Stocks you can pick up this week

Tech Mahindra
Research: Enam Securities
Rating: Neutral
CMP:RS 1,640 (Face Value Rs 10)
12-Month Price Target: RS 1,721-1,748

Tech Mahindra’s (TML) recent $1-billion 5-year deal propels it into a high growth orbit. The order involves servicing the global external client base of BT Global Services (BTGS), a key business unit of British Telecom (BT).

The quantum of deal was higher than expected. The first year will entail investments and transition pains, which may result in lower margins. Revenues will scale up from the second year onwards. Based on the revised FDEPS estimate of Rs 65.5 for FY08E, Enam has assigned a higher P/E multiple of 25 times, largely to factor in the higher than industry average growth and better earnings visibility.

Material contribution from the present deal is expected from FY09 onwards. Given the recent outperformance and 3-5% price upside, Enam initiates coverage with sector ‘neutral’ rating. TML currently trades at 25.5 x FY08E FDEPS of Rs 65.5 and 17.1x FY08E EV/EBITDA.

Aventis Pharma
Research: Kotak Securities
Rating: Buy
CMP:RS 1,477 (Face Value RS 10)
12-Month Price Target: RS 1,643

Aventis’ focus on its strategic brands, successful mapping with its parent’s portfolio, strong presence in certain therapeutic areas, high brand recall among the medical fraternity and increasing outsourcing by the parent company continue to be the key determinants of its future valuation.

The company’s performance in its strategic brands is enviable. Kotak Securities expects earnings growth of 17% CAGR for the next two years. From ’08, Aventis is likely to launch patented drugs from its parent’s portfolio. However, more clarity on this is likely to emerge this year.

Aventis has about 60% of its total assets in liquid cash, which can be utilised for inorganic growth or acquisition of brands. Kotak Securities initiates coverage with a ‘buy’ recommendation with ’07 DCF-based price target of Rs 1,643. This implies an upside of 22% from the current level.

Info Edge
Research: Citigroup
Rating: Buy
CMP:RS 689 (Face Value RS 10)
12-Month Price Target:RS 750

Info Edge is poised to become one of India’s dominant internet companies. Its naukri.com is India’s leading online recruitment site; the company also owns the No 3 matrimonial site and an online real estate site.

Indo Edge is likely to be a key sector consolidator. Naukri.com dominates India’s online job market and has more than 20,000 corporate clients, over 7.5 million resumes and 120 million page views per month (twice that of its nearest competitor). India’s internet users have tripled since ’03 and should surpass 100 million by CY09.

Citigroup expects Info Edge’s revenues and profits to grow at CAGRs of 46% and 62% from FY06-09E, respectively. At 27x FY09E estimates, Info Edge is pricier than its regional peer group, which reflects a scarcity premium. However, it looks undervalued compared to its closest Indian peer, Nasdaq-listed portal Rediff, which trades at 52x consensus FY09E earnings.

Bajaj Hindusthan
Research: Karvy Stock Broking
Rating: Market Performer
CMP:RS 205 (Face Value RS 1)
12-Month Price Target:RS 235

For Q4 FY06 (standalone), Bajaj Hindusthan (BHL) reported a healthy revenue growth of 30.5% y-o-y to Rs 360 crore on the back of 81% increase in cane-crushing capacity. Revenues in the sugar segment grew by 30% to Rs 340 crore, while revenues from the distillery division grew by 100% to Rs 43 crore.

The total revenues were in line with Karvy’s estimates of Rs 360 crore. Operating margins declined by 495 bps to 14.6% due to higher raw material cost and increase in other expenditure. Overall, adjusted net profit declined by 31.5% y-o-y to Rs 38.2 crore, translating into an EPS of Rs 2.5 on diluted equity, against Karvy’s estimates of Rs 4.6.

For consolidated FY06, revenues increased by 77.2% to Rs 1,480 crore, while net profit grew by 31% to Rs 180 crore. At current levels, the scrip is trading at a P/E of 12.1x FY07 and 10.4x FY08 earnings.

Karvy Broking expects revenues to grow at a CAGR of 55% to Rs 3,560 crore and adjusted net profit to grow at a CAGR of 32% to Rs 320 crore in FY08. It is maintaining valuation at 11x FY08 and revising target price from Rs 305 to Rs 235.

Jindal Saw
Research: Anand Rathi
Rating: Outperformer
CMP:RS 382 (Face Value RS 10)
12-Month Price Target: RS 440

JSL is part of the $5-billion Jindal group and is the first company in India to manufacture saw pipes. It has two wholly-owned subsidiaries — HexaSecurities & Finance Company and Jindal Enterprises, USA.

The third subsidiary, IUP Jindal Metals and Alloys, is a joint venture between Jindal Saw and Imphy Ugine Precision, a division of Arcelor, France with 73% and 27% shareholding, respectively.

JSL plans to add about 200,000 MTPA of spiral pipe capacity to cater to the burgeoning oil & gas and water transportation sectors. It also plans to increase its seamless pipe capacity from about 100,000 MTPA to 250,000 MTPA by Q2 CY08.

As a result, the company will incur a total capex of about Rs 700 crore, including other projects during FY07E and FY08E. JSL’s strong order book position and its presence across all segments are expected to drive its topline.

The company’s earnings are expected to grow at a CAGR of 30% during FY06-08E. It is trading at a PER of 8.7x FY07E earnings and 7x FY08E. In terms of EV/EBITDA, it trades at 5.4x FY07E and 4.5x FY08E.

State Bank Of India
Research: Ask-Raymond James
Ratings: Sell
CMP:RS 1,244 (Face Value RS 10)
12-Month Price Target: RS 1,217

The net profit of State Bank of India (SBI) is expected to grow at a modest 11% CAGR over FY06-09E, led by net interest income (NII) growth of 8% CAGR and advances growth of 19% CAGR over the period.

Margin pressures may ensue from mid-FY08E on exhaustion of excess SLR and accelerated increases in deposit costs. SBI’s capital requirements are expected to increase on account of higher proportion of advances to total assets (shift from SLR) and Basel-II requirements, with risk weighted assets growing at 33% CAGR over FY06-08E (compared to 21% CAGR over FY03-06).

ASK-Raymond James values SBI’s parent bank at Rs 872 per share (1.65x core adjusted book value for FY08E) and the subsidiaries at Rs 345 per share (post-discount of 10%). Its return ratios are expected to remain lower than that of its peer banks due to slower earnings growth and accentuated capital requirements.