Stocks you can pick up this week

Indraprastha Gas
Research: India Infoline
Ratings: Buy
CMP: Rs 116 (Face Value Rs 10)
12-Month Price Target: Rs 162

Mandatory sources such as DTC buses, taxis and auto rickshaws, generate approximately 92% of the revenues for the CNG segment of Indraprastha Gas (IGL). The client profile is now broadening with private cars realising the advantages of CNG over petrol or diesel.

The increased awareness along with widespread infrastructure set up by IGL will translate into increased conversions of private vehicles. Recent statistics indicate that 2,000-2,500 conversions are happening every month. The company is likely to witness a CAGR of 12.8% in revenues from sale of CNG between FY06-FY09.

As only around 8% of CNG volumes arise from discretionary sources, the business risk with IGL is very low. Further, there is a strong visibility for revenue and profitability growth over the next few years as the mandatory sources cannot shift back to other fuels and the cost dynamics will continue to attract private cars towards conversion to CNG.

With features of pressurised natural gas (PNG) also making it an attractive fuel in comparison to LPG, the growth in PNG customers is sustainable. India Infoline feels that the stock can continue to trade at 12 times one year forward earnings or 6 times EV/EBIDTA. Assigning a P/E multiple of 12x to FY09 EPS of Rs13.6 our target price works out to Rs162.7 providing an upside of 42.6%.

Cadila Healthcare
Research: Angel Broking
Ratings: Buy
CMP: Rs 351 (Face Value Rs 5)
12-Month Price Target: Rs 430

Over the past three years the company has taken initiatives to enhance presence in the regulated markets. New product launches in Europe (France) and US, will aid the robust export growth.

During its first year of operations (FY2006), company grossed sales of Rs 50 crore, which is a good performance given that the company has been a late entrant in this region, in comparison to its peers.

Going forward, with a robust product pipeline (till date company has filed 41 ANDAs, with 24 pending approval, it is expected that the company would clock robust 53.3% CAGR during FY2007-09.

The company’s JV with Altana Pharmaceutical for contract manufacturing is currently the most profitable one in the Indian space. While earlier confined to one client, the company is diversifying its client risk.

During FY2006, the company entered into two 50% JVs, namely Mayne (Now Hospira for manufacturing of eight anti-cancer drugs) and Bharat Serums & Vaccines (for developing and manufacturing an NDDS anti-cancer drug). These JVs are likely to start contributing from FY2009. Currently, we have not factored in any upsides from the same.

Apart from these two JVs, till date the company has added 17 clients, having peak sales potential of $ 25.5 million. At current market price, the stock trades at 15.2 times FY2008E and 12 times FY2009E earnings, at a discount to its peers.

Poly Medicure
Research: Edelweiss
Ratings: Buy
CMP: Rs 153 (Face Value Rs 10)
12-Month Price Target: NA

The Indian medical disposables market is valued at ~Rs 2,000 crore and is growing at a CAGR of 18-20%, compared to the $40 billion global medical disposables industry, which has been growing at a CAGR of ~10%.

Hike in healthcare expenditure, opening up of new hospitals, and preference for private medical care has led to increase in demand for quality healthcare products. Poly Medicure (Poly) is augmenting its capacity by 47% to 190 million pieces by FY08.

The capacity expansion is being done through automation at the Faridabad plant and a new plant at Haridwar. This will not only boost revenues by 29% CAGR from FY06-09E, but also expand its product portfolio by addition of five-six new products. In an attempt to reduce costs, Poly Medicure is integrating backwards for production of needles, which are used in IV cannula and blood bags.

The needle capacity will be 100 million pieces p.a. This backward integration will not only lead to lower costs, but will also enable control over product quality. Edelweiss estimates Poly Medicure’s revenues and profits to grow at 29% CAGR respectively, between FY06 and FY09E.

At the current market price, the stock trades at 8.7 times FY07E EPS of Rs 15.6 and at 6.2 times FY08E EPS of Rs 22.1. With capacity expansion, entry in the US market, decent valuations and healthy return ratios, Edelweiss initiates a ‘BUY’ recommendation on the stock.

