Stocks you can pick up this week

Sterlite Industries
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 542 (Face Value Rs 2)
12-Month Price Target: Rs 725

Sterlite plans to raise Rs 12,500 crore mostly for its commercial power venture, Sterlite Energy. The company has also filed a F1/preliminary prospectus with the US SEC for raising $2 billion.

The ADS proceeds will be used for the following: (a) A $41.9-billion investment in a 2,400-mw power project in Orissa through Sterlite Energy; (b) Acquisition of the government of India’s balance 26/29.5% stake in Hindustan Zinc — the value of which will be around $2.3 billion; and (c) Repay $50 million in debt.

The entry into the commercial energy business will be based on Sterlite’s existing strength of running the captive coal-based power plant for its aluminium smelters and zinc refinery. The existing power capacity of the company is 1,040 mw.

Sterlite Energy plans to build a 2,400-mw power plant in Orissa. Enam believes Sterlite is well-placed to benefit from additional funds that will be deployed for the new growth/high-return business — energy, with captive coal resources.

Apollo Tyres
Research: BRICS PCG
Recommendation: Buy
CMP: Rs 339 (Face Value Rs 10)
12-Month Price Target: Rs 475

Apollo Tyres has set a target of becoming a $1-billion (Rs 4,600 crore) company by FY07-end from its current turnover of Rs 3,000 crore, and plans to grow into a $2-billion player by ’10. It has charted out an aggressive growth blueprint, involving an investment outlay of Rs 600 crore over the next four years.

The management has set a target of doubling revenues to Rs 9,200 crore ($2 billion) by ’10. It is exploring organic and inorganic routes to achieve these objectives, and the recent acquisition of Dunlop Tyres, South Africa is in line with its strategy for growth. At the current market price, ATL is trading at 11.6 times EPS, 7.1 times cash earnings and 5.7 times EV/EBIDTA on 12-month forward basis.

Dunlop Tyres, at 10x CY07E earnings, works out to Rs 390 crore or Rs 77 per share of ATL. Excluding the fair value of Dunlop, ATL is trading at FY07E multiples of 8.7x EPS, 5.3x cash earnings and 4.5x EV/EBIDTA, which is almost 30% discount to the industry average.

Cranes Software
Research: Angel Broking
Recommendation: Buy
CMP: Rs 109 (Face Value Rs 2)
12-Month Price Target: Rs 125

Cranes Software started off as a distributor of third-party mathematical/scientific software products, and has since evolved to become a niche provider of such products to the global scientific and engineering community. The company has achieved this through its strategy of ‘acquire, enhance and expand’.

Through this evolution, Cranes now has a large addressable market in the region of around $40 billion, thus giving significant growth potential to the company going forward. Cranes enjoys one of the highest operating margins in the industry, at 54.5% (H1 FY07).

This is because the proportion of proprietary products in total sales has increased. Products enjoy significant operating leverage, and after recovery of associated fixed costs, all additional revenues flow straight to the profit before tax (PBT).

Gateway Distriparks
Research: CLSA
Recommendation: Buy
CMP: Rs 186 (Face Value Rs 10)
12-Month Price Target: Rs 215

Margins at Gateway Distriparks’ (GDL) Mumbai facility seem to be bottoming out with the start of the third container terminal. Additionally, the company’s attempts to geographically diversify are already visible, with the volume share of the Mumbai unit already dropping to 75% from more than 96% in FY05. JNPT CFS volumes and margins have now stabilised.

GDL’s container freight station (CFS) facility at Mumbai accounts for 90% of total profits and margins, and the facility has been under pressure due to competition from some of the new entrants. Margins dropped by nearly seven percentage points during Q4 FY06.

However, with the commencement of the third container terminal at the port, H1 FY07 volumes at the port grew by 21% y-o-y. Further ramp-up in the operations of the third container terminal will gradually remove supply overhang, improving margins, initial signs of which are already visible.

Garware Offshore
Research: Darashaw Equity Research
Recommendation: Buy
CMP: Rs 149 (Face Value Rs 10)
12-Month Price Target: Rs 200

Garware Offshore Services (GOSL) is in the business of providing offshore support vessels on a lease basis to companies involved in oil and gas exploration. The company’s only two clients are ONGC and British Gas.

Due to sky-rocketing oil prices, oil and gas exploration activities across the globe have seen huge investments. India, too, is encouraging public and private participation under its NELP policies.

Rise in exploration activities has made offshore industry very lucrative, with scaling demand for support leading to higher lease prices. GOSL is on an expansion spree. High debt-to-equity ratio is a growing concern.

At the current price of Rs 133, the stock is trading at a forward P/E of 10x and 6x of CY07 and CY08 earnings. Despite EPS growing at a CAGR of 48% over next the two years, the stock should trade at a modest P/E range of 14-16 due to its high leverage buyouts. Over a 12-month investment horizon, the stock can give returns of 48% with a price target of Rs 200.

Ranbaxy
Research: CLSA
Recommendation: Underperform
CMP: Rs 385 (Face Value Rs 5)
12-Month Price Target: Rs 320

Driven by poor organic profitability and a stretched balance sheet, Ranbaxy has underperformed the Sensex by 153% in the past two years. Cost-cutting initiatives and inorganic growth have contributed to a significant turnaround in profitability in CY06.

Future cost-cutting opportunities will be limited and a stretched balance sheet does not leave much room for further acquisitions. With 45% of the business being commoditised, Ranbaxy faces challenges in organic revenue growth.

Valuations on a price/sales basis may appear cheap at 2.3 times, but are not undemanding in comparison to global peers. Teva and Par Pharma trade at 2.7 times and 1.1 times respectively. Ranbaxy trades at a 50% P/E premium to Teva and valuations at 21.3x CY07CL are not cheap, given the low level of confidence in the company’s future earnings.

Expensing the interest on $440-million FCCBs will impact reported CY07 profits by 13%. Based on historical stock price behaviour, CLSA believes valuations based on price/sales may provide support at Rs 350 and provide a trading opportunity to play on news flows.