Hot Picks

Hero Honda Motors
Research: UBS Investment
Recommendation: Buy
CMP: Rs 853 (Face Value Rs 2)
12-Month Price Target: Rs 1,010

Over the past two months, the Hero Honda stock has declined 11%, against 10% rise in the sensex. While part of the underperformance may be a result of concerns on demand slowdown due to rise in interest rates and margin compression due to hike in raw material prices, a major part of the underperformance is due to the recent strike at Hero Honda's Gurgaon plant.

UBS Investment has upgrading the rating from Neutral to Buy. The strike by contract labourers at the Gurgaon plant was resolved in six days. The strike is unlikely to have any negative impact on the company's sales volumes in April and in FY07 as it has adequate pipeline inventory and has increased production at its other (Dharuhera) plant to compensate for production loss at Gurgaon.

UBS maintains the sales volume and earnings estimates for Hero Honda. UBS estimates already take into account the other risks faced by Hero Honda, i.e. entry of HMSI into executive segment and success of Bajaj's products.

UBS has factored in 1.5-2% market share loss for the company in FY07. However, the current valuations are over-discounting the negatives. UBS price target is based on DCF with WACC of 12%, medium-term growth rate of 12% and terminal growth of 5%.

Dr Reddy's Laboratories
Research: CLSA
Recommendation: Buy
CMP: Rs 1,481 (Face Value Rs 5)
12-Month Price Target: Rs 1,650

Dr Reddy's has received USFDA approval for generic Allegra and has launched the product as the third generic after Teva and Prasco. CLSA expects Sandoz to be the next generic in the market on or after June 9, '06.

This will give Dr Reddy's 2-3 months in a three-player generics market. For a $1.4-bn blockbuster, this should be a substantial opportunity (potential of 30-40% pricing and 15-25% marketshare). Dr Reddy's could generate Rs 7-14 of EPS from the opportunity in FY07.

CLSA expects Dr Reddy's to launch the authorised generic of Merck's Proscar in June '06. Cipla/Ivax are the 'real' generics which will get 180-day exclusivity on the product. Since Dr Reddy's authorised generic is contingent on other generics getting 180-day exclusivity, CLSA does not expect Dr Reddy's to get an upside from Zocor's authorised generic.

Zofran ($900m) is another wild card, for which Dr Reddy's could get potential 180-day exclusivity. It could also settle out of court with GSK and launch the product with 180-day exclusivity in December '06 (potential authorised generic).

CLSA continues to be ahead of consensus on the estimates and expects the stock to perform with consensus upgrades. With several near-term triggers like Allegra generics, Proscar authorised generics, as well potential upsides like Zofran's 180-day exclusivity, CLSA expects current valuations to sustain and raise their target to Rs 1,650 (23x Mar08EPS).

Andhra Pradesh Paper Mills
Research: Emkay
Recommendation: Buy
CMP: Rs 142 (Face Value Rs 10)
12-Month Price Target: Rs 224

APPM is part of the fast-growing paper sector that is expected to grow higher than 6% annually. Industry has already achieved a growth rate of 6% in FY05 and is ready to reap the benefit of strong GDP growth of ~8% and improving economic fundamentals of the country.

Low per capita consumption of paper at 5.5 kg in the country vis-à-vis average global consumption of 53 kg and 11 kg in the south Asian market indicates the scope for future demand growth of paper in the domestic market.

Further, upcoming elections in five states during the year will trigger growth for low-end paper. APPM's net sales are expected to grow with a CAGR (FY05/08E) of 15.2% to Rs 680 crore and PAT at 38% to Rs 66.7 crore. Sharp improvement in EBIDTA margins from 13.5% in FY05 to 26.2% in FY08E will gear up the EBIDTA by 196% to Rs 180 crore (Rs 60 crore in FY05).

EBIDTA margins expansion will lead to improved return ratios. Emkay expects RoCE to improve 13.7% (12.8%) and RoE to 15.1% (11.8%) by FY08E. APPM at current price is trading at 5.8 times EPS Rs 21.5 in FY07E and 4.4 times EPS Rs 28 of FY08E.

EV/EBIDTA of 6.2 times and 4.0 times of FY07E and FY08E, respectively, and P/BV of 0.7 times and 0.6 times respectively are very much favourable and indicates the potential upside for the stock.

In light of the quantum jump in EBIDTA margins and strong return ratios, Emkay values the stock at Rs 224 based on 8 times of FY08E earnings in 12-18-months period, i.e. 81% upside from current levels.

Historically, the stock has been traded at these levels. At Emkay's target price, the stock quotes at P/BV of 1.13 times of FY08E and EV/EBIDTA of 5.3 times of FY08E estimated earnings.

UTI Bank
Research: Angel Broking
Recommendation: Buy
CMP: Rs 344 (Face Value Rs 10)
12-Month Price Target: Rs 410

UTI Bank reported an overall strong performance for the quarter ended March '06. The bank registered a y-o-y net profit growth of 30.2% to Rs 152 crore in the quarter under review, beating expectation of Rs 129 crore.

UTI Bank's balance sheet continued to grow at a rapid pace, led by the strong growth in business volumes. The bank's balance sheet grew by around 32% to Rs 49,700 crore in FY06. Its net advances surged by around 43% to Rs 22,300 crore, led by strong growth in both corporate and retail advances.

Corporate advances were up 38.6% to Rs 15,800 crore, while retail advances witnessed a rapid growth of 55.1% to Rs 64,900 crore. Combined, they constituted around 29.1% of the bank's total advances. In retail advances, housing loans constituted around 41%, while auto loans made up around 39%.

The bank's strategy of Retail Asset Centres (RACs) has led the way for strong growth in its retail portfolio. It has retail distribution centres across 43 towns and cities and plans to extend the centres to additional 30 towns and cities.

UTI Bank's investment portfolio also registered a strong growth of 43% to Rs 21,500 crore. (Rs 15,000 crore). UTI Bank has leveraged on its widespread network and RACs to expand its low-cost deposits, retail portfolio and improve margins.

The bank has also maintained the robust growth in core business and balance sheet. At the current market price, the stock is trading at 16.1 times FY07E EPS of Rs 21.5, 2.4 times FY07E book value of Rs 143.1 and 2.5 times FY07E adjusted book value of Rs 136.8.