Analysts' picks

Bajaj Hindusthan
CMP: Rs 161.60
Target price: Rs 147

HSBC Global Research has maintained an underweight rating on Bajaj Hindusthan, reducing the target price from the earlier Rs 200 to Rs 147. “We reduce our earnings forecast for Bajaj Hindusthan as we believe that sugar realisations are likely to remain under pressure, and alcohol sales volumes should be lower than we had estimated.

This should lead to losses, as high fixed costs are likely to erode EBITDA margins,” says the brokerage in a note to its clients. HSBC has reduced EBITDA forecasts by 68% and 30% for FY07e and FY08e, respectively, due to high staff cost and other expenditures.

“We expect the company to incur losses for FY07e and thus reduce our EPS forecast by 115% and 45% for FY07e and FY08e, respectively,” it adds.

Incidentally, sugar realisation for the first half of FY07 for Bajaj Hindusthan was Rs 15,587 per tonne, which was 11.5% lower than the FY06 full year average realisation of Rs 17,576 per tonne.


SAIL
CMP: Rs 153.45
Target price: Rs 180

UBS has initiated coverage on SAIL with a buy 2 rating and has set a 12-month price target of Rs 180. The rating is based on the company’s ambitious capacity expansion plans and internal funding of the proposed expansion.

“SAIL’s $9.5-billion capacity expansion will be funded internally with no equity dilution. After completion, it will have the potential to expand margins for the business,” notes the report.

While the company is self-sufficient in iron ore and is in the process of negotiating and leasing new coal mines to feed the expanded capacity, according to UBS, SAIL’s key challenges include managing the impact of higher cost coal, for which it is dependent on third-party suppliers. “SAIL trades at 4.6x FY08E EV/EBITDA compared with the sector benchmark of 6.4x EV/EBITDA,” says the report.

However, UBS has not factored in any possible margin expansion at SAIL. “If SAIL receives mining lease approval from state governments for planned expansion, we think there is a possibility of higher operating margins.

SAIL will also upgrade its product mix, which should also deliver better operating margins,” adds the report

Cummins India
CMP: Rs 347.55
Target price: Rs 463

Credit Suisse has initiated coverage on Cummins India with an outperform rating after factoring in the MNC parentage, its strength in technology and leadership position in the Indian back-up power market. Cummins India is a 51% subsidiary of Cummins, USA.

Cummins India is the leading maker of diesel engines (in the 205-2,365 hp range), catering to the power generation, industrial and automotive markets. It also caters to the growing market for gas and dual fuel engines.

“We believe Cummins should be able to sustain at least a 25% CAGR in revenue and a 30% CAGR in net profit due to strong demand, especially in the domestic market. This is likely to be on the back of improving margins in the overall business mix,” says the foreign brokerage.

Credit Suisse has arrived at a valuation of Rs 463 based on a PE of 20 times FY09 based on the company’s consolidated earnings per share of Rs 23.2. “This is at a 15% discount to front-line engineering stocks such as BHEL and L&T,” adds the report.


Apollo Tyres
CMP: Rs 365.10
Target price: Rs 468

Religare has maintained a buy rating on Apollo Tyres on account of a major expansion programme aimed at enhancing its passenger car radials capacity. The company is also setting up an off-the-road speciality tyre facility.

While the total capital outlay for the expansion is estimated to be Rs 6.50 billion over the next four years, the company generates enough cash to meet this requirement.

“We expect the company’s expansion plans to keep revenue growth intact in the long term. We thus reiterate our buy call on the stock with a target price of Rs 468, representing an upside of 35%,” said the report in a note to its clients.

Incidentally, the company is setting up a Rs 4.50-billion radial tyre plant in Tamil Nadu and has already signed an MoU with the state government for the same. The plant is expected to go on stream by the second half of FY09.

Analysts corner

Punj Lloyd
Current price: Rs 263
Target: Rs 296
Date: June 19

Alchemy has a put a buy on Punj Lloyd with a target of Rs 296. The key investment rationale is the global capex in the energy and infrastructure sectors especially from the Gulf Cooperation Council states which are flush with cash.

Punj Lloyd’s revenues are expected to register 46 per cent FY07-09E growing from Rs 51 bn in FY07 to Rs 108 bn in FY09E, primarily driven by strong order inflows after the acquisition of SEC and Simon Carves.

