Analyst Picks - Sector Views

MERRILL LYNCH

Auto: Positive

Tata Motors, Ashok Leyland to benefit from reduction in Cenvat for commercial vehicles. Reduction in excise duty for small cars, two- and three-wheelers could result in higher demand for Maruti, Bajaj Auto, TVS Motor and Hero Honda. Subsidies to farmers on old loans and approval for new loans will improve cash flow and push demand for autos and tractors. Reduction in personal taxes to result in up to 15% higher disposable income. This will benefit Maruti and other two-wheeler companies.

Infrastructure: Positive

Avoidance of double taxation on dividend payments between infrastructure SPV subsidiary and parent would benefit project developers (JP Associates ). Other beneficiaries include L&T , GMR Infra, IVRC and Nagarjuna Constructions. Hike in defence spend is marginally positive for defence contractors such as Bharat Electronics, Tata Power and L&T .

MORGAN STANLEY

Cement: Neutral

Increase in excise duty on clinker to Rs 450/MT from Rs 350/MT will be neutral, as clinker produced is not sold directly but converted into cement. Excise of Rs 400/MT, or 14% ad-valorem duty, (whichever is higher) on bulk cement will also be neutral as most of the cement sold in India is packaged cement and not bulk cement.

Steel: Positive

Budget positive for iron ore miners and steelmakers with captive ore mines (Sesa, SAIL, Tata Steel) since export taxes haven’t been imposed. Less than expected hawkishness on steel price control issue is another positive. Reduction in excise duty to 14% from 16% should give some relief to steel consumers and so is a marginal positive. Budget neutral for nonferrous companies.

ICICI SECURITIES

Telecom: Neutral

The 1% NCCD on cellphones would have no major impact since it would increase the cost of handsets only slightly. Duty exemption on specified parts of set-top boxes would make DTH/IPTV connections cheaper. Companies such as Reliance Communications and Bharti Airtel would benefit (though not significantly ) given their planned foray into the DTH/IPTV space.
Technology: Neutral

Increased expenditure on education is positive for Educomp, Everonn, NIIT and Aptech. Enhanced allocation to the department of information technology will be positive for CMC, TCS, Spanco Telesystems, Wipro, HCL Infosystems and 3i Infotech. Increased excise duty on packaged software would increase the cost for companies operating in the domestic market, including 3i Infotech and Nucleus Software. However , the same will be recovered from clients, so impact will be minimal. Similarly, 12% service tax imposed on customised software will increase the cost for companies, including 3i Infotech, Rolta and to some extent TCS (10% domestic revenues) and Wipro. However, the impact will be minimal as it will be recovered from clients.

IDFC-SSKI

Engineering: Positive

Increase in textile upgradation provision would benefit Voltas. Reduction in excise duty on refrigeration equipment will also help Voltas as it would boost its cold-chain equipment revenues. Increased thrust on power sector investment will benefit Elecon as also AIA Engineering, which supplies grinding media for thermal projects.

Financials: Positive

Positive for tractors due to trickle down effect; hence, benefiting tractor finance companies like M&M Finance . Neutral for banks and NBFCs having interest in life insurance business since service tax could be a passthrough to policyholders in line with the practice followed by asset management companies.

IDBI CAPITAL

Oil & Gas: Positive

Reduction in customs duty on crude is positive for refinery companies like RIL, IOC, HPCL and BPCL. Reduction in duty on unbranded petrol and diesel is positive news for IOC, HPCL and BPCL. Removal of duty exemption on imported naphtha is negative for RIL as it will have to bear the duty burden on imported naphtha for polymer production. Reduction in CST positive for oil marketing companies for petroleum products that attract CST.

FMCG: Neutral

Imposition of duty on non-filter cigarettes positive for ITC as it makes filter cigarettes. But the hike would also be negative for the company as it also makes non-filter cigarettes. The reduction in CST positive for the food processing industry.

