Power Picks

Power Picks

2007 Stocks, stats

BSE Metal Ind up 122%, Cap Goods up 117%, Oil up 116%

BSE IT Index down 13.9%, BSE Auto Index up 3%

REL up 310%, RPL up 255%, SAIL up 220%, L&T up 189%

Tata Power up 162%, RIL up 127%, NALCO up 127%

Infosys down 21%, Tata Mot down 17.7%, Cipla dn 15%

FIIs pump in Rs.70,291cr in cash+F&O in 2007

MFs net buyers of Rs.6622cr in 2007

Jai Corp up 769%, IFCI up 663%, Ispat up 646%

GMDC up 611%, Nag Fert up 538%, India Info up 530%

Hexaware dn 57%, Subex dn 50%, Sundaram Clay dn 38%

News, Views and Stocks

US markets were Flat & Asian Markets are trading up. Levels for Nifty are support at 4280 - 4263 - 4248 & resistance at 4308 - 4322 - 4342. Bias for the day is +ve. Possible target for Nifty being 4325 with support at 4259.

News : FY2007 GDP growth was at 9.4% ahead of the market estimate of 9.0 %. Wockhardt gets US FDA nod to enter the $680 mln Lamisil market. UB holdings picks up 26% stake in Air deccan for Rs. 500 crs. BNP PARIBASpicks up 50% in SREI INFRASTUTURE FINANCE ARM.Inflation is expectation at 5.06% ( mkt estimate )vs estimate of 5.12 %. NDTV has anounced its funding program,they have raised 120mln & which works out to price of NDTV at 493.

Stocks with + ve bias for trading are : Bajaj Auto, Glaxo,TataTea, IDEA

Stocks for Short term Delivery are : KLG Systel(417), Hind Oil exploration(116), Biocon(464), Guj NRE coke(60)

Stocks for Investment are : HDFC Bank, CEAT, Crompton Greaves

Stocks you can trade upon this week

Karnataka Bank
CMP: Rs 164.10
Target price: Rs 220

Deutsche Bank’s global markets research has initiated coverage on Karnataka Bank with a ‘buy’ and price target of Rs 220.

In its recent research note, Deutsche said, “We like KBL’s strategy of controlled loan growth, effective use of excess SLR securities and shedding of high-cost liabilities — features which further much-needed stability in the current volatile interest rate scenario, and potentially continued good asset quality.”

Deutsche estimates Karnataka Bank’s earnings per share (EPS) for 2006-07 at Rs 18.49 and for 2007-08 at Rs 20.59. In 2004-05, its EPS was at Rs 14.52.

Dishman Pharma
CMP: Rs 244.75
Target price: Rs 270

Motilal Oswal Securities has initiated coverage on Dishman with a ‘buy’ citing robust earnings growth prospects as the key trigger. The brokerage estimates Dishman’s EPS for 2006-07 at Rs 10.3 and for 2007-08 at Rs 15.5. In 2004-05, its EPS was at Rs 5.80. “

Dishman is likely to be one of the key beneficiaries of the increased outsourcing from India, resulting in 32% earnings CAGR (compounded annual growth rate) over FY07-FY09,” the brokerage said in a recent report to clients. “

Partnerships with large innovators like GSK, Merck, Astra Zeneca, J&J and Novartis imply good long-term potential for the CRAMS business, resulting in 25% revenue CAGR (excluding Carbogen-AMCIS ) for FY06-09,” it said.


Jet Airways
CMP: Rs 688.85
Target price: Rs 900

CLSA Securities has retained ‘buy’ rating on Jet Airways with a 12-month price target of Rs 900 post the announcement of its buyout of Air Sahara.

“We believe the new deal helps Jet to get out of a sticky situation; an early dispute resolution will likely help in accelerating the fund raising program and staggered payment will ease potential stress on cash flows,” the French brokerage said in a note to clients. “

We also believe aircraft addition plans of some airlines have slowed down and the infrastructure constraints are currently at peak. Hence, additional slots, trained manpower and additional aircraft on order by Air Sahara will all come in handy for Jet,” it said.

