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SKS Microfinance, Reliance Industries , Cairn

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Trading Call - Cairn India

Sell Cairn India - SL - Rs 278 for Target Rs 230

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Nestle, Cairn India, Ranbaxy, Godrej Consumer, Strategy

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Bajaj Auto,Bharat Forge, Cairn, Financial Tech, JP Associates, Maruti Suzuki, MTNL, Reliance Capital, Reliance Industries, Unitech, VSNL

Cairn India

Cairn India

Cairn India

Morgan Stanley research is bullish on Cairn India and has maintained overweight rating on stock with target price of Rs 191.

Morgan Stanley research report on Cairn India

Conclusion:

We are increasing long-term earnings by 20% and upgrading Cairn India to Overweight and raising our price target to Rs191. Our global team has raised normalized long-term crude oil (WTI) price forecasts to USD65/billion from USD55/billion. Cairn is India’s most levered company to crude oil prices. At a 2008E EV/boe of 14.1x, Cairn trades in line with its global peers, though its major production is two years away.

However, on C2010 earnings it trades at 6x P/E compared to an average of 12-13x for its global peers, yielding attractive valuations. Cairn has underperformed the market by 20% since its listing, making entry look attractive at current levels. Mid-Cycle oil prices revised to USD65/billion – Our global team has raised normalized long-term crude oil (WTI) price forecasts to USD65/billion from USD55/billion, prompting us to also raise our 2007/08 assumptions from USD60/billion to USD65/billion.

We also factor in a weaker dollar and higher costs. We are also incorporating a weaker dollar and higher costs into our new estimates to reflect further tightening in the service industry. Every USD per billion change in crude oil prices changes Cairn’s earnings estimates by 3%.

Key risks:

As the Rajasthan crude is viscous in nature, handling is more difficult than for other crudes. Also, as it operates in an inland basin, the company has to create logistics handling systems to get the oil to its consumers. Finally, the amount of cess Cairn has to pay is unclear.

Investment Thesis

Cairn has an excellent track record, with three of the country’s seven landmark discoveries since 2000. It has made 30 hydro-carbon discoveries in India.

Overall, the company has working interests of 498 million boe of proved and probable oil reserves, and has the potential for 740 mmboe via enhanced oil recovery and resource optimization.

Valuation

Our valuation methodology primarily assesses cash flow of individual fields owned by Cairn India based on its 2P reserves. For our base case, we used a 10.9% cost of capital in the initial seven years of the field.

Key Catalysts

Leverage on crude oil prices. If crude were to remain at USD70/billion in the long term, our price target would move to Rs210/share. Resolution of pipeline logistics.

Key Risks

Execution: Cairn faces the challenge of executing its projects in a timely manner. Crude volatility: Global crude prices are cyclical and volatile, so Cairn’s earnings, too, may correlate with sector cyclicality. • Crude oil sales agreement and pipeline logistics still not set.

Cairn India, ITC, Hindustan Constructions,

Cairn India, ITC, Hindustan Constructions,

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Cairn India, Wipro

Cairn India, Wipro

Stocks you can pick up this week

Cadila
Research: Kotak Securities
Rating: outperform
CMP: Rs 376 (Face value Rs 5)

Zydus Cadila has acquired a 100% stake in Nikkho, a mid-sized,privately held company in Brazil. Nikkho is generating profits andposted sales of $26 million in calendar year ’06. The acquisitionprice is around 1x sales, and seems to be attractive. This is Zydus’second oveRseas acquisition this year, after the one in Japan, and ispart of its global expansion strategy.

More such acquisitions arepossible in the medium term. For FY08, the estimated revenuegrowth is expected to be 18% and net profit growth, 25%. This acquisitionwill add about 5% to the company’s revenues. Kotak hasassigned an outperform rating to Cadila, with a DCF-based targetprice of Rs 420, or 17x FY09 earnings.

Reliance Communications
Research:HSBC
Rating: Outperform
CMP: Rs 517 (Face Value Rs 5)

HSBC believes that it is time to update/upgrade its estimate of thevalue unlocked by Reliance Communications’ (RCOM) balancesheet, following the planned spin-off of its telecom tower and undeRseafibre optic assets. RCOM will be the fiRst operator to monetisetower assets via a strategic investment by private equity playeRs/tower operatoRs. The company acquired its FLAG undeRsea fibreoptic unit in ’04 and is well-positioned to benefit from the globalre-rating of fibre, following the listing of FLAG on London’s AIMlater this year.