The acquisitions have also helped the company become main contractor for new complex jobs in large projects like the pipeline project in Libya. Its EBIDTA margin (excluding other income) is expected to improve from 7.3% in FY07 to 9.1% in FY09E.

Network 18 Fincap
Current price: Rs 499
Target: Rs 651
Date: June 20

Sharekhan recommends a buy on Network 18 which runs business channels CNBC-TV18 and Awaaz and general news channels CNN-IBN and IBN 7.

With the digitalisation of cable and advent of DTH platform, the subscription revenues would substantially boost the profitability of the group.

Web properties such as moneycontrol.com, poweryourtrade.com and yatra.com among others, covering the news, e-transaction, travel, recruitment, shopping and e-ticketing genres will also add tremendous value, feels the research firm.

To tap into the opportunities the company has built up a cash pile which include Rs 200 crorethrough a QIP and proposes to raise a similar amount through a rights issue of partly convertible preferential shares.

Jet Airways
Current price: Rs 812
Target: Rs 998
Date: June 19

ICICI Securities has put a buy on Jet Airways with a target of Rs 998. The research firm has revised Jet Airways’ earnings upwards, on the back of a lower cost structure for US routes and alignment of ATF prices corresponding to crude price of $68-70/Bbl. The improving load factor trend is also likely to boost international earnings on the back of increasing product acceptance.

Further, with the culmination of two mega consolidations in the domestic circuit, the sector will witness the return of pricing power, says the equity research company.

On EV/sales multiple and greater chances of an early turnaround, we find Jet’s acquisition of Air Sahara (now JetLite) relatively cheaper as compared to Kingfisher’s (KF) valuation of Air Deccan (AD). Together with JetLite, it values Jet Airways at Rs 998 representing about 22% upside to the CMP.

IPCA Laboratories Ltd
Current price : RS 695
Target: RS 800
Date: June 20

Kotak Securities has given a buy call on IPCA Laboratories with a target of Rs 800. The research firm’s optimism on the stock is a result of the USFDA approval for hydroxychloroquine sulfate tablets (200 mg strength) with annual sales of $50 mn in the US.

The company's marketing partner Ranbaxy Pharmaceuticals Inc, US will commercialise this product in the US market utilising its marketing expertise and distribution network.

After this approval, the company now has three products for marketing under the company's alliance with Ranbaxy after Furosemide and Atenolol tablets. Ipca is one of the largest producers of API hydroxychloroquine sulfate in the world and holds its DMFs in various countries.

Sharon Biomedicine
Current price: Rs 257
Target: Rs 375
Date: June 18

Antique Stockbroking has put a buy on Sharon Biomedicine, a manufacturer of API and intermediates.

By backward integrating and providing a complete package of product development from raw materials to the final formulations, Sharon is filing DMF’s, building up its R&D facility and designing expansions as per USFDA norms.

All this would help it be an integrated pharmaceutical company in a scenario favouring CRAMS businesses. The change from a bulk drug manufacturer to a high end formulation provider is helping push up its margins.

ONGC
Current price: 912
Target: Rs 1025
Date: June 19

CLSA has put a buy on ONGC with a price target of Rs 1025. The impending 16% legacy gas price increase for ONGC from Q2FY08 is a mixed bag, feels the research firm.

While it positively impacts earnings, it also delays gas price deregulation till FY10 diluting the value of this embedded option. The price target has factored in higher gas price (positive), stronger rupee (negative), stronger crude (positive) and higher and longer subsidy sharing (negative).

The resultant effects cancel each other in FY08-09CL but will be positive if the rupee depreciates or the subsidy sharing for FY08 reverts back to the norm.

Indian Hotels
Current price: Rs 143
Target: Rs 187
Date: June 20

Citigroup Research has recommended the Indian Hotels stock on the back of strong results and growth prospects with a target of Rs 187. Standalone Q4FY07 revenues and net profit grew 42% and 71% respectively YoY, while FY07 consolidated revenues grew 37% YoY and net profit grew 49% YoY.

Though the numbers were strong they were below expectations due to a higher interest and depreciation cost on account of amalgamation of five subsidiaries/associate companies and acquisition of Taj Boston in Q4FY07 and lower-than-expected consolidated margins because of higher than anticipated proportion of revenues from overseas properties.