Analyst Picks - Biocon, IDFC, Marico, ONGC

ONGC

CMP: Rs 1,209.45

Target price: Rs 1,348

CLSA expects ONGC shares to consolidate, citing absence of major triggers for at least a year.“With valuations at par with global peers, we see a more challenging near term stock outlook — especially as visibility on other triggers (discoveries, East Coast developments, ONGC Videsh re-rating, gas price deregulation, fuel pricing overhaul) is a year or more away,” the investment bank said in a recent note.

“While there is potential for 15-16% EPS upgrades if the likely Re1-2/litre price hike and Rs 2/litre excise cut in auto fuels is not followed by a hike in ONGC’s OIDA (Oil Industry Development Act) cess or subsidy sharing, the lacklustre outlook for ONGC’s production growth over FY09-10CL and its relatively modest leverage to crude prices (every $/bbl changes EPS by 0.5%) is a dampener for future surprises,” CLSA added.


IDFC

CMP: Rs 209.25

Target price: Rs 195

Citigroup rates IDFC a sell with a price Target of Rs 195. It believes the recent rise in this stock factors in possible positive surprises. “While the business momentum continues to remain strong and in line with expectations; we believe wholesale funded institutions such as IDFC are relatively more exposed to interest rate tightness/cyclicality (as is the case with many global markets currently) and should be valued at a discount to private banking peers,” the investment bank said in a note.

Citi estimates the infrastructure financier’s earnings per share (EPS) for 2007-08 at Rs 6.54 and Rs 8.82 in 2008-09. For 2006-07, IDFC reported EPS of Rs 4.48.

Marico

CMP: Rs 65.25

Target price: Rs 90

Kotak’s private client group recommends a buy on Marico, with a 12-month price Target of Rs 90.
“We expect business revenues to grow at a CAGR (compounded annual growth rate) of 23% over FY07-09. The PAT (profit after tax) is expected to grow to Rs 2.25 billion ( Rs 225 crore) at a CAGR of 41% over FY07-09E,” the retail brokerage said in a note.

“We forecast Marico will consolidate its leadership position in the beauty and wellness segment on the back of changing lifestyles, demand for high quality products and consistent introduction of new products and brand extensions. Kaya Skin Clinic, the skincare solutions business, is also expected to witness high growth post consolidation in FY07,” Kotak added.


Biocon

CMP: Rs 518.70

Target price: NA

IDBI Capital Markets has rated Biocon a buy, after its lower-than-expected third quarter earnings. It advises clients to buy the stock on fall citing better growth prospects.

“There are quite a few positive developments, the management has indicated intent of unlocking value in its contract research subsidiary ‘Syngene’ though an IPO. Also, Clinigine has now broken even and though much smaller presently, is likely to follow a similar path,” the institutional brokerage said in a report.

“The other research programmes - both in Oral Insulin and other biosimilars are progressing well. In fact, the company hopes to launch some of these in the Indian market as early as 2010. The process for registration and sale in a number of markets for injectible insulin/insugen is ongoing. The earliest launch in US / Europe could be 2-years hence, but the opportunity is big,” IDBI Cap added.

Analysts’ picks

PYRAMID SAIMIRA THEATRE Reco price: Rs 417 Target price: Rs 736 Current market price: Rs 420 Upside: 75.23% Brokerage: IL&FS Investsmart

Pyramid Saimira Theatre (PSTL), a leading exhibitor based in South India is expected to emerge as India’s largest fully integrated media company with business interests in production, distribution and exhibition.

PSTL has successfully demonstrated its ability to enhance revenues and realise operating efficiencies while ramping up at a fast pace. The company’s revenues and net profit are expected to record a CAGR of 151 per cent and 254 per cent respectively through FY07-09E. IL&FS Investsmart has put a BUY recommendation with a target price of Rs 736.

The stock at the recommended price of Rs 417 is valued at PE multiple of 18 times FY08 and 9 times FY09E estimated earnings.

