Quickies - ENAM - Ambuja Cements

ENAM has a target price of Rs. 152 on Ambuja Cements

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.

ENAM, ADAG Portfolio

ENAM Portfolio

Company Name	% stake
Bannari Amman	3.4
Champagne Indage	1.4
Educomp Solution	5.9
Elder Health	2.8
Elgi Equipment	1.7
Ess Dee Aluminiu	7.2
FDC	1.5
Greenply Inds.	3.8
Guj. Flourochem.	1.3
Helios Matheson	1.0
Hi-Tech Gears	3.1
IP Rings	7.1
Kar Mobiles	4.3
Kernex Microsyst	1.1
Khaitan Elect.	4.4
Lak. Mach. Works	2.4
Motherson Sumi	1.4
MRF	5.1
Munjal Showa	7.1
Pantaloon Retail	1.0
Plethico Pharmac	1.3
Polyplex Corpn	3.6
Prima Agro	2.0
Prithvi Info	1.2
Rane Engine Val.	3.9
Rane Holdings	1.1
Rico Auto Inds	2.3
Shree Ram Mills	3.7
SPL Polymers	1.2
Sterling Tools	1.8
Super Spinning	1.4
Taneja Aerospace	2.6
XL Telecom	3.5

ADAG

Company Name	% stake
Bhartiya Intl.	2.8
HBL Power System	3.0
Zodiac Cloth. Co	6.4
Anant Raj Inds.	4.8
Champagne Indage	6.8
Hitachi Home	2.2
ICSA (India)	6.8
KLG Systel	3.7
Magma Shrachi	12.7
Mercator Lines	1.8
NDTV	1.6
Network 18	2.5
OCL India	1.4
Oswal Chem & Fer	5.0
PVR	1.3
Ramco Systems	2.2
Reliance Communi	0.7
Reliance Natural	0.0
Saregama India	6.0
Shri Lakshmi	2.0
TV 18 India	2.6
Venus Remedies	2.5
Viceroy Hotels	3.1
Hind.Dorr-Oliver	1.1

ENAM - India Cement Sector

ENAM - India Cement Sector

(link updated, download the second pdf)

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.

Lakshmi Machine Works, Crompton Greaves, Nagarjuna Constructions, Britannia, Maruti Udyog, Mahindra & Mahindra, Welspun

ENAM on Lakshmi Machine Works,

Revenue growth expected at 35% in FY08E and 22% in FY09E. A stable pricing environment and volume driven operating leverage is expected to deliver earnings growth of 34% CAGR over the next 2 years.

At CMP (Rs 2,636) the stock trades at P/E of 11x FY08E earnings of Rs 229 and 9x FY09E earnings of 298. We continue to maintain our sector Outperformer rating on the stock.

ENAM on Crompton Greaves

CG has acquired Microsol Holdings, a power automation company for an EV of Euro 10.5mn or 8.7x EV/EBIDTA. The acquisition has further strengthened CG’s power T&D product portfolio, making it a total T&D solutions provider, at par with global majors such as ABB, Siemens, etc. CG believes that it can scale up this acquisition by 5-7 fold to Euro 50-70mn over the next 2 years. Globally power automation is ~20% OPM business and going by CG past track record, we estimate that the acquisition will pay off in < 2 years.

Strong growth in global T&D market and surging corporate capex has enhanced visibility across CG’s segments. Hence, we believe that CG will surpass its guidance of 30% revenue growth and maintain its trend of margin expansion. At CMP (Rs 246), the stock trades at 9x FY09E EV/EBIDTA. Maintain sector Outperformer.

ENAM on Nagarjuna Constructions

NCC has guided for Rs 40bn in revenues in FY08 with an OPM of 9.5%. Further, the management has guided for a 30% tax rate in FY08 due to 80 IB benefits in certain projects. This is inline with our estimates and we maintain our FY08E earnings. We believe that the proposed QIP will accelerate earnings growth for NCC and will be a key trigger for re-rating. At CMP (Rs 161), adjusted for Rs 69/share of BOT + real estate value, the stock trades at an EV/EBIDTA of 6.7x FY08E and 5.7xFY09E. Maintain sector Neutral rating on the stock.

Citigroup on Britannia

Britannia had emerged as the third most attractive candidate for a leveraged buyout (LBO) across our regional consumer universe in Feb-07. While the stock is up 50% since then and no longer attractive in our LBO screen, it is still a good fit for companies like HLL and ITC, which are trying to enhance their presence in the foods segment.