UTI Bank
CMP: Rs 465.05
Target price: NA

SSKI Securities has reiterated ‘outperformer’ rating on UTI Bank, post its fourth-quarter earnings. The brokerage has raised UTI Bank’s EPS estimates for 2007-08 by 3% to Rs 29.3 and by 3.8% to Rs 36.7 for 2008-09 on pre-dilution basis citing higher-than-expected increase in core earnings.

“Though the current adequacy numbers are comfortable, we expect the bank to raise equity capital in FY08. We believe that the bank has entered a successful chain of growth, enabling it to raise fresh equity capital at every stage at richer valuations to fund its strong loan expansion,” SSKI said in a recent research note.


HCL Technologies
CMP: Rs 335.20
Target price: Rs 358

Ask Raymond James has maintained a ‘buy’ on HCL, while downgrading its price target to Rs 358 from Rs 370 after the company’s January-March earnings announcement, citing “compelling valuations”.

“In view of the better-than-expected results, we have revised our FY07E (estimated) EPS to Rs 17.1 (+2.5%) and FY08E EPS to Rs 19.9 (+1.5%),” ASK said in a recent report to clients. “In-line with the recent downgrades that we had for the exit multiple for the top tier companies, we are reducing the target PE multiple for HCL Tech from 19x (times) to 18x,” it said.

Stocks you can pick up this week

Hero Honda
Research: CLSA
Rating: Underperform
CMP: Rs 692 (Face Value Rs 2 )
12-Month Price Target: Rs 675

After a healthy 18% YoY rise during the nine months ended December ’06, the industry’s motorcycle sales growth moderated to 12% in January ’07. Hero Honda, which had reported a better-than-industry growth of 19% in January ’07, is also witnessing weakness in retail sales. This has led to an inventory build-up estimated at over one month of sales.

Considering build-up of inventory, as well as weak retail demand, CLSA expects Hero Honda may resume discounting. In early ’06, with market share under pressure, Hero Honda had initiated a Rs 1,000 discount (3-4%) on its motorcycles.

During the festive season (October-November ’06), the company had offered an aggressive incentive scheme (‘mobile on mobike offer’). These discounts were withdrawn in January ’07 and the company raised its prices. Hero Honda has already underperformed the market by a sharp 41% over the past one year, with a dip in earnings.

However, valuations, at 14.3x FY08CL earnings, are still not compelling, given lacklustre volume growth, potential downside to earnings from continuing margin pressures and entry of HMSI (Honda Japan’s 100% subsidiary) in the 100cc segment. Only higher returns on its cash surplus can provide an earnings upside.

Wockhardt
Research: Angel Broking
Rating: Buy
CMP: Rs 373 (Face Value Rs 5)
12-Month Price Target: Rs 550

During CY06, the company acquired Pinewood (Ireland) and Dumex India (along with two heritage brands, Protinex and Farex) in the European and Indian markets, respectively which helped the company to post 22.4% growth in sales.

During CY06, the domestic market reported a growth of 28.3% to Rs 676.4 crore compared to overall exports, which grew by 18.9% to Rs 1,052.7 crore. For Q4 CY06, Wockhardt registered a growth of 43.8% and 19% in sales and net profits to Rs 526.5 crore and Rs 87.2 crore, respectively, while the company registered a growth of 22.4% in net sales to Rs 1,729 crore in CY06.

But net profit fell 6.5% to Rs 241.2 crore. The decline in profitability was on the back of Rs 60.2-crore write-off booked by the company for its US business. Adjusting for the same, growth in net profit during the period was around 16.9%. At the current market price, the stock trades at 15.4 times CY06 and 9.2x CY07E earnings.

Unlike its peers, the company has focused more on its inorganic growth initiatives to ramp up its presence in regulated markets. Going forward, inorganic growth indicatives will continue to be a key growth driver for the company. However, at current valuations, the risk-reward in the stock is highly favourable. At the targeted price of Rs 550, the stock will trade at 14.8x CY07E earnings, at 20-30% discount to its large-cap peers.

IDFC
Research: ASK Raymond James
Rating: Buy
CMP: Rs 85 (Face Value Rs 10)
12-Month Price Target: Rs 107

The key concerns for IDFC’s profitability — poor visibility on fee income and non-scalability of high proportion equity gains — have been resolved, with new initiatives on its $5-billion fund and excellent performance by its first PE fund (unrealised gains of $250 million from three partial exits).

