Jindal Steel and Power, JSW Steel, VSNL, Divis Labs, Dr Reddys Lab, HPCL, Educomp Solutions, Tata Tea, GSPL, Federal Bank, Mahindra Finance, Sadbhav E

Jindal Steel and Power, JSW Steel, VSNL, Divis Labs, Dr Reddys Lab, HPCL, Educomp Solutions, Tata Tea, GSPL, Federal Bank, Mahindra Finance, Sadbhav Engineering, LT, Jet Airways

Bajaj Auto,Bharat Forge, Cairn, Financial Tech, JP Associates, Maruti Suzuki, MTNL, Reliance Capital, Reliance Industries, Unitech, VSNL

Bajaj Auto,Bharat Forge, Cairn, Financial Tech, JP Associates, Maruti Suzuki, MTNL, Reliance Capital, Reliance Industries, Unitech, VSNL

VSNL, Automobiles, Consumer Products

VSNL, Automobiles, Consumer Products

Tata Motors, VSNL, Ultratech Cement, Bharti Airtel, United Breweries, Unitech, IDFC

Tata Motors, VSNL, Ultratech Cement, Bharti Airtel, United Breweries, Unitech, IDFC

Strategy, VSNL, Jindal SAW, Telecom

Strategy, VSNL, Jindal SAW, Telecom

VSNL, Siemens, Financial Technologies, Jindal Steel and Power, Cairn India, Unitech, NALCO

VSNL, Siemens, Financial Technologies, Jindal Steel and Power, Cairn India, Unitech, NALCO

Stocks you can pick up this week

Videsh Sanchar Nigam
Research: ICICI Securities (June 8, ’07)
Rating: Sell
CMP: Rs 451.15 (Face Value Rs 10)

Tariff pressure, coupled with declining market share in the voice segment, will affect VSNL’s domestic operations. The company’s international operations and new initiatives in the retail segment will continue to hamper profits in the near to medium term. ICICI Securities initiates its coverage on VSNL with a ‘sell’ rating and estimates that though its international presence and retail venture may provide impetus to the topline, it will hamper margins in the medium term. Competitive pressures, coupled with a decline in tariff, also will dent VSNL’s margins. Although the company has taken some initiatives on cost management, EBITDA margins could improve marginally from 12.2% during FY07 to 14% during FY09. Higher debt to fund capex on account of low profitability and high interest will keep the free cash flow under pressure.

ITC
Research: CLSA (June 7, ’07)
Rating: Underperform
CMP: Rs 150.70 (Face Value Re 1)

Itc has underperformed the market by 6% over the past 10 days following news that Uttar Pradesh (UP) is levying higher tax on cigarettes. The 32.5% trade tax levied by UP is not a big cause of concern as it merely raises the weighted average value-added tax (VAT) from 12.5% earlier to 13.7%. However, this raises doubts about whether other states will follow suit. While this is unlikely, given the spirit of the VAT regime, there is potential for more negative news. UP is one of the few states that has still has not joined the VAT regime. This regime was introduced to ensure a unified tax regime across states However, states always enjoy the power to change the tax rate on individual product categories in an asynchronous manner. UP’s example may embolden some of the rogue states to follow suit and raise taxes on tobacco. Hence, the worst may not be over for ITC.

NIIT
Research: Citigroup (June 7, ’07)
Rating: Buy
CMP: Rs 892.80 (Face Value Rs 10 )

The upswing in the domestic retail training business remains intact. NIIT’s quarterly result was lifted by strong growth in China. The company has raised fees for most of its courses — CATS by 8-15%, 3-year GNIIT by 18% and ANIIT by ~15%. The recently launched NetworkLABS has received good response and the company plans to roll this out in large cities during this fiscal. NIIT expanded its capacity by 18% during FY07 and expects to further expand capacity by 10-12% over the next two years. This capacity expansion supports Citigroup’s thesis of industry upturn as NIIT has expanded its capacity for the first time in the 4-5 years. The company looks well-positioned to benefit from growing concerns over the supply of talent. In this context, Citigroup expects strong business momentum in the retail training business in India.

