Cadila
Research: Kotak Securities
Rating: outperform
CMP: Rs 376 (Face value Rs 5)
Research: Kotak Securities
Rating: outperform
CMP: Rs 376 (Face value Rs 5)
Zydus Cadila has acquired a 100% stake in Nikkho, a mid-sized,privately held company in Brazil. Nikkho is generating profits andposted sales of $26 million in calendar year ’06. The acquisitionprice is around 1x sales, and seems to be attractive. This is Zydus’second oveRseas acquisition this year, after the one in Japan, and ispart of its global expansion strategy.
More such acquisitions arepossible in the medium term. For FY08, the estimated revenuegrowth is expected to be 18% and net profit growth, 25%. This acquisitionwill add about 5% to the company’s revenues. Kotak hasassigned an outperform rating to Cadila, with a DCF-based targetprice of Rs 420, or 17x FY09 earnings.
More such acquisitions arepossible in the medium term. For FY08, the estimated revenuegrowth is expected to be 18% and net profit growth, 25%. This acquisitionwill add about 5% to the company’s revenues. Kotak hasassigned an outperform rating to Cadila, with a DCF-based targetprice of Rs 420, or 17x FY09 earnings.
Reliance Communications
Research:HSBC
Rating: Outperform
CMP: Rs 517 (Face Value Rs 5)
HSBC believes that it is time to update/upgrade its estimate of thevalue unlocked by Reliance Communications’ (RCOM) balancesheet, following the planned spin-off of its telecom tower and undeRseafibre optic assets. RCOM will be the fiRst operator to monetisetower assets via a strategic investment by private equity playeRs/tower operatoRs. The company acquired its FLAG undeRsea fibreoptic unit in ’04 and is well-positioned to benefit from the globalre-rating of fibre, following the listing of FLAG on London’s AIMlater this year.
In a May ’07 initiation report, HSBC valued RCOM’stower business at $4.8 billion or Rs 97 per share, based on 12,000toweRs. It has since updated its tower valuation, based on the15,000 toweRs the company currently has in place, thus raising valuationto $5 billion or Rs 102 per share. The target price for thestock has now been upgraded from Rs 624 to Rs 644.
Tata Steel
Research: Macquarie Research
Rating: Outperform
CMP: Rs 597 (Face Value Rs 10)
Tata Steel’s recently acquired subsidiary, Corus, has announced a7% hike in UK wire rod prices for deliveries beginning in July.Corus has been increasing prices across product segments sinceFebruary this year. Macquarie has assumed a year-on-year increaseof 3% in average realisations for FY3/08 for Tata Steel and Coruscombined. Prices remaining at current levels could add Rs 9 to theFY3/08 EPS estimate.
Tata Steel trades at a rights-adjusted PER of5.4x its FY3/08 EPS estimate, which represents a 43% discount toAsian steel stocks Macquarie believes that this steep discount is unwarranted,given the margin expansion and strong growth that isprojected for the company. It strongly reaffirms its outperform recommendationwith a target price of Rs 800.
Ranbaxy
Research: CLSA
Rating: Outperform
CMP: Rs 355 (Face Value Rs 5)
While CLSA maintains an outperform rating on the stock, it has downgraded its target price for the stock from Rs 445 Rs 405. CLSA believes that even though there have been visible improvements in cost control in both selling, general & administrative (SG&A) and research& development (R&D), organic growth remains a challenge and aweak balance sheet limits its ability to grow inorganically. A 10% appreciationin the rupee vis-à-vis the dollar will result in a strong secondquarter (expected profit of more than Rs 300 crore), as well as an8% upgrade to CLSA’s CY07 estimates due to the translation gains on$600 million+ ECB/FCCBs.
However, CLSA is concerned about a potentialstructural downward shift in margins if the rupee remainsstrong and is downgrading its CY08/09CL estimates by 12%, assuming that the rupee trades at 42 to a dollar.
LIC Housing Finance
Research: SBICAP Securities
Rating: Buy
CMP: Rs 206 (Face Value Rs 10)
SBICAP believes that LIC Housing Finance (LICHF), the second largest non-banking housing finance company (HFC), is a serious long-term player in the business and deserves better valuations.The industry offeRs great potential for growth, given Indian demographics.LICHF will be able to reap benefits with its marketingnetwork and enhanced operational set-up. SBICAP expects thedisbuRsements for LICHF to witness a compounded annual growthrate (CAGR) of 22.5% over the next three yeaRs, against 11.7%CAGR witnessed in the past three yeaRs. It believes that the restructuringof business processes and improvement in credit qualityundertaken by LICHF will also pay dividends.
At the currentmarket price of Rs 193, the stock is trading at 5.7x (FY08E) and4.8x (FY08E) its earnings and 1x (FY08E) and 0.8x (FY09E). Thecurrent valuations do not fully reflect the growth potential of theindustry and the company. With expected return on equity (RoE)at around ~17.5% and return on assets (RoA) at ~1.4% over thenext couple of yeaRs, SBICAP believes that the stock deservesbetter valuations.
Union Bank
Research: CLSA
Rating: Buy
CMP: Rs 212 (Face Value Rs 10)
Union Bank of India is the fifth-largest state-owned bank. Itranks in the top tier on all operational measures with 30% earningsgrowth in FY08CL and has one of the highest FY09CL returnon equity (RoE) at 21%. With the non-retail sector accounting formore than 75% of its lending, Union Bank is a key beneficiary of rising corporate credit demand. With the management strategicallyreducing its lending to large corporates and focusing on thesmall & medium enterprises (SME) segment, CLSA expects marginsto expand by 4-7 basis points over the next two yeaRs.
UnionBank trades at a 20-25%discount to its peeRs like Bank of Indiaand Canara Bank. CLSA believes that while it has underperformedin the past year, given earnings growth in excess of 30% in FY08and high RoE of 20% in FY08, Union Bank could trade up to 1.2-1.3x one-year forward (FY09CL) adjusted book, with a pricetarget of Rs 180.
Cairn India
Research: Citigroup
Rating: Buy
CMP: Rs 146 (Face Value Rs 10)
Citigroup has set a target price of Rs 185 for Cairn India, based ona 15% premium to net asset value (NAV) of cash flows and recoveryand exploration upsides. Cairn India’s owneRship of valuable oil reservesin Rajasthan should generate steady cash flows from ’09, besideshaving the potential to generate further upside from enhancedoil recovery (EOR) and exploration.
Cairn India’s valuations areamong the most highly leveraged to crude among global exploration& production (E&P) peeRs, offsetting inherent operationalrisks. Key risks include delays and cost overruns, unfavourable rulingon cess liability being higher and potential conflict of interestarising out of Cairn’s majority owneRship in Cairn India, especiallyin the context of the new exploration assets in the country.