Subhash Project
Research: Prabhudas Lilladher
Ratings: Buy
CMP: Rs 252 (Face Value Rs 2)
12-Month Price Target: NA

Subhash Projects, started in 1981, is a pioneer in executing water-related projects in India. Even today it gets over 50% of its revenues from water projects (largely end-to-end turnkey). It is also a significant player in the power sector, which contributes about 40% of revenues. It gets its remaining 10% revenues from roads, environment etc.

Subhash Projects has an unexecuted order book of about Rs 2,600 crore and L1 status in Rs 800 crore worth of projects. Its order book to sales ratio of 4.4x (based on H1 annualised revenues).

The momentum of order flows remains quite strong with the company likely to bid for Rs 2,000 crore worth of projects in the coming weeks. The management expects the order book to stand at about Rs 4,000-4,500 crore by December next year. Prabhudas expect Subhash Projects to grow its revenues by 104%, 73% and 46% in FY07, ‘08 and ‘09 respectively.

The company also expects margins to improve leading to higher profit growth. PAT is likely to grow by 114%, 78% and 54% in FY07, ’08 and ‘09 respectively. Assuming a dilution of 8 million shares, Subhash is quoting at 11.6 times FY08 and 7.5 times FY09 earnings.

Stocks you can pick up this week

Marico
Research: India Infoline
Ratings: Outperformer
CMP: Rs 552 (Face Value Rs 10)
12-Month Price Target: NA

Marico has acquired a hair cream and hair gel brand – HairCode from Egypt’s Pyramids Group for an undisclosed consideration. The Pyramids group has agreed for a non-compete agreement in hair creams and hair gels segments with Marico. The brand enjoys ~23% market share of the pre- and post-wash hair care market in Egypt. In September ‘06, Marico had acquired a hair care brand called Fiancee, owned by the Ready Group of Egypt.

With both these acquisitions, Marico has now achieved a dominant market share of ~50% in the Rs1.7-bn pre- and post-wash hair care market in Egypt. Both these acquisitions are expected to contribute ~Rs 95 crore plus to Marico’s consolidated turnover in FY08.

Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Deepak Fertilisers
Research: Anand Rathi
Ratings: Buy
CMP: Rs 87 (Face Value Rs 10)
12-Month Price Target: Rs 120

DFPL is the only domestic producer of isopropyl alcohol (IPA), which until recently was fully imported to cater to domestic demand. IPA will significantly add to the revenues and is likely to contribute around 20% of FY09 revenues. Real estate unlocking further de-risks the revenue model. DFPL has been fractionally unlocking large land bank it has at prime locations in Pune.

Ishanya, a specialty mall, is a unique venture by the company and will add some stability to its revenue base. Availability of gas is to ease raw-material pressures from FY08. Margins have been under pressure due to non availability of natural gas in required quantities, which is likely to ease post the completion of Dahej-Uran gas pipeline by H2FY08, leading to resurrection of margins enjoyed earlier. At the current market price, stock is trading at a P/E of 8.1x and 6.1x and EV/EBITDA of 3.8x and 2.8x FY07 and FY08 earnings respectively. Anand Rathi feels the fruits of the capex underway currently will be realised from FY08 onwards.

Raipur Alloys & Steel
Research: Networth Stock Broking
Ratings: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 200

Raipur Alloys and Steel manufactures 2,10,000 MT of sponge iron and 1,40,000 MT of steel ingots with captive iron ore and power. It is undergoing a structural change with a merger of group companies. Moreover, aggressive plans for backward and forward integration will enhance operating margins going forward. At the current market price, the stock is trading at a P/E of 9.3x FY07E and 5.6x FY08E and EV/ EBITDA of 7.4x FY07E and 5.1x FY08E on a consolidated basis. Networth Stock Broking recommends a ‘Buy’ with a one-year price target of Rs.200, considering P/E of 8x and EV/EBITDA of 6.5x.