Glenmark Pharmaceuticals
Research: HDFC Securities (June 6, ’07)
Rating: Buy
CMP: Rs 675.70 (Face Value Rs 2)

HDFC Securities expects the company to achieve remarkable growth in revenue and net income in coming years due to a strong research pipeline, which will fetch it high returns from out-licensing deals. At the end of FY07, the company had 13 products in the US market and 36 ANDAs pending approval. These will help sustain its growth in the US market. With acquisitions expected in central and eastern Europe, revenues will start flowing in from FY08. The changing business mix will also help improve its margins, going forward. Based on an estimated EPS of Rs 39.2 for FY08 and Rs 50.3 for FY09, the stock currently trades at a forward P/E of 17.4x and 13.6x, respectively. Looking at the company’s capabilities and strong business prospects, the stock is cheaply valued, as per HDFC Securities.

Strides Acrolab
Research: Kotak Securities (June 6, ’07)
Rating: Buy
CMP: Rs 329.55 (Face Value Rs 10)

Strides Acrolab (SAL) is engaged in the manufacture of ethical pharmaceuticals products, over-the-counter products and neutraceuticals. Its products include soft-gel and hard-gel capsules, tablets and dry and wet injectables. Kotak Securities initiates coverage with a ‘buy’ rating and estimates that revenues will grow by 25% in FY08, led by export growth. Operating margin is expected to improve by 370 bps due to improved product flow and higher capacity utilisation. The company has capex plans of about $30 million over the next two years. SAL’s focus on the HIV AIDS, TB and malaria businesses, its big product pipeline in soft-gel capsules and capacity expansion plans are its key growth triggers.

Aban Offshore
Research: Merrill Lynch (June 6, ’07)
Rating: Buy
CMP: Rs 2842.25 (Face Value Rs 2)

Merrill Lynch forecasts that Aban’s earnings will jump 18x in FY07-FY10E, driven by an expanding rig fleet and rising day rates. There may be upside risk to day rates and therefore, to earnings and valuation. The global rig market is in the midst of a recovery since ’04. The drivers are high oil prices, rising exploration budgets and no major additions to an ageing fleet. Rig utilisation rate has risen to 90% and day rates are at record levels. New rigs are being built, but incremental demand will still be twice the new supply up to ’08. Merrill Lynch expects Aban’s EPS to surge to Rs 499 in FY10E from Rs 27 in FY07E. Expansion of the rig fleet from eight to 20 by FY09E will be one of the company’s earnings drivers. The other triggers will be rising day rates on existing rigs under new contracts and on new high quality rigs being added to the fleet. An income tax holiday enjoyed by its Singapore-based subsidiary ASPL, will also boost earnings. All new rigs are in ASPL.

Gail
Research: ASK Securities (June 5, ’07)
Rating: Buy
CMP: Rs 294 (Face Value Rs 10)

The domestic natural gas supply scenario is expected to improve (more than 240 mmscmd) over the next three-five years. Gail has already entered into MoUs with RIL and ONGC for marketing and supply of natural gas. Gail’s pipeline business is a cash cow for the company. Citing the improving gas supply scenario, Gail has announced a Rs 18,000-crore capex to increase its pipeline capacity from the current 130 mmscmd to 360 mmscmd in 4-5 years. Cash flows from new pipelines are expected to contribute around Rs 65/share to Gail’s fair value, making it an attractive long-term bet. Funding the pipeline capex will not be an issue for Gail, considering its low 0.1x debt-to-equity ratio. Even after factoring this capex (0.1x debt/equity for FY09E), Gail will be comfortably placed to finance its additional capex (around Rs 7,000 crore) for the proposed Assam gas cracker complex (Rs 5,600 crore capex) and exploration and production (E&P) over the next five years.

VSNL, GSPL

VSNL, GSPL

Omax Auto, IVRCL, VSNL, HPCL, India Strategy,Crompton Greaves

Man Financial on IVRCL

IVRCL's Q4FY07 numbers are much above our expectations with sales growth at 67.5% against expectations of 40.2% growth and margins increased to 10.6% as against expectations of 9.5%. With a healthy outlook for the core business and value creation from its real estate ventures, four special purpose vehicles (SPVs), and a strong performing subsidiary, Hindustan Dorr Oliver (HDO), we increase our target price to Rs 448 and maintain BUY.

Man Financial - Crompton Greaves

We expect consolidated eps of Rs 10.2 and Rs 12.5 (excluding upsides from Ganz and newly acquired Microsol) in FY08E and FY09E respectively. CG trades at a PER of of 23x FY08E and EV/EBITDA of 13x FY08E. We currently have a Outperformer rating on the stock. The rating is under review.


