Stocks you can pick up this week

KPIT Cummins
Research: Prabhudas Lilladher
Recommendation: Outperformer
CMP: Rs 587 (Face Value Rs 5)
12-Month Price Target: Rs 650

The company is set to achieve its targeted revenue of $100 million by FY07. From less than 10 customers a few years ago, to over 80 now, the company has done well in bagging some of the well-known names in the manufacturing and banking & financial services (BFS) verticals. It has also widened its scope in terms of service offerings — apart from IT solutions, it offers a variety of services such as consulting, engineering and business process outsourcing (BPO). The company’s revenue (at Rs 320 crore) and PAT (at Rs 32 crore) recorded a CAGR of 58.3% and 50.2%, respectively, between ’04 and ’06.

According to the company’s FY07 guidance, it is set to post a 34-40% growth in revenue and 51-61% growth in profit. Revenue for FY07 will be in the range of Rs 9.8-10.2 crore, while PAT will be in the range of Rs 1.1-1.2 crore.

Over the past eight quarters, the company has seen a 9% CQGR in revenue, primarily due to robust growth in volumes. Overall, the company’s future scenario appears to be fairly strong. At the current market price, the stock trades at 17.1 times and 11.6 times the expectations of its FY07 and FY08 earnings.

Provogue
Research: Karvy Stock Broking
Recommendation: Outperformer
CMP: Rs 380 (Face Value Rs 10)
12-Month Price Target: Rs 466

Established as a strong fashion brand, Provogue is now engaged in aggressively expanding its retail reach. Along with increasing its retail space, the company is increasing the number of store formats and product lines under the brand name ‘Provogue’.

It has also entered into multi-brand large format retailing under the brand name ‘Promart’. Leveraging on its retail expertise, the company’s wholly-owned subsidiary, Prozone, has adopted a business model to develop and actively manage malls.

The company has signed up six malls in tier-II cities, which are likely to be operational over the next three years. Prozone intends to bridge the gap between traditional property developers and modern retailers.

Liberty International, one of UK’s largest real estate companies with property investments of over £7.5bn, has entered into an agreement to take 25% stake in Prozone with an equity contribution of Rs 200 crore, thereby valuing Prozone at Rs 800 crore.

The DCF value for Prozone is estimated at Rs 130 per share. Valuing Prozone at Rs 130 per share, the core business of the company is available to Karvy at Rs 250, which is 14.8x FY08E. Karvy expect 51% EPS growth over FY07 and FY08. Based on 20x FY08E, the value of the core business stands at Rs 336 and DCF value of Prozone stands at Rs 130.

Thermax
Research: Edelweiss
Recommendation: Buy
CMP: Rs 367 (Face Value Rs 2)
12-Month Price Target: NA

Thermax’s Q2 FY07 results were in line with expectations in terms of revenues and above expectations in terms of profitability. On a consolidated basis, the company’s revenue grew by 21.2% y-o-y to Rs 520 crore. Sales from the energy segment grew by ~81% y-o-y, contributing 84% to the sales of the standalone entity in Q2 FY07.

EBITDA grew by ~140% y-o-y to Rs 72.1 crore, while net profit grew by ~147% y-o-y to Rs 53.7 crore on a consolidated basis for the quarter. The energy segment contributed ~90% and the environment segment contributed ~10% to the order book in the quarter.

On a standalone basis, the order book backlog was ~Rs 2,700 crore for Q2 FY07, with a similar breakup between the energy and environment segments as in the consolidated entity.

The consolidated order intake for the energy division was ~Rs 1,600 crore for the quarter, showing a growth of ~38% for Q2 FY07 and a strong growth ~179% for H1 FY07 y-o-y. With significant presence across various industry verticals, coupled with better operational efficiency than industry standards, Thermax remains one of Edelweiss’ top picks in the industrial machinery space.

3i Infotech
Research: Emkay
Recommendation: Buy
CMP: Rs 180 (Face Value Rs 10)
12-Month Price Target: Rs 232

3i Infotech has acquired 51% stake in US-based Professional Access for $12 million and will acquire the balance stake over two years. Professional Access specialises in the area of e-commerce for BFSI and retail segments. It has close to 500 employees with an offshore development centre in India.

It is a profitable company with PAT margin of 10% and annual revenue of $24 million. This acquisition will benefit 3i Infotech in the following ways: (a) Enter and penetrate the US market; (b) Tap large base of marquee clients such as Citibank, JP Morgan, Goldman Sachs and Duke Energy; (c) Access to global delivery centres and (d) Increase deal ticket size in the range of $5 million.

Rhyme’s acquisition will be EPS accretive for 3i Infotech from Q3 FY07 and Professional Access’ acquisition will be EPS accretive from Q4 FY07. With the continuation in growth, Emkay expects the company to post a CAGR of 60% in revenues and 60% in profit over FY06-08E.

Emkay expects forward EPS of Rs 14.3 and Rs 21 for FY07E and FY08E respectively. At current market price, the stock is trading at 13.1x and 8.9x FY07E and FY08E EPS respectively.

Usha Martin
Research: India Infoline
Recommendation: Buy
CMP: Rs 174 (Face Value Rs 5)
12-Month Price Target: Rs 228

Usha Martin posted strong results for Q2 FY07 with its performance improving on a sequential basis, while registering robust growth on a y-o-y basis. The sequential earnings growth was led by margin improvement, while the y-o-y earnings growth was driven by flattish interest, depreciation and lower taxes.

For H2 FY07, the company expects further improvement in operational performance with strong volumes and higher benefits from iron ore integration. The current FY07 valuations are similar to commodity steel makers like Tata Steel and SAIL, despite the company’s character of an alloy/special steel-maker, producing high value-added products like wires and wire ropes.

India Infoline feels the key reason for this is the company’s relatively lower margins, with lesser backward integration.

However, with increasing mineral integration over the next two years and relatively superior pricing power for its product portfolio, India Infoline expects significant upgrade in valuations. India Infoline believe the stock will trade at 7 times (factoring 0.5x multiple re-rating) FY08E EPS. i.e. Rs 228 one-year forward, representing 34% appreciation from current levels.