Analysts' picks

Tech Mahindra

CMP: Rs 1,224.50

Target Price: Rs 1,062

India Infoline has rated Tech Mahindra a ‘sell’ with a price target of Rs 1,062 as it expects the stock to slide 4-5% in the near-term due to hazy earnings outlook. “The outlook on the topline, which has been a major cause of concern off late, remains hazy in the near term with the Top 2 clients (BT and AT&T -- 76% of revenues) undergoing major restructuring,” the brokerage said in a note to clients.

“Valuations have declined drastically from 23-27 times 1-year forward P/E (price to earnings) to 13-16 times with moderation in growth expectations from 40-50% to 20-25% over the medium term (1-2 years),” the note said

“We believe the relative positives about Tech Mahindra like low US exposure, low dollar exposure, no BFSI/subprime exposure and niche positioning have been outweighed by the increasing concerns about the high vertical and client concentration in the light of recent happenings in the above key accounts,” it added.


Union Bank of India

CMP: Rs 189.90

Target Price: Rs 230

Lehman Brothers has initiated coverage on Union Bank of India with an ‘overweight’ rating and a 12-month price target of Rs 230.

“We believe that even after factoring in the constrained profitability scenario, Union Bank’s valuations at 1.3 times FY09E (estimates) adjusted B/V (book value) are attractive vis-a-vis other larger PSU banks in our view,” the investment bank said in a note to clients.

“We believe the recent Reserve Bank of India (RBI) guidelines, which allow banks to shore up their tier-1 ratio through non-cumulative preference shares, is a big positive given the bank’s capital constraint,” Lehman noted.

“We believe there continues to be a trade-off between achieving asset growth and maintaining profitability, given the bank’s weaker liability profile with a low current and savings account (Casa) ratio of 31%. Maintaining growth in Casa deposits is likely to remain a challenge in our view,” it added.

Core Projects

CMP: Rs 399.10

Target Price: Rs 412

Reliance Money has recommended a ‘buy’ on Core Projects (CPTL) with a price target of Rs 412. “We believe CPTL has moved up the value chain from pure IT service provider to IT education and is likely to further move up to IT-education-infrastructure play in the next two years,” the brokerage said in a note to clients.

Reliance Money expects the company to benefit from the government’s initiatives to increase education spending over the next few years and joint ventures with IL&FS and Indira Gandhi National Open University.

“We believe these (JV) projects have a three-year payback period and would offer significant boost to consolidated profitability of CPTL,” the brokerage said in a note to its clients. “Strong revenue growth at a CAGR (compounded annual growth rate) of 111% and an earnings growth of 81% CAGR over a period of FY07A-FY10E would drive CPTL stock valuations in the near future,” it added.

Patel Engineering

CMP: Rs 823.90

Target Price: Rs 901

Deutsche Bank has initiated coverage on Patel Engineering with a ‘buy’ and 12-month price target of Rs 901.

“We value Patel Engineering at an EV (enterprise value) of Rs 59 billion ($1.5 billion), translating into a Target Price of Rs 901, implying a 1-year forward PE (price to earnings) of 34 times. With its real estate foray gaining traction, we see a significant value-unlocking opportunities over the medium term,” the investment bank said in a note to clients.

“PEC derives majority of its revenues from water and related businesses (80%) and we expect 29% revenue growth of over FY07-10E led by strong visibility and an order backlog of Rs 54 billion ($1.4 billion),” it said.

IVRCL Infra

CMP: Rs 493.95

Target Price: Rs 582

HSBC Securities has rated IVRCL an ‘overweight’ while raising its price target to Rs 582 from Rs 440, citing attractive valuations and robust growth prospects. “We expect IVRCL to trade at higher multiples than it is currently trading at as we estimate earnings CAGR of 29% over FY07-10e, given the strong business prospects,” the investment bank said. HSBC has kept the company’s earnings per share (EPS) estimates unchanged at Rs 15.3 for 2007-08.