Stock Recommendations

Thermax Reco price: Rs 611 Current price: Rs 635 Target price: Rs 740 Broking firm: Reliance Money

Engineering major Thermax’s order balance as on June 30, 2007 remained at Rs 2,726 crore compared to Rs 2,449 crore for the corresponding period last year.

The research firm believes that strong capex announcement made by user industries such as cement, steel, chemicals, textiles and oil and gas would continue to drive the order book of Thermax.

At the recommended price of Rs 611 the stock traded at a price-earnings multiple of 28 times and 22 times on Reliance Money’s estimated FY08 and FY09 earnings respectively.

Although the stock is trading at high price-earnings multiple, Reliance Money remains positive on the it mainly because of the growth prospects and growth in its user segments.

The firm estimates Thermax to report compound annual growth in net sales and net profit of 33 per cent and 34 per cent respectively over FY07-09E.

Thermax’s return on equity is also expected to go up from 28 per cent in FY06 to 38 per cent in FY09E. Reliance Money recommends investors a BUY on the stock with a price target of Rs 740.

HDFC Reco price: Rs 1986 Current price: Rs 1976 Target price: Rs 2406 Broking firm: Enam

Enam believes that HDFC offers the best mix of growth, quality and returns. Its loan disbursements are up 29 per cent annually for the last ten years and 42 per cent since inception with gross non-performing assets (NPAs) at around one per cent.

Over this period, ROE doubled from 16 per cent in FY97 to an estimated 31 per cent in FY07. Despite rising interest rates there was no pressure seen on growth or profitability with spreads likely to be maintained at over 2 per cent. The sector too has potential.

Mortgages remain under penetrated despite having moved up to 9 per cent of GDP against around 2 per cent five years back. Banks have started going slow on the mortgage business, which will help HDFC and affordability is far better– average cost of house to annual gross income is at about 5 times against 15-20 times a decade ago.

HDFC’s investment in the insurance business is estimated at Rs 826 per share. Net of the value of investments, at the recommended price HDFC quotes at 3.2 times estimated FY09 book value and 13.2 times estimated FY09 earnings. Enam maintains a sector outperformer rating and has given a target of Rs 2406.

Unitech Reco price: Rs 242 Current price: Rs 241 Target price: Rs 315 Broking firm: Motilal Oswal

Unitech is shifting focus to emerging profitable segments such as premium apartments, commercial offices, retail and hotels, which enjoy higher yields and have significant entry barriers.

In FY08, the company intends to commence construction on ~10msf of ‘Grade A’ retail mall space and roll out plans for the hotel segment encompassing 4,800 rooms. Unitech’s business model focuses on early monetisation for commercial projects.

In FY07, the company sponsored Unitech Corporate Park (raised Rs 3,200 crore), primarily intended towards monetisation of under development commercial office space.

Going forward, we expect Unitech to adopt a similar strategy for retail and hotels. Post completion, it could also sponsor REIT structures to acquire constructed projects. The fee structure will also lead to substantial value creation by the fund management business, as assets under management (AUM) expand.

The research firm expects Unitech to report a compounded annual growth in revenue and earnings of 80 per cent and 75 per cent respectively, over FY07-10E.

This growth would be driven by increase in revenue bookings from nearly 7.2 msf in FY07 to around 24msf by FY10. The target price for Unitech is Rs 315 per share - a 20 per cent premium to estimated FY09 NAV of Rs 262. Upsides to NAV exists from land bank augmentation and changes in development plans.

JK Lakshmi Cement Reco price: Rs 145 Current price: Rs 147.35 Target price: Rs 215 Brokerage firm: UTI Securities

Recommended a “buy”, JK Lakshmi Cement is diversifying into value added products such as ready mix concrete and plaster of paris.

The company has a manufacturing facility at Jaykaypuram, Rajasthan with a capacity of 3.4 million tonne a year. JK Lakshmi Cement also has a 1,500 strong dealer network spread across the northern region in states of Rajasthan, Gujarat, Delhi, Haryana, Uttar Pradesh and Punjab.

The company is expected to record a compounded annual growth of 15 per cent over the coming two years as it reaps the benefits of the capacity expansion to 5 million tonne which is expected to be commissioned by October 2008. As a result, the company is expected to grow its top line by 22.4 per cent.

Add to this, the company is commissioning a 36 MW captive power plant which would reduce its per unit power cost from Rs 4.3 a unit in FY07 to Rs 3.4 a unit by FY08.

The cost saving from this power plant would be to the tune of Rs 25 crore, which would be earning accretive to the extent of Rs 2.7 per share in FY08 and Rs 3.8 per share in FY09.

At Rs 145, the stock traded at a price earnings ratio of 3.4 and 3.1 times estimated FY08 and FY09 earnings, respectively.