Stocks you can pick up this week

Dr Reddy’s Labs
Research: ABN Amro
Rating: Buy
CMP: Rs 633

ABN Amro maintains its ‘buy’ rating on Dr Reddy’s Laboratories (DRL). DRL reported lower-than-expected sales on lower Ondansetron sales and supply constraints in contract manufacturing. DRL’s subsidiary, betapharm, returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities.

The surprise was the 600 bps improvement in betapharm’s active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold. The key R&D product, Balaglitazone, is in Phase III trials and can provide news flow that may increase its valuation, given the recent listing of Sun Pharma’s R&D business at $500 million.

ABN Amro values DRL’s Balaglitazone at $100 million (Rs 24/share) and cut its FY08 earnings forecast to reflect the lower-than-expected Q1 FY08 result. ABN Amro also lowers its profitability assumption for the contract pharma business, but leaves API profitability untouched.

Kalpataru Power
Research: HSBC Global
Rating: Neutral
CMP: Rs 1,548

HSBC Global Research has downgraded Kalpataru Power Transmission from ‘overweight’ to ‘neutral’, with a potential total return of 13%. Kalpataru has a presence in the infrastructure sector. In FY07, the company increased investments in its three subsidiaries, which will add value to the stock.

To strengthen its balance sheet, it invested Rs 42.9 crore in JMC Projects, a construction company with an order backlog of Rs 1,200 crore, 2.4x FY07 sales. Further investments were made in Shree Subham Logistics and Energylink, another construction company. Kalpataru’s Q1 FY08 sales grew 23% YoY to Rs 370 crore, while net profit was up 28% YoY to Rs 37.1 crore.

EBITDA margin improved to 16.4%, an increase of 40 bps YoY, due to higher margins in infrastructure (transmission and distribution margins were lower). HSBC Global has reduced its EPS forecasts by 5% for FY08E and FY09E to Rs 70 and Rs 96.9, respectively, based on higher depreciation and interest cost.

Patel Engineering
Research: Enam Securities
Rating: Outperformer
CMP: Rs 432

ENAM Securities initiates coverage on Patel Engineering (PEL) with ‘outperfomer’ rating. PEL’s Q1 FY08 results were above expectations, driven by some large transportation projects reaching the threshold revenue booking level. On a consolidated basis, PEL reported revenues of Rs 410 crore (up 43% YoY) and adjusted profit after tax (PAT) of Rs 25.8 crore (up 29% YoY). During the quarter, PEL bagged its first order worth $153 million for a dam project from the high-margin market of Africa.

The order backlog stands at a robust ~Rs 5,300 crore (up 8%YoY). The management has stated a guidance of 25% revenue growth in FY08; it expects operating profit margin (OPM) to sustain at ~13%. PEL has a substantially higher intake capacity and is pre-qualified for new projects worth over Rs 6,000 crore. Going by its historical bid-to-success ratio of ~25%, Enam believes that intake may gain traction, going forward.

Factoring in higher-than-estimated interest cost and a lower tax rate of 25%, compared to 33% factored in earlier, the FY08E and FY09E EPS stand revised at Rs 18 and Rs 21.4, respectively. At current market price, adjusted for value of real estate and build, operate & transfer (BOT) investments of Rs 271 per share, the stock trades at an EV/ EBIDTA of 5x FY09E.

Tata Teleservices
Research: Citigroup
Rating: Sell
CMP: Rs 27

CITIGROUP has downgraded Tata Teleservices (TTML) to ‘sell’ as the current stock price appears to fully reflect the sustained trend of operational improvement witnessed over the past six quarters. Estimates have changed slightly, incorporating the recent subscriber additions and cost structure trends.

TTML’s Q1 FY08 EBITDA growth of 3.8% QoQ at Rs 100.4 crore was 12% below expectations. Even EBITDA margin, at 25.5%, remained flat QoQ. Low tariffs, in addition to a cumulative share of ~8% in Mumbai/Maharashtra, remain sub-optimal and constrained by CDMA network.

Given that TTML is likely to break-even only in FY09, the financial milestones which could drive the next round of re-rating may not be achieved immediately. EBITDA margin improvement of 10% during FY07-09E will be critical for earnings. Citigroup expects Tata group to eventually consolidate its telecom holdings, i.e. VSNL, TTSL and TTML. However, the Tatas lost out on the opportunity to hike their stake in VSNL by forgoing the call option in the latter.

