Bull's Eye

Bharat Electronics

Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 1,428 (Face Value Rs 10)
12-Month Price Target: Rs 1700

Bharat Electronics (BEL's) FY06 results were largely in line with the expectations, with net sales up 10.8% to Rs 3,560 crore. EBIDTA rose 19% to Rs 840 crore, on the back of 170bps improvement in EBIDTA margin, reflecting the company's sustained efforts at increasing indigenisation. Net profit rose 19.7% to Rs 580 crore in FY06. BEL's order book at a robust Rs 660 crore (1.5x FY07E sales), as at end FY06, reversed the declining trend of the last two years. Increased contribution of indigenously manufactured products coupled with a reduction in wage costs resulted in a 170bps improvement in EBIDTA margins. The company expects margins to remain stable, despite 10-15% expected upward revision in wages, which is due in January '07. In its civilian business, BEL bagged a major order (Rs 500 crore) from MTNL. BEL is exploring CDMA and GSM opportunities in telecom though consortium approach with OEM's. It has created a separate SBU to improve its market share and expects its civil business to revert to 20% of sales in FY07. Exports stood at Rs 61.1 crore and the company has set an ambitious target of Rs 110 crore in exports for FY07. During the year, the company has been granted patent rights for Electronic Voting Machines (EVMs) and Solar Traffic signaling systems. BEL foresees export potential for EVMs. BEL's management has guided for Rs 4,200 crore, Rs 5,000 crore and Rs 10,000 crore revenues for FY07, FY08 and FY12 respectively. Execution of orders from the army for upgraded versions of its existing radars coupled with anticipated orders for army guns will be a major revenue driver going forward. At the current market price the stock trades at an EV/EBIDTA of 8.5 times FY07E and 6.8 times FY08E, which is at a significant discount to industry average EV/EBIDTA of 16.5 times FY07E.

UltraTech Cement

Research: CLSA
Recommendation: Buy
CMP: Rs 772 (Face Value Rs 10)
12-Month Price Target: Rs 1020

UltraTech is the most favoured pick in the cement sector as it has the maximum leverage to cement prices. Additionally, it trades at 25% discount to other cement players on asset valuations. The company's efficiency improvement initiatives coupled will reduce the gap between UltraTech's Ebitda/MT and peers from nearly US$6/MT (33%) now to nearly US$2/MT (7%) by FY09. This improvement in asset efficiencies will drive a steady stock re-rating in asset valuation terms. Potentially, a sharp improvement in cement prices in south, post state elections, will be the nearterm trigger for the sector/stock. Significant potential for low cost capacity expansion UltraTech's current 17m MT of cement capacity can be ramped up quickly and at incremental cost of nearly $25/MT. UltraTech's current clinker capacity is 15.5m MT of clinker produce 19.5m MT of cement assuming the average industry conversion factor of 1.25x. To scale up to that, UltraTech needs to add grinding capacities which can be a potential quick and low cost capacity expansion, assuming that the company secures a source of fly ash. In the meanwhile, i.e., before FY09 - the cost saving initiatives will have a limited impact and the benefits will be restricted to conversion from clinker exports to cement sales. During FY06, the company has already reduced the clinker exports by half down to 9% of total volume. Also, potential increase in conversion factor to 1.25x as explained above will bring down per MT production cost by an estimated Rs3/bag. The stock currently trades at FY07 EV/MT of $136/MT or 25% discount to asset valuations to the other large cap cement stocks. The discount will be even larger if compared on the basis of clinker capacity as against cement capacity. CLSA believe that this discount will keep on narrowing as the company's EBITDA/MT improves from less than Rs400/MT now to more than Rs600/MT by FY08.

Coromandel Fertilisers

Research: Angel Broking
Recommendation: Buy
CMP: Rs 95 (Face Value Rs 2)
12-Month Price Target: Rs 125

Coromandel Fertilisers (CFL) is the second largest phosphatic fertiliser player in India and markets approximately 2m tonnes of phosphatic fertilisers. CFL also holds a 45.07% stake in Godavari Fertilisers & Chemicals (GFCL), which is a leading player of phosphatic fertilisers in Andhra Pradesh. CFL has been able to achieve one of the highest operating efficiencies with containment of costs and a raw material to sales ratio of 69.5% in the fertiliser industry where the raw material and fuel costs account for up to 80% of cost of production. CFL has entered into a strategic alliance with South African major Foskor. This would lead to improved availability of phosphoric acid to CFL, a major raw material highly in demand; and help the company to further consolidate its market position in South East coast of India. CFL has an excellent financial track record backed by an improvement in margins; with more than 20% CAGR in earnings during FY03-'06. Besides, CFL has one of the most favourable debt equity ratios of 1.9 amongst its peers. It operates in the phosphatic and complex fertilisers segments, which do not fall under the purview of controlled distribution, initiated by the Government, unlike nitrogenous fertilisers, thus benefiting the company. Considering the various initiatives taken to contain costs together with the ramped up volumes and improved customer focus coupled with bright industry prospects, CFL is expected to maintain the growth momentum. At the current market price, CFL is trading at 8.1 times FY2008E Earnings. Considering the combination of market potential and CFL's growth initiatives, Angel Broking recommends a BUY with a 12-month price target of Rs 125.

Glenmark Pharma

Research: ICICI Securities
Recommendation: Buy
CMP: Rs 340 (Face Value Rs 10)
12-Month Price Target: Rs 483

Glenmark Pharma unveiled two new chemical entities (NCE) last week at the Annual Investor Meet and exuded confidence of closing two out-licensing deals in FY07. Due to the delay in receipt of $34m R&D income, the company has not been able to meet its guidance in FY06; as a result, ICICI Securities revised the earnings forecast downwards by 7% for FY07E. Besides, the management has guided for net profit of $55-60m in FY07 and $70-75m in FY08, implying a CAGR of 85%. The company could earn potential R&D income of $34-54m over the next 12 months. Glenmark remains the best Indian play on drug discovery research and one of the top buys among midcaps in the sector. Glenmark unveiled two more promising NCEs: i) GRC6211 - a Vanilloid receptor (TRP V1) antagonist useful in the treatment of pain, migraine, incontinence and asthma, and ii) GRC10622 - a Cannabinoid (CB-2) receptor against useful in pain treatment. Currently, these compounds are at an advanced stage of pre-clinical studies and Glenmark expects to start Phase-I clinical trials for both NCEs by FY07. The company targets to have six NCEs in human trials by end of FY07. Over the next one-year, we expect the company to: i) outlicense GRC3886 (for the EU market) and GRC8200 (for the US, EU and Japan markets) ii) earn R&D income of $34-54m, and iii) make acquisitions in the EU and LatAm. The stock is trading at FY07E P/E of 17.4x on a consolidated basis.