GMR INFRASTRUCTURE Reco price: Rs 235 Target price: Rs 358 Current market price: Rs 236 Upside: 51.7% Brokerage: Emkay Share and Stock Brokers

GMR Infrastructure has recently announced the placement of 165.23 million shares at a price of Rs 240 to QIB's. The company has raised Rs 396.6 crore through the issue and would result in the equity base being expanded by 9.08 per cent post dilution.

The funds raised from this issue would be utilised for capital expenditure of its various projects. The fair value for GMR Infrastructure is based on the DCF value for each of the projects.

Though the equity dilution does not in any way change the fair value of the company, the per share value stands reduced on account of the increase in the equity capital. We revise our target price to Rs 358. The target price is based on the embedded value of each of the projects.

VARUN SHIPPING Reco price: Rs 87 Target price: Rs 106 Current market price: Rs 83 Upside: 27.7% Brokerage: Angel Broking

Varun Shipping is one of the safest bets in the shipping industry, given higher stability in its revenues. Further, Varun Shipping has been consistently declaring dividends over the past many years.

The company is expanding its asset base and business operations in the offshore support services segment to explore newer opportunities in energy. Varun Shipping had allocated $400 million for expansion of fleet. Of this, it spent $320 million in the last one year with the addition of five vessels.

Most of the vessels acquired over the last 3-4 quarters are expected to contribute fully to the revenue 2HFY2008 onwards. At recommended price of Rs 87, Varun Shipping is trading at 5.8 times and 5.3 times FY2009 and FY2010 estimated earnings. The brokerage puts a buy recommendation with a 12-month target price of Rs 106.

HERO HONDA Reco price: Rs 702 Target price: Rs 745 Current market price: Rs 693 Upside: 7.5% Brokerage: Religare

According to the brokerage, Hero Honda is aggressively capturing market share in economy and premium segment. This is further expected to improve its market share to 18 per cent in the near term in the premium segment.

Also, on the back of attaining high degree of localisation of components and with the expectation that prices of nickel, aluminium will remain soft, EBIDTA margins are expected to improve.

Further, the company has indicated that it has lined up its new product and variant launches for motorcycle and scooters till FY10.

The brokerage house has increased its revenue and margin estimates on the back of recent developments in the company. With the revised estimates, the target has been raised to Rs 745. At the recommended price the stock is valued at 15.4 times FY08 and 13.7 times FY09 estimated earnings.

CORE PROJECTS AND TECHNOLOGIES Reco price: 400 Target price: NA Current market price: 412 Upside: NA Brokerage: ICICIdirect

Core Projects and Technologies a pure IT company with interests in verticals such as education, logistics and healthcare, is set to capitalise on the education boom across the globe with its strong product portfolio.

The company has successfully acquired seven companies in the past two financial years across various verticals and products. This has helped the company triple its revenues in FY07 with the acquired companies contributing more than 65 per cent to revenues (Rs 194 crore) and net profit (Rs 33.37 crore).

The company’s inorganic growth strategy has helped it to penetrate newer geographies and cross-sell products and solutions to new clients. The company is expected to continue to grow inorganically and acquire companies having strong products in the US and UK.

Core Projects has signed an agreement with the CHL at NASA’s space centre for delivering educational content exclusively to the Asia-Pacific region.

The company has also signed a MOU with IL&FS and the Indira Gandhi National Open University (IGNOU) to create education content. At the recommended price of Rs 400, the stock trades at 55 times FY08 and 29.3 times FY09 estimated earnings.

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.

Analysts corner

JSW Steel Broking firm: India Infoline Reco Price: Rs 961 Target Price: Rs 1240 CMP: Rs 1009 Upside: 22.9%

JSW’s expansion plans are ahead of schedule and strong demand is likely to lead to higher capacity utilisation. India Infoline expects the company’s steel output to register a compounded average growth rate (CAGR) of 28.3 per cent over FY07-FY10 from 2.6 tonne per annum to 5.6 tonne per annum.

JSW’s crude steel making capacity is expected to be 10 tonne per annum by 2010 from current 3.8 tonne per annum. The company is also increasing its upstream capacities, cushioning it from any downturn in the industry.

