Best Brokers, Research India Polls 2007

Best Brokers, Research India Polls 2007

Research Calls

SAIL

KR Choksey Research recommends a �buy� on Steel Authority of India (SAIL) at a price of Rs 103, as it expects that rise in prices of steel internationally will lead to improved realisations for the company.

Globally, steel prices have risen about 7-8 per cent over the last couple of months and are expected to remain strong following healthy demand in Asia, Europe and the US.

SAIL is the largest integrated steel company in India, with a hot metal production of about 15 million ton and a market share of 25 per cent. It operates four integrated steel plants and three special steel plants in the country.

Further, it also has its own captive iron ore, dolomite and limestone miles. It now plans to increase its hot metal production capacity from the existing 14.6 million ton to 23 million ton a year by 2012.

In addition, to meet the increased power requirement due to augmented capacity, it plans to set up two power plants of 500 mw each in two separate joint ventures with NTPC at Bhilai and with Damodar Valley in Jharkhand. At the price of Rs 103, the stock is valued at about 8 times its trailing twelve month earnings.

Shasun Chemicals

Angel Broking recommends a �buy� on Shasun Chemicals at a price of Rs 101, with an 18-month target of Rs 145. Shasun Chemicals is a generic drug-maker with a small foray in active pharmaceutical ingredients (APIs) and plans to enter the formulations exports, especially in regulated markets of Europe and the US.

The company has forged an alliance to market 22 products of Glenmark Pharmaceuticals and Alpharma, and expects a United States Food and Drug Administration (USFDA) approval of its facilities in order to launch its products by the first half of FY08.

In FY07, the company acquired assets of Rhodia�s custom synthesis business along with some proprietary technologies. The assets included USFDA and Medicines and Healthcare Regulatory Agency, UK (MHRA) approved contract manufacturing and custom synthesis manufacturing units, and technologies like hydrolytic kinetic resolution (HKR), aromatic bond formation (ABF) and trifluoro methylation.

This business clocks sales of �40 million (approximately Rs 343 crore) and has a pipeline of around 14 products in advanced stages of clinical trials and about 20 products in the preclinical phase.

The company is expected to grow at a compound rate of 45.1 per cent and 24.3 per cent in sales and net profit over FY06-FY09. At Rs 101, the stock is valued at 8.8 times and 7 times its expected FY08 and FY09 earnings respectively.

KPIT Cummins Infosystems Emkay Private Client Research recommends a hold on KPIT Cummins Infosystems at a price of Rs 114 with a target price of Rs 144.

Despite the negative impact of the appreciating rupee and lower billing days, EBITDA (earnings before interest, tax and depreciation) margin for the quarter has marginally declined by 30 basis points to 15.2 per cent.

On the other hand, lower effective tax rate of 3.2 per cent, on accounts of deferred tax assets, resulted a 10 per cent growth in the net profit to Rs 137.23 million.

Overall the December quarter proved to be quite a mixed bag. In revenue terms there was decent growth, however rupee appreciation and lower number of billing hours dampened the growth in the rupee term.

However a strong positive has been the company's ability to maintain its margins. Going forward strong medium term growth drivers are discerned from the strong ramp up in the non-Cummins Star customers accounts and improved performance from the acquired companies.

Emkay expects KPIT Cummins revenue and profit to grow at a CAGR of 37 per cent and 46 per cent to Rs 4,682 million and Rs 6006 million and Rs 535 million and Rs 698 million respectively.

KPIT Cummins trades at a P/E of 14.6 times estimated FY08 earnings. Adjusted for the recently concluded bonus issue and stock split, at the target price of Rs 144, the stock is valued at 15.5 times for estimated FY08 earnings.

Research Calls

BRICS PCG recommends a "Buy" on Infosys Technologies at Rs 2183 with a revised target of Rs 2806 (earlier target price of Rs 2217). The stock trades at 32.1 times and 25.7 times its estimated FY07 and FY08 earnings respectively.

The strong growth recorded in the December 2006 quarter with a 9.7 per cent growth in total billed volumes and a 10.1 per cent growth in revenues in dollar terms was in line with expectations.

Though the rupee appreciation led to a fall of 200 basis points in margins, it was offset to the extent of 80 basis points by an improvement in revenue productivity, 30 basis points by lower SG&A expenses and 80 basis points by higher license fees from banking product Finnacle.

Though BRICS has marginally revised its FY07 EPS estimates down to Rs 68 from Rs 69, it has kept its FY08 estimates of 85.1 unchanged. Moreover added offshore effort and continuing Client growth are key positives.

Gujarat Gas

Angel Broking recommends a “Buy” on Gujarat Gas at Rs 1,274 with a 12 month target price of Rs 1,653. The stock is valued at 17.2 times, 14.4 times and 11.9 times its estimated CY06, CY07 and CY08 earnings, respectively.