While the EBITDA margins increased 640 bps YoY, on a consolidated basis FY07 EBITDA margins expanded 80 bps YoY. Growth in revenue and profit was supported by strong occupancies of 73% and a healthy 28% increase in ARRs for FY07.

The company plans to add five hotels to its portfolio in FY08 – two new hotels at Bangalore (ITPL) and Chennai (Mount Road) and three management contracts for hotels in Vijayawada, Trivandrum and Langkawi (Malaysia).

In addition, the company plans to increase the number of 'Ginger' hotels to 30 by March 2009, up from eight at present.

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Deciphering the analyst's jargon

When analysts recommend stocks, they often use such terms as `overweight', `underweight', `outperformer', `neutral' etc. I thought that you could only buy, sell or hold a stock. What do these terms mean?

They are often just investment-speak for a recommendation to buy, sell or hold a stock. But there are subtle nuances to each term, which can convey an analyst's opinion on the returns expected or risks attached to a stock.

To start with, analysts may use different terms to convey the same view on a stock. Therefore, an `accumulate' rating on a stock often means the same as a `buy'. A `book profits' suggestion means the same as a simple `sell'. A `book profits' is usually suggested in the place of a sell, when the analyst has already recommended buying at a lower price and the stock has run up subsequently, leaving you with profits. In contrast, a `cut losses' recommendation could be an admission of guilt! The message it sends out is that the earlier `buy' recommendation has not worked and you had better exit while the going is good!

Standard terminology

A `reduce' recommendation asks you to trim your exposure to a specific stock in your portfolio; it is generally a milder form of an unequivocal `sell' (which means that the stock is expected to drop like a stone). Every brokerage or advisory house usually adopts standard terminology to convey its views on stocks and sectors and this is applied uniformly across the stocks and sectors that it covers. A basic `buy', `sell' or `hold' recommendation conveys whether the analyst expects the stock to rise, fall or trade sideways from its current price. A stock may appreciate 15 per cent from a price at which you bought it; but will you be happy with the pick, if the Sensex rises by 20 per cent over the same period? Maybe not. If you own a portfolio of stocks, you would probably like most of your stocks to do better than the market. This is why ratings such as `outperformer', `overweight' or `neutral' are used to add on another layer of information for those who own an entire portfolio — they talk about the stock's performance relative to the market as a whole. An `outperformer' rating on a stock or sector conveys the view that the stock or sector will do better than the market in future. Similarly, an `underperformer' rating suggests that the stock may lag the market.

Do note that you could lose money on a stock that is an `outperformer', as the rating does not convey absolute returns.

If the Sensex slides by 16 per cent over a month, a stock that was battered by only 14 per cent would be an `outperformer'... but you would not have made any money on it! Similarly, `overweight' or `underweight' ratings tell you about the exposure that you should take to a specific stock or sector in your portfolio, relative to an index.

`Neutral' rating

If an analyst puts an `overweight' rating on Reliance Industries, he is asking you to take a larger exposure in the stock than it has in the benchmark. You could probably choose to invest 15 per cent of your money in the stock, though it has only an 11.5 per cent weight in the Sensex basket.

If recommendations such as `outperformer' and `overweight' convey a strong positive view on a stock, a `neutral' rating can mean several things. In the strict sense of the term, a `neutral' rating is an indication that, though the analyst in not wildly enthusiastic about the company's prospects, he believes that it will perform in line with the markets; therefore the stock is worth holding. However, a `neutral' rating can also convey that an analyst has turned ambiguous about the company's prospects.

`Neutral', in some cases, could also be a euphemism for an outright sell recommendation! To interpret a neutral rating, it may be best to check the ratings on the stock before the latest recommendation. It is a negative sign if the view on the stock has turned from a `buy' to a neutral and a positive one if the view has turned from `sell' to `neutral'.

We hope we've covered the whole gamut of investment terms that you've come across while researching stocks. Hope this helps you navigate the minefield of stock market investments better!

Dead Presidents' Reader Analyst

Gaurav Yadav, one of our visitors has sent his analysis on Kalpataru Power


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His email - rocky5_iitr @ yahoo.com