Citigroup Reports

Mahindra & Mahindra (MAHM.BO): Maintain Buy: Raising Target Price

* Raising estimates, target price — Raising target price to Rs1,032 (from Rs702) as we are raising cash earnings by 9-10% over FY07E/09E, and factoring in higher subsidiary valuations (run up in Tech Mahindra's share price). We value M&M on a sum–of–parts methodology, core value at Rs543/sh (11x FY08E cash EPS) and Rs489/sh (for subsidiaries and the auto component initiatives).
* Continued dominance in tractor market — M&M has consolidated on its dominant presence in the domestic tractor market – current market share is around 30%, through greater focus on the sub 30hp segment (traditionally a weaker segment for M&M). We contend that M&M might further consolidate its leading position in the tractor industry through inorganic initiatives.
* Recouping market share in core UV business — M&M has recently recouped nearly 9% market share in the UV segment (market share currently at 53%), due to performance of the Maxx pick-up variant it launched in Sept 06. We expect M&M's core auto volumes to post a 10% CAGR over FY07E-09E. Operating leverage benefits should continue, mitigating material cost pressures.
* New initiatives gain momentum — M&M's Renault JV will launch the Logan in 1QFY08; JV with Navistar should be operational in mid CY08E. Both JVs have enhanced scope and scale of operations. M&M's auto components initiative (Systech) is ahead of its schedule of attaining its USD1bn revenue target (given recent acquisitions in Germany, with more on the anvil).

National Aluminum (NALU.BO): Changing Forecasts: Commodity Price Revisions, Duty Cut

* Changing forecasts — Following the recent duty cuts and the upward revision to our near-term global price forecasts, we have adjusted our EPS estimates for FY07E by +5%, FY09E by -4% and FY08E is unchanged. Target price unchanged at 8x FY08E EPS – at the top end of the 6-year P/E band of 6-8x.
* Global commodity team raises near-term forecasts — Our global commodity analyst, Alan Heap, has raised 1HCY07 price forecasts by 9-10% for alumina and aluminium. This is on the back of strong Chinese demand, and a large speculative long position (expected to last until April).
* Import duty cut for aluminium — The impact of the increase in our near-term international prices has been offset by the recent reduction in import duty rates, especially for FY09E. Import duty on aluminium was reduced from 7.5% to 5%. Producers responded with a price cut of about 2% taking prices to about Rs135,500/t. The current landed price is higher at Rs139,000/t.
* Spike in spot alumina helps FY07E — Our FY07 forecasts incorporate the results for 9MFY07. We have also accounted for the jump in spot alumina prices from US$200/t to around US$350/t due to the general strike and subsequent martial law declared in Guinea, the world’s second-largest bauxite producer, which will likely help support spot alumina prices in the near term.
* Reiterate Sell — Based on our global outlook of falling international prices for alumina and aluminium, we expect a yoy fall in margins and earnings in FY08 and expect Nalco to underperform. Sell/Medium Risk with Rs206 target price.

Flash: ABB(India) (ABB.BO): Buy: Another Strong Quarter, PAT Up 43% YoY

* PAT up 43% YoY — ABB (India) 4QCY06 PAT at Rs1.35bn (up 43% YoY) was 7% ahead of CIR estimate of Rs1.26bn on faster execution of orders leading to net sales of Rs14.3bn, which was 5% ahead of CIR estimates. CY06 PAT of Rs3.4bn (up 56% YoY) was 3% ahead of CIR estimate of Rs3.3bn.
* Strong order inflow momentum — ABB (India) booked Rs14.1bn (up 40% YoY) of fresh orders in 4QCY06, ending the year with an order backlog of Rs33.7bn (up 60% YoY). In CY06, the company booked orders worth Rs56.2bn (up 50% YoY). Strong industrial growth and power capex imply future order inflows.
* Power capex: stronger for longer — The power capex cycle will be stronger for longer as the first concrete numbers of the Ministry of Power’s (MoP) generation targets for the XIIth Plan (FY12-17E) at 86.5GW has started trickling in, implying that capacity addition targets in the 10 years from FY07E-FY17E is likely to be 153.5GW, up 89% vis-à-vis that in FY97A-FY07E
* Peak utilizations drive corporate capex — India’s industrial capex is set to take off driven by (1) a strong macroeconomic tail-wind, (2) peak industry utilizations and (3) strong corporate balance sheets. According to CRISINFAC, industrial capex is set grow 181% in FY06-10, up 181% over that in FY99-FY05.
* Maintain Buy/Low Risk rating —Our target price of Rs4,400 is based on a P/E of 34.7x FY08E which is a ~50% premium to BHEL, in line with the premium over the last 3 years.

Hindalco Industries (HALC.BO): Sell: Cutting Back Our Target Price

* Worse position; weaker earnings — We are lowering our target price to Rs137 based on: 1) lower FY08E P/E of 7x given its higher risk profile, high gearing and lower margins from the Novelis acquisition; and (2) lower forecast earnings due to the recent import duty cut. This negates our upward aluminium price revision, higher profits from Aditya Birla Minerals, and higher investment value.
* Novelis: strong markets but low margins — Hindalco’s proposed acquisition of Novelis gives it a 19% share of the global sheet market (~3mn tpa of capacity), and high-end technology. However, Novelis reported a 9mCY06 net loss of US$170m due to the inability to pass on higher metal prices (price ceiling on can sheet sales in North America) and higher energy and transport costs.
* High acquisition cost — Novelis has been valued at US$6bn, including US$2.4bn of debt. The acquisition is at a significant premium to Hindalco’s valuations. Also the additional debt and sale of investments (US$450m) will raise consolidated interest costs substantially and reduce other income.
* Raising commodity forecasts — We are raising our 1HCY07 alumina and aluminium price forecasts by 9-10%. This is on the back of strong Chinese demand, and a large speculative long position (expected to last until April).
* Higher profits forecasted at ABML — We incorporate newly released forecasts for Aditya Birla Minerals (51% subsidiary), suggesting a 10x jump in FY08 PAT.
* Reiterate Sell — Based on this and our global outlook of declining aluminium prices and copper TC/RC margins, we maintain Sell.

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