The corresponding EV/EBITDA ratios are 9.9 times, 8 times and 6.4 times respectively. The company which has operations in gas distribution in the industrial retail, PNG and CNG domains.

The high margin industrial retail and CNG are expected to grow by over 15 per cent, while PNG is likely to grow by over 35 to 40 per cent. The company also has plans to add to its existing 2,100 km gas pipelines entering newer industrial areas of Jagadia, Kim-Karanj and Vapi.

In addition, about 5-7 new CNG stations will be set up, with an investment of Rs 70-100 crore a year. The power co-generation business too, would remain under focus with a scaling up of capacity by 20 MW each year until 2010, adding to the existing 18 MW. With stable revenues ensured, the business appears to be on a steadily upward trend.

Bartronics India

HDFC Securities Retail research recommends a “Buy on decline” on Bartronics India (BIL) with a price range of Rs 98 to Rs 111. The stock closed at Rs 123 on January 12 and trades at at 13.8 times and 8.9 times FY08 and FY09 estimated earnings.

BIL, which is the only integrated player in the AIDC/RFID solution market in India, planning to establish a manufacturing facility near Hyderabad for smart cards and/or RFID tags with an investment of Rs 262 crore.

HDFC securities expects the company to achieve a topline of Rs 71 crore, Rs 210 crore and Rs 280 crore respectively in next three years from FY07 on the back of rising output.

The new project brings with it the benefits of the first mover in a fast growing industry, faster rollout, backward integration and change in orbit for BIL. However, it exposes to the risks of project completion, gestation issues, operating risk of low utilisation in a capital-intensive industry and an entry into a commodity business.

Kalpataru Power Transmission

Edelweiss Capital recommends a “Buy” on Kalpataru Power Transmission at Rs 1043. The stock trades at 20.4 times , 14.8 times and 11.1 times its FY07, FY08 and FY 09 estimated earnings, respectively.

The corresponding EV/EBITDA ratios for FY07, FY08 and FY09 are 13 times, 10.9 times and 8.5 times. Kalpataru Power has interests in power transmission line towers, transmission equipment and gas pipeline infrastructure projects with approximately 25 per cent of the market share in domestic power transmission and distribution towers.

By the end of H1FY07, the company had domestic orders worth about Rs 130 crore and is expected to grow further, thanks to the rise in the power transmission capacity in India. Further, the revenues from the company’s gas pipeline business are growing at about 60 per cent year on year.

Tanla Solutions

Emkay Private Client Research recommends a “Buy” on Tanla solutions at Rs 395 with a target price of Rs 613. The stock trades at 15.9 times and 11.5 times its estimated FY08 and FY09 earnings respectively.

Emkay believes that an impressive business model and the robust industry environment as also Tanla’s future plans to enter new geographies and extending the services and product offerings make its growth prospects very positive.

Revenue is expected to grow at an CAGR of 92 per cent and net profits at a CAGR of 79 per cent over FY06A-FY09E.

Research Calls

Balaji Telefilms

Angel Broking has given a ‘buy’ recommendation for Balaji Telefilms with a 12-month price target of Rs 170. The company has been enjoying high TRPs over the years. This helps it to have the upper-hand while negotiating with broadcasters and this is reflected in the consistent high per hour realisations of the company.

Considering that Balaji's content commands a significant premium and Balaji itself has refrained from compromising on its realisations, Angel expects these to improve. Balaji has two shows lined up for release during Q4FY07 which will be beamed on Star One.

At the end of FY06, cash and investments amounted to around Rs 26 per share and by FY08 they are expected to be around Rs 33 per share, thus providing a cushion to the stock price. At the current price, the stock trades at a P/E of 9.8 times expected FY09 earnings.

Dr. Reddy's Laboratories

Motilal Oswal Securities recommended a ‘buy’ for Dr. Reddy's Laboratories with a price target of Rs 800. The company has recently priced its ADS at $16/ADS and has raised about $200 million. It is assumed that the ADS proceeds will be used for debt reduction.

Hence, savings in interest costs will compensate for the equity dilution. The company is eligible of Ondansetron 180-day exclusivity but the launch is contingent on US FDA approval. Motilal expects one-time upside of $45 million in revenues and an incremental EPS of Rs 9 from this opportunity.

The company expects to start Phase-III trials for Balaglitazone in early 2007 subject to favourable data on some of the tests conducted. Improvement in core business coupled with large short-term opportunities like Fexofenadine and Finasteride will result in increased traction for FY07.

The German operations are likely to contribute positively to margins despite the recent price cuts. The company is currently valued at 29.5 times and 21.3 times its expected FY07 and FY08 earnings.