Also, its operating margins are expected to expand in FY09 led by higher realisations from value-added products and increased usage of captive resources. JSW’s consistent focus on value-added products would lead to higher price realisations for the company in the next three years.

Besides, JSW’s captive coke and power plants are expected to be fully operational in FY09 leading to better margins. At Rs 961, the stock trades at 10.1 times and 7.1 times on consolidated EPS of Rs 94.8 in FY08 and Rs 136.1 in FY09, respectively.

Godawari Power & Ispat Broking firm: Motilal Oswal Reco Price: RS 263 Target Price: Rs 380 CMP: Rs 290.5 Upside: 31%

Godawari Power and Ispat Ltd. (GPIL) has nearly doubled capacity of sponge iron to 495,000 tpa and that of steel billets to 400,000 tpa. Captive power capacity too has increased from 28MW to 53MW. They are likely to benefit from current strong prices of steel products and sponge iron.

GPIL is also setting up a 0.6 mtpa pelletisation plant to utilise iron ore fines, required for sponge iron production. This will bring down raw material costs substantially and improve the margins. GPIL has been allotted both iron ore (reserves of 15m tons) and non-coking coal mines (reserves of 63m tons) to meet its requirement of raw materials which will bring down costs and insulate earnings from input price risk.

Besides this, the benefit of carbon credits (Rs 10.8 crore) and sales tax benefit (Rs 240 crore) will prop up the bottomline. At recommoneded price the stock trades at a PE multiple of 5.5 times FY09E.

Aftek Broking firm: Networth Stock Broking Reco Price: Rs 70 Target Price: Rs 100 CMP: Rs 69.6 Upside: 43%

Aftek, a seasoned player in software product engineering has more than 100 active intellectual properties to its credit. It commands a premium in its billing rates and has increased its revenue per employee. The non-linear model of the company and its subsidiaries enable it to beat the rising rupee.

The company’s investments into its subsidiaries, Arexera, Seekport and Digihome will transform the company into the league of royalty-bearing product companies. At the recommonded price of Rs 70, the stock is trading at a PE multiple of 6.7 times and 4.9 times its FY08E and FY09E earnings.

The broking firm believes that despite strong fundamentals, Aftek is valued at 50 per cent discount to its nearest competitor. Besides, Aftek’s cash reserves is a huge strength for expansions in future. The company’s cash on its books stands at Rs 33 per share. At a P/BV of 1.0, the stock is undervalued. Valuing the company at 7-times its FY09 likely EPS of Rs 14.4, gives it a price target of Rs 100.

Salora International Broking firm: Parag Parikh Financial Advisory Reco Price: Rs 218 Target Price: Rs 312 CMP: Rs 234 Upside: 33%

Salora International has transformed itself from a manufacturer of colour television parts to a distributor of telecom and infocom products deriving 85 per cent of revenues and 90 per cent of earnings before interest and tax from the latter. The company enjoys excellent relationships with its vendors such as Sony Ericssion, BenQ and Acer and has managed to build a strong distribution network of 30 offices touching over 25,000 retailers.

As a result, it is mulling the idea of retailing the products. The company’s turnover, which grew 50 per cent in FY07 to Rs 887 crore, is poised to cross Rs 1,000 crore and jump by another 40 per cent in FY08. However, the stock is still valued in terms of its legacy business. Moreover, the stock’s valuation of 7.2 times for estimated earnings for FY09 is much less than its peers- Redington India (13.7 times) & HCL Infosystems (9.4 times).

NCL Industries Broking firm: IL&FS Investsmart Reco Price: RS 55 Target Price: Rs 120 CMP: Rs 59 Upside: 103%

South India-based NCL Industries (NCL) is well-poised to capitalise on the emerging opportunities in the southern cement market. Cement demand in south India is likely to grow at a CAGR of over 10 per cent between FY07-11.

