs 9395 crore cash which translates to Rs 220 per share. We recommend a BUY on the Stock with a target price of Rs 455 which is an upside potential of 118% from the CMP," says KRChoksey's research report.

Dishman Pharma - Target Rs 247.60

KRChoksey Research has recommended a buy rating on Dishman Pharmaceuticals, with price target of Rs 247.60, in its report dated October 29, 2008. "In Q2FY09, the company’s sales have increased by 39.2% on a y-o-y basis to Rs 255.6 crore. The EBITDA for the quarter has increased by 41.8% to Rs 52.4 crore compared to Rs 37.7 crore, whereas the margins have increased marginally by 40bps to 20.9% as against 20.5% a year earlier. The net profit of the company declined by 90.1% y-o-y to Rs 2.8 crore against Rs 27.7 crore, due to MTM losses of Rs 30.01 crore in the quarter under review. At the CMP of Rs 139.6 the stock is trading at 8.9x, TTM EPS of Rs 15.7 and 6.5x FY09E EPS of Rs 21.6. We assign BUY rating to the stock with a target price of Rs 247.6, implying an upside potential of 50%. At the target price, the stock would be valued at 11.5 x FY09E EPS of Rs 21.6," says KRChoksey's research report.

Mahindra Lifespaces - Target Rs 394
KRChoksey Research has recommended a buy rating on Mahindra Lifespaces, with price target of Rs 394, in its report dated November 1, 2008. "At the CMP of Rs 187, Mahindra Lifespaces is trading at 8.3x FY09E EPS. The Company trading at a P/BV of 0.85 and has a comfortable balance sheet compared to its peers. It has a Net Debt/Equity ratio of 0.3x and also has a healthy Interest Coverage ratio 30.9. The company is trading below its book value per share of Rs 209. Both of Mahindra key SEZ are operational and the processing areas sold (100%in Chennai and 25-30%in Jaipur) which gives visibity to company earning and captive demand for the residential component in the segment. Looking at the strong growth prospects of all its verticals, we recommend a BUY with a target price of Rs 394, an upside potential of 111%. At the target price the stock would be valued at 17.5x FY09E EPS of Rs 22.52," says KRChoksey's research report.

SAIL - Target Rs 110

October 22, 2008. "Net sales increased 34% Y-o-Y to Rs 12,238.59 crore in Q2FY09 but volume growth declined by 16.1%. All its businesses - Heavy structurals, Pipes, TMT rounds, Plates, Tin plates showed healthy growth. Though the company exhibited 17% Y-o-Y growth in operating profit, its operating profit margins declined by 395 bps to 28.06% compared to 32.01% in Q2FY08. Margins declined mainly because of increase in raw material prices and employee cost which has gone up on account of salary revision due to implementation of 6th Pay commission. Net profit of the company increased 18% Y-o-Y to Rs 2,009.6 crore. Net profit margin dipped by 213 bps Y-o-Y from 18.55% to 16.42%."

"The company is currently trading at a forward P/E of 7x at our base case valuation which assumes average EBITDA margins of 24% and average realization of Rs 33,000/ton. We recommend a hold on the stock with a target price of Rs 110 which is an upside potential of 9%," says KRChoksey's research report.

Stock Views on ACC, Power Grid, Bank of Baroda, Steel Authority of India, Hindustan Construction, Reliance Industries

ABN Amro on ACC

ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So, demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industry much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-core businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply.

HSBC on Hindustan Construction

HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation

CITIGROUP on Power Grid Corporation

CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs.

Indiabulls Securities on Bank of Baroda

INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM.

MERRILL Lynch on Reliance Industries
MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations.

EDELWEISS on Steel Authority of India

SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.