Man Financial on HPCL

* HPCL's quarterly results were above estimates as there was marketing over-recovery for Q4FY07 due to higher-than-expected subsidy-sharing by upstream companies.
* Although the refining margins recovered in this quarter, they were slightly disappointing as they lagged industry trends.
* We maintain our Neutral rating with a price target of Rs 315

JP Morgan on VSNL

Valuations and stock view. We maintain neutral rating on VSNL stock with Jun-08 SOP price target of Rs500 (Rs475 previously). Our SOP includes Rs235 from the India business, which we have valued using DCF (implied FY08E EV/EBITDA is 6.0x). Stock is likely to remain in a trading range and we would consider buying around Rs400/share level.

Risks to our view. Downside risks are competition, adverse regulatory changes (regulation of access to cable landing stations) and delay in cash breakeven of TGN. Upside may come from unlocking of surplus land value. Furthermore, listing of RCOM's cable assets (FLAG) could also boost investor outlook on the value of TGN submarine cable system.

JP Morgan on India Strategy

Earnings expectations lowered. Over May, consensus earnings estimates for FY08E & FY09E were revised down by 1.2% and 1.6% respectively. The trend in terms of breadth also remained weak - 29 out of 67 stocks in the MSCI India saw upward revisions, while earnings for 36 stocks were revised down for FY08.
· Consumer, healthcare and financials lead downward revisions. Earnings estimates for the metals, industrials and energy sectors were revised up, while for consumers, healthcare and financial sectors were reduced.
· Earnings expectations and index performance. An analysis of changes in historic and forward EPS expectations vs stock prices indicates significantly higher correlation in the case of materials, financials and consumer discretionary and relatively weaker relationship in the case of IT services, healthcare, telecoms and industrials.
· Key consensus earnings and recommendation changes. Among the stocks mentioned, we have Overweight rating on Jet Airways and Underweight on Bajaj Hindusthan and Arvind Mills

SSKI on Omax Auto

Omax's Q4FY07 revenue and profits have been in line with our expectations, though operating margins were below our expectations. Q4FY07 net sales growth was strong at 27.6%yoy (Rs1.81bn), though operating margins were lower by 130bps qoq (higher 90bps yoy) at 9.1%. Operating profit grew by 42.6%yoy to Rs163m and net profit grew by 10.3%yoy to Rs54.6m, impacted by higher depreciation and interest charges.
The company has trimmed its export target for FY08 to ~Rs400-Rs500m against its earlier target of Rs500-Rs600m. The company's margins which had improved in the first nine months of FY07 due to the company's cost saving initiatives have surprised us negatively in Q4FY07 with an increase in overheads and conversion costs. Further, Omax Auto is not likely to derive any significant cost benefit in its steel procurement from Omax steel as the company's steel production and rolling mill project has not scaled up as planned and the company is now also considering an option of divesting part of its stake in Omax Steel (76% at present). In view of these factors we have lowered our revenue estimates by 4.7% in FY08 and 3.1% in FY09 and also lowered our margin estimates by ~70bps for FY08 and ~30bps for FY09. This has led to a sharp downgrade of 15.8% in earnings for FY08 and 5.3% for FY09. Notwithstanding the sharp earnings downgrade in FY08, valuations at PER of 6.0x and EV/EBIDTA of 4.2x FY09 estimates appear attractive. Maintain Outperformer with revised price target of Rs122 based on PER of 8.0x FY09.

Kotak - Ranbaxy, Nagarjuna Constructions, VSNL, Mahindra & Mahindra, Indian Oil Corporation

Kotak Instutional Recommendations

Indian Oil Corporation

IOCL reported 4QFY07 standalone adjusted net income at Rs29.1 bn (reported Rs16.1 bn) versus our estimated Rs30.7 bn. The difference between adjusted and reported net incomereflects decrease in value of investments in IBP (Rs13.2 bn), which has been merged withIOCL. 4QFY07 results include FY2007 financials of IBP and thus are not comparable withresults of 3QFY07 or 4QFY06. FY2007 reported net income is Rs75 bn (Rs56.2 bnadjusted) versus Rs49.2 bn (without IBP). We see little merit in analyzing quarterly resultsgiven (1) merger of IBP with IOCL and (2) quarterly volatility in the amount of oil bondsand payment from upstream companies. We have fine-tuned FY2008, FY2009 andFY2010 consolidated EPS estimates to Rs63.6, Rs62.7 and Rs55.2 versus Rs62.8, Rs62.1and Rs59.7, respectively, previously. We retain our 12-month target price of Rs500, whichis based on a 30% discount to our 5X normalized EBITDA. Key downside risk is higherthan-expected subsidy losses.