In a May ’07 initiation report, HSBC valued RCOM’stower business at $4.8 billion or Rs 97 per share, based on 12,000toweRs. It has since updated its tower valuation, based on the15,000 toweRs the company currently has in place, thus raising valuationto $5 billion or Rs 102 per share. The target price for thestock has now been upgraded from Rs 624 to Rs 644.

Tata Steel
Research: Macquarie Research
Rating: Outperform
CMP: Rs 597 (Face Value Rs 10)

Tata Steel’s recently acquired subsidiary, Corus, has announced a7% hike in UK wire rod prices for deliveries beginning in July.Corus has been increasing prices across product segments sinceFebruary this year. Macquarie has assumed a year-on-year increaseof 3% in average realisations for FY3/08 for Tata Steel and Coruscombined. Prices remaining at current levels could add Rs 9 to theFY3/08 EPS estimate.

Tata Steel trades at a rights-adjusted PER of5.4x its FY3/08 EPS estimate, which represents a 43% discount toAsian steel stocks Macquarie believes that this steep discount is unwarranted,given the margin expansion and strong growth that isprojected for the company. It strongly reaffirms its outperform recommendationwith a target price of Rs 800.

Ranbaxy
Research: CLSA
Rating: Outperform
CMP: Rs 355 (Face Value Rs 5)

While CLSA maintains an outperform rating on the stock, it has downgraded its target price for the stock from Rs 445 Rs 405. CLSA believes that even though there have been visible improvements in cost control in both selling, general & administrative (SG&A) and research& development (R&D), organic growth remains a challenge and aweak balance sheet limits its ability to grow inorganically. A 10% appreciationin the rupee vis-à-vis the dollar will result in a strong secondquarter (expected profit of more than Rs 300 crore), as well as an8% upgrade to CLSA’s CY07 estimates due to the translation gains on$600 million+ ECB/FCCBs.

However, CLSA is concerned about a potentialstructural downward shift in margins if the rupee remainsstrong and is downgrading its CY08/09CL estimates by 12%, assuming that the rupee trades at 42 to a dollar.

LIC Housing Finance
Research: SBICAP Securities
Rating: Buy
CMP: Rs 206 (Face Value Rs 10)

SBICAP believes that LIC Housing Finance (LICHF), the second largest non-banking housing finance company (HFC), is a serious long-term player in the business and deserves better valuations.The industry offeRs great potential for growth, given Indian demographics.LICHF will be able to reap benefits with its marketingnetwork and enhanced operational set-up. SBICAP expects thedisbuRsements for LICHF to witness a compounded annual growthrate (CAGR) of 22.5% over the next three yeaRs, against 11.7%CAGR witnessed in the past three yeaRs. It believes that the restructuringof business processes and improvement in credit qualityundertaken by LICHF will also pay dividends.

At the currentmarket price of Rs 193, the stock is trading at 5.7x (FY08E) and4.8x (FY08E) its earnings and 1x (FY08E) and 0.8x (FY09E). Thecurrent valuations do not fully reflect the growth potential of theindustry and the company. With expected return on equity (RoE)at around ~17.5% and return on assets (RoA) at ~1.4% over thenext couple of yeaRs, SBICAP believes that the stock deservesbetter valuations.

Union Bank
Research: CLSA
Rating: Buy
CMP: Rs 212 (Face Value Rs 10)

Union Bank of India is the fifth-largest state-owned bank. Itranks in the top tier on all operational measures with 30% earningsgrowth in FY08CL and has one of the highest FY09CL returnon equity (RoE) at 21%. With the non-retail sector accounting formore than 75% of its lending, Union Bank is a key beneficiary of rising corporate credit demand. With the management strategicallyreducing its lending to large corporates and focusing on thesmall & medium enterprises (SME) segment, CLSA expects marginsto expand by 4-7 basis points over the next two yeaRs.

UnionBank trades at a 20-25%discount to its peeRs like Bank of Indiaand Canara Bank. CLSA believes that while it has underperformedin the past year, given earnings growth in excess of 30% in FY08and high RoE of 20% in FY08, Union Bank could trade up to 1.2-1.3x one-year forward (FY09CL) adjusted book, with a pricetarget of Rs 180.

Cairn India
Research: Citigroup
Rating: Buy
CMP: Rs 146 (Face Value Rs 10)

Citigroup has set a target price of Rs 185 for Cairn India, based ona 15% premium to net asset value (NAV) of cash flows and recoveryand exploration upsides. Cairn India’s owneRship of valuable oil reservesin Rajasthan should generate steady cash flows from ’09, besideshaving the potential to generate further upside from enhancedoil recovery (EOR) and exploration.

