Weekly Stock Recommendations

Bharti Airtel
Research: HSBC Global Research
Rating: Overweight
CMP: Rs 866

HSBC Global Research is bullish on the earnings outlook for Bharti Airtel and forecasts FY07-09E EPS CAGR of 41%. Bharti’s aggressive and sustained capex has led to significant geographic coverage advantage, which is driving higher market share and enabling Bharti to benefit from rural expansion.

HSBC upgraded the tower company valuation by 24%, reflecting a reduced emphasis on informal-bilateral tower sharing in favour of formal-contractual lease contracts with an independent tower company.

The increase in number of tower rental slots in Bharti’s independent tower company is the key driver for its higher valuation. But disclosure on the towers business is limited and HSBC has some reservations about using the recent Reliance Comm tower transactions as reliable competitors for Bharti’s tower assets.

Domestic telecom companies are well-positioned vis-à-vis the macro risks of rising interest rates and strengthening of the rupee. Downside risks are delay in release of additional spectrum, rapid drop in revenue per minute and aggressive global expansion strategy.

Bhel
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,750

Merrill Lynch is confident that Bhel will achieve the FY08 estimate for new orders worth Rs 37,500 crore ($9.4 billion), despite competition, translating into a backlog of Rs 71,400 crore ($18 billion).

Bhel won two orders worth Rs 6,500 crore from Damodar Valley Corporation for 2,000 mw in an international competitive bidding. This should drive its order backlog to a historic Rs 72,000 crore (3.4x FY08E sales).

Bhel won these two turnkey orders of 1,000 mw each — 2 x 500 mw each for Koderma TPS, Jharkhand and Durgapur Steel TPS, West Bengal. The combined value of these orders was $1.6 billion — 17% of FY08E inflows. Realisations at Rs 32.5 million/mw were healthy, considering the tax breaks and economies of scale.

As per on-ground research, Bhel has had a dream run with regard to the tenders that were opened in the past 16 weeks — it has beaten its Chinese, Czech and European competitors.

Bhel’s plans to expand capacity to 15 gw (+130%) by ’09 is on track and will be carried out at the existing locations with only 20% increase in work force, which should boost its competitiveness. The stock is likely to outperform on improved competitiveness, as the company addresses key concerns regarding Chinese competition and expects super-critical orders in ’07.

SAIL
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 146

Morgan Stanley remains ‘overweight’ on Steel Authority of India (SAIL). The company looks set for strong earnings improvement driven by aggressive brownfield expansion plans, as well as strengthening steel prices.

Morgan Stanley has increased its steel price assumptions, expecting: (a) steel prices in India to come out of the current seasonal lull in the next 2-3 months; (b) curtailed steel exports from China with the recent export-curbing measures initiated by the Chinese government; and (c) steel de-stocking in the US to end by mid Q4 CY07.

Morgan Stanley is projecting a production CAGR of 8.5% (9.6% previously) for the company in FY07-FY09, as the bulk of the enhanced capacity may start flowing in from FY10.

Steel prices exceeding the Street’s expectations, impact of volume growth & cost reduction initiatives on SAIL and strong quarterly results will be the stock catalysts. At a P/E of 6.2x and EV/EBITDA of 3.5x based on FY09 projections, the stock looks attractively priced in light of peer comparable multiples of 11.2x and 6.5x, respectively.

Vishal Retail
Research: Enam Securities
Rating: Outperformer
CMP: Rs 589

Enam Securities has initiated coverage on Vishal Retail with sector ‘outperformer’ rating. The company is a leading value retailer, which operates a chain of low-cost hypermarkets, focused on Tier-II and III towns and cities across the country.

Vishal Retail primarily caters to the bulging middle and lower middle class consumer bracket, which accounts for a bulk of India’s purchasing power. The company has also been successful in establishing a strong ‘customer connect’ with its offering of apparels, non-apparels and a variety of FMCG products.

It has established a pan-India presence with 53 stores, covering a total of 1.3 million sq ft of retail space. It has now embarked on an aggressive roll-out plan to reach a total of 81 stores covering ~2 million sq ft of retail space by FY08. Vishal Retail has differentiated itself with its strong focus on private labels manufactured in-house, and quasi-private labels sourced from low-cost manufacturers.

The company is now focusing on de-risking its business model by strengthening its management team and upgrading its technology and supply chain efficiencies. This will help support scalability and derive efficiency gains. At current market price, the stock trades at 20.8x FY09 earnings and EV/sales multiple of 1.1x.

GMR Infrastructure
Research: ICICI Securities
Rating: Buy
CMP: Rs 721

ICICI Securities has recommended a ‘buy’ on GMR Infrastructure, considering the strong cash flow generation post FY12-13, which will aid the company in its future projects. GMR, as a pure infrastructure developer, is suitably positioned to benefit from the strong growth envisaged in infrastructure spend via the public-private partnership route.

Among its existing projects, airports and the attached real-estate ‘sweetener’ contribute maximum value for the company. With orders exceeding $175 billion slated to flow in from key sectors such as power, roads and airports, the company’s opportunity-scape is expanding rapidly.

GMR has ~1,250 acres of prime real estate surrounding its Delhi and Hyderabad airports projects, where it plans to monetise value in the next few years. The Sabiha Gokcen airport win showcases GMR’s global ambitions. The company has witnessed a mixed trend in the power and roads sectors.

But going forward, it plans to bid for power projects with assured fuel linkages. With 21 projects (power and roads) in the bid/request for quotation (RFQ) stage and two announced wins, ICICI Securities expects potential upside in the stock. Apart from opportunity in domestic airport development, GMR is well-placed to explore airport projects globally, supported by its existing partners such as Malaysia Airports Holdings.

United Spirits
Research: Citigroup
Rating: Buy
CMP: Rs 1,319

United Spirits is one of Citigroup’s top picks in the FMCG sector. The company is best leveraged to capitalise on domestic consumption growth and young population profile. Citigroup expects strong demand for branded liquor and improving margins to drive 41% EPS CAGR over FY07-FY10E.

Historically, United Spirits’ earnings have been surprisingly positive, and there are ample levers for the company to continue to do so. Key positive surprise is likely on earnings of Whyte & Mackay (acquired recently) — the management has stated a guidance of £50 million EBITDA for FY08E, which could be beaten, given that scotch prices have continued to increase, post-acquisition.

The management has indicated that it is likely to pre-pay debt raised for the Whyte & Mackay acquisition. This could happen through a combination of sale of treasury stock and raising funds via a potential listing of Whyte & Mackay. An earlier-than anticipated debt pay-down will boost earnings and the stock price.