Bull’s Eye

Reliance Industries
Research: UBS Investment (June 14, ’07)
Rating: Buy
CMP: Rs 1,680 (Face Value Rs 10)

Based on an improved outlook for gas price realisation from KG D6 gas, UBS Investment has raised the FY09 EPS estimate by 3.6% from Rs 96.4 to Rs 99.8, while FY08 estimate remains unchanged. Media reports indicate that Reliance Industries (RIL) has received bids in the region of $4.3-4.7/mmbtu (excluding transportation charges, marketing margins and sales tax) for 25 mmscmd of gas. The contracts are likely to be for three years. UBS is upgrading its estimate for average KG D6 gas realisation from $3.55/mmbtu to $4.2/mmbtu. Recent disclosures by RIL’s partner, Hardy Oil (HOGP), indicate additional upside in new blocks D3, D9 and GS-01. HOGP has estimated gross prospective resources of 33.6 tcf of gas in D9 and 4.2 tcf of gas in D3. RIL has 90% interest in these blocks.

Dabur
Research: Macquarie (June 13, ’07)
Rating: Outperform
CMP: Rs 101 (Face Value Rs 1)

Dabur’s competitive advantage lies in its niche position as the premium player in ‘herbal’ personal care products. The company owns some of India’s most trusted brands in hair care, oral care and health supplements on an Ayurvedic platform. These factors support Dabur’s margins due to sustainable pricing power. The trend of margin expansion is unlikely to reverse. The strength of Dabur’s core business and brands, combined with the positive impact of its recent forays on the bottomline, should protect against any margin erosion due to investment in new businesses such as retail. Macquarie expects Dabur to remain among the fastest-growing FMCG players in India and report a three-year earnings CAGR of 18%. The company’s core business strength has enabled it to consistently deliver 20-50% earnings growth over the past five years. Importantly, earnings have outpaced revenues in each of these years. Dabur trades at a P/E ratio of 17x FY08E earnings, which is at a ~20% discount to its domestic consumer sector peers.

Gujarat State Petronet
Research: Citigroup (June 13, ’07)
Rating: Buy
CMP: Rs 55 (Face Value Rs 10)

Citigroup has raised the target price of Gujarat State Petronet as higher volumes of gas are likely to flow from Reliance Industries through GSPL’s network, as indicated by the management of both companies. The gas volumes transported through GSPL’s pipeline network are likely to increase ~2.5-fold to 38 mmscmd by FY12E. Recent speculation on the adverse impact of regulatory intervention in setting pipeline tariffs is premature and overdone. Based on the analysis, introducing regulated tariffs on the cost of service methodology may result in a net positive impact of 7-11% to Citigroup’s steady state (FY10-12E) earnings estimates. GSPL is Citigroup’s top pick in the domestic gas utilities space. A pure play gas transmission company, GSPL is highly levered to increasing consumption of gas in Gujarat, without being exposed to the vagaries of gas pricing. The stock trades at 8.8x FY09E P/CEPS, marginally higher than other gas utilities, but this is justified by its 30% EPS CAGR over FY07-10E (significantly higher than peers) and highest leverage to KG gas

Jaiprakash Associates
Research: CLSA (June 14, ’07)
Rating: Buy
CMP: Rs 690 (Face Value Rs 10)

Jaiprakash is well-positioned for growth in the construction, cement, hydropower and real estate sectors. Cement capacity is set to triple by FY10 and construction revenue should improve by H2 FY08 as the Taj Expressway project takes off. Jaiprakash will triple its cement capacity to 21.7 million tonnes by FY10CL. Its average cost of capacity expansion is 30-40% below benchmark replacement cost, and it will receive excise duty and sales tax exemptions at some of its new plants. The government’s strategic interest in hydropower will boost the company’s construction order flow (hydro-projects comprise 70% of the order book) and provide opportunities for investment in new projects. The company’s two existing projects earn a 22-24% return on equity. Jaiprakash’s construction business will also see a rebound in construction segment revenue in FY09CL, with a pick-up in progress of the Rs 6,000-crore Taj Expressway project. The addition of 650 acres to its existing land bank of 600 acres in Noida, over the next few months, will deliver visibility on the value-creation potential in the Taj Expressway project.