Despite factoring in lower raw material costs we are cutting our FY08E-FY09E EPS estimates by 9.2%-23.5%, mainly reflecting 1) lower than expected FY07 and 2) higher ad expenses going forward. However we increase our price target to Rs1, 825 as we roll forward our target 20x P/E 1-year forward to mid-FY09E.

Citigroup on Maruti Udyog

Domestic sales rose modestly c.10% YoY due to slowdown in mid-size segment. High base effect has also led to a moderation in growth. Maruti is offering attractive finance schemes at around 8% in select cities aided by promotions to maintain steady growth.

Key risk factors are rising rates, changing model mix and higher promotional spends/discounts. Target of 945

Citigroup on Mahindra & Mahindra

Bouyed by strong UV sales (+23% YoY) and modest tractor sales (+2% YoY). Strong Scorpio sales (+28% YoY) led to a strong growth in UV sales. UV sales without Scorpio grew by +21% YoY. 3 wheeler sales also grew by a robust +22% YoY after a modest decline in April 07.

Key downside risks are: reduced market value of principal subsidiaries (off which our sum-of-the-parts target price is pegged); rising interest rates – which could curb growth; rise in input costs. Target of 1032 (37% upside)

Macquarie on Welspun

Appreciation of the Indian Rupee (versus US dollar) is a near term concern but should not dampen Welspun’s intention to grow through multiple routes. Its organic growth strategy aims to tap the 5% interest subsidy provided through the technology upgradation fund to fund massive capacity expansion.

The Christy acquisition is in line with the inorganic strategy of driving margins through increased contributions from designer brands. Welspun is currently trading at extremely compelling valuations, considering its multiple growth drivers (PEG is <0.4). Our revised price target of Rs95 provides 34% upside

Thermax, HPCL, NTPC, IVRCL

SSKI on Thermax

Thermax has reported strong Q4FY07 results, which were broadly in line with our expectations with consolidated net profit growth of 74.3%yoy to Rs668m. However, operating margins fell 80bp yoy to 12.4% owing to raw material price pressure and higher proportion of lower margin products. Topline growth of 65%yoy has been driven by a healthy order book as well as operational improvement. Going forward with the closure of ME Engineering, robust order inflow and stable raw material cost will drive earnings. Led by favorable macro economic fundamentals, Thermax has guided for 40% revenue growth for FY08. To factor in robust earnings momentum we are increasing our FY08 and FY09 EPS estimates by 7.2% and 8.1% to Rs24 and Rs32.9 respectively. We estimate 40% CAGR in Thermax's consolidated earnings over FY07-09. Reiterate Outperformer with a revised price target of Rs 590

SSKI on HPCL

Hindustan Petroleum Corporation's (HPCL) Q4FY07 results - net profit of Rs 5.5 bn - were below our estimates, due to lower than expected refining margins. Oil bonds amounting to Rs 10bn and upstream share of Rs11.4bn more than offset the negative impact of under recovery impact of Rs 16.1bn. We upgrade the stock to Outperformer to factor in an expected improvement in fuel marketing margins driven by lower crude prices. Reiterate outperformer with a price target of Rs 375.

ENAM on NTPC

Rich valuations, Maintain Neutral
NTPC’s Q4FY07 profits were in-line with our estimates, if adjusted for extraordinary expenditure of Rs 3bn. As of now, we maintain our FY08E earnings and await greater clarity from the management on the capacity adds. Given the rich valuations (2.5x FY08E BV), the near term earnings seem fully factored in. We maintain a sector Neutral rating.

ENAM on IVRCL

The company has guided for Rs 33bn of revenues in FY08 and a marginal improvement in OPM; higher than its initial guidance of Rs 30bn in sales. Given the current order backlog and high intake capacity of the company due to increased net worth, we believe a 30% CAGR is achievable over FY07-09E. However, we are factoring in a full tax rate until further clarity on the same. Accordingly, our FY08E earnings stand revised upwards by 8%. We have also introduced FY09 earnings estimate of Rs 2.1bn

HPCL, IVRCL, IOC, Larsen Tourbo, BHEL

Merrill Lynch in their report on HPCL,

Attractive dividend yield, P/BV of 0.99; retain Buy HPCL's FY07 EPS, at Rs46.4, is almost 4x FY06 EPS of Rs12. Quality of FY07 earnings is admittedly poor as it is entirely attributable to oil bonds. There is also uncertainty on FY08E earnings. However, recent government decisions suggest bond issue may be generous even in FY08. HPCL's dividend yield is attractive - 6.5% for FY07 and 5.4% for FY08E. It is also cheaper than peers on PE and is trading marginally below estimated NAV. We retain our Buy rating on HPCL.