By FY09E, the proportion of fee income in non-fund income is expected to increase to 60%, from 40% in FY07E — thus, gradually replacing the volatile equity gains component of non-fund income.

The contraction of spreads on IDFC’s project finance business is an economic reality, given the strong upward bias in interest rates and competition from commercial banks. However, sustained robust demand in the infrastructure sector — gross disbursals are expected to grow by 23% CAGR over FY06-09E — will result in healthy NII growth of 34% CAGR over the period.

ASK Raymond introduces earnings estimates of Rs 7 per share (20% YoY growth, RoE of 20%) in FY09E, and upgrades its recommendation to ‘buy’ (from ‘hold’) with a 12-month target price of Rs 107 per share at P/ABV multiple of 3x for FY09E (increased from P/ABV of 2.5x for FY08E)

Reliance Energy
Research: Emkay
Rating: Buy
CMP: Rs 471 (Face Value Rs 10)
12-Month Price Target: Rs 646

Reliance Energy, through its 50% holding in REGL, has bought a 100% stake in the Rosa project. This 1,200 mw project will be implemented in two phases of 600 mw each, entailing a total investment of Rs 5,500 crore.

This project will be funded on a debt-equity ratio of 80:20, requiring an equity investment of Rs 1,100 crore, of which, Rs 550 crore will be invested by Reliance Energy, including Rs 275 crore as its share for the first phase of the project. During Q3 FY07, Reliance Energy increased its stake in RETL to 51%, making it a subsidiary.

This company currently has one Rs 1,800-crore project, that of Western Power Grid. Reliance Energy will contribute Rs 275 crore as its share of equity investment in RETL for this project over three years. Emkay has valued this project at Rs 9 per Reliance Energy share, which is the equity investment in the company.

Even though RETL is the L1 bidder, it has not yet been issued the letter of intent (LoI) and has not achieved financial closure. REL is scouting for power generating assets and coal mining operations in global markets. Any such buys will lead to higher returns from operational assets, enhancing its returns. Emkay has valued the company on a sum-of-the-parts basis.

Stocks you can pick up this week

Tech Mahindra
Research: Enam Securities
Rating: Neutral
CMP:RS 1,640 (Face Value Rs 10)
12-Month Price Target: RS 1,721-1,748

Tech Mahindra’s (TML) recent $1-billion 5-year deal propels it into a high growth orbit. The order involves servicing the global external client base of BT Global Services (BTGS), a key business unit of British Telecom (BT).

The quantum of deal was higher than expected. The first year will entail investments and transition pains, which may result in lower margins. Revenues will scale up from the second year onwards. Based on the revised FDEPS estimate of Rs 65.5 for FY08E, Enam has assigned a higher P/E multiple of 25 times, largely to factor in the higher than industry average growth and better earnings visibility.

Material contribution from the present deal is expected from FY09 onwards. Given the recent outperformance and 3-5% price upside, Enam initiates coverage with sector ‘neutral’ rating. TML currently trades at 25.5 x FY08E FDEPS of Rs 65.5 and 17.1x FY08E EV/EBITDA.

Aventis Pharma
Research: Kotak Securities
Rating: Buy
CMP:RS 1,477 (Face Value RS 10)
12-Month Price Target: RS 1,643

Aventis’ focus on its strategic brands, successful mapping with its parent’s portfolio, strong presence in certain therapeutic areas, high brand recall among the medical fraternity and increasing outsourcing by the parent company continue to be the key determinants of its future valuation.

The company’s performance in its strategic brands is enviable. Kotak Securities expects earnings growth of 17% CAGR for the next two years. From ’08, Aventis is likely to launch patented drugs from its parent’s portfolio. However, more clarity on this is likely to emerge this year.

Aventis has about 60% of its total assets in liquid cash, which can be utilised for inorganic growth or acquisition of brands. Kotak Securities initiates coverage with a ‘buy’ recommendation with ’07 DCF-based price target of Rs 1,643. This implies an upside of 22% from the current level.

Info Edge
Research: Citigroup
Rating: Buy
CMP:RS 689 (Face Value RS 10)
12-Month Price Target:RS 750

Info Edge is poised to become one of India’s dominant internet companies. Its naukri.com is India’s leading online recruitment site; the company also owns the No 3 matrimonial site and an online real estate site.