Mahindra & Mahindra

M&M reported 4Q recurring net profit at Rs2.3 bn ' a 33% yoy growth in-line with our estimate of Rs2.6 bn. Net sales for the quarter at Rs27.5bn increased 20% yoy. This was on account of a 15% increase in volumes and 5% increase in realisations. 4Q EBITDA margins at 11.4% declined 30 bps yoy and 60 bps qoq. There was an exceptional profit of Rs100mn during the quarter on account of sale of certain long term investments. We maintain our consolidated fully diluted EPS estimates for M&M for FY2008 at Rs67.8 and for FY2009 at Rs85.0. We maintain our OP rating on the stock with a SOTP based target
price of Rs1,000 based on Rs613 for M&M stand-alone at 7.1X FY2009 EV/EBITDA equivalent to 11.4X FY2009 P/E and Rs387 for value in key subsidiaries of the company (valued at 20% discount to market value of holding). We shall be revising our numbers shortly.

VSNL


VSNL's 4QFY07 reported net income (standalone) of Rs1.31 bn was 4% ahead of our estimates of Rs1.26 bn. EBITDA declined 6% qoq to Rs2.4 bn, 6% lower than our estimate of Rs2.6 bn. Year-end seasonality along with one-off items to the tune of Rs600 mn such as provision for doubtful debts, legal and professional charges and R&M costs impacted EBITDA performance. Voice and data business demonstrated robust performance. We have fine-tuned FY2008E and FY2009E EBITDA to Rs10.4 bn and Rs11.7 bn from Rs10.4 bn and Rs11.2 bn, respectively previously. We will wait for FY2007 annual report and full consolidated accounts to convert our earnings model to consolidated basis. Our 12-month SOTP-based target price of Rs560 faces risk from continued delay in unlocking of land value and aggressive pricing competition

Nagarjuna Constructions

Nagarjuna construction has reported revenues of Rs8.7 bn in 4QFY07 versus our expectation of Rs10.5 bn and EBITDA (before other income) of Rs737 mn versus our expectation of Rs901mn respectively. EBITDA margin at 8.4% was about 20 bps lower
than our expectations. Order backlog at the end of FY2007 was Rs73 bn, providing a visibility of 1.8 years based on forward 12 month revenues. We revise our FY2008 EPS estimated downwards based on lower execution versus our earlier expectations. We revise our DCF based target price to Rs204/share from Rs198 earlir based on higher valuation of investment in Land bank/BOT projects. We maintain out perform rating based on strong macro outlook and value unlocking in real estate and infrastructure holding subsidiary.

Ranbaxy

Ranbaxy has acquired from Bristol-Myers Squibb (BMS) the US rights to a group of 13 dermatol/asaogy products. These brands have revenues of US$15 mn and have been acquired for US$26 mn. Clearly, these are small tail-end brands, which were not being promoted by BMS. Ranbaxy hopes to grow these brands by promoting them (through its existing dermatology sales force) and thereby improving profitability. The acquisition will add about 4% to US revenues (1% to total revenues) and is likely to be EPS neutral for the next two years, assuming that deal price will be amortised over ten-years. We have an OP rating on the stock.

Indian Banks

Key highlights of the financial results of Indian banks for 4QFY07 are:
a) Most banks maintain margins, despite fall in CASA for a few
b) Credit growth remained robust and led to increased reliance on bulk deposits for most
banks,
c) Non-interest income remained robust aided by fee income and loan loss recoveries,
d) Higher provisions (NPL, standard asset and investment depreciation losses) impacted
overall PAT growth.
e) Some banks like Indian Bank, PNB and Federal Bank made higher provisions than
mandated by RBI regulations to strengthen their balance sheets.