Unitech
Research: JP Morgan
Rating: Overweight
CMP: Rs 512

JP MORGAN initiates coverage on Unitech with an ‘overweight’ rating. The company focuses on developing mixed-use townships in city suburbs. This helps it to acquire land at relatively lower cost and generate better realisations/margins as price increases occur due to occupancy and land price inflation.

Unitech’s key area of operations has been the suburbs of the National Capital Region (NCR), but the company has recently entered Kolkata. Unitech has also acquired large chunks of land in South India, which are likely to come under development soon. The FY08E and FY09E P/E of 31.9x and 15.7x, respectively, are supported by 103% earnings CAGR over FY08-09E.

Mastek
Research: Edelweiss
Rating: Accumulate
CMP: Rs 267

MASTEK has been downgraded by Edelweiss from ‘buy’ to ‘accumulate’, due to the absence of near-term triggers that signal an uptick in growth rates. Mastek’s Q4 FY07 revenues were slightly lower than expected, though net profit was above expectation. Revenues, at Rs 180 crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on a like-on-like basis.

However, higher other income of Rs 6.5 crore reduced this impact at the net profit level. Mastek continues to suffer from several issues that limit its expansion. Its sales and marketing engine is investment-heavy, direct client relationships are few, slowdown in the government sector drags down growth, and the new client acquisition pace is lethargic. The company seems to be highly dependant on acquisitions to meet its stated revenue growth guidance of 35% (in USD) for FY08.

Edelweiss believes the company may come up short of its guidance. Also, its efforts to rationalise its high-cost sales and marketing cost model are unlikely to bear fruit in the near term, due to its investments in expanding solutions footprint in the US insurance segment. At current market price, the stock trades at a P/E of 7.4x and 6.5x its FY08E and FY09E earnings, respectively.

ABN Amro - Jindal SAW - Trading Call - BUY - CMP 575 - TGT 760

ABN Amro has given a buy trading call on JSW Steel,
,
Strong Business Traction: Increasing demand of hydrocarbons is providing ample business opportunities and the same is expected to continue. Further, increased focus of Government on improvement in the water and sanitation facilities throws up good business prospects. JSL, with a wide product portfolio is expected to witness significant growth, which is further substantiated with its strong order book of Rs66bn.

Reasonable Valuation: JSL is currently trading at 12x F9/07E EPS of Rs47.22 (Reuters Consensus estimate), 9.8x F9/08E EPS of Rs57.69 and 7.6x F9/09E EPS of Rs74.15. However the market value of its quoted investments stands at Rs68 per share, factoring which JSL seems an attractive investment opportunity.

Price Breakout: JSL has given a strong breakout on a daily, weekly and monthly basis at Rs.500. The weekly price projection of the breakout comes to Rs.760.

Dishman Pharma,Dwarikesh, ITC, Oil Marketing Companies

Edelweiss in their result update on Dishman Pharma

Dishman announced results for Q4FY07, the revenues were higher than our estimates but lower EBITDA margins resulted in lower than expected EBITDA. Higher other income and lower depreciation and negative tax rate compensated for the lower EBITDA margin and the net profit was in line with expectation. Sales increased by 139% on Y-o-Y basis to INR 2057 mn, EBITDA increased by 20%, and net income grew by 255%. This quarter’s financials carried the impact of adjustment related to change in accounting nos. to IGAAP from UK GAAP for Carbogen Amcis.

Dishman’s outlook remains positive as it has announced several new initiatives which
might turn into new sizable contracts and Synergy derived from Carbogen-Amcis. At CMPof INR 258, the stock trades at a P/E of 14.6x on FY08E estimates. We retain our ‘BUY’ recommendation.

Edelweiss in their report on Dwarikesh Sugar

The stock has corrected by ~12% from our sugar sector update of February 2007,
paradise Lost, where we had downgraded the sector and DSIL to ‘REDUCE’ from ‘ACCUMULATE’. On SS07 capacity, the stock trades at 0.8x EV/replacement cost. Although valuation looks compelling vis-à-vis peers, we reckon it to be primarily attributable to DSIL continuing to be a relatively purer play on the sugar cycle with limited integration benefits. If current sugar prices continue, leading to funds’ crunch for holding on to working capital commissioning delays of its cogen unit in SS08 cannot be ruled out. Due to lack of any medium term triggers to revive sugar prices, highly levered balance sheet (D/E of ~2x), and over reliance on sugar segment, we maintain ‘REDUCE’ recommendation.