Omax Auto
Research: Angel Broking
Ratings: Buy
CMP: Rs 86 (Face Value Rs 10)
12-Month Price Target: Rs 105

OMAX has been transforming itself from a strong player in the Indian auto component industry to a global manufacturer of sheet metal component. OMAX is aggressively targeting overseas market and has export orders of Rs 150 crore, which is to be executed in the next three years. The company secured orders from Tenneco, Supersporx, Lkea, Delphi, Cummins and Piaggio for supply of various components. OMAX’s export revenue is to grow at a CAGR of around 45% between FY06-FY09 from Rs 26.6 crore to Rs 80 crore.

It’s OPM was under pressure largely due to increase in raw material, power and staff costs. The margin is expected to expand further in the medium term on account of various cost control measures initiated by the company. At the current market price, the stock is trading at a P/E of 8.3x FY07E earning and 6.8x FY08E earnings. The stock has corrected very sharply in the recent past and appears very attractive at EV/EBIDTA of 4.4x and PEG ratio of 0.8 on FY07E earnings (less than 1 PEG ratio indicates that the stock is trading at a discount) and has potential upside of around 20%.

NRB Bearings
Research: Buy
Ratings: ULJK Securities
CMP: Rs 493 (Face Value Rs 10)
12-Month Price Target: Rs 551

NRB Bearings with an 80% market share, growing at a CAGR of 18.15% in the last five years, is expected to grow further more on account of surging demand from OEMs and increase in exports. It is undertaking an expansion programme of Rs 100 crore, which is to be completed by end-‘07. It’s expanding its roller bearing segment from 2.045 crore to 2.615 crore, and needle roller from 272.9 crore to 350 crore.

NRB is also setting up a subsidiary company at Thailand for manufacturing activities, and to cater to the growing south-east Asian markets, which will all together help NRB to strenghthen its overseas presence. NRB also enjoys highest margins in the industry despite huge competition and price pressure, from peer companies and OEMs. The stock has a strong potential and to be an outperformer.

Asian Paints
Research: Edelweiss
Ratings: Buy
CMP: Rs 715 (Face Value Rs 10)
12-Month Price Target: NA

Asian Paints’ EBITDA margins to increase from 13.0% in FY06 to 14.7% in FY09 due to shift towards higher margin products, favourable raw material outlook, and operational leverage advantages. The recent decline in crude oil prices is likely to result in improved gross margins, as the impact of inflation has been already passed on through price hikes. The international operations, in which Asian Paints lacks pricing power, are expected to benefit more.

The product mix is expected to shift in favour of higher margin products such as emulsions and exterior paints, as they will grow at a higher rate. Operational leverage advantage from scaling up is expected to boost margins further. At the current market price, Asian Paints trades at 25.1 times FY07E earnings and 20.1 times FY08E earnings. EV/EBITDA for the stock is 14.8 and 11.9 times on FY07E and FY08E, respectively. An EPS growth of ~25% accompanied by ROE of ~30% makes it an attractive stock.

Stocks you can pick up this week

Reliance Industries
Research:Enam Broking
Rating: Outperformer
CMP: Rs 1,254 (Face Value Rs 10)
12-Month Price Target: Rs 1,500

Reliance Industries’ revised field development plan for KGD-6 asset reasserts that its E&P business remains grossly undervalued. The FDP submitted factors in cumulative production of 11 TCF gas over 14.5 years (or a recovery rate of 22% over a 3 P reserves + resource base of 50 TCF).

As the consortium (RIL and Niko) intends to scale up gas-handling infrastructure capacity by almost 50% (to 120 mmscmd), it will lead to a significant increase in gas production. Netting of the ‘best case’ E&P valuations and investment portfolio from the current valuations translates into a payback of ~3.5 years for RIL’s core operations.

Niko expects production from MA-1 field to begin by ’08. A plateau production rate of 60 kbpd for 20 years could translate into 2 P reserves of ~1.4 billion bbl. Thus, the enterprise value of the oil field could be estimated at $7.5bn (or Rs 245/share), based on ONGC’s EV/BoE multiple.

At current valuations, assuming the ‘best case’ valuation scenario of E&P portfolio and market value of investment portfolio, RIL effectively trades at 3.5x FY07E EV/EBIDTA. This translates into a payback of ~3.5 years for the refining and petrochem assets, which are delivering value.