During FY08, NCL, one of the leading cement manufacturers in the region, augmented its cement capacities from 0.297 million tonnes per anum to 0. 63 million tonnes per anum. It is expected to further expand its capacity by 1.32 million within a year. Thus it is likely to emerge as a key beneficiary.

Further its pre-fab business is expected to grow at over 30 per cent annually for the next three years. As a result, the company’s revenues and profits are expected to grow at an annual rate of 36 per cent and 31 per cent between FY07-10. The stock trades at 4.5 times and 4 times its estimated earnings for FY08 and FY09 estimated earnings respectively.

Vishal Retail Broking firm: Religare Securities Reco Price: Rs 697 Target Price: Rs 1018 CMP: Rs 695 Upside: 46%

Vishal Retail has 70 stores, out of which 80 per cent are located in Tier-II and Tier-III cities and is a strong player in high margin apparel space with focus on private labels. This has been partly responsible in improving margins and profitability. It has aggressive plans to add 200 more stores and five million square feet between FY07-11 taking the total area to 6.2 million square feet.

Indian organised retail is expected to grow 25-30 per cent between FY07-11 to $60 billion. However, Vishal’s revenues and profits are expected to grow at 77 per cent and 81 per cent between FY07-11 respectively. Though not directly comparable, Vishal trades at 15 times its estimated earnings for FY09, which is at a significant discount to Pantaloon (44 times) and Shoppers’ Stop (41 times)

Analysts corner

Gujarat NRE Coke Reco price: Rs 73.45 Current price: Rs 87 Target price: Rs 113 Brokerage: Macquarie Research

Macquarie compares Gujarat NRE Coke with Chinese coal company Hidili, which has proposed an initial public offering, as there is hardly any comparable peer for the former in India. The brokerage infers that Gujarat NRE Coke is valued at a significant discount and has an upside potential of over 50 per cent, and rates it an outperformer.

Gujarat NRE Coke’s total coal resources are measured to be nearly 589 million tonne, valued at $1 per tonne. In comparison, Hidili’s resources of 217 million tonne are valued at $8.4 per tonne, Macquarie expects Gujarat NRE Coke’s production of coal to overtake Hidili’s production by FY11, as Gujarat NRE Coke’s newly acquired mines go on-stream.

Further, Gujarat NRE Coke clocks higher revenues ($127 million in FY07) compared to Hidili ($109 million in FY07). However, Gujarat NRE Coke commands an enterprise value (EV) of just $587 million as compared to Hidili’s EV of around $1.4-1.8 billion.

Based on EV/tonne, Gujarat NRE Coke trades at $2.2 a tonne, which is 20 per cent of Hidili’s $10 per tonne, considering that the fully subscribed offering of Hidili trades at the higher end of its price band. Going by price-earnings (P/E) multiples, Gujarat NRE Coke trades at a P/E ratio of 12.5 times estimated FY08 earnings, much lower compared to around 28.5 times for Hidili.

Alembic Reco price: Rs 76 Current price: Rs 79 Target price: Rs 110 Brokerage: IL&FS InvestSmart

Alembic, a leading player in the Indian formulations space with a 39.7 per cent market share in the macrolides segment, is expected to record a compounded annual growth rate of 23.2 per cent in revenues and 33.5 per cent in net profits through FY07-09.

IL& FS InvestSmart expects the revenues and net profits to be Rs 910 crore and Rs100 crore in FY08, and Rs1,060 crore and Rs130 crore in FY09, respectively, much above the expected market growth rates.

Alembic has restructured its product mix from anti-infective products which are at a maturity stage in their life-cycle to a high-growth life style product basket, thereby focussing more on higher profitability.

In order to accomplish this, in January 2007, Alembic acquired the non-oncology division of Dabur for Rs159 crore, with full rights to market 24 brands in the high-growth, life-style therapeutic segments. At Rs 76, the stock traded at a price-earnings ratio of 10.5 times and 8.5 times estimated FY08 and FY09 earnings respectively. The brokerage recommends a “buy”.