ABN in their report on ITC say,

4QFY07 results reflect strong underlying performance ITC reported 16% yoy EBITDA growth, driven by 16% EBIT growth in cigarettes, 23% EBIT growth in paper and 20% EBIT growth in hotels. The FMCG business recorded higher losses yoy, partly driven by heavy launch expenses for the Bingo range of potato chips. While ITC's reported PAT growth was lower at 15% yoy, the underlying growth was 19% adjusting for the higher base in 4QFY06 due to tax refunds. Cigarette prices raised proportionately more than tax increases ITC needed to raise prices by around 15% to neutralise the impact of the VAT and excise increases. However, the company has raised cigarette prices at a weighted average of 20%. In some brands, like Wills Navy Cut, Scissors and Capstan, the price hikes have been sharper, while in its key king-size brands like Classic and Gold Flake, the hikes have been close to the tax increases.

We estimate ITC's FY08 cigarette volumes will decline 2% (factoring in segments that are price inelastic and relatively inelastic), but expect cigarette net sales to grow 5.2% as price hikes have been sharper. Investing in paper and hotels for the next leg of growth FY07 EBIT for the hotels and paper businesses came in at Rs3.5bn and Rs4.2bn, respectively.

ITC is planning investments of Rs10bn in each of these businesses over the next three years, to be funded by their respective cash flows. The company plans to raise paper-board capacity from 0.32m mt to 0.42m mt, double its paper-pulp capacity from 0.1m mt to 0.2m mt, and set up uncoated-paper capacity of 0.1m mt (by 4QFY08). In hotels, ITC plans to set up two 900-room hotels, one each in Bangalore and Chennai. Maintaining Buy, with a lower target price of Rs205 (from Rs215) We cut our FY08F EPS by 9.1% to Rs7.75 to account for our lower cigarette volume estimate, but expect 15% EPS growth from FY09. ITC has underperformed the market 13% since the Budget and 9.3% ytd, which we believe largely discounts the earnings moderation we had expected. In line with our earnings downgrade, we reduce our DCF-based target price to Rs205, from Rs215.

Edelweiss in their report on Oil Marketing Companies

Based on our new oil price and INR/USD assumptions and revised under-recovery sharing between government, upstream and OMCs, we have revised our FY08 and FY09 earnings estimates for the oil marketing companies. For BPCL, our revised consolidated FY08 and FY09 EPS estimates stand at INR 52.4/share and INR 62.1/share. For HPCL, our revised FY08 and FY09 EPS stand at INR 38.2/share and INR 56.3/share and for IOCL we have revised our FY08 and FY09 EPS estimates to INR 59.9/share and INR 64.8/share.


We estimate the fair value of BPCL, HPCL and IOCL at INR 376, INR 266 and INR 529,
respectively. Both, BPCL and IOCL provide marginal upside from current levels. Though HPCL’s fair value is lower than CMP, it is explainable considering the higher earnings growth in FY09 due to increase in refining capacity and complexity. Further, current political scenario makes it unlikely that the government may reduce its controls on the sector. We believe that any reduction in crude price may only provide an opportunity for the government to reduce the auto fuel prices (run up to the elections in 2009). On the other hand the low P/BV and high dividend yield valuations provide support to the oil marketing companies. We therefore downgrade the R&M stocks (HPCL, BPCL, and IOCL) from ‘BUY’ to ‘ACCUMULATE’.

SAIL, Omax Auto, Jyothi Structures, BHEL, Motherson Sumi, India Technicals

Angel on SAIL

Better-than-expected Q4FY2007 performance: Public sector steel major, SAIL, reported a better-than-expected performance for the quarter ended March 2007 (Q4FY2007). It reported a yoy Topline growth of 15.7% to Rs10,385cr (Rs8,980cr). This was primarily led by higher realisations even as volume sales declined during the quarter. It must be noted that the company is already operating at around 119% capacity utilisation, which leaves little room for volume-led growth until new capacities come onstream.

At the CMP, SAIL trades at 11.8x FY2009E EPS, 6.8x EV/EBITDA and P/BV of 2.3x. Considering current valuation of the stock and the outlook in the medium-term, we maintain our Neutral view on the stock.

Angel on Omax Auto

In line Q4FY2007 results: In Q4FY2007 the company’s Net Sales grew by 27.6% yoy Rs181.2cr. The company sustained its margin improvement achieved in 9MFY2007 on the back of a lowered cost base. Operating Profit grew 59.3% yoy to Rs16.3cr. Net Profit grew 116% yoy to Rs8.1cr mainly on account of an 88.2% jump in Other Income. Omax has lowered its operating cost base over the last two quarters and will further benefit from partial captive sourcing of steel and higher capacity utilisation at its Bangalore and Binola plants.

