Stocks you can buy this week

Educomp Solutions
Research: CLSA
Rating: Buy
CMP: Rs 3,628

CLSA has assigned a ‘Buy’ Rating to Educomp Solutions. Educomp’s plays are India-centric . Its multimedia-in-schools offering now reaches more than 650 private schools and its adoption is accelerating. K-12 school management, a new segment, is set to reach 100 schools over the next three years (150 in four years). IT in public schools, although a fairly narrow-margin business (25-30 % EBITDA versus 60% in other areas ), augments this portfolio. Several other niche offerings are centred around these businesses.

These offerings include teacher training, online tutoring, e-learning and pre-schools . In many segments, the company enjoys a 12-24-month lead over new entrants. Educomp seems expensive, but its earnings are set to grow seven-fold over FY08-11 and its stock price needs to be seen in this context.

CLSA’s target price is based on a discounted cash flow model that assumes a 13% weighted-average cost of capital and 5% terminal growth. Non-linear growth, potential operating leverage as sales and product development expenses even out, and the potential to expand into adjacent spaces (such as higher education ) may further boost the stock.

Tata Teleservices
Research: HSBC
Rating: Underweight
CMP: Rs 31

HSBC initiates coverage on Tata Teleservices (Maharashtra), or TTML, with an ‘underweight’ Rating and a target price of Rs 30, assuming GSM spectrum is obtained by late FY09E and GSM is rolled out by mid-FY 10E. TTML, which represents a small portion of Tata’s broader national wireless footprint, operates in Maharashtra.

The company runs a CDMA network , but also has regulatory approval to operate GSM services. However , the timetable for the transition to GSM is unclear and the company has not yet been allocated any GSM spectrum. De-Rating on the stock continues on the back of delays over the switch to GSM. HSBC believes this is an event-driven story, rather than one based on fundamentals.

The alliance, which is still to be approved by the regulator, can represent an effective stop-gap arrangement to maximise yield on CDMA assets, but faces challenges, given the uncertain outlook for CDMA in India. The Tata group appears to be stuck when it comes to telecom. It has invested enough to establish a national footprint across multiple services, but is unwilling to surrender control to a strategic investor.

BHEL
Research: Motilal Oswal
Rating: Neutral
CMP: Rs 1,879

Motilal Oswal maintains a ‘neutral’ Rating on Bharat Heavy Electricals (BHEL). Since FY06, BHEL has witnessed significant traction in order intake. In FY08, Motilal Oswal expects an order intake of 15,514 mw, vs 9,904 mw in FY07 and 3,473 mw in FY06. As orders pending award under the 11th Plan stand at just 12,359 mw, a large part of the order award for FY09 is contingent on 12th Plan projects (FY13-17 ).

BHEL’s revenues may witness a CAGR of 34% over FY08-10 , driven by a surge in order intake to Rs 47,000 crore in FY08 (up from Rs 18,900 crore in FY06; CAGR of 57.5%). The report ‘Crash Programme for Power Generation’ suggests incremental capacity addition of 30,000 mw by NTPC and state electricity boards (SEBs) if private sector projects fail to take off. In that case, BHEL may emerge as the largest beneficiary, given its ~85% share of central and state government projects.

Both BHEL and NTPC have entered into JVs with SEBs for 4,240 mw of generation capacity. Motilal Oswal expects BHEL to report a net profit of Rs 2,950 crore in FY08 (up 22% y-o-y ), Rs 4,300 crore in FY09 (up 45.9% y-o-y ) and Rs 5,760 crore in FY10 (up 34% yo-y ). At the current market price, the stock trades at 33.5x FY08E EPS of Rs 60.2, 23x FY09E EPS of Rs 87.8, and 17.1x FY10E EPS of Rs 117.7.

State Bank of India
Research: Indiabulls
Rating: Buy
CMP: Rs 1,714

Indiabulls upgrades its Rating on SBI from ‘hold’ to ‘Buy’ because the bank’s aggregate business registered an increase of 25.9% y-o-y , led by increase in advances and deposits. SBI’s net interest margin is high at 3.01%.

Further, its CASA ratio is 41.05% and is set to rise further as SBI plans to enhance its geographical spread over the next few years. The bank has been displaying a positive trend in non-interest income. From a negative growth rate last year, there has been a 35.2% y-o-y increase in SBI’s other income for the first nine months of FY08.

Huge shareholder value may be unlocked following listing of SBI’s non-banking businesses and merger with associate banks. The merger with State Bank of Saurashtra has already been approved by both entities. This is may pave the way for merger with other associate banks. Subsidiaries are valued at P/B multiples, the new business achieved profit (NBAP) multiple and percentage of AUM, depending on the business.