Merrill Lynch on IVRCL

Key Triggers: Growth, Margin Expansion & IVR Prime IPO IVRCL, our top pick in the mid-cap E&C space, reported solid 4QFY07 on all fronts. Sales were up Rs10bn +67%YoY; EBITDA margin expanded by 140bpsYoY & PAT of Rs732mn, +67%YoY. PAT was ahead of MLe due to better margins & non-prov of full tax (25% v/s MLe 32%) pending appeal in tribunal. Order backlog remains robust at ~3x FY07 sales. Value creation through the listing of IVR Prime, and 42% earnings CAGR in core business are potential triggers ahead. Buy, PO Rs450.

ENAM on Mahindra & Mahindra

While outlook for the subsidiaries remains buoyant, we are concerned about a likely moderation in the core business and the high capex outlined by M&M and its JVs (details on pg2). We continue to maintain our sector Neutral rating on the stock. At CMP of Rs 765, the stock trades at 10x FY08E and 9.2x FY09E core EPS of Rs 34.6 and Rs 38.5 respectively. Our target price of Rs 825 is based on 12x FY08 core EPS + value of subsidiaries at Rs 410/ share.


ENAM on Larsen and Tourbo

L&T’s management has guided for 25-30% revenues as well as order intake growth and 11% margins for the E&C business. Further, its tie up for supercritical technology in thermal power, foray into shipbuilding, defense and aerospace are likely to drive long term growth for L&T. Value unlocking of its IDPL and Infotech subsidiaries will be the icing on the cake. We maintain our earnings estimates. At CMP (Rs 1,857), the stock trades at 12.0x FY08E and 8.5x FY09E EV/EBIDTA (adj. for investments Rs 218). Maintain sector Outperformer and a target of Rs 2200

ENAM on IOC

Maintain Outperformer, retain price target IOC in our opinion is a low risk play in the OMC pack, given its diversified revenue stream. Also, given its relatively low regulatory
exposure to earnings, its valuations are likely to be at a premium to its domestic peers. We maintain our sector Outperformer rating and a target of Rs 525

ENAM on HPCL

HPCL reported profits largely on the back of oil bonds and upstream subsidiary assistance. Going ahead in FY08 profits remain leveraged to - (1) issuance of oil bonds and (2) sustained assistance from the upstream subsidiary. We still await clarity on the subsidy sharing mechanism as well as on the issuance of oil bonds. Given this weak
regulatory outlook, earnings uncertainty remains high and therefore HPCL is likely to trade at a discount to regional peers. HPCL has declared a final dividend of Rs12/share (in addition to an interim dividend of Rs 6/share) thereby offering a yield of 4.5% on the final dividend. This is likely to offer support for the stock. We maintain our
sector Underperformer rating. Target of Rs 280.

ENAM on BHEL

A healthy order backlog of Rs 550bn provides a strong near-term growth visibility. BHEL has an estimated outlay of Rs 44bn over FY08-09E taking its total capacity from 6000MW to 15000MW. Factoring in the higher than estimated order inflows in Q4FY07, we raise our FY08 earnings estimates by 10% to Rs 31.2bn and introduce a FY09 earnings estimate of Rs 36.3bn. We believe that order intake traction is likely to significantly slow down going forward due to increasing competitive intensity, technology gaps in the high rating hydro, nuclear and 765kv T&D space, and limited visibility in the fast growing super-critical technology space. Despite this, BHEL has set a target of doubling revenues in 3 years and reaching USD 10bn in revenues by FY12. This implies that BHEL may end up servicing unfavorable international contracts.
Hence, we believe that a premium in valuations is not justified given the uncertainties cited above. At CMP (Rs 2,856) the stock trades at a 13.2x FY08E EV/ EBIDTA. We maintain our sector Underperformer with a target of Rs 2500

Nestle, Indraprastha Gas, IOC, CBoP, Gokaldas

ENAM recommends OUTPERFORMER on Nestle

We believe Nestlé India has a significant intrinsic value (~Rs 2056 per share) and value unlocking will unfold in stages on successful introduction of brands / products from its parent¿s global portfolio and an improvement in its existing portfolio¿s reach and affordability in the rural markets. At CMP (Rs.1143) Nestlé India is currently trading at P/E of 24x CY08E and EV/EBITDA of 14x CY08E, close to its long-term one-year forward valuations. Given the growth momentum and EBITDA margin (pre provisions) expansion in Q1CY07, we believe the company has the potential to positively surprise consensus growth expectations in the interim term. We maintain sector Outperformer rating on the stock.


