Stocks you can pick up this week

Reliance Industries
Research:Enam Broking
Rating: Outperformer
CMP: Rs 1,254 (Face Value Rs 10)
12-Month Price Target: Rs 1,500

Reliance Industries’ revised field development plan for KGD-6 asset reasserts that its E&P business remains grossly undervalued. The FDP submitted factors in cumulative production of 11 TCF gas over 14.5 years (or a recovery rate of 22% over a 3 P reserves + resource base of 50 TCF).

As the consortium (RIL and Niko) intends to scale up gas-handling infrastructure capacity by almost 50% (to 120 mmscmd), it will lead to a significant increase in gas production. Netting of the ‘best case’ E&P valuations and investment portfolio from the current valuations translates into a payback of ~3.5 years for RIL’s core operations.

Niko expects production from MA-1 field to begin by ’08. A plateau production rate of 60 kbpd for 20 years could translate into 2 P reserves of ~1.4 billion bbl. Thus, the enterprise value of the oil field could be estimated at $7.5bn (or Rs 245/share), based on ONGC’s EV/BoE multiple.

At current valuations, assuming the ‘best case’ valuation scenario of E&P portfolio and market value of investment portfolio, RIL effectively trades at 3.5x FY07E EV/EBIDTA. This translates into a payback of ~3.5 years for the refining and petrochem assets, which are delivering value.

Gujarat Ambuja Cements
Research:CLSA
Rating: Buy
CMP: Rs 140 (Face Value Rs 2)
12-Month Price Target: Rs 142

Gujarat Ambuja plans to increase its capacity from 16 million mt currently to 21.5 million mt by December ’08 through a combination of greenfield expansions and blending of fly ash across seven locations. Increase in the ash content will account for 25% of capacity expansion.

Since conclusion of the monsoon, cement prices have moved up by Rs 6- 8 per bag (3-4%) at the retail level and the news flow on this front will remain positive. Holcim has recently bought the stock from the market at about Rs 139 per share.

As per a recent press interview with one of Holcim's directors, there are indications that the company may buy more stock. Gujarat Ambuja is the only large-cap cement stock without FII limit and remains one of CLSA's favourite picks in the sector.

IL&FS Investsmart
Research: Citigroup
Rating: Sell
CMP: Rs 207(Face Value Rs 10)
12-Month Price Target: Rs 161

The regulatory ban on opening new depository accounts has been lifted, but it has hit Investsmart hard. Management changes and transition to E*Trade suggests that the core businesses may remain in flux over the near term.

A fall in earnings reflects lower market volumes and market share, a shrunk margin book and slower investment banking. The worst is probably over, but the company does not appear positioned to benefit from any upswing yet.

E*Trade, which has raised its stake to 38% and is offering to buy another 20%, now appears positioned as a dominant shareholder. Over the medium term, this may drive strategy, positioning and growth.

But in the immediate term, this suggests transition. Citigroup believes the fundamental value is lower than the current price; supported by the expected open offer price of Rs 210. It recommends that investors should exit at the current price or during the offer period.

Tata Consultancy Service
Research: Ask-Raymond James
Recommendation: Buy
CMP: Rs 1,156 (Face Value Rs 1)
12-Month Price Target: Rs 1,350

Tata Consultancy Services (TCS) has been on a deal-winning spree. It has closed $500-million deals in 40 days. The management had mentioned in its Q2 FY07 earnings call that the deal pipeline looked robust, with the company pursuing five contracts above $50 million and another five worth about $100 million.

TCS is also in the final stages of five contracts above $50 million. Within a fiercely competitive environment, the company seems to have emerged as a winner in the large deals space. ASK-Raymond believes that there has been a structural change in the IT industry, with a marked polarisation towards larger players.

The stock trades at 29.1 times FY07E earnings and 22.1 times FY08E earnings. ASK-Raymond is revising its target price upwards to Rs 1,350 (25x FY08E earnings), from its earlier target price of Rs 1,240 (24x FY08E earnings).

Bombay Dyeing
Research: Motilal Oswal
Recommendation: Buy
CMP: Rs 725 (Face Value Rs 10)
12-Month Price Target: Rs 850

Motilal Oswal is upgrading price target for Bombay Dyeing to Rs 850, based on positive developments with respect to unlocking of hidden value from its two plants at Dadar and Lower Parel, Mumbai. There has been a significant increase in expected value accretion in its real estate at Dadar and Lower Parel.

Substantial changes in planned development have allowed the company to increase its developable area from 3.7 million sq ft at both its plants to 4.3 million sq ft — an increase of 16%.

Bombay Contrary to its earlier plans of selling a majority of its developable area outright, the company now plans to sell only 0.4 million sq ft at Dadar, while commercially leasing the remaining 3.9 million sq ft. This will be more value-accretive for the company.

Based on the SOTP valuations, Motilal Oswal arrives at the target price of Rs 850 per share, valuing the real estate rental business at Rs 615 per share, PV from sale of the Dadar property at Rs 101 share and its traditional businesses at Rs 134 per share.

Nucleus Software
Research: Sharekhan
Recommendation: Buy
CMP: Rs 558 (Face Value Rs 10)
12-Month Price Target: Rs 680

Nucleus Software Exports is a niche player offering software products to companies in banking and financial service. It has established itself globally with a product installation base of over 250 application modules in more than 30 countries.

The product business grew exponentially in FY06. It added 21 new clients and bagged orders for 38 new installations in FY06. In H1 FY07, it added 14 new clients; its order book stood at Rs 135 crore as on September ’06. Product revenues may grow at a CAGR of 67% over FY06-08.

Alliances with global technology giants could result in higher-than-expected order bookings. At the current price, the stock trades at 11x its FY08 earnings, which is relatively cheaper than its peers.