BRICS PCG Research

Bank of India

CMP: Rs 167 Target: Rs 186 (upgraded from Rs 170) BUY

Hitting the high notes

Bank of India (BOI) has churned out an excellent Q2FY07 performance, posting the best results among PSU banks. As guided by the bank after the FY06 results, net interest income (NII) continues to grow at a very robust pace, well ahead of expectations. An improved yield on funds and a relatively lower increase in cost of funds led a 47% growth in NII. This together with the healthy 18% growth in non-interest income (ex-treasury) to Rs 3bn led to a 61% spurt in net profit. Within loans, lending towards the retail, agriculture and SME segments recorded strong YoY growth of 56%, 22% and 27% respectively. BOI expects these segments to continue to drive asset growth and boost yields.

The management is targeting a growth of 20% in deposits (25% in low-cost deposits) and 25% in loans in FY07. Based on our dividend discount model (DDM) we value the bank at Rs 186, an upward revision from Rs 170 earlier to incorporate the robust financial results. BUY.

Tulip IT Services

CMP: Rs 362 Target: Rs 457 (upgraded from Rs 383) BUY

Power packed performance

Tulip IT Services reported a very strong Q2FY07 financial performance, much ahead of our expectations. Revenues in the quarter grew sequentially by 29.7% to Rs 1.9bn on the back of 59.4% growth in the corporate data services (CDS) segment. Operating margins expanded by 280 bps to 15.5% as the share of CDS revenues increased to 34% of total revenues. Net profit grew by 46.5% to Rs 202.5mn, a slower pace than the 58.6% QoQ increase in operating profit due to higher depreciation and tax costs during the quarter. In view of the exceptional performance, we are raising our estimates for FY07 and FY08 and accordingly upgrading our target price to Rs 457 (from Rs 383). BUY.

K S Oils

CMP: Rs 176 Target: Rs 218 BUY

Fuelled for success

KS Oils (KSO) has clocked an outstanding performance during Q2FY07 with 79% YoY growth in revenues to Rs 2.3bn and a 213% spike in net profit to Rs 111mn. Better volumes due to enhanced capacity utilisation and increased realisations from a heightened focus on the retail segment drove sales during the quarter. Operating profit has grown 140% YoY to Rs 161mn, accompanied by an improved margin at 7.1% from 5.3% a year ago. The margin growth was fuelled by increased realisations, lowered operating costs (particularly power) and better working capital cycles. Net profit margins also rose 75% from 2.8% to 4.9% this quarter. We retain our projections for FY07 and FY08, and thus recommend a BUY with our initial target price of Rs 218.

Indoco Remedies

CMP: Rs 293 Target: Rs 410 BUY

Healthy growth, in line with estimates

Indoco Remedies' Q1FY07 results are largely in line with our estimates. Though the sales growth in the quarter exceeded our expectations, net profit was marginally below our estimates due to higher finance charges and depreciation. Net sales in Q1FY07 grew by 37% to Rs 726.5mn as against Rs 529mn in Q1FY06, driven by 26% growth in domestic sales and a 103% rise in exports to regulated markets. Domestic sales contributed about 81.3% to the topline whereas exports to regulated markets contributed about 12% in Q1FY07. These exports have grown more than anticipated (103% as against 60%) on account of a swelling customer base as well as an increase in the products supplied. Operating margins for the quarter have fallen by 90 bps YoY due to an increase in raw material cost as a percentage of sales. We believe the margins in the coming quarters will stabilise at about 20% as the exports gain further momentum.

At the current market price of Rs 293, the stock is trading at P/E multiples of 7.4x on FY07E and 5.9x on FY08E which we believe is very attractive. With an expected ROE of 23% in FY08 and earnings growth of about 30% we believe the stock should trade at a higher multiple. We therefore recommend a BUY with a target of Rs 410.

JK Cements

CMP: Rs 191 Target: Rs 315 BUY

Pillar of strength

JK Cements' (JKCL) Q2FY07 results are in line with our expectations. Sales have grown by 30% YoY from Rs 2.1bn to Rs 2.7bn. The company sold 8.13 lakh tonnes of grey cement and 60,900 tonnes of white cement in Q2FY07. Net profit has risen substantially from Rs 49mn to Rs 340mn in Q2FY07 mainly due to better realisations as compared to the last year. Operating margins have also jumped from 13.7% in Q2FY06 to 23.7% in Q2FY07. The EPS for the current quarter stands at Rs 4.9 versus Rs 1 in Q2FY06.

The company's expansion plans and power projects are on schedule and it has concluded the acquisition of JayKayCem, a wholly owned subsidiary. Further, the outlook on cement demand and prices remains upbeat, with a Rs 3-5 price hike per bag expected in the near term. We thus maintain a strong BUY on JKCL with our target of Rs 315.

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