Gujarat Ambuja Cements
Research:CLSA
Rating: Buy
CMP: Rs 140 (Face Value Rs 2)
12-Month Price Target: Rs 142

Gujarat Ambuja plans to increase its capacity from 16 million mt currently to 21.5 million mt by December ’08 through a combination of greenfield expansions and blending of fly ash across seven locations. Increase in the ash content will account for 25% of capacity expansion.

Since conclusion of the monsoon, cement prices have moved up by Rs 6- 8 per bag (3-4%) at the retail level and the news flow on this front will remain positive. Holcim has recently bought the stock from the market at about Rs 139 per share.

As per a recent press interview with one of Holcim's directors, there are indications that the company may buy more stock. Gujarat Ambuja is the only large-cap cement stock without FII limit and remains one of CLSA's favourite picks in the sector.

IL&FS Investsmart
Research: Citigroup
Rating: Sell
CMP: Rs 207(Face Value Rs 10)
12-Month Price Target: Rs 161

The regulatory ban on opening new depository accounts has been lifted, but it has hit Investsmart hard. Management changes and transition to E*Trade suggests that the core businesses may remain in flux over the near term.

A fall in earnings reflects lower market volumes and market share, a shrunk margin book and slower investment banking. The worst is probably over, but the company does not appear positioned to benefit from any upswing yet.

E*Trade, which has raised its stake to 38% and is offering to buy another 20%, now appears positioned as a dominant shareholder. Over the medium term, this may drive strategy, positioning and growth.

But in the immediate term, this suggests transition. Citigroup believes the fundamental value is lower than the current price; supported by the expected open offer price of Rs 210. It recommends that investors should exit at the current price or during the offer period.

Tata Consultancy Service
Research: Ask-Raymond James
Recommendation: Buy
CMP: Rs 1,156 (Face Value Rs 1)
12-Month Price Target: Rs 1,350

Tata Consultancy Services (TCS) has been on a deal-winning spree. It has closed $500-million deals in 40 days. The management had mentioned in its Q2 FY07 earnings call that the deal pipeline looked robust, with the company pursuing five contracts above $50 million and another five worth about $100 million.

TCS is also in the final stages of five contracts above $50 million. Within a fiercely competitive environment, the company seems to have emerged as a winner in the large deals space. ASK-Raymond believes that there has been a structural change in the IT industry, with a marked polarisation towards larger players.

The stock trades at 29.1 times FY07E earnings and 22.1 times FY08E earnings. ASK-Raymond is revising its target price upwards to Rs 1,350 (25x FY08E earnings), from its earlier target price of Rs 1,240 (24x FY08E earnings).

Bombay Dyeing
Research: Motilal Oswal
Recommendation: Buy
CMP: Rs 725 (Face Value Rs 10)
12-Month Price Target: Rs 850

Motilal Oswal is upgrading price target for Bombay Dyeing to Rs 850, based on positive developments with respect to unlocking of hidden value from its two plants at Dadar and Lower Parel, Mumbai. There has been a significant increase in expected value accretion in its real estate at Dadar and Lower Parel.

Substantial changes in planned development have allowed the company to increase its developable area from 3.7 million sq ft at both its plants to 4.3 million sq ft — an increase of 16%.

Bombay Contrary to its earlier plans of selling a majority of its developable area outright, the company now plans to sell only 0.4 million sq ft at Dadar, while commercially leasing the remaining 3.9 million sq ft. This will be more value-accretive for the company.

Based on the SOTP valuations, Motilal Oswal arrives at the target price of Rs 850 per share, valuing the real estate rental business at Rs 615 per share, PV from sale of the Dadar property at Rs 101 share and its traditional businesses at Rs 134 per share.

Nucleus Software
Research: Sharekhan
Recommendation: Buy
CMP: Rs 558 (Face Value Rs 10)
12-Month Price Target: Rs 680

Nucleus Software Exports is a niche player offering software products to companies in banking and financial service. It has established itself globally with a product installation base of over 250 application modules in more than 30 countries.

The product business grew exponentially in FY06. It added 21 new clients and bagged orders for 38 new installations in FY06. In H1 FY07, it added 14 new clients; its order book stood at Rs 135 crore as on September ’06. Product revenues may grow at a CAGR of 67% over FY06-08.