Indo Edge is likely to be a key sector consolidator. Naukri.com dominates India’s online job market and has more than 20,000 corporate clients, over 7.5 million resumes and 120 million page views per month (twice that of its nearest competitor). India’s internet users have tripled since ’03 and should surpass 100 million by CY09.

Citigroup expects Info Edge’s revenues and profits to grow at CAGRs of 46% and 62% from FY06-09E, respectively. At 27x FY09E estimates, Info Edge is pricier than its regional peer group, which reflects a scarcity premium. However, it looks undervalued compared to its closest Indian peer, Nasdaq-listed portal Rediff, which trades at 52x consensus FY09E earnings.

Bajaj Hindusthan
Research: Karvy Stock Broking
Rating: Market Performer
CMP:RS 205 (Face Value RS 1)
12-Month Price Target:RS 235

For Q4 FY06 (standalone), Bajaj Hindusthan (BHL) reported a healthy revenue growth of 30.5% y-o-y to Rs 360 crore on the back of 81% increase in cane-crushing capacity. Revenues in the sugar segment grew by 30% to Rs 340 crore, while revenues from the distillery division grew by 100% to Rs 43 crore.

The total revenues were in line with Karvy’s estimates of Rs 360 crore. Operating margins declined by 495 bps to 14.6% due to higher raw material cost and increase in other expenditure. Overall, adjusted net profit declined by 31.5% y-o-y to Rs 38.2 crore, translating into an EPS of Rs 2.5 on diluted equity, against Karvy’s estimates of Rs 4.6.

For consolidated FY06, revenues increased by 77.2% to Rs 1,480 crore, while net profit grew by 31% to Rs 180 crore. At current levels, the scrip is trading at a P/E of 12.1x FY07 and 10.4x FY08 earnings.

Karvy Broking expects revenues to grow at a CAGR of 55% to Rs 3,560 crore and adjusted net profit to grow at a CAGR of 32% to Rs 320 crore in FY08. It is maintaining valuation at 11x FY08 and revising target price from Rs 305 to Rs 235.

Jindal Saw
Research: Anand Rathi
Rating: Outperformer
CMP:RS 382 (Face Value RS 10)
12-Month Price Target: RS 440

JSL is part of the $5-billion Jindal group and is the first company in India to manufacture saw pipes. It has two wholly-owned subsidiaries — HexaSecurities & Finance Company and Jindal Enterprises, USA.

The third subsidiary, IUP Jindal Metals and Alloys, is a joint venture between Jindal Saw and Imphy Ugine Precision, a division of Arcelor, France with 73% and 27% shareholding, respectively.

JSL plans to add about 200,000 MTPA of spiral pipe capacity to cater to the burgeoning oil & gas and water transportation sectors. It also plans to increase its seamless pipe capacity from about 100,000 MTPA to 250,000 MTPA by Q2 CY08.

As a result, the company will incur a total capex of about Rs 700 crore, including other projects during FY07E and FY08E. JSL’s strong order book position and its presence across all segments are expected to drive its topline.

The company’s earnings are expected to grow at a CAGR of 30% during FY06-08E. It is trading at a PER of 8.7x FY07E earnings and 7x FY08E. In terms of EV/EBITDA, it trades at 5.4x FY07E and 4.5x FY08E.

State Bank Of India
Research: Ask-Raymond James
Ratings: Sell
CMP:RS 1,244 (Face Value RS 10)
12-Month Price Target: RS 1,217

The net profit of State Bank of India (SBI) is expected to grow at a modest 11% CAGR over FY06-09E, led by net interest income (NII) growth of 8% CAGR and advances growth of 19% CAGR over the period.

Margin pressures may ensue from mid-FY08E on exhaustion of excess SLR and accelerated increases in deposit costs. SBI’s capital requirements are expected to increase on account of higher proportion of advances to total assets (shift from SLR) and Basel-II requirements, with risk weighted assets growing at 33% CAGR over FY06-08E (compared to 21% CAGR over FY03-06).

ASK-Raymond James values SBI’s parent bank at Rs 872 per share (1.65x core adjusted book value for FY08E) and the subsidiaries at Rs 345 per share (post-discount of 10%). Its return ratios are expected to remain lower than that of its peer banks due to slower earnings growth and accentuated capital requirements.