Cairn India’s valuations areamong the most highly leveraged to crude among global exploration& production (E&P) peeRs, offsetting inherent operationalrisks. Key risks include delays and cost overruns, unfavourable rulingon cess liability being higher and potential conflict of interestarising out of Cairn’s majority owneRship in Cairn India, especiallyin the context of the new exploration assets in the country.

Ansal Properties, Apollo Hospitals, Cairn India

Ansal Properties, Apollo Hospitals, Cairn India

Macquarie - Unitech, Citigroup - Cairn, India Market Watch

Macquarie on Unitech say,

Unitech announced a strong set of FY3/07 results, with top-line revenue rising 255% to Rs33.9bn from the FY3/06 level, and net profit up 15x at Rs13.05bn; implying an EPS of Rs16.09 for the full FY3/07.

Impact
We estimate that approximately half of EPS, ie Rs8, is from the sale of commercial assets to UCP, a vehicle listed on AIM, London in December 2006. Excluding this sale to UCP, remaining net profit is in line with or core business full year FY3/07 EPS estimate of Rs7.92.

Our estimate suggests that the company must have delivered ~8m sqf in FY3/07 in line with our expectation of 7.8m sqf. We believe the company is on track to achieve our strong development schedule forecasts (FY3/08 and FY3/09), and thereby reduce execution risk.
Operating margins are very strong at 62.0% against our expectation of 44% but the two numbers are strictly not comparable. The reported numbers include the sale of commercial assets to UCP where company has partly monetised its land at relatively higher margins.

UT is planning to hive-off 25¿30% of its hotel assets comprising 28 hotel sites, and press reports suggest this is likely to be valued at $2bn. Presently we have valued these hotel sites around $450m.

UT stated that it plans to spend $6bn over next four years to develop residential, commercial, retail properties and build hotels.

UT's board of directors has also announced 1:1 bonus shares. This is the second time the company has declared bonus shares in the last 12 months. The board also announced a 25% dividend for FY3/07.

Earnings revision
No change.

Price catalyst
12-month price target: Rs501.00 based on a Sum of Parts methodology.

Catalyst: Surging Residential Demand and Higher Realisations
Action and recommendation
We strongly reiterate our Outperform rating. We believe Unitech is a very good proxy for the Indian property sector as it is the most diversified property company both geographically and in terms of business segments. We also see Unitech getting re-rated with DLF soon looking to hit the capital markets. Our best-case scenario (which includes option value of future projects like the 38,000-acre Kolkata project) suggests a potential price of Rs750-800.


Citigroup in their report on Cairn India

Oil forecasts raised

After our global oil numbers were raised to US$63.5/b, US$60/b and US$55/b for 2007E, 2008E and long-term respectively, we adjusted our estimates for Cairn India. Our core NAV moved up to Rs160 from Rs146, with a target price of Rs185 reflecting a 15% premium to NAV. Cairn is highly leveraged to long-term oil price expectations.

Uncertainty over offtake should pass; Buy

The recent newsflow on new refinery and consequent changes to the ¿approved¿ production plan are overdone in our opinion. While the associated political overtones of recent developments could delay first oil, there is unlikely to be a complete overhaul. The sensitivity of NAV to a 6-month delay is a manageable 4%. The recent correction in the stock therefore, in our view, offers favorable risk-reward in the context of consensus oil moving up.

Core valuation support

At long-term Brent of US$55/bbl, the shares trade at 0.85x NAV. But potential bid interest raises the possibility that a higher oil price is used in the bid valuation. In this context, premium to NAV of 15% therefore imputes a long-term oil assumption of US$60/bbl.
Oil upgrade drivers

We remain of the view that a weak US$, rising costs and limited
visibility on new sources of long-term non-OPEC supply strengthen OPEC's ability to set a floor under prices facilitated by a creeping increase in market share


Citigroup in their report India Market Watch...

Spotlight on External Commercial Borrowings: Latest data on external borrowings (ECBs) indicates that corporates raised a record US$25.3bn during FY07, over 50% higher than the amount raised during FY06, and breaching the annual cap of US$22bn fixed by the Finance Ministry. ECBs during March 2007 totaled as much as US$5bn- the highest-ever borrowing in a single month. Over the past year, ECBs. which include loans, buyers/suppliers credit, securitized instruments and Foreign Currency Convertible Bonds (FCCBs) have been a growing source of funding for corporates and have a minimum average maturity of 3 years (for ECBs below US$20mn) and 5 years (for ECBs over US$20mn).