Alliances with global technology giants could result in higher-than-expected order bookings. At the current price, the stock trades at 11x its FY08 earnings, which is relatively cheaper than its peers.

2-day fall 7th highest since ’03

The two-day fall in benchmark indices has sent jitters among several market participants. The current fall is the biggest one after the crash in May this year. The 572-point fall in Sensex is the seventh highest, in terms of points, since the beginning of the bull run in April 2003. And in percentage terms, the fall is 4.1%. There have been 20 bigger falls than the latest Sensex crash.

The biggest continuous fall was five-day long. But, it may be extended further after a brief pullback, which may last only for one trading session. Usually, this pullback will be very weak. There have been five such five-day continuous falls since April 2003.

The biggest such fall shaved off 17.2% from the Sensex. This happened in May 2004 when the ruling party was toppled and the Congress-led UPA took control at the Centre.

Big falls occur when there are key concerns such as ripe valuations and political hurdles. RBI’s decision to raise the cash reserve ratio of banks may have been the key trigger for the latest fall. At roughly 17 times the one-year forward earnings, domestic equities are among the most expensive in emerging markets.

This is the only major correction in December since the beginning of the bull run. December has always been a month where markets have ended on a positive note. Historical data shows that Sensex has ended in the negative territory only 5 times in the previous 27 years.

FIIs have been at the centre of every major market correction. In the previous few market sessions, FIIs have sold around Rs 2,000 crore of stocks, both in the cash and futures & options segment. Normally, indices pull back at least one-third of their losses. Market watchers feel there is lot of money waiting on the sidelines, so this correction could turn out to be a short-lived one.

Lalit Thakkar, director, Angel Broking, says, “We are not seeing it as a significant correction like the one witnessed in May this year. What happened in May was a global correction and that is why the recovery was slower.”

Technical chartist Vijay Bhambwani feels, “Indices are exhibiting a “long pole” formation on intra-day charts as the steep fall resembles a pole due to the vertical fall of nearly 3%. While the 3913-point support in Nifty advocated for Monday’s session did not hold, the bearish pressure was significant and seems to be placing the extremely short-term oscillators in the near oversold zone. That indicates a short pull-back rally, though the same can terminate without a warning and therefore maybe very treacherous to trade.”

Stocks you can pick up this week

Mangalam Cement
Research: Emkay
Recommendation: Buy
CMP: Rs 207 (Face Value Rs 10)
12-Month Price Target: Rs 306

Mangalam Cement (MCL) is a Rajasthan-based cement player with an aggregate capacity of 1.5 million tonnes. MCL repaid its entire long-term debt as on October ’06 and plans to expand its cement capacity by 0.50 million tonnes, which will be commissioned by September ’07.

It will also set up a 17.5-mw thermal-based captive power plant (to be commissioned by June ’07), which will result in savings in power cost to the tune of Rs 133 per tonne. Emkay expects cement prices to remain firm during FY07E and FY08E, since major capacity additions will come by end FY08E and early FY09E.

This will drive MCL to report a 21% CAGR topline growth between FY06 and FY08, with EBITDA margins improving from 24% in FY06 to 29.7% in FY08E and PAT increasing at a CAGR of 30% during the period FY06-FY08E.

With an expected CAGR of 30% in EPS over FY06-FY08E, Emkay expects RoCE and RoE levels to remain healthy at 28.5% and 36.0%, respectively, for FY07E, and 41.9% and 55.4%, respectively, for FY08E.

Biocon
Research: Anand Rahi
Recommendation: Buy
CMP: Rs 360 (Face Value Rs 5)
12-Month Price Target: Rs 400-460

Biocon is a leading biopharmaceutical company with strong R&D capabilities in fermentation technology, biotechnology and drug discovery. The company is a pioneer and leader in production of biopharmaceuticals through the fermentation route.

With focus on generics, bio-generics and drug discovery, the company is poised to grow exponentially in coming years. Its manufacturing capacity is set to rise four-fold. Moreover, with the commissioning of Biocon’s Biopark, volumes are likely to drive growth in coming years.

