Stocks you can buy this week

HCL Infosystems
Research: Citigroup
Rating: Buy
CMP: Rs 256

Citigroup values HCL Infosystems (HCLI) at Rs 305, which includes hardware business Rs 184 (12x EV/EBIT), the Nokia business Rs 107 (probability weighted 5.5x EV/EBIT) and cash Rs 14. HCLI is a play on government and domestic industry tech spending. With a focus on systems integration, its hardware revenues — backed by stable margins — will witness an estimated CAGR of 25%.

The Nokia business has been a drag on HCLI’s growth over the past few quarters. With re-distribution of the addressable market having been completed, the business is likely to recover in Q308 and witness a CAGR of 14% during FY08-11. On a like-for-like basis (ex-Nokia renegotiation), HCLI’s FY08E sales growth should be much higher.

Adjusting for the value of the hardware business and net cash, the market values the Nokia business at an estimated Rs 27 per share — lower than Citigroup’s worst-case assumption of the contract value terminating in FY11. Nokia is unlikely to end its contract with HCLI, given the latter’s wide and hard-to-replicate distribution network. The company has ventured into digital lifestyle stores as a new distribution channel, as well as training.

Bharat Petroleum
Research: Morgan Stanley
Rating: Underweight
CMP: Rs 421

Morgan Stanley has downgraded BPCL to ‘underweight’ due to three reasons. Firstly, BPCL has outperformed the market by 19% in the past month. Secondly, Morgan Stanley’s global team has revised upward its long-term estimate of crude oil to $85/barrel (bbl); the Indian basket is at $63/bbl.

Thirdly, Morgan Stanley does not expect any major price rise in the next 12-15 months due to a possible election in the country. This has made the predictability of earnings very low and dependent on how much bonds the government wants to provide as part of its subsidy share.

BPCL has one of the lowest operating costs per barrel in the refining business across Asia, at under $2/bbl, and it has one of the strongest marketing franchises in the retail petroleum segment in India. However, the more it sells, the more it loses in the current high crude oil environment.

The global team expects crude oil prices to move to higher levels of $95/bbl by ’12, and has revised its long-term estimate to $85/bbl from $65/bbl. Thus, the cash losses of $22-23/bbl will continue in the system. Uncertainty on earnings for the downstream sector will continue at least for the next two years.

Nestle
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,442

Merrill Lynch expects Nestle to be the fastest-growing company in the consumer staples space in ’08. Relative to the Sensex, it is at a P/E premium of 20%, which is low for a domestic high-growth consumer business.

Nestle’s sharp underperformance in the past few years makes it a good buying opportunity. Nestle is growing faster than the earlier expectations, led by stronger topline and higher operating efficiencies.

Hence, Merrill Lynch has upgraded its ’07E EPS by 6%. Over the next two years, Nestle’s EPS is expected to grow at an average of 26.5%. There is a strong upward risk to the estimates led by Nestle’s robust topline growth.

Over the next two years, Nestle’s sales will grow by an average of 21% with two-thirds of the growth coming from volumes. The company’s key growth drivers are: 1. Growing urban incomes — Nestle is a key beneficiary of this trend; 2. Stronger new product activity offering higher margins; and 3.

Benign competition: Nestle is a virtual monopoly in the structurally higher growth processed foods categories. Agri input costs will continue to rise, but the rate of growth is likely to be lower than in the past. More importantly, Nestle has been able to pass on the cost increases; higher sales volumes are delivering operating leverage and its new products are likely to offer higher margins.

Suzlon Energy
Research: HSBC
Rating: Neutral
CMP: Rs 1,936

Suzlon Energy has underperformed the domestic market by 6% on a 12-month basis, versus the rest of the wind energy stocks, which have outperformed their respective local markets by an average of 50%.

However, in absolute terms, the stock has gone up by 32% due to the strength of the domestic market. This relative underperformance has been due to concerns over the bidding war that developed over REpower, as well as concerns regarding the leverage of Suzlon Energy (gearing stands at 102%).

There were also concerns regarding its ongoing ability to finance its aggressive expansion plans at the same time as completion of the acquisition of REpower. In addition, margins have been falling as the business internationalises, in line with expectations.

However, with some clarity emerging now on Suzlon’s funding position with the recent issuance of a convertible bond, and the prospective spin-off of a stake in Hansen Transmission, HSBC believes that this period of uncertainty has ended.

HSBC retains some concerns regarding Suzlon’s balance sheet — especially given the aggressive nature of its acquisition strategy and expansion plans — and over the full integration of REpower and the evolution of margins. However, the balance of risks is more today than it has been throughout ’07.

Crompton Greaves
Research: Lehman Brothers
Rating: Overweight
CMP: Rs 415

Crompton Greaves (CGL) is one of the largest domestic transmission and distribution (T&D) equipment manufacturers in India. It has a presence across various products, and will reap the benefits from the spate of investments in the T&D segment. The company is also a major player in the industrial motors segment. It manufactures both high tension (HT) and low tension (LT) motors.

Lehman Brothers expects this segment to grow robustly, since there will be large industrial capex in India over the next three years. CGL’s consumer products division, which manufactures products such as household fans and pumps, should also reap the benefits of high GDP growth. Lehman Brothers’ research estimates that India’s GDP growth could be as high as 10% over the next 10 years. On a consolidated basis, CGL’s core EBITDA margins for FY07 were 8.5%, while standalone margins stood at 10.2%.

Consolidated margins were depressed because of the impact of acquisitions of loss-making Ganz and lower operating margins of Pauwels. Crompton Greaves recently entered into a franchise agreement with Maharashtra State Electricity Distribution Corporation (MSEDCL) for electricity distribution in three divisions of Nagpur circle in Maharashtra.

This is a new business initiative for the company and the targets set in the agreement are fairly aggressive. The foray, if successful, may help the company to bag more orders for its T&D division and reduce its receivables cycle in the long run. If CGL is able to beat the loss reduction targets set by MSEDCL, that will be its main upside in this deal.