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Tuesday, May 16, 2006

Sharekhan - Investor's Eye


Sundaram Clayton  
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs1,550
Current market price: Rs1,178

Br(e)aking new ground 

Key points 

  • Sundaram Clayton Ltd (SCL) would benefit from the buoyancy in the country's commercial vehicle (CV) industry. The shift from hydraulic brakes to air brakes expected in the CV industry augurs well for SCL.
  • WABCO, holding a 39.17% stake in SCL, is scouting for a low-cost producer of brakes in India and SCL would be the ideal choice. We expect SCL to become a major sourcing hub for WABCO and meet its global requirements of brakes and machined castings. Such an arrangement would increase SCL's business opportunities significantly. 
  • We believe that the much-awaited demerger of SCL is about to take place. A demerger would enhance the business focus of both the divisions and lead to the unlocking of the value of the company's investments in group companies.
  • SCL has introduced anti-lock braking systems (ABSs) in India. It would get a boost from the government's move to make the use of ABS in CVs mandatory from January 2007. Also, the margins in ABSs are higher than that in the conventional braking systems which should further boost the company's margins.
  • The value of SCL's total investment in group companies works out to Rs1,930 per share. While computing SCL's value, we have assumed a 75% discount to the company's total investment. After adjusting for this, the SCL stock is currently trading at around 8.8x its stand-alone FY2008E earnings and around 7.1x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We believe the valuations are attractive and hence recommend a Buy on SCL with a one-year price target of Rs1,550.

STOCK UPDATE

Wockhardt  
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs552
Current market price: Rs453

Wockhardt to launch ceftriaxone
Wockhardt has announced that it has received the approval of the US Food and Drug Administration (USFDA) to market the Ceftriaxone sodium injection in the USA.


SECTOR UPDATE

Cement  

Concerns overdone
In the wake of the continued rise in cement prices, in an unexpected move the government has intervened and asked cement manufacturers to reduce the price of cement. On Friday, the Commerce Minister Kamal Nath had given cement companies time till Monday (ie May 15, 2006) to decide on the pricing of the commodity. If their proposal fails to meet the government's approval, the government might come up with its own measures to curb the huge rally in cement prices. These may include the banning of cement exports and a cess on cement manufacturers. Meanwhile cement manufacturers are slated to submit a proposal by 6:00pm today. The government is of the view that the rise in cement prices has been much higher than the increase in the input cost.