The company’s mainstay continues to be bio-pharmaceuticals. The competition in bio-generics is much less and the opening up of the biggest bio-generics market (USA) will boost growth potential for Biocon significantly.

In coming years, the company’s financials will improve, with sharp rise in volumes and wider range of products for the global generic markets. The long-term potential of the company lies in the success of its various R&D projects in drug discovery and drug delivery technologies.

This stock is meant for smart players looking for small downside, a modest upside in the short to medium term and very good long-term gains in a quality large-cap stock. So, it’s a stock for all classes and all time periods.

Bharati Shipyard
Research: Angel Broking
Recommendation: Buy
CMP: Rs 320 (Face Value Rs 10)
12-Month Price Target: Rs 450

Global order book registered a 29% CAGR over the period ’03-06. Going forward, a similar trend is expected on the back of growth in demand for vessels, which is a result of replacement demand and capex boom in the offshore segment (leading to increasing demand for offshore vessels).

India’s current market share in the world ship-building industry is around 0.3% in terms of dead weight tonne (DWT). It is set to gain market share on the back of cost competitiveness and availability of technically qualified manpower.

India also has a locational advantage (a vast coastline of 7,516 km). Bharati’s order book has shown a robust CAGR of 135% over the past three years. The company currently has an order book size of Rs 2,335 crore, which will sustain growth through FY09.

Completion of its Mangalore yard will further boost growth beyond FY09. The stock is currently trading at 17.8x FY07E earnings of Rs 17.9, 8.0x FY08E earnings of Rs 40.1 and 5.6x FY09E earnings of Rs 56.7. Angel initiates coverage on the stock with a ‘buy’ recommendation and a 12-month target price of Rs 450, giving a 41% upside from the current market price.

Sasken Communication
Research: Citigroup
Recommendation: Buy
CMP: Rs 492 (Face Value Rs 10)
12-Month Price Target: Rs 653

Strong presence in offshore R&D services and a turnaround in the products business in FY08E should ensure strong earnings momentum for Sasken in FY06-09E. Growth in the services business is being driven by higher acceptance of offshoring in R&D services.

The services business has marquee clients such as Nortel and Nokia. Citigroup expects the business to register revenue and EBITDA CAGR of 42% and 36%, respectively, over FY06-FY09. The Botnia acquisition has added further momentum to growth.

Sasken has been making significant investment in creating software for mobile phones. It forecast a 52% revenue CAGR over FY06-09 and a turnaround in FY08 for this business, with shipments expected to start over the next few months.

The loss-making products business has been a drag on overall profit. Hence, the stock looks expensive on P/E. Citigroup values the products business on a P/S basis and the services business on EV/EBITDA. Apart from sector risks, the products business has a high risk profile on the technology front and is exposed to delays in handset shipments.

Panama Petrochem
Research: Edelweiss
Recommendation: Buy
CMP: Rs 123 (Face Value Rs 10)
12-Month Price Target: NA

Panama Petrochem manufactures specialty petroleum products that serve as raw materials for various industries like inks and resins, textiles, rubber, pharmaceuticals, cosmetics, transformers and power cables. These industries are growing significantly on the back of strong demand growth for their manufactured goods, which in turn, is propelling Panama’s growth.

Panama also has a well-diversified customer profile, eliminating risks of revenue concentration. Panama has tied up with Petronas, the Malaysian oil and gas (O&G) giant, to distribute Petronas’ high-end auto lubricant ‘Syntium’ in India. Petronas is keen on entering the Indian market in a big way and plans to launch more of its products here.

Panama, the most likely medium for Petronas’ Indian foray, stands to benefit greatly, as the alliance will give Panama a foothold in the Rs 500-crore high-end auto lubes market in India. Depending on Syntium’s success, Panama will also start blending and packaging Petronas’ products at its Baddi plant in future.

Edelweiss expects this division to generate Rs 1.2 crore revenue in FY07E with gross margins of ~12%. It estimates revenues and profits to grow at 25% and 26% CAGR, respectively, between FY07E and FY09E. At the current market price, the stock trades at 5.7x FY07E EPS of Rs 23.2 and 4x FY08E EPS of Rs 33.