Valuation: At the CMP, the stock trades at 7.3x FY2008E and 6.5x FY2009E Earnings. It appears very attractive at EV/EBIDTA of 4.7x FY2008E and 3.7x FY2009E. We maintain a Buy on the stock with a Target Price of Rs105.


Angel on Motherson Sumi

Consolidated Performance: Motherson Sumi Systems (MSSL) reported Net Sales of Rs462.7cr for Q4FY2007 as against Rs305.4cr in 4QFY2006. The results are not exactly comparable with the corresponding quarter of last year, as Q4FY2007 results include Motherson Advanced Polymer (MAPL) numbers, a 100% subsidiary amalgamated with MSSL with effect from February 1, 2006. OPM, for the quarter, was flat at 16%. Net Profit was Rs45.7cr (Rs42.2cr).

MSSL is a leader in wire harnessing and controls over 65% of the domestic passenger car market. The company is now focusing on the supply of higher level assemblies and modules where the Margins are comparatively higher. The company is also increasing content per car to diversify its product portfolio. MSSL is laying emphasis on its global product plan (GPP) wherein it would enter into JVs with leading tier-I suppliers to upgrade its technology base and increase clientele. MSSL targets to achieve 60% of consolidated turnover from overseas clients. The company expects to continue exploring opportunities in the non-automotive segments, which contributed 15.8% to FY2007 consolidated Revenue compared to 13.8% in FY2006. Increased
share of non-automotive segment is expected to help the company de-risk its business.

We remain positive on the company. We believe MSSL will grow at a CAGR of around 30% over the next two years. We upgrade our consolidated EPS for FY2008E and FY2009E to Rs6.9 and Rs8.4, respectively. At the CMP, the stock trades at 20.4x FY2008E and 16.6x FY2009E consolidated earnings. We maintain a Hold on the stock with a Target Price of Rs130.


Angel on BHEL

Net Sales surge: For Q4FY2007, Bharat Heavy Electricals (Bhel) reported a strong yoy growth of 25.5% to Rs6,919.7cr (Rs5515.7cr). For FY2007, the company reported growth of 29.7% to Rs17,237.5cr (Rs13,289.28cr). This was expected FY2007 being the last year of the Tenth Plan.

Strong Order Book: Bhel clocked a sharp increase in order inflow of more than 88% (5%) to Rs36,300cr (Rs1,9318cr). In absolute terms, order inflow increased by around Rs17,000cr as against a relatively moderate increase of Rs2,650cr in turnover has resulted in an unexecuted order book of Rs55,000cr, an increase of 47% (18%). Of this, the power segment, which accounts for more than 70% of the company's revenues, contributed Rs27,700cr with orders for nearly 9,900MW of capacity being booked during the year. Apart from this, transmission sector orders doubled to Rs1,170cr. FY2007 has been a significantly better year than FY20, in terms of the order intake and order book position, which had grown at a modest rate of 5% and
18% only in FY2006.

Bhel has grown at a CAGR of more than 25% in terms of sales over the past three years. With significant growth in sales, and fixed cost getting spread over a larger base, profits have risen sharply by around 43%. The growth in sales came on the back of a strong order book and government initiatives in the power sector. Going ahead, we expect a slow down in order book to slowdown as there have been issues regarding delays in execution, capacity limitations of the company and the government requires faster execution of the projects to meet the targets set for the Eleventh Plan. The Central Electricity Authority (CEA) had undertaken assessment of preparedness of Bhel to meet the capacity requirement of the power sector during the Eleventh Five Year Plan. The report stated that while some of the delays in the Tenth Plan were on account of state power utilities, major delays have been attributed to Bhel -- “major delays are attributable to Bhel”. Hence, the Ministry of Power has held Bhel responsible for much of the delays in the Tenth Plan, which led to a shortfall of nearly 15,000MW in the period.
At the CMP, the stock trades at 22.2x and 18.2x FY2008E and FY2009E EPS. With valuation stretched and sustained earnings momentum also factored in, we remain Neutral on the stock.