Kirloskar Ferrous Reco price: Rs 44 Current price: Rs 43.75 Target price: Rs 65 Brokerage: Anand Rathi

Banking on the favourable industrial environment and buoyant auto sector, Anand Rathi expects demand for steel and castings to remain robust. As a result, the brokerage expects Kirloskar Ferrous to be able to register a strong growth in its revenues and expand its margins.

Kirloskar Ferrous has lined up Rs 330 crore as capital expenditure for the next two years, expanding both the molten metal and castings capacity from the present 240,000 and 84,000 tonne, respectively, to 425,000 and 130,000 tonne. It has initiated cost savings in coke by setting up a hot stove and a turbo blower.

This is expected to save nearly 10-15 per cent in coke cost, a major raw material in producing pig iron. It is also putting up a sinter plant, which would aid in cost reduction in iron ore production.

The rise in castings capacity and cost reduction measures are likely to be key drivers for better margins. For FY08 and FY09, the brokerage expects a top line growth of 20 per cent and 11.6 per cent, respectively from Rs 525.1 crore in FY07 to Rs 632.3 crore in FY08 and Rs 705.7 crore in FY09.

An operating margin expansion of 220 basis points in FY08 and 100 basis points in FY09 is likely. At Rs 44, the stock is valued at 13.5 times estimated FY08 earnings and 10.6 times estimated FY09 earnings.

Larsen & Toubro Reco price: Rs 2621 Current price: Rs 2783 Target price: 2921 Brokerage: Edelweiss

Edelweiss estimates Rs 14 trillion to be spent on infrastructure in India, across segments over FY07-12. As a result, with its broad-based and deep presence, Larsen & Toubro (L&T) is expected to witness a noteworthy momentum in order intake.

Over FY08-09, Edelweiss expects L&T’s order intake to be Rs 61,400 crore in the infrastructure space, in addition to Rs 13,100 crore order intake from the process vertical.

In the core engineering and construction segment, the order accretion is expected to be around Rs 74,600 crore over FY08-09, and there could be positive surprises with large orders accruing from verticals like ship building, dredging, defence, power and railways.

Also, given that both defence and ship building/dredging have better profits compared to L&T’s current portfolio, the company’s overall consolidated margins are expected to expand over the next three-four years.

Led by stellar performance of L&T’s key subsidiaries like L&T Infotech, L&T Finance, L&T Oman, and its transportation arm, the subsidiary portfolio contributed 21 per cent to overall profits of the company, last fiscal.

Edelweiss expects the growth trajectory for its subsidiary portfolio to further improve and contribute 20% to consolidated revenues and 30% to consolidated profits by FY09. At Rs 2621, the stock traded at a price-earnings multiple of 28.6 times estimated FY08 earnings and 21.5 times estimated FY09 earnings.

Analysts corner

Cadila Healthcare Reco price: 320 Current price: 303.5 Target price: 416 Broking firm: Religare

The research firm believes that Cadila Healthcare’s domestic and international operations are on track to deliver a robust performance over the next two years.

While domestic operations are likely to be ahead of the industry, export sales would be driven by the US, French and Brazilian markets. Zydus France is on track to turnaround in FY08 and will have a positive impact on margins.

The company’s JV with Hospira for oncology products is also progressing smoothly. Further, CHL is eyeing acquisitions in the European markets. We believe CHL’s growth drivers remain strong and estimate that the company will witness an earnings growth of 20.7 per cent to Rs 340 crore over FY07-FY09.

A key concern for the medium-term is the ongoing patent litigation on Altana’s Pantoprazole (now part of Nycomed) which is now proceeding to the trial stage.

While the court has stated that the generic companies (Teva and Sun Pharma) would need to meet a higher burden of proof, if the trial goes in their favour and a generic version is launched in FY09, it could significantly affect Religare’s FY09 estimates for Cadila as it makes the drug for the patent holder.

