Stocks you can pick up this week

Videsh Sanchar Nigam
Research: ICICI Securities (June 8, ’07)
Rating: Sell
CMP: Rs 451.15 (Face Value Rs 10)

Tariff pressure, coupled with declining market share in the voice segment, will affect VSNL’s domestic operations. The company’s international operations and new initiatives in the retail segment will continue to hamper profits in the near to medium term. ICICI Securities initiates its coverage on VSNL with a ‘sell’ rating and estimates that though its international presence and retail venture may provide impetus to the topline, it will hamper margins in the medium term. Competitive pressures, coupled with a decline in tariff, also will dent VSNL’s margins. Although the company has taken some initiatives on cost management, EBITDA margins could improve marginally from 12.2% during FY07 to 14% during FY09. Higher debt to fund capex on account of low profitability and high interest will keep the free cash flow under pressure.

ITC
Research: CLSA (June 7, ’07)
Rating: Underperform
CMP: Rs 150.70 (Face Value Re 1)

Itc has underperformed the market by 6% over the past 10 days following news that Uttar Pradesh (UP) is levying higher tax on cigarettes. The 32.5% trade tax levied by UP is not a big cause of concern as it merely raises the weighted average value-added tax (VAT) from 12.5% earlier to 13.7%. However, this raises doubts about whether other states will follow suit. While this is unlikely, given the spirit of the VAT regime, there is potential for more negative news. UP is one of the few states that has still has not joined the VAT regime. This regime was introduced to ensure a unified tax regime across states However, states always enjoy the power to change the tax rate on individual product categories in an asynchronous manner. UP’s example may embolden some of the rogue states to follow suit and raise taxes on tobacco. Hence, the worst may not be over for ITC.

NIIT
Research: Citigroup (June 7, ’07)
Rating: Buy
CMP: Rs 892.80 (Face Value Rs 10 )

The upswing in the domestic retail training business remains intact. NIIT’s quarterly result was lifted by strong growth in China. The company has raised fees for most of its courses — CATS by 8-15%, 3-year GNIIT by 18% and ANIIT by ~15%. The recently launched NetworkLABS has received good response and the company plans to roll this out in large cities during this fiscal. NIIT expanded its capacity by 18% during FY07 and expects to further expand capacity by 10-12% over the next two years. This capacity expansion supports Citigroup’s thesis of industry upturn as NIIT has expanded its capacity for the first time in the 4-5 years. The company looks well-positioned to benefit from growing concerns over the supply of talent. In this context, Citigroup expects strong business momentum in the retail training business in India.

Glenmark Pharmaceuticals
Research: HDFC Securities (June 6, ’07)
Rating: Buy
CMP: Rs 675.70 (Face Value Rs 2)

HDFC Securities expects the company to achieve remarkable growth in revenue and net income in coming years due to a strong research pipeline, which will fetch it high returns from out-licensing deals. At the end of FY07, the company had 13 products in the US market and 36 ANDAs pending approval. These will help sustain its growth in the US market. With acquisitions expected in central and eastern Europe, revenues will start flowing in from FY08. The changing business mix will also help improve its margins, going forward. Based on an estimated EPS of Rs 39.2 for FY08 and Rs 50.3 for FY09, the stock currently trades at a forward P/E of 17.4x and 13.6x, respectively. Looking at the company’s capabilities and strong business prospects, the stock is cheaply valued, as per HDFC Securities.

Strides Acrolab
Research: Kotak Securities (June 6, ’07)
Rating: Buy
CMP: Rs 329.55 (Face Value Rs 10)

Strides Acrolab (SAL) is engaged in the manufacture of ethical pharmaceuticals products, over-the-counter products and neutraceuticals. Its products include soft-gel and hard-gel capsules, tablets and dry and wet injectables. Kotak Securities initiates coverage with a ‘buy’ rating and estimates that revenues will grow by 25% in FY08, led by export growth. Operating margin is expected to improve by 370 bps due to improved product flow and higher capacity utilisation. The company has capex plans of about $30 million over the next two years. SAL’s focus on the HIV AIDS, TB and malaria businesses, its big product pipeline in soft-gel capsules and capacity expansion plans are its key growth triggers.

Aban Offshore
Research: Merrill Lynch (June 6, ’07)
Rating: Buy
CMP: Rs 2842.25 (Face Value Rs 2)

Merrill Lynch forecasts that Aban’s earnings will jump 18x in FY07-FY10E, driven by an expanding rig fleet and rising day rates. There may be upside risk to day rates and therefore, to earnings and valuation. The global rig market is in the midst of a recovery since ’04. The drivers are high oil prices, rising exploration budgets and no major additions to an ageing fleet. Rig utilisation rate has risen to 90% and day rates are at record levels. New rigs are being built, but incremental demand will still be twice the new supply up to ’08. Merrill Lynch expects Aban’s EPS to surge to Rs 499 in FY10E from Rs 27 in FY07E. Expansion of the rig fleet from eight to 20 by FY09E will be one of the company’s earnings drivers. The other triggers will be rising day rates on existing rigs under new contracts and on new high quality rigs being added to the fleet. An income tax holiday enjoyed by its Singapore-based subsidiary ASPL, will also boost earnings. All new rigs are in ASPL.

Gail
Research: ASK Securities (June 5, ’07)
Rating: Buy
CMP: Rs 294 (Face Value Rs 10)

The domestic natural gas supply scenario is expected to improve (more than 240 mmscmd) over the next three-five years. Gail has already entered into MoUs with RIL and ONGC for marketing and supply of natural gas. Gail’s pipeline business is a cash cow for the company. Citing the improving gas supply scenario, Gail has announced a Rs 18,000-crore capex to increase its pipeline capacity from the current 130 mmscmd to 360 mmscmd in 4-5 years. Cash flows from new pipelines are expected to contribute around Rs 65/share to Gail’s fair value, making it an attractive long-term bet. Funding the pipeline capex will not be an issue for Gail, considering its low 0.1x debt-to-equity ratio. Even after factoring this capex (0.1x debt/equity for FY09E), Gail will be comfortably placed to finance its additional capex (around Rs 7,000 crore) for the proposed Assam gas cracker complex (Rs 5,600 crore capex) and exploration and production (E&P) over the next five years.