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Monday, June 26, 2006
ET - Picks for the week
Reliance Energy
Research: JM Morgan Stanley
Recommendation: Overweight
CMP: Rs 469 (Face Value Rs 10)
12-Month Price Target: Rs 526
JM Morgan Stanley rated 'overweight' on Reliance Energy with a one-year price target of Rs 526. Reliance Energy (REL), part of the Anil Dhirubhai Ambani Group, is one of India's premier integrated electric utilities, owning over 700 MW of generation capacity and distributing power in Mumbai, Delhi and Orissa.
REL also undertakes EPC business, via a separate division, which constitutes 17% of REL's operating profit. The promoters own 53.8% stake in REL, foreign holding stands at 18.6%. With financial assets comprising over 50% of REL's total assets, ROE is depressed and non-operating earnings comprise close to 75% of stand-alone pre-tax net profit.
There has been little progress on the implementation of its big ticket projects over the past 12 months and REL has been neither able to deploy a sizeable proportion of its cash chest in high-ROE projects, nor has the company paid out a chunk of the cash to shareholders.
Further, performance in its Delhi distribution business has been lacklustre and EPC division earnings arguably remain a wildcard. All these developments are reflected in the stock's performance – over the past 12 months, the stock is down 25% in absolute terms and has underperformed the BSE sensex by 67%.
The price target for the stock includes the value of REL's existing utility business (Mumbai and other IPPs), EPC business, Delhi distribution business (BRPL & BYPL), and net cash valued at 1.3x book. JM Morgan Stanley assume REL will invest 50% of its net cash and 75% of returns thereon in projects that generate an 18% ROE (invested cash), while the remainder (idle cash) generates an 8% return.
GlaxoSmithKline Pharma
Research: HSBC
Recommendation: Neutral
CMP: Rs 1,006 (Face Value Rs 10)
12-Month Price Target : Rs 980
HSBC Global Research upgraded the rating from 'underweight' to 'neutral' with a target price of Rs 980 in a year for GlaxoSmithKline Pharma. HSBC believes that the benefits from restructuring exercise for GSK India may largely be over and may only contribute marginally to earnings growth going ahead.
However, it notes several positives on the product development front. Only 29% of GSK's India's product portfolio is currently under price control as of '05 as against c40% in '01. 'Power brands' identified as key drivers early on have grown at rates much higher than industry.
In-licensing of products from global pharma companies (at least seven launches since '03) has enabled GSK India to expand its therapeutic coverage from anti-infectives to the more profitable chronic therapies. However, HSBC lowers their revenue forecasts by 4% for 2006E and by 5% for 2007E.
The decline in the forecasts mainly stems from the proposed disposal of the animal healthcare business which is effective from '06. The proposed disposal of the veterinary business and the potential divestures of the remaining non-pharma business is a positive as the profitability for these businesses is well below that for the pharmaceutical business.
Among MNC pharma companies in India, GSK India is ahead in terms of clearly outlining its strategy for the Indian pharma market as well as delivery. Given the significant correction in the share price recently, HSBC revises the rating from 'underweight' to 'neutral'.
Dwarikesh Sugar
Research: IDBI Capital
Recommendation: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 230
Dwarikesh Sugar Industries (DSIL), a leading sugar player, has been rated 'buy' by IDBI Capital. DSIL is all set to capitalise on the demand supply gap in the international sugar markets through its aggressive expansion plan. It has ordered machinery for its third unit at Bareilly, UP, which will boost the total capacity to 21,500 TCD.
The proposed greenfield 7,500 TCD unit along with a co-gen plant of 36MW and additional 24MW cogeneration at Dwarikesh Puram, put together will cost the company around Rs.3,00 crore. The facility will be operational by the sugar season of '07-08. On account of the proposed expansion, the EPS is expected to grow to Rs 21.0 in FY07 and Rs.34.9 by FY08 from Rs.13.9 in FY06E.
Earnings are expected to expand further on account of the company's planned acquisition. The current market price discounts the FY07 EPS 8.9 times and FY08 EPS 5.4 times. The Indian sugar story has gone beyond the international boarders, as the international price has gone much above the domestic price owing to rising crude price and end of dumping by the EU.
Thus India is expected to emerge as a major international player in the sugar industry. With the combined effects of cost control measures, cane development, higher recovery and higher crushing the OPM (%) is improving year on year and is expected to stabilise at around 21% with the economies of scale arising out of expanded capacities, increased R&D and higher capacity utilisation.
Clutch Auto
Research: Emkay
Recommendation: Accumulate
CMP: Rs 120 (Face Value Rs 10)
12-Month Price Target: NA
Clutch Auto (CAL) is the largest maker of clutches and assemblies in the country with a market share of 60%. The company specialises in the heavy-duty segment which offers a decent scope both in the new as well as replacement market. CAL has tapped key players of the industry as its OE customers in the auto and tractor segments in India.
The exports of the company have been growing at a sturdy pace. CAL has entered into various agreements to market its products in the US and other international markets and has established a warehouse facility in the US to meet the growing demand. CAL exports to major American countries and expects to cater to more geographical locations.
Recently, CAL inked a JV with Pioneer - a leading US-based tractor component manufacturer to supply clutches and related components for the tractor market in the country. The American partner will supply products to original equipment manufacturers (OEM) as well as after market sales service through its 3,300 odd retail outlets across the North American market.
CAL supplies clutches to leading automakers in the country as well as abroad and its domestic clientele include prominent names like Tata Motors, Maruti, Escorts Tractors, M&M, etc. Clutches have a huge replacement market owing to the wear and tear of the hoses and plates.
CAL has penetrated across India and garnered a 30% market share in the replacement market. For FY06, the company has posted a 58% yoy rise in net sales to Rs 149.32 crore and margins remained steady at 15.9%. A lower tax and depreciation helped the net profit zoom 122% to Rs12.66 crore.
Exports contribution is on the rise and is likely to account for over 35-40% of the sales volume in the coming years. Factors like the recent ban on over loading is likely to aid growth in the CV industry and in return assist CAL's growth momentum.
The company is geared to improve performance both in the domestic and export markets over the coming years. Currently, the scrip is available at attractive valuations of 9.5x and 6.8x FY07 and FY08 estimated earnings respectively.
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