ABN Amro Technicals

The broader indices namely BSE Midcap and C NX 500 are trading near their weekly resistance levels. However, the BSE Smallcap index seems to have some more steam left on the upside. All the major sectoral indices namely, Auto, Capital Goods, Consumer Durables, Healthcare, Oil & Gas, PSU and Bankex are trading near their medium term resistance levels. However, IT Index is trading near the lower end of its channel which suggests the fall in the sector is likely to get arrested in the short term.
The FMCG Index and the Metal Index are also showing some strength in the near term.
To sum it up, the broader indices and major sectoral indices are near their strong resistance levels, after the recent up move. Therefore caution and some profit booking is advised in the short term.

BSE Midcap Index is trading near its weekly trend line resistance of 6187 and 6314. Sustaining above 6314 on a weekly basis can take the index to 6600. On down side support is at 5752.

BSE Small Cap Index faces resistance at 7510; currently the index is in mid way suggesting that it can still witness some up move. Support comes at 6971 and 6815 thereafter.

CNX IT index is trading near its lower band of long term channel hence the chance of bounce back is not ruled out. It needs to sustain and make a good base around 5060, from where it can rally to levels of 5900. In case support is broken on monthly basis it could be headed towards 4500.


ABN Amro on Jyothi Structures

Strong sector growth outlook: The transmission business has high visibility over the next few years, with a continuous focus on improving the power infrastructure in the country. Projects such as Accelerated Power Development and Reforms Programme (APDRP), Rural electrification under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and measures to reduce Aggregate Technical & Commercial (AT&C) losses by upgrading the Transmission & Distribution (T&D) infrastructure would drive demand for the services rendered by the transmission companies. An investment of Rs4270bn is envisaged during the 11th 5 Year Plan on various schemes in the T&D sector.

Valuation: JSL’s revenues and PAT are estimated to grow at a CAGR of 33% and 51% between FY07- FY09. At the CMP of Rs185, JSL trades at 17.3x FY08F EPS of Rs10.7 and 11.8x FY09F EPS of Rs15.7. We reiterate our Buy call on JSL, given the high earnings visibility for the sector, and greater comfort over management

ABN Amro - United Phosphorus - Buy - Trading Call - CMP 287 - TGT 340

ABN Amro - United Phosphorus - Buy - Trading Call - CMP 287 - TGT 340

ABN Amro - Jet Airways - A change in the air - Buy - 18 May 2007

ABN Amro - Jet Airways - A change in the air - Buy - 18 May 2007

ABN Amro - JB Chemicals - Trading Call - Buy - CMP 82 - TGT 104

ABN Amro - JB Chemicals - Trading Call - Buy - CMP 82 - TGT 104

ABN Amro - KPIT Cummins - Over the hedge - Hold - 14 May 2007

ABN Amro - KPIT Cummins - Over the hedge - Hold - 14 May 2007

ABN Amro - Pharmaceuticals & Biotechnology - Sector Report

ABN Amro - Pharmaceuticals & Biotechnology - Sector Report

ABN Amro - Retailing - Testing Times - Sector Report

ABN Amro - Retailing - Testing Times - Sector Report

ABN Amro - Texmaco - Trading Call - Buy - CMP 836 - TGT 1090

ABN Amro - Texmaco - Trading Call - Buy - CMP 836 - TGT 1090

ABN Amro - Lupin, Grasim

ABN Amro - Grasim - Concrete Growth Prospects - Buy - 10 May 2007

ABN Amro - Lupin - Solid prospects in the price - Hold - 10 May 2007

ABN Amro - Nestle - Back to Growth - Buy

ABN Amro - Nestle - Back to Growth - Buy

ABN Amro - M&M - Core performance is back in focus - Buy

ABN Amro - M&M - Core performance is back in focus - Buy

ABN Amro - Castrol - Easing Pressures - ready to Grow! - Buy

ABN Amro - Castrol - Easing Pressures - ready to Grow! - Buy

ABN Amro - Bajaj Auto - Hold - 30 Apr 2007

ABN Amro - Bajaj Auto - Hold - 30 Apr 2007

ABN Amro - Patni Computer - The Long Walk Home - Hold

ABN Amro - Patni Computer - The Long Walk Home - Hold

ABN AMRO - Manufacturing PMI

ABN AMRO-- Manufacturing PMI

Motilal Oswal - KPIT Cummins, ABN Amro - Glenmark Pharma, ABN Amro - Cipla

Motilal Oswal - KPIT CumminsABN Amro - Glenmark PharmaABN Amro - Cipla

ABN Amro - Satyam - Buy - In pursuit of happiness

ABN Amro - Satyam - Buy - In pursuit of happiness