Stocks you can pick up this week

Hero Honda
Research: CLSA
Rating: Underperform
CMP: Rs 692 (Face Value Rs 2 )
12-Month Price Target: Rs 675

After a healthy 18% YoY rise during the nine months ended December ’06, the industry’s motorcycle sales growth moderated to 12% in January ’07. Hero Honda, which had reported a better-than-industry growth of 19% in January ’07, is also witnessing weakness in retail sales. This has led to an inventory build-up estimated at over one month of sales.

Considering build-up of inventory, as well as weak retail demand, CLSA expects Hero Honda may resume discounting. In early ’06, with market share under pressure, Hero Honda had initiated a Rs 1,000 discount (3-4%) on its motorcycles.

During the festive season (October-November ’06), the company had offered an aggressive incentive scheme (‘mobile on mobike offer’). These discounts were withdrawn in January ’07 and the company raised its prices. Hero Honda has already underperformed the market by a sharp 41% over the past one year, with a dip in earnings.

However, valuations, at 14.3x FY08CL earnings, are still not compelling, given lacklustre volume growth, potential downside to earnings from continuing margin pressures and entry of HMSI (Honda Japan’s 100% subsidiary) in the 100cc segment. Only higher returns on its cash surplus can provide an earnings upside.

Wockhardt
Research: Angel Broking
Rating: Buy
CMP: Rs 373 (Face Value Rs 5)
12-Month Price Target: Rs 550

During CY06, the company acquired Pinewood (Ireland) and Dumex India (along with two heritage brands, Protinex and Farex) in the European and Indian markets, respectively which helped the company to post 22.4% growth in sales.

During CY06, the domestic market reported a growth of 28.3% to Rs 676.4 crore compared to overall exports, which grew by 18.9% to Rs 1,052.7 crore. For Q4 CY06, Wockhardt registered a growth of 43.8% and 19% in sales and net profits to Rs 526.5 crore and Rs 87.2 crore, respectively, while the company registered a growth of 22.4% in net sales to Rs 1,729 crore in CY06.

But net profit fell 6.5% to Rs 241.2 crore. The decline in profitability was on the back of Rs 60.2-crore write-off booked by the company for its US business. Adjusting for the same, growth in net profit during the period was around 16.9%. At the current market price, the stock trades at 15.4 times CY06 and 9.2x CY07E earnings.

Unlike its peers, the company has focused more on its inorganic growth initiatives to ramp up its presence in regulated markets. Going forward, inorganic growth indicatives will continue to be a key growth driver for the company. However, at current valuations, the risk-reward in the stock is highly favourable. At the targeted price of Rs 550, the stock will trade at 14.8x CY07E earnings, at 20-30% discount to its large-cap peers.

IDFC
Research: ASK Raymond James
Rating: Buy
CMP: Rs 85 (Face Value Rs 10)
12-Month Price Target: Rs 107

The key concerns for IDFC’s profitability — poor visibility on fee income and non-scalability of high proportion equity gains — have been resolved, with new initiatives on its $5-billion fund and excellent performance by its first PE fund (unrealised gains of $250 million from three partial exits).

By FY09E, the proportion of fee income in non-fund income is expected to increase to 60%, from 40% in FY07E — thus, gradually replacing the volatile equity gains component of non-fund income.

The contraction of spreads on IDFC’s project finance business is an economic reality, given the strong upward bias in interest rates and competition from commercial banks. However, sustained robust demand in the infrastructure sector — gross disbursals are expected to grow by 23% CAGR over FY06-09E — will result in healthy NII growth of 34% CAGR over the period.

ASK Raymond introduces earnings estimates of Rs 7 per share (20% YoY growth, RoE of 20%) in FY09E, and upgrades its recommendation to ‘buy’ (from ‘hold’) with a 12-month target price of Rs 107 per share at P/ABV multiple of 3x for FY09E (increased from P/ABV of 2.5x for FY08E)

Reliance Energy
Research: Emkay
Rating: Buy
CMP: Rs 471 (Face Value Rs 10)
12-Month Price Target: Rs 646

Reliance Energy, through its 50% holding in REGL, has bought a 100% stake in the Rosa project. This 1,200 mw project will be implemented in two phases of 600 mw each, entailing a total investment of Rs 5,500 crore.

This project will be funded on a debt-equity ratio of 80:20, requiring an equity investment of Rs 1,100 crore, of which, Rs 550 crore will be invested by Reliance Energy, including Rs 275 crore as its share for the first phase of the project. During Q3 FY07, Reliance Energy increased its stake in RETL to 51%, making it a subsidiary.

This company currently has one Rs 1,800-crore project, that of Western Power Grid. Reliance Energy will contribute Rs 275 crore as its share of equity investment in RETL for this project over three years. Emkay has valued this project at Rs 9 per Reliance Energy share, which is the equity investment in the company.

Even though RETL is the L1 bidder, it has not yet been issued the letter of intent (LoI) and has not achieved financial closure. REL is scouting for power generating assets and coal mining operations in global markets. Any such buys will lead to higher returns from operational assets, enhancing its returns. Emkay has valued the company on a sum-of-the-parts basis.