Stocks you can pick up this week

Welspun India
Research: Merrill Lynch
Rating: Buy
Current Market Price: Rs 64

Fundamentals of Welspun remain intact despite the rupee’s appreciation. The negative impact has already been factored in as the stock has corrected more than 20% over the past few months. Merrill Lynch has revised the earnings estimate on the back of growth in volumes, both for towels (27%) and bed linens (40%).

For India, home textile exports seem to be performing better than apparel exports. This is visible from the strong performance in home textile exports to the US, compared to apparel exports. Keeping in mind the strong underlying growth potential and relatively better pricing power to weather the rupee storm, Welspun is fairly priced at an estimated P/E of 11x FY08 and 0.8 P/B. The company will save power cost as it has shifted to gas-based power for its Vapi facility. The Christy manufacturing facility is being shifted to India, the benefits of which will be onstream from FY09.

Jet Airways
Research: HSBC
Rating: Underweight
Current Market Price: Rs 795

The March ’07 results were not as good as expected. Quarterly performance was inflated by including the whole year’s export credits received from the Indian government. Stripping this out, recurring earnings fell 30% to Rs 39.8 crore and were 40% below forecast.

Even after adjusting out export credits, EBIT and EBITDAR both fell YoY, gross domestic yields per available seats per kilometre (ASK) were flat and excluding surcharges, were down 14% YoY. International routes finally broke-even, almost two years after Jet’s expansion. However, HSBC doesn’t expect this to last. It has reduced FY08 forecast to reflect these risks. It estimates tangible book value per share will collapse to Rs 142 in FY08. It says that the current price levels imply that Jet can grow its EBIT at a 23% CAGR after its earnings recovery in ’10, which is unrealistic.

UTV Software
Research: Prabhudas Lilladhar
Rating: Buy
Current Market Price: Rs 509

UTV Software expects its movie business segment to report revenues in the range of $50-55 million for FY08, with EBITDA margins close to 30% for the segment. Based on the performance of recent movie releases and guidance provided by the company, Prabhudas Lilladhar has revised upwards its estimates for UTV. It expects UTV’s earnings to witness a CAGR of 98% over the next three years.

At the current market price of Rs 526, UTV Software is trading at a price-to-earnings multiple of 13.9x FY10 estimates. The company has raised $77.3 million on AIM for financing the cost of production and working capital requirements of 30 movies.

Reliance Industries
Research: ABN Amro
Rating: Sell
Current Market Price: Rs 1,711
ABN Amro has downgraded RIL to a sell on account of aggressive valuation of its E&P assets. RIL’s EEPS of Rs 100-113 over FY08-10 shows a growth of just 6% p.a. ABN Amro’s FY10 estimates are 26% below consensus on account of its cautious view on refining/petrochemicals margins and assumption of an appreciating rupee (Rs/$ will average 41 in FY08, 39.35 in FY09 and 38.40 thereafter).

The KG-D6 oil and gas production is expected to start from Q2 FY09, with oil production averaging 25,000 b/d in FY09 and 50,000 b/d in FY10. If the court order on KG-D6 gas is enforced, EPS in FY09 and FY10 may drop by 10% and 22%, respectively. The Reliance Petroleum (RPL) refinery could begin operations in H2 CY08, but commercial production will commence only from April ’09. The Singapore GRM is estimated to fall to $5/bbl in FY10, from $6.1/bbl in FY07. Petrochemical margins should remain healthy for the next 12 months, but a sharp downturn looks inevitable by ’09-10, as most new Middle East projects (ex-Iran) are on track.

Saregama
Research: ICICI Direct
Rating: Outperformer
Current Market Price: Rs 326

Saregama is set to script a turnaround, piggybacking on the emergence of new entertainment media. It has diversified into digital music, internet radio and online music sales. With a new management and more focus on new income streams such as FM and mobile ring tones, Saregama’s film and home video division will contribute handsomely, following key tie-ups with big international studios. Re-entry into the film distribution and production space and 14 hours/week of TV content production will drive growth for the non-music segment.

Given the robust growth in the high-margin business like publishing and home video, coupled with effective utilisation of the music library, ICICI Direct expects Saregama to command improved valuations given its high earnings visibility. At the current price of Rs 302, the stock trades at a P/E of 21.15x FY08E EPS of Rs 14.28 and 16.77x FY09E EPS of Rs 18.01.

Wipro
Research: ICICI Direct
Rating: Hold
Current Market Price: Rs 519

AT the current market price, the stock trades at 23.2x FY09E EPS of Rs 23.2, which factors in the impact of a strong rupee. Wipro has acquired a number of firms in FY07 to add domain expertise across a number of verticals.

The benefits of these acquisitions will accrue going forward, aiding volume growth and pricing power. The company will be impacted by the current strength in the rupee, which is evident from ICICI Direct’s EPS estimates derived from a rupee-dollar rate of 40 in FY09E. Margins could fall by 445 bps in FY08E and by 155bps in FY09E, with the company’s current state of operations. However, it’s too early to ring the alarm bells.

The rupee impact will be offset by reduction in average employee costs by employing more freshers, increasing utilisation, a growing non-ADM (non-application development & maintenance) business portfolio with higher margins, and maturing BPO practice building strong domain-specific, platform-based solutions that will drive realisations.

Kamat Hotels
Research: Tower Capital & Securities
Rating: Buy
Current Market Price: Rs 180

Room demand is growing at a rapid pace of 13% YoY. Tower Capital expects the pick-up in average room rates (ARRs) and occupancy rates (ORS) to continue at least till FY09. Kamat Hotel’s blended ARR will rise at a CAGR of 21% from FY06-FY09E. This, coupled with the expansion in both properties, will add to the bottomline.

By ’10, the company plans to increase its room capacity by 223%. KHIL is envisaging management of eight properties that will provide better visibility in earnings from FY09. Revenues are expected to see a CAGR of 35% and PAT a CAGR of 41 % during FY06-FY09E. At 10x FY09 FDEPS, it is a good buy, which Tower Capital believes is conservative, taking in account the huge growth, healthy margins, peer comparison and cyclicality of the industry.