Indraprastha Gas
Research: Enam Securities (June 11, ’07)
Rating: Buy
CMP: Rs 120 (Face Value Rs 10)

Indraprastha Gas (IGL) is the only distributor of compressed natural gas (CNG) and piped natural gas (PNG) in the national capital territory of Delhi (NCTD). IGL offers a leveraged play on the increasing penetration of natural gas in India. During Q4 FY07, IGL continued to benefit from its aggressive marketing strategy in CNG and PNG. As a result, it experienced a 12% YoY and 2% QoQ growth in CNG, primarily driven by conversion towards CNG by private car owners. PNG sales grew 44% YoY and 14% QoQ in Q4 FY07. Overall, IGL posted a 13% volume growth in Q4 FY07. Enam expects IGL to sustain a long-term volume growth of over 10% given: (1) economic benefits of CNG (2) regulatory directives and (3) a relatively under-penetrated market. Although competition remains inevitable in the near future, Enam expects IGL’s leadership position to be maintained, given its access to gas supplies and its first mover advantage. Given IGL’s strong business franchise, superior profitability and inexpensive valuations, it’s attractively valued at 9.8x FY08E EPS.

Gateway Distriparks
Research: ASK Securities (June 13, ’07)
Rating: Buy
CMP: Rs 178 (Face Value Rs 10)

Gateway Distriparks (GDL) is the largest private sector logistics service provider in the container freight station (CFS/ICD) business with a market share of 18%. With India’s containerised traffic set to double to 10 million TEU over the next five years, GDL is well-positioned to capitalise on the same. Unbridled competition in the traditional CFS business has led to a price war, which is most likely to play out for a few more quarters. Hence, margins may remain range-bound at 50%. Landside infrastructure development, particularly with regard to the upcoming dedicated freight corridor, may not lock step with growth in container traffic and therefore, the shift in time lines will impact the overall throughput. GDL is in the right business at the right time. While opportunities are compelling, the near-term prospect for GDL is lukewarm. Hence, GDL is an investment proposition only for the long term. Based on ASK Securities’ DCF analysis, the fair value is Rs 251. GDL discounts its FY08 and FY09 earnings of Rs 9.8 and Rs 11.6 by 18.2x and 15.5x, respectively.

Max India
Research: Merrill Lynch (June 8, ’07)
Rating: Sell
CMP: Rs 250 (Face Value Rs 2)

Merrill Lynch has downgraded Max India to a ‘sell’ as the company continues to lose market share and its first-year premia growth (though up 72% YoY) was 17% below estimates and 30% below the sector growth of 104%. Healthcare revenues were also 16% below estimates. Merrill Lynch has assigned higher NBAP multiples of 20x FY09E NBAP (v/s 16x earlier) due to its strong growth trajectory and higher margins that Max New York Life is likely to have on higher share of traditional policies and lower costs.

ASK - Gateway Distripaks

ASK Securities report on Gateway Distriparks:

Investment highlights:

Leader in traditional CFS business: Gateway Distriparks (GDL) is the largest private sector logistic service provider in the container freight station (CFS/ICD) business with market share of 18%. With India's containerized traffic set to double to 10 mn TEU over the next five years, GDL is well positioned to capitalize on the same.

Emerging leader in contemporary business - rail services: GDL is yet again the only private sector player to provide rail services, currently in partnership with the incumbent CONCOR and plans to eventually provide its owned services. This business venture, both complements as well as supplements GDL's traditional CFS/ICD business as rail connectivity provides compelling economics - 2.5 times cheaper than road in hauling containers to and from port gateways.

Envisions becoming an end-to-end logistic company: GDL envisions of becoming a full service container logistic outfit over the next five years with expertise spanning across the entire value chain, CFS/ICD, W&D, MTO, and cold chain. Its recent foray into cold chain logistics along with its rail services marks the beginning of this transformation.

Investment concerns

Margins to be under pressure in the near term: Unbridled competition in the traditional CFS business has led to a price war, which is most likely to play out for a few more quarters, thereby margins are likely to remain range bound at 50%. Delay in growth of support infrastructure: Landside infrastructure development particularly with regard to the upcoming dedicated freight corridor may not lock step with growth in container traffic and therefore the shift in time lines will impact the overall throughput.

Valuation

Worthwhile does take a while: GDL is in the right business at the right time. Whilst the opportunities are compelling, the near term prospect for GDL is lukewarm. Hence, GDL is an investment proposition only for the long-term. Based on our DCF analysis, the fair value is Rs251. GDL discounts its FY08 and FY09 earnings of Rs9.8 and Rs11.6 by 18.2x and 15.5x respectively. We initiate coverage with a Buy rating.

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