ISEC recommends BUY on Indraprastha Gas

IGL reported impressive 35% YoY growth in Q4FY07 recurring net income to Rs401mn, the best ever quarterly performance. Recurring net income was 11% higher than our estimates on the back of higherthan- expected volumes and margins. The company's growth prospects are bright based on accelerated conversion of private vehicles to CNG and incremental demand of 1,000 CNG buses due to Commonwealth Games in '10. Valuations are attractive as the stock has fallen 14.1% YoY and has underperformed the BSE-200 45% in the past one year. Maintain BUY.

ISEC on Indian Oil Corporation

Indian Oil (IOC) reported recurring net income of Rs29bn in Q4FY07 as against Rs8bn in Q4FY06. The impressive 262.5% YoY growth was post pro-rata adjustment of oil bonds worth Rs65.7bn issued to IOC in Q4FY06 for full FY06. However, reported net income at Rs16.1bn was down 60.1% YoY. Overall, fall in crude prices reduced gross underrecoveries, which, along with the surprise increase in subsidy relief through upstream sharing and oil boosted IOC¿s performance. Further, the healthy outlook on refining margins and expected reforms on cooking fuel subsidies is a key positive for IOC. Added drivers include the impact of the company¿s petrochemicals business (paraxylene, PTA) and the upside from oil & gas finds from IOC¿s E&P assets. The stock rose 13.2% QoQ, outperforming the Sensex 7.7% QoQ based on the benign subsidy sharing scheme implemented by the Government. The stock is currently trading at FY07 P/E of 8.3x.

ENAM on Centurion Bank of Punjab

Our FY08 numbers take into account the LKB merger, Bank of Muscat preferential allotment and a part of warrants conversion by Sabre Capital. This will keep the reported ROE low, but the ROA will likely be maintained at 0.8%. Given that valuations at 3.6x FY09E are rich, the stock may underperform in the short term. However, along with the strong growth prospects and high execution capability, the bank is also a strong takeover candidate post 2009. Hence, valuations are
likely to remain high in the coming years. Maintaining our sector Outperformer rating on the stock.

ENAM on Indraprastha Gas

In our view, market is largely ignoring IGL¿s business franchise, itsability to manage the costs and seems to be concerned on the impactregulations. However, at current valuations (9.8x FY08E EPS), theconcerns seem to be overdone, making it one of the mostinexpensive stock in oil & gas universe. We maintain our sectorOutperformer rating on the stock.

Merrill Lynch on Gokaldas Exports

Valuations at 10x FY08E PER, look undemanding, being at the lowest end of thehistoric PE band (12-15x). However, with expectations of an earnings slowdown inFY08, these multiples may just about be right, for now. We note that impendinglabor reforms and the big domestic opportunity remain as key long term growthdrivers for Gokaldas. However, in the absence of any near term triggers and theoverhanging concern on Re appreciation, we maintain our Neutral rating

ENAM - India Strategy

ENAM in their recently released India Strategy report say

Near term Macro environment remains challenging

Growth necessitates end of tightening cycle. Despite some moderation in consumption &exports, Base Case for FY08 GDP growth at ~8.6%, if RBI manages inflation despite surging liquidity

Sensex at 17x FY08E EPS of Rs 848 not so cheap. But EPS growth of 20% in FY 09 sets base for 2009+ acceleration on Secular factors

Top Absolute Buys*: ONGC, SAIL, L&T, HDFC, HLL, Sterlite, Satyam, Hindustan Zinc, Tata Motors, GAIL, PFC, Nalco, BEL, Concor, REL, Crompton Greaves

Top Absolute Sells*: Unitech, ACC, Tata Power, Titan Industries

Short term relative outperformance would be in Visibile Growth sectors ie IT & Telecom.

However, don’t over-allocate:

Telecom: Growth tapering in 2 yrs to depress PE in FY09
IT: INR to secularly appreciate, tax exemption withdrawal in FY09

House Chitter Chatter - May 28 2007

SSKI maintains OUTPERFORMER on BHEL as they believe valuations are
attractive.

Kotak PCG recommends HOLD on Suzlon Energy with a target of Rs 1500. In
their report, they say at the EPS estimate of Rs.49.2 in FY08 and Rs.66.1 in FY09, the stock is trading at 28x and 21x FY08 and FY09 estimates, respectively. The impact on the revenues of Suzlon from the acquisition would be marginal in FY08. Suzlon deserves to be re-rated because it is in the forefront of technology in wind power. The company also has an edge over other wind power majors in terms of control over wind power components like gear box (which is currently facing a supply crunch). The stock had a very sharp re-rating on Friday, rising 22% in a single day itself.
Kotak retains their HOLD rating on the stock with an enhanced price target of Rs.1500.

