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.

HSBC - RPL - June 22 2007

HSBC in their report on RPL,

We have upgraded our regional refining margin forecasts to USD9/bbl (FY08), USD9.3/bbl (FY09) & USD6.5/bbl long term

RPL with its high complexity and superior product slate could gain the most from expected robustness in margins

We have raised our target price to INR144/share (INR87/share earlier) and upgraded RPL to Overweight

HSBC - Tech Mahindra

HSBC in their report on Tech Mahindra,

IT spending programs and cost-saving initiatives of BT and other service providers have led to growing demand for offshore technology vendors

We believe positives of USD1bn deal win by Tech Mahindra are largely priced in. Expect initial investments on the deal to drag margins over the next two years

Trades at a premium to peers despite management guiding to lower growth in FY08. We initiate coverage with a Neutral (V) rating and 12-month target price of INR1600

HSBC - India Power Utilities

HSBC in their report on India Utilities is very bullish on PTC

We see distinct opportunities in India’s deregulated power sector, with growth driven by consumer demand for a cheaper and more efficient power supply and industry players who will make higher margins than in the regulated market, especially those with first mover advantage.

In a country with a severe power shortage, we believe there is a bigger growth story here than the market is factoring in. Our analysis yields a 71% CAGR for deregulated power from FY07-12e and our estimates for companies discussed in this report are 0-40% above consensus. We believe government initiatives to increase competition –
including the ultra mega power policy – will increase deregulated power capacity from just 2.6GW (less than 2% of the country’s total) to 38GW (18%) by FY12e. While regulated plants’ ROE is currently 14%, deregulated plants should average 20-25%. We forecast that merchant power plants – those permitted to sell power to the spot
market – will be the most profitable segment, with expected ROEs of 25%.
PTC India should be a key beneficiary; we estimate net profit CAGR of 42% over FY06-11e and initiate coverage with an Overweight (V) rating and target price of INR99. Tata Power (Overweight), with 77% capacity in the deregulated segment
by FY12, should also gain significantly.


PTC India: market leader in trading Target price: INR99; rating: Overweight (V)
PTC India has a pipeline of 5GW of projects to be developed over the next five years, most of its capacity is in merchant power and it has innovative propositions like tolling (a virtual power plant agreement wherein the company will pay fixed charges to the plant developer, supply fuel and get power in return). We initiate coverage with Overweight (V) and a target price of INR99 (average of DCF fair value of INR114 and sumof- the-parts fair value of INR84/share). It trades at 15.5x FY08e and 12.7x FY09e earnings.

Our forecasts for trading volumes are higher than consensus, as we have factored in fee-based income from its non banking finance company (NBFC). Our EPS forecasts are 13% and 18% above consensus for FY08e and FY09e respectively.

Tata Power: right place, right time Target price: INR732; rating: Overweight Tata Power is likely to have more than 40% of its capacity in the deregulated segment by 2010,
compared to its current capacity of less than 20%.


NTPC
Target price: INR176; rating: Neutral
NTPC, the biggest player in the power sector, will also benefit from deregulation. However, we think valuations have run up recently and maintain our Neutral rating on the stock. If NTPC wins the Tilaiya or Krishanapatanam ultra mega power projects we think it stands to gain. It trades at 14.3x FY08e and 12.3x FY09e earnings.
We have factored in very high utilisation rates (88%) for coal plants, and so our EPS forecasts for FY08e and FY09e are 20% and 23% above consensus, respectively.

Reliance Energy
Target price: INR589; rating: Neutral
We think Reliance Energy is a cautious player and has taken a small step towards deregulation. If it wins the Tilaiya project, its earnings could grow above our forecasts. It trades at 12.2x FY08e and 10.7x FY09e earnings. Our forecasts for other income are higher than consensus because we factor in higher interest and foreign exchange income. Our EPS forecasts are 16% and 17% above consensus for FY08e and FY09e, respectively.

HSBC India Watch

HSBC in their India Watch report have slightly raised GDP growth forecast,

At 9.4% in 2006/07, Indian GDP growth was the strongest since 1988/89 and the second biggest fiscal year expansion since the series began 1950/51. Not bad and not a million miles away from the 10.9% growth rate achieved by China over the same period. The January-March quarter saw year-on-year growth of 9.1%, down from a high of 10.2% in fiscal Q2 and lower than China’s 11.1%. But this is hardly cause for gloom. Excluding agriculture, GDP growth has softened from 11.6% to 10.3% over the same period.

