Analysts' picks

Bajaj Hindusthan
CMP: Rs 161.60
Target price: Rs 147

HSBC Global Research has maintained an underweight rating on Bajaj Hindusthan, reducing the target price from the earlier Rs 200 to Rs 147. “We reduce our earnings forecast for Bajaj Hindusthan as we believe that sugar realisations are likely to remain under pressure, and alcohol sales volumes should be lower than we had estimated.

This should lead to losses, as high fixed costs are likely to erode EBITDA margins,” says the brokerage in a note to its clients. HSBC has reduced EBITDA forecasts by 68% and 30% for FY07e and FY08e, respectively, due to high staff cost and other expenditures.

“We expect the company to incur losses for FY07e and thus reduce our EPS forecast by 115% and 45% for FY07e and FY08e, respectively,” it adds.

Incidentally, sugar realisation for the first half of FY07 for Bajaj Hindusthan was Rs 15,587 per tonne, which was 11.5% lower than the FY06 full year average realisation of Rs 17,576 per tonne.


SAIL
CMP: Rs 153.45
Target price: Rs 180

UBS has initiated coverage on SAIL with a buy 2 rating and has set a 12-month price target of Rs 180. The rating is based on the company’s ambitious capacity expansion plans and internal funding of the proposed expansion.

“SAIL’s $9.5-billion capacity expansion will be funded internally with no equity dilution. After completion, it will have the potential to expand margins for the business,” notes the report.

While the company is self-sufficient in iron ore and is in the process of negotiating and leasing new coal mines to feed the expanded capacity, according to UBS, SAIL’s key challenges include managing the impact of higher cost coal, for which it is dependent on third-party suppliers. “SAIL trades at 4.6x FY08E EV/EBITDA compared with the sector benchmark of 6.4x EV/EBITDA,” says the report.

However, UBS has not factored in any possible margin expansion at SAIL. “If SAIL receives mining lease approval from state governments for planned expansion, we think there is a possibility of higher operating margins.

SAIL will also upgrade its product mix, which should also deliver better operating margins,” adds the report

Cummins India
CMP: Rs 347.55
Target price: Rs 463

Credit Suisse has initiated coverage on Cummins India with an outperform rating after factoring in the MNC parentage, its strength in technology and leadership position in the Indian back-up power market. Cummins India is a 51% subsidiary of Cummins, USA.

Cummins India is the leading maker of diesel engines (in the 205-2,365 hp range), catering to the power generation, industrial and automotive markets. It also caters to the growing market for gas and dual fuel engines.

“We believe Cummins should be able to sustain at least a 25% CAGR in revenue and a 30% CAGR in net profit due to strong demand, especially in the domestic market. This is likely to be on the back of improving margins in the overall business mix,” says the foreign brokerage.

Credit Suisse has arrived at a valuation of Rs 463 based on a PE of 20 times FY09 based on the company’s consolidated earnings per share of Rs 23.2. “This is at a 15% discount to front-line engineering stocks such as BHEL and L&T,” adds the report.


Apollo Tyres
CMP: Rs 365.10
Target price: Rs 468

Religare has maintained a buy rating on Apollo Tyres on account of a major expansion programme aimed at enhancing its passenger car radials capacity. The company is also setting up an off-the-road speciality tyre facility.

While the total capital outlay for the expansion is estimated to be Rs 6.50 billion over the next four years, the company generates enough cash to meet this requirement.

“We expect the company’s expansion plans to keep revenue growth intact in the long term. We thus reiterate our buy call on the stock with a target price of Rs 468, representing an upside of 35%,” said the report in a note to its clients.

Incidentally, the company is setting up a Rs 4.50-billion radial tyre plant in Tamil Nadu and has already signed an MoU with the state government for the same. The plant is expected to go on stream by the second half of FY09.