Prism Cement Reco price: 61.25 Current price: 62.25 Target price: NA Broking firm: HDFC Securities

Owing to the healthy uptrend in the cement industry over the last two years, Prism Cements (PCL) has planned an expansion at its Satna plant of 2 mtpa clinker which is expected to come onstream by 2010. This would offer locational advantage, as the demand is strong in the North and growing at a good rate, while capacities are limited.

It has also planned a greenfield expansion of 3 mtpa clinker capacity in Andhra Pradesh, which is slated to be completed by 2012. These two expansions would involve a capital outlay of about Rs 1600-1800 crore and a major part of it would be funded by PCL through internal accruals.

PCL has the best operating margins across the industry recording an EBIDTA margin of 43.1 per cent for FY 2007 and has shown an excellent growth trend over past few years.

For the last quarter ended June 07, PCL witnessed another high in its operating margins recording 50.6 per cent, the best in the industry. HDFC Sec recommends accumulating the stock in the Rs 53-61 band for 30-40 per cent gain in a year’s time.

Jindal Saw Reco price: 620 Current price: 617 Target price: 813 Broking firm: Khandwala Securities

Jindal SAW (JSL) is the largest pipe producer in India with an annual capacity of 1.25 million tonnes. Its saw pipes, seamless pipes and ductile iron pipes divisions have capacities of 9.5 lakh, 1 lakh and 2 lakh tonnes respectively.

JSL would add about 2 lakh tonnes of spiral pipe capacity by March 2008 for catering to oil & gas as well as water transportation sectors. The company would increase its seamless pipe capacity to 2.5 lakh tonnes by June 2008.

The company is also putting a 15 MW power plant based on waste gases, which would improve profitability. The current capacity utilisation for pipe plants for the last financial year stood at 46 per cent.

There is further scope of improving utilisation, which would improve volumes going forward. The company has recently divested its minority interest in US operations as the company want to focus on pipe business only.

This divestment will fetch JSL post tax cash flow of over Rs 8,40 crore. JSL has an order book of Rs 2870 crore for Indian operations (excluding US order book), which is going to be executed in current financial year.

The company is also expected to receive a significant number of orders from upcoming oil and gas projects in India as well as abroad as cost of conversion in India is approximately $50/tonne vs. $90-110/tonne for overseas competitors.

GEI Industrial Systems Reco price: 98.45 Current price: 115 Target price: 240 Broking firm: Networth

GEI manufactures air cooled heat exchangers and air cooled steam condenser and other allied products used in critical applications in oil refinery, thermal power and gas transmission projects.

Booming petroleum and petrochemicals business, the company’s scalability in operations and product mix and ability to bid for big-ticket projects are positives for GEI. Its revenues are expected to grow annually at 51 per cent and EPS at 89 per cent over FY07-09.

The recommended price of Rs 98.45 discounts the FY07 EPS of Rs 3.99 by 24.7x and the FY08E and FY09E EPS of Rs 6.53 and Rs 14.31 by 15.1x and 6.9x respectively.

The firm recommends a buy on the stock as the significant growth story would unfold over FY07-09 on the back of opportunities in the petroleum, gas exploration, processing and transportation and power sectors. Networth has a 18-month price target at Rs 240, which gives an upside of 144 per cent over the recommended price.

Indian Hotels Reco price: 128 Current price: 128.5 Target price: 170 Broking firm: Mata Securities

Indian Hotels enjoys a stong brand image and operates 81 hotels in all major business and tourist destinations across India and 11 hotels outside the country.

Its presence in the low-tariff Ginger brand of hotels, food and beverage business, air catering and travel assistance services insulates it from segmental business risk.

The company is expanding its operations in F&B business with a target to generate an annual revenue of Rs 5000 crore within a period of five years.

The company has registered 30 per cent annual growth in total income during FY03 to FY07 to Rs 2506 crore. Operating profit margin improved from 17 per cent to 31 per cent while net profit margin moved up from 3 per cent to 15 per cent in the same period.

At recommended price of Rs 128, it trades at 20.84x its FY’07 earning and 14.88x on EPS’09E on diluted equity.