As usual, we have created our own seasonally adjusted estimates of GDP and its
components in order to gain a better idea of what is happening in underlying terms. These suggest that GDP rose by 2.5% in the latest quarter (non-annualised), up from 1.8% in fiscal Q3. We estimate that the economy grew by an annualised 8.5% in the last six months compared with the previous six months, down from a high of 10.5% in the final two quarters of the previous fiscal year.

As such, while there is some suggestion that GDP growth has passed its cyclical peak it is hardly resounding as yet and the bottom line as far as we are concerned is that the economy continues to grow in excess of its sustainable rate. If this is right then it is likely to mean that evidence of overheating will persist, notwithstanding the on-going drop in wholesale price inflation. It is worth noting that the GDP deflator
jumped to 6.2% in the January-March quarter, up from 5.5% in fiscal Q3. It is the highest number for eight years.

Looking ahead, we expect growth to continue to soften modestly in underlying terms as the impact of the rate rises feeds through. It is important to bear in mind that the pace ofmonetary tightening was stepped up only over the last six months, while one would normally expect interest rate changes to take a year to 18 months be fully felt. Indeed, we have decided to revise up our 2007/08 GDP growth forecast, albeit slightly, to 8% from 7.8% previously

Havell's India, Mahindra & Mahindra, HPCL

HSBC in their report on Havell's India

We lower sales expectations on volatile copper prices; cut standalone EPS forecast by 11% and 20% for FY08e and FY09e to INR26.3 (+38% y-o-y) and INR32.1 (+22.4%)
Sylvania acquisition should be earnings-accretive even at 10% equity dilution; consolidated EPS for FY08e and FY09e estimated at INR34.4 and INR39.4, 31% and 23% higher than standalone, respectively Await more information on the acquisition; retain Overweight (V) rating and revise target price to INR631 from INR635

HSBC in their report on Mahindra & Mahindra say,

PAT for core auto and farm equipment business up 11.6% y-o-y, and for the remaining divisions, up 147% for FY07 We estimate contribution of non-auto and tractor business to total EPS is likely to go up to 57.5% in FY08 from 48.6%
currently Maintain Overweight with sum-of-parts valuation based target price of INR950/share. Restructuring of auto-parts business and potential IPO of hospitality division should help off-set lower value of auto and tractor divisions

Man Financial in their report on Mahindra & Mahindra

Mahindra and Mahindra's (M&M) Q4FY07 results were in line with our estimates, both on the top-line and bottom-line front. However, operating margins were under pressure and fell 50bps YoY to 11.4%, below expectations. M&M stock is down by about 24% from its peak in January 2007, turning the valuations attractive. We continue to believe that M&M is one of the best plays on the growing Indian automotive industry from a long-term perspective. Maintain BUY with target of Rs 1060, based on SOTP valuation.

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.

Kotak Mahindra Bank, BPCL, Construction, Consumer, IOC, IVRCL

Morgan Stanley in their report on Kotak Mahindra Bank

Kotak’s stock is up 40% YTD, buoyed by strong capital markets. Its earnings continue to be largely dependent on capital markets: 78% of F2007 PBT was contributed by businesses linked to capital markets, such as securities, distribution income, investments, etc. With competition intensifying in these segments due to entry of strong players, we expect Kotak’s capital markets-related earnings to come under
pressure. This, coupled with steep valuations, will keep further stock performance in check, in our view.

Increased competition likely to depress brokerage earnings. Kotak’s average daily volume rose 52% in F2007, but its PBT increased by only 12%, implying downward pressure on brokerage rates – which we expect to accelerate with entry of Reliance Money (brokerage rates offered are significantly below the current market rates) in retail broking and distribution business.

Full Valuations – Our New Target Price of Rs450 implies 22% downside from current levels. Kotak is trading at 32x our F2008E earnings – highest in our coverage universe in India. Given its dependence on capital markets, we view these valuations as full. We
maintain our Underweight rating but raise our target price to Rs450 based on sum of parts.


HSBC in their report on BPCL say

BPCL’s FY07 profits almost quadrupled on higher oil bonds and increased subsidy sharing by upstream companies

Subsidy sharing based on oil bonds looks set to continue in high crude price scenario – positive for R&M companies

We revise our target price marginally upwards to INR445 to reflect change in EPS, BVPS and value of investments


B&K on Construction

In line with the NHDP, the government has embarked ambitious programme for the state highways and has urged state government to take a cue from the NHAI in expanding the road network. The government has also advised private sector to prepare for a bigger role in the development of infrastructure sector. The government is ready to provide financial assistance and do handholding for the state government in setting technical and procedure standards.