How brokers turn small investors into traders

Cut-throat competition among broking houses has resulted in brokerage rates falling to ridiculously low levels over the past few months. This is partly-good news for the small investors. But what is not so good for these investors is that brokerages are trying their best to make them trade as frequently as possible in order to make up for the low-broking charges. It may be in the form of a persuasive customer service representative, or a burst of SMS and e-mail messages.

Broking business is getting competitive by the day, with one broker claiming to charge less than the competitor. But, in the end all charge more or less the same, often billing small retail investors through other charges. A few small retail investors ET spoke to mentioned that their trading frequency had certainly increased.

Mumbai-based Rasik Shah, a 42-yearold small retail investor, who has been investing in equities from the past 10 years said, “Every time I call my broker (one among the top three retail brokerages), the customer service representative would not allow me to hang up the call unless I bought or sold something. And they are so convincing that one actually bites the bait.”

Bharat Dave, 37-year-old executive said, “We receive an overload of information from our broker on our mobiles, emails. And often we are lured to buy into their recommendations for a short timeframe .” Over the past one year, brokerage charges have almost halved to around 15-20 paise for Rs 100 worth of delivery trades and 3-5 paise for Rs 100 worth of intra-day trades. Also, retail investors are a fickle lot. They come rushing in hordes during a booming market, and then vanish for months when the market corrects. So, brokerages have no option but to extract the maximum possible brokerage out of them when the going is good.

Almost all brokerage houses go a step further by offering small retail investors margin trading facility. Margin trading is the use of borrowed money to buy securities with the expectation of magnifying profits. It can lead to greater returns, but is also very risky. Brokerage houses, often, are more than happy to offer you margin. Sometimes these margins go up to fivetimes your portfolio size and are offered at interest rates as high as 18% per annum.

ET tried to speak to brokers. They denied the charges that they are converting small retail investors into traders. In fact, brokers mentioned that since they have the expertise through dedicated high quality research, they are offering a better chance for small retail investors to make money free of cost.

According to Gaurav Mashruwala, a certified financial planner, “The greed of quick returns is luring many small retail investors into trading. Investment in equities should be for the very long term, where returns are high and risks are lower. When one does day-trading , the probability of returns are very low, but the risks are very high. So, ideally, small retail investors must avoid getting into this trap of churning stocks very often.”

Stocks you can pick up this week

Sterlite Industries
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 542 (Face Value Rs 2)
12-Month Price Target: Rs 725

Sterlite plans to raise Rs 12,500 crore mostly for its commercial power venture, Sterlite Energy. The company has also filed a F1/preliminary prospectus with the US SEC for raising $2 billion.

The ADS proceeds will be used for the following: (a) A $41.9-billion investment in a 2,400-mw power project in Orissa through Sterlite Energy; (b) Acquisition of the government of India’s balance 26/29.5% stake in Hindustan Zinc — the value of which will be around $2.3 billion; and (c) Repay $50 million in debt.

The entry into the commercial energy business will be based on Sterlite’s existing strength of running the captive coal-based power plant for its aluminium smelters and zinc refinery. The existing power capacity of the company is 1,040 mw.

Sterlite Energy plans to build a 2,400-mw power plant in Orissa. Enam believes Sterlite is well-placed to benefit from additional funds that will be deployed for the new growth/high-return business — energy, with captive coal resources.

Apollo Tyres
Research: BRICS PCG
Recommendation: Buy
CMP: Rs 339 (Face Value Rs 10)
12-Month Price Target: Rs 475

Apollo Tyres has set a target of becoming a $1-billion (Rs 4,600 crore) company by FY07-end from its current turnover of Rs 3,000 crore, and plans to grow into a $2-billion player by ’10. It has charted out an aggressive growth blueprint, involving an investment outlay of Rs 600 crore over the next four years.

The management has set a target of doubling revenues to Rs 9,200 crore ($2 billion) by ’10. It is exploring organic and inorganic routes to achieve these objectives, and the recent acquisition of Dunlop Tyres, South Africa is in line with its strategy for growth. At the current market price, ATL is trading at 11.6 times EPS, 7.1 times cash earnings and 5.7 times EV/EBIDTA on 12-month forward basis.