We continue to maintain preference for banks focusing on moderate asset expansion and funding their loan growth through core deposits. PNB, IOB, Andhra Bank, SBI, Federal Bank and J&K Bank are our favored stocks in this space given their valuations and growth outlook.

Citigroup - VSNL, BHEL

Citigroup in their report on VSNL say

We maintain our Hold/Medium Risk (2M) rating with a target price of Rs450. Speedy implementation of land sale could provide upside to our target whereas adverse ruling on FLAG compensation could be a negative. However, the concerns relating to reselling of IPLC by operators are unfounded.

Citigroup in their report on BHEL say

Raise target price to Rs3,344 — We are raising our target price to Rs3,344 (from Rs2,764 earlier) given an earnings revision and rolling forward of our P/E multiple (20x) to FY09E. We now expect sales CAGR of 24% to drive earnings CAGR of 27% over FY07-10E with RoEs in the 25–30% range.

Under-performance since January 2007 implies this is a good time for investors to build long-term holdings in the stock as BHEL remains our top pick in the Indian Electric Equipment space.

VSNL: Buy

Investors with a penchant for high risk can consider taking fresh exposure in the Videsh Sanchar Nigam (VSNL) stock with a one-year perspective. At the current market price, the stock trades at a price-earnings multiple of 24 times its likely 2006-07 earnings. While the valuation is not cheap and the fundamentals yet to stabilise fully, there are two near-term potential triggers for the stock.

Impact of listing

One, the proposed listing of Flag Telecom, Reliance Communications subsidiary, at the London Stock Exchange, is likely to have a positive impact on the valuation of Tyco Global Network, the undersea cable network acquired by VSNL. These assets were acquired by VSNL by $130 million in 2005 and its undersea cable capacities are similar to Flag Telecom at 65,000 km.

Going by the preliminary valuation estimates of $1.5-2 billion for Flag Telecom, if the listing happens at this value, it will have a positive effect on VSNL too. Even if we assign a value of 70-80 per cent to the assets of Flag, Tyco's value will work out to Rs 160-175 per share.

Two, according to recent news reports, VSNL has plans to de-merge the telecom business into a separate company. The existing company, which holds the prize-surplus real-estate assets of VSNL, will become the holding company.

This proposal is said to be under government scrutiny. While no confirmation is available, this reflects that the government is possibly moving closer to a decision on monetising the real-estate assets that will unlock handsome gains for shareholders of VSNL.

According to the original privatisation and shareholding agreement, 51 per cent shareholding in the real-estate company was to be held by the government and the rest with the shareholders.

On a per share basis, rough estimates place the real estate value at anywhere between Rs 200 and Rs 240.

Though no moves are afoot now, with the listing of Idea Cellular and Vodafone's acquisition of Hutch-Essar, the Tatas may consider restructuring the entire telecom holding within the group.

If the Tatas decide to consolidate all the assets under Tata Teleservices, the mobile arm of the group, VSNL, which holds an effective equity stake of 14.1 per cent (as of March 31, 2006) in the former will have an opportunity to monetise this equity holding.

The value of this equity stake will be about Rs 75 depending on the valuation placed for Tata Teleservices.

Based on the sum-of-the-parts valuation, elements such as real estate, Tyco and equity stake in Tata Teleservices offer a fair degree of valuation comfort in the stock.

The flip side

On the flip side, however, there are three variables that are a cause for concern. VSNL has recast its business into three broad segments — wholesale voice, carrier and enterprise/carrier data and broadband.

Of these three segments, it is likely to face intense competition in the wholesale voice, which includes the international/domestic long-distance voice operations as newer players enter the fray.

The segment margin on the wholesale voice business has been stable at 17.5 per cent in the first nine months of 2006-07 compared to the corresponding previous period.

Two, any slowdown in enterprise/carrier data is likely to hit them hard as the margins from this segment are spectacular.

Finally, Flag Telecom has approached the Arbitration Tribunal of the International Chamber of Commerce seeking monetary relief of $406 million from VSNL relating to construction and maintenance of Flag Europe-Asia cable system. As it is a legal dispute, its impact of financials is hard to evaluate at this point.

Prime Broking - VSNL

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Sharekhan High Noon - Nov 17

Featuring .. Jet Airways, VSNL updates.

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Sharekhan Eagle Eye (equities) & Derivatives Info Kit

VSNL

Gitanjali Gems

GAIL

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