Although, few state governments have taken initiatives for highway construction. Ability and willingness of most of the state government and PWD departments to implement the projects of such magnitude is yet to be seen. The states needs to raise fair amount of resources on their own by taking the partnership route and even collecting levies from the public to meet the additional burden for highway construction.

Though, order book is not a concern for the construction sector, even if state governmentsare able to convert small portion of proposed investment into actual projects, it would be big opportunity for the construction sector. We remain upbeat on the construction sector.

JP Morgan on Consumer Shelf


Key highlights of our fourth edition of the consumer fortnightly:

Domestic : 1) HLL extends its premium soap brand 'Dove' into hair care segment with the launch of shampoos, conditioners and treatments under this brand to counter rising competition from L'Oreal in premium segment, 2) Godrej Consumer is planning to enter the shampoo segment with the launch of a mass market brand in near future. This is likely to intensify competition in this space which is currently dominated by HLL and Procter & Gamble, and 3) Diageo-Radico JV launches Masterstroke whisky targeting mid-premium segment in Maharashtra.
· Key commodity trends: Palm oil prices continued their uptrend rising almost 5% over the fortnight. Expected tightness in soyabean (closest substitute) supply and increased demand for bio-diesel is leading to new highs for palm oil (now at over M$2500/tonne). On the other hand prices for wheat softened by 2% over the past fortnight on the back of steady crop arrivals.
· International: 1) Luxury brand Christian Dior Couture is planning to set up its subsidiary in India and expand its operations, reflecting confidence of foreign luxury brands in India's fast growing luxury retailing market (35-40% growth p.a.), 2) UK based Cobra beer has announced plans to set up two Greenfield breweries in India.


Merrill Lynch on Indian Oil Corporation

IOC has attained a recurring consolidated EPS of Rs50.2/share in FY07, which implies 31% YoY earnings growth. The rise in earnings has been driven by generous issue of oil bonds in FY07 by the government. IOC received Rs139bn of oil bonds in FY07, which is almost twice the Rs70bn of oil bonds received in FY06. FY08E earnings outlook is uncertain. It is entirely dependent on the
government decision on oil bonds. We remain Neutral on IOC.

We are keeping our FY08E earning forecast unchanged at Rs49/share, which implies 2.5% YoY earnings decline. There could be upside risk to our earnings forecast if the government is generous in the issue of oil bonds to R&M companies even in FY08E. Clarity on earnings outlook for FY08E is possible in the next two months. The government may announce a subsidy sharing plan for FY08E as it did in June 2006 for FY07. The fact that it stuck to its announced subsidy sharing plan in FY07 would lend credibility to any such plan for FY08E

Merrill Lynch on IVRCL

IVRC, 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.

Our PO of Rs450 is based on an SOTP approach. We have valued IVRCL's core construction business at PER 14x FY09E - a 30% discount to E&C majors despite its faster growth. Risk: Unrelated acquisitions (oil & gas), project execution.

HSBC - Mindtree Consulting

HSBC - Mindtree Consulting

HSBC - Precious Metal Outlook

HSBC - Precious Metal Outlook

HSBC - India Watch

HSBC - India Watch

HSBC - India Monthly

HSBC - India Monthly

HSBC - Jyothi Structures, Merrill Lynch - Ranbaxy Labs, JP Morgan - Moser Baer

HSBC - Jyothi StructuresMerrill Lynch - Ranbaxy Labs

JP Morgan - Moser Baer

HSBC - HT Media

HSBC - HT Media

HSBC, JP Morgan - Reliance Communications

HSBC, JP Morgan - Reliance Communications

HSBC - Asian Steel Producers

HSBC - Asian Steel Producers

HSBC - Cipla

HSBC - Cipla

HSBC: Indian Auto market : Few medium-term opportunities for Japanese Automakers

HSBC: Indian Auto market : Few medium-term opportunities for Japanese Automakers

HSBC - Credit Policy Review, Goldman Sachs - Cairn India

HSBC - Credit Policy Review

Goldman Sachs - Cairn India

HSBC - Satyam Computers, Macquarie - Suzlon Energy

HSBC - Satyam Computers

Macquarie - Suzlon Energy

HSBC - Credit Policy Preview

HSBC - Credit Policy Preview