Dunlop Tyres, at 10x CY07E earnings, works out to Rs 390 crore or Rs 77 per share of ATL. Excluding the fair value of Dunlop, ATL is trading at FY07E multiples of 8.7x EPS, 5.3x cash earnings and 4.5x EV/EBIDTA, which is almost 30% discount to the industry average.

Cranes Software
Research: Angel Broking
Recommendation: Buy
CMP: Rs 109 (Face Value Rs 2)
12-Month Price Target: Rs 125

Cranes Software started off as a distributor of third-party mathematical/scientific software products, and has since evolved to become a niche provider of such products to the global scientific and engineering community. The company has achieved this through its strategy of ‘acquire, enhance and expand’.

Through this evolution, Cranes now has a large addressable market in the region of around $40 billion, thus giving significant growth potential to the company going forward. Cranes enjoys one of the highest operating margins in the industry, at 54.5% (H1 FY07).

This is because the proportion of proprietary products in total sales has increased. Products enjoy significant operating leverage, and after recovery of associated fixed costs, all additional revenues flow straight to the profit before tax (PBT).

Gateway Distriparks
Research: CLSA
Recommendation: Buy
CMP: Rs 186 (Face Value Rs 10)
12-Month Price Target: Rs 215

Margins at Gateway Distriparks’ (GDL) Mumbai facility seem to be bottoming out with the start of the third container terminal. Additionally, the company’s attempts to geographically diversify are already visible, with the volume share of the Mumbai unit already dropping to 75% from more than 96% in FY05. JNPT CFS volumes and margins have now stabilised.

GDL’s container freight station (CFS) facility at Mumbai accounts for 90% of total profits and margins, and the facility has been under pressure due to competition from some of the new entrants. Margins dropped by nearly seven percentage points during Q4 FY06.

However, with the commencement of the third container terminal at the port, H1 FY07 volumes at the port grew by 21% y-o-y. Further ramp-up in the operations of the third container terminal will gradually remove supply overhang, improving margins, initial signs of which are already visible.

Garware Offshore
Research: Darashaw Equity Research
Recommendation: Buy
CMP: Rs 149 (Face Value Rs 10)
12-Month Price Target: Rs 200

Garware Offshore Services (GOSL) is in the business of providing offshore support vessels on a lease basis to companies involved in oil and gas exploration. The company’s only two clients are ONGC and British Gas.

Due to sky-rocketing oil prices, oil and gas exploration activities across the globe have seen huge investments. India, too, is encouraging public and private participation under its NELP policies.

Rise in exploration activities has made offshore industry very lucrative, with scaling demand for support leading to higher lease prices. GOSL is on an expansion spree. High debt-to-equity ratio is a growing concern.

At the current price of Rs 133, the stock is trading at a forward P/E of 10x and 6x of CY07 and CY08 earnings. Despite EPS growing at a CAGR of 48% over next the two years, the stock should trade at a modest P/E range of 14-16 due to its high leverage buyouts. Over a 12-month investment horizon, the stock can give returns of 48% with a price target of Rs 200.

Ranbaxy
Research: CLSA
Recommendation: Underperform
CMP: Rs 385 (Face Value Rs 5)
12-Month Price Target: Rs 320

Driven by poor organic profitability and a stretched balance sheet, Ranbaxy has underperformed the Sensex by 153% in the past two years. Cost-cutting initiatives and inorganic growth have contributed to a significant turnaround in profitability in CY06.

Future cost-cutting opportunities will be limited and a stretched balance sheet does not leave much room for further acquisitions. With 45% of the business being commoditised, Ranbaxy faces challenges in organic revenue growth.

Valuations on a price/sales basis may appear cheap at 2.3 times, but are not undemanding in comparison to global peers. Teva and Par Pharma trade at 2.7 times and 1.1 times respectively. Ranbaxy trades at a 50% P/E premium to Teva and valuations at 21.3x CY07CL are not cheap, given the low level of confidence in the company’s future earnings.

Expensing the interest on $440-million FCCBs will impact reported CY07 profits by 13%. Based on historical stock price behaviour, CLSA believes valuations based on price/sales may provide support at Rs 350 and provide a trading opportunity to play on news flows.