ECB uptrend has created a liquidity dilemma: Given the backdrop of an unfolding capex cycle and rising investment spend across industries such as infrastructure, telecom, cement and financial services; ECBs have emerged as a significantly cheaper corporate financing strategy especially under the current scenario of tighter domestic interest rates and a steady appreciation in the rupee. While overseas borrowings make commercial sense for most companies in the current backdrop, they have posed as a liquidity concern given that higher foreign inflows have resulted in more dollars coming into the system, thus creating inflationary worries.

New Regulations make ECBs less attractive. In order to manage capital flows, the RBI recently imposed several regulations that would make ECBs less attractive. These include (1) lowering interest rate ceilings on ECBs under the automatic route1 thus making it difficult for companies with lower credit quality to access overseas markets. (2) Banning ECBs for integrated townships for100 acres or more thereby further tightening funding towards real estate. While the new norms will help limit borrowings, given the uptrend in FDI, we are maintaining our full year balance of payments estimates of a reserve accretion to the tune of US$21.5 and our rupee appreciation view.

Kotak - NTPC, Tata Power,Shriram Transport Finance, Cairn India

Kotak Institutional in their report on NTPC

NTPC reported net sales of Rs88.6 bn, EBITDA of Rs23.4 bn and net profit of Rs17.4 bn for 4QFY07 as against our estimate of Rs80.6 bn, Rs20.9 bn and Rs14.8 bn respectively.

Better than expected operating performance, higher prior period revenue and other
income (including forex gains) resulted in the company reporting higher than expected
profits. Higher fuel expenses (usage of naphtha and spot LNG) further contributed to
higher revenues. NTPC has also made additional provisions for the pending pay revision of the employees w.e.f. January 1, 2007. The reported net sales of Rs326.3 bn for FY2007 includes income tax of Rs16.76 bn recovered through tariffs. The tax recovered through tariffs was earlier not included in the reported revenues. We will revisit our estimates after the conference call when more details on operating performance and non-recurring income/expenses are available. We retain our In Line rating on the stock with DCF based target price of Rs160/share.

Kotak Institutional in their report on Tata Power

Tata Power (TPC) reported 19% decline in revenues and 97% decline in EBITDA during
4QFY07 as against our estimate of 42% decline in revenues and 75% decline in EBITDA. The year-end results are lower due to the reversal of tax provisions of earlier years resulting in a net surplus of Rs2.42 bn over the reasonable return requirement. MERC in its tariff order for Tata Power had adjusted the net deficit of previous years against available reserves and also used the residual reserves of Rs0.62 bn for reducing the applicable tariffs for FY2007. FY2007E are impacted by one-off adjustment to tariffs and FY2008E reflect the normalized earnings based on FY2007 tariff order. We note that TPC has filed a petition seeking the review of the tariff order and has not made any adjustments in the accounts till now. Reported profit of Rs0.93 bn (our est. loss of Rs0.37 bn) includes a large other income of Rs1.78 bn (Rs0.29 bn from sale of investments) compared to only Rs0.53 bn last year. We will revisit our estimates when more details on the other income and operating performance of the company are available. We retain our In Line rating with SOTP based target price of Rs670/share.

Kotak Institutional in their report on Shriram Transport Finance

STFC's net profit was up 28% yoy to Rs484 mn supported by growth in net operational income (Rs1,829 mn) up 37% yoy. Key highlights: (1) Moderate disbursements growth in 4QFY07 of 24% yoy as against 73% in 3QFY07- nevertheless disbursements were ahead of our estimates, (2) spreads have likely been stable, (3) Gross NPLs increased to 1.9% in 4QFY07 from 1.2% in 3QFY07 - this is a concern and we will ascertain reasons for the same. We will revisit our estimates after the conference call with management. Retain OP with target price of Rs155.

Kotak Institutional in their report on Cairn India

An unconfirmed Bloomberg report has cited that Cairn India may be barred from building a pipeline to transport crude from its Rajasthan fields. Instead, the government wants Cairn to reduce plateau crude production to 80,000 b/d from the currently planned 150,000 b/d and ONGC to build a refinery to use the crude oil. We see absolutely no logic for sub-optimal production of crude oil and refinery capacity and do not expect such an eventuality. Nonetheless, this development, if confirmed, could have a significant impact on the valuations of Cairn India. We have previously highlighted the pending issue of crude evacuation as a key downside risk; however, we have seen this more as a financial issue (cost recovery). We maintain our earnings estimates and our 12-month DCF-based target price of Rs130.

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