Kotak PCG recommends BUY on BHEL, Bhel's audited results are close to the provisional results it had earlier reported for FY07. For the quarter, the company has reported a 33% rise in earnings. Bhel continues to focus on its growth
strategy and endeavors to maintain its dominant market share in
installing power generation capacity in India. The company has doubled
its turnover over the last three years and plans to reach US$10 bn by
2011-12 from US$4.25 bn currently. The record date fixed for the purpose
of 1:1 bonus is June 1, 2007. Kotak reiterates the BUY call with a price target of Rs.2850.

ENAM puts UNDERPERFORMER on Suzlon Energy with a target of Rs.1100

CLSA maintains UNDERPERFORM on ITC with a target of Rs.150


Kotak Institutional in their report on ITC say "ITC reported 24.5% net sales growth, 15.9% EBITDA growth and 14.7% PAT growth during 4QFY07 against our expectation of 8.9%, 16.9% and 11.5% respectively. ITC retained growth momentum across businesses—cigarettes, FMCG, hotels etc reporting high double-digit revenue growth. However, EBITDA growth lagged the sales growth due to faster revenue growth in low margin agri-commodity business. We believe that a robustbusiness environment (both in urban and rural markets) will likely help ITC in maintaining cigarette volumes despite a hefty 20-24% price hike being taken to recover the higher incidence of excise (increased by 6%) and introduction of VAT at 12.5%. Several state governments have issued the notification for levy of 12.5% VAT on cigarettes. We retain our OP rating on the stock with DCF based target price of Rs215/share."

Kotak Institutional maintains Outperform rating on the Mothersun Sumi with our SOTP target price unchanged at Rs120. This is based on a DCF value of Rs107 for MSSL
stand-alone and Rs13 for value in key subsidiaries at 12X contribution to FY08 EPS.

Kotak Insitutional maintains Outperformer on IPCA with a target price of 800, and say "We expect net profit growth of 20% for the next two years, on the back of
18% revenue growth. Focus is on branded sales (emerging economies) and a low cost
structure—maintain OP."

Kotak Institutional recommends Inline on HDFC and retain IL rating with target price of Rs1,550.

Kotak Institutional on Suzlon Energy say "Suzlon Energy has announced a cooperation agreement with Areva to end the bidding war. As per agreement Areva would vote along with Suzlon (providing voting control) while Areva gets option to exit after one year. Accelerated volume growth, integration of complementary product portfolio and R&D and component availability for Repower would provide synergy benefits. We estimate that Repower acquisition is marginally value destructive but strategic benefits such as European presence and offshore technology overweighs such concerns. Deferred payment structure moderates near term impact on Suzlon's balance sheet and creates window of opportunity to complete the committed capital expenditure before payouts to Martifer and Areva. We maintain our outperform
rating on the stock on back of (a) increasing government support for renewable energy across the globe and (b) Suzlon's positioning to leverage those opportunities to gain further market share. Sharp 19% appreciation has led to attainment of our price target of Rs1,390/share, however, we believe that there would be further upside when we reset our target price on FY2009 basis. Key catalysts would be (a) capacity expansion plan, (b) visibility of synergies and consolidation of stake in Repower (c) order inflows building visibility for FY2009 and FY2010. Key risk for this deal includes the fact that the price of Areva's exit is not fixed and another bidder may queer the pitch of Suzlon."

Kotak Inst have a target price of 420 for Indiainfoline

Kotak Inst have a target of 400 for ABG Shipyard

ENAM - BPCL, NIIT Technologies

ENAM - BPCL, NIIT Technologies

ENAM - Bharat Forge

ENAM - Bharat Forge

ENAM - Crompton Greaves

ENAM - Crompton Greaves

ENAM - Federal Bank, Jindal Steel & Power, Tata Motors

Federal Bank

Jindal Steel & Power

Tata Motors

ENAM - Dr Reddy's Labs

ENAM - Dr Reddy's Labs

or

ENAM - Dr Reddy's Labs

ENAM - Tata Steel

ENAM - Tata Steel

ENAM - Bajaj Auto

ENAM - Bajaj Auto

ENAM - Result Estimates - May 17 2007

ENAM - Result Estimates - May 17 2007

ENAM - Voltas

ENAM - Voltas