Kotak Reports - Weekly + Daily - Jul 03

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ET - Stocks you can pick up this week

HDFC
Research: HSBC Global
Recommendation: Overweight
CMP: Rs 1,130 (Face Value Rs 10)
12-Month Price Target: Rs 1,351

HDFC is among the rare Indian lenders that succeeded in preserving its spread in FY06. Lending rates were raised four times in the past six quarters. They will need to rise more if HDFC is to preserve its spread. Net interest margin (NIM) expanded for seven years while rates were falling to reach an estimated 296 bps for FY06.

HSBC forecasts assume that NIM could decline by 10 bps in the next three years. The fair value range is lowered to Rs 1,267-1,436 following revisions in the forecasts for growth, profitability and value of the associate businesses. The notional target price of Rs 1,351 includes Rs 336 per share for the associate businesses.

HSBC has upgraded the rating to 'overweight' from 'neutral' to reflect the 21% potential upside. Near-term triggers could arise from upward revision of lending rates and the passage of a resolution to increase the authorised capital to accommodate the possible conversion of convertible bonds, starting late August. Key risks are a larger rise in funding cost relative to loan yield and lower growth in capital gains.

ONGC
Research: JM Morgan Stanley
Recommendation: Overweight
CMP: Rs 1,108 (Face Value Rs 10)
12-Month Price Target: Rs 1,405

Apart from concerns regarding the subsidy burden and gas price decontrols, both of which are not in ONGC's hands, JM Moran Stanley believes the management is focusing on growth in an effort to enhance shareholders' value. It has also maintained its estimates and assigned 'overweight' rating to the stock.

The positive view on the stock is based on: (i) the expected growth rate of 8.7% per year of ONGC's production over FY06-8E; (ii) option value on gas, which is controlled by the government; (iii) ONGC's international acquisition strategy seems to be paying rich dividends; and (iv) attractive valuations.

ONGC has underperformed the market by 16.3% YTD, 3.89% in the last month and is the cheapest E&P stock in JM Morgan Stanley's Asian universe, trading at FY07E P/E of 8.1 times, dividend yield of 4.5%, EV/EBITDA of 3.5 times, an implied crude oil price of 29/bbl,and current EV/BOE of $4.73, which make valuations look attractive.

GHCL
Research: Kotak Securities
Recommendation: Buy
CMP: Rs 122 (Face Value Rs 10)
12-Month Price Target: Rs 170

GHCL is one of the leading producers, as well as largest exporters of soda ash in India. The company is strengthening its position by adding capacity and has made overseas acquisitions. GHCL also has a presence in the textiles business and is expanding capacities in spinning, processing and weaving.

It has also set up a home textiles manufacturing unit at Vapi, Gujarat, and has acquired US textile major Dan River to gain access to the US home textiles market. Kotak Securities is positive on the growth prospects of GHCL and has recommended a 'buy' on the stock, with a 12-month price target of Rs 170, implying 60% upside from current level.

PSL
Research: Edelweiss
Recommendation: Buy
CMP: Rs 239 (Face Value Rs 10)
12-Month Price Target: NA

PSL revenues and profits for Q4FY06 were lower than expectations due to lower revenues from the pipe sales and lower margins due to higher proportion of pipe business booked during the quarter. Yearly revenues were higher by 4.3% due to higher volumes and realisation.

Going forward, Edelweiss is positive on order flows to pipe companies as the deadline for the companies to start production approaches. PSL will benefit from its low-cost and multi-location facility. Edelweiss believes that gas-producing companies like Reliance will have to take a decision on gas pipeline infrastructure before the end of FY07.

Moreover, increase in the recent gas reserves by Reliance will require more capacities in pipelines. Hence, Edelweiss maintains its FY07E and FY08E EPS numbers at Rs 20.7 and Rs 28.2 respectively. At the current market price, PSL trades at 11.1 times FY07E and 8.2 times FY08E EPS estimates.

Mangalam Cement
Research: Religare Securities
Recommendation: Outperformer
CMP: Rs 153 (Face Value Rs 10)
12-Month Price Target: Rs 249

Mangalam Cement is expected to benefit from higher realisations and lower power cost due to commissioning of its power plant by June '07. This will result in expansion of margins. The cement industry grew at 11% during April '05-March '06. Religare expects demand to grow at 8-9% over the next couple of years, which will be in sync with the GDP growth of the country.

In the short term, stock inventory levels and pace of construction activities will drive prices. However, in the medium term, prices will be firm due to lack of fresh capacities and sustained demand growth.

At the current market price, the stock is trading at a P/E of 6.5 times FY06E, 5.6 times FY07E and 4.8 times FY08E earnings and EV/EBITDA of 5.5x FY06E, 4.7 times FY07E and 3.4 times FY08E.

EV/ton at $72 FY06E, $75 FY07E and $63 FY08E is below the industry average of $80. Factoring robust Q2 FY06 results, Religare has raised its profit estimates and consequently, raised the price target.

Andhra Pradesh Paper Mills
Research: Emkay
Recommendation: Buy
CMP: Rs 117 (Face Value Rs 10)
12-Month Price Target: Rs 224

Andhra Pradesh Paper Mills (APPM) posted 19.4% decline in net sales to Rs 96.5 crore, as expected. Revenues suffered on account of production loss (approx 12,000 mt) at the company's CP unit due to workers' strike, which lasted for 70 days during the quarter.

Nevertheless, EBITDA margins at 11.8% were higher by 140 bps (y-o-y) and lower by 230 bps (q-o-q). Due to higher other income, the company ended the quarter with 18.6% (y-o-y) growth in PAT to Rs 7.5 crore. For FY06, net sales remained flat at Rs 450 crore, while EBITDA margins improved by 60 bps to 14.1%, leading to 6% growth in PBT.

Due to higher share of other income, APPM's PAT increased by 38% to Rs 35 crore, resulting in EPS of Rs 14.7 for FY06. The company also recommended a dividend of Rs 2 per share. Emkay expects the company's net sales to grow at a CAGR of 23.3% and PAT at 38% by F08E. It has positive view on the company and recommends a 'buy' on the stock

Equitymaster - Wipro

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HDFC Bank - Hinduja TMT

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Sugar: Still a sweet story?

The stock markets continue to face tremendous pressure. The fall in stocks across sectors and categories over the last few sessions has been painful for retail investors. Sugar stocks have been one of the worst losers in the recent falls. However, despite the fall in stock prices, the sugar story is still 'sweet' from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations. In this write-up, we take a look at some of the factors that have the potential to lead the sugar industry on a higher growth trajectory in the future.

Stock	Price on 10, May	Price on 27, May	% change
Bajaj Hindusthan	529	363	-31.4%
Balrampur Chini	196	113	-42.3%
EID Parry	296	200	-32.4%
Sakthi Sugars	259	160	-38.2%

Supply deficient: The sugar industry is expected to grow strongly in next two years, mainly on the back of low stock-use ratio. The industry will again face production shortfalls in the year 2006, with inventory filling the gap for the third year in a row. The difference between the production and consumption has reduced the inventory levels, from 11.3 MT in 2002 expected to go down to 3.5 MT in 2007. Also, the stock consumption ratio, which was around 67% in 2002, has reduced to 17% in 2005. this, we believe, have a positive impact on sugar prices.

Consumption performance: Sugar consumption depends on population growth and per capita consumption, and has increased at a CAGR of 4% in the last 5 years. We expect the consumption to clock similar levels of growth in the future. Per capita consumption for sugar is around 18 kg in India, which is one of the lowest in the world. With growing population, the demand for sugar is expected to go up.

Ethanol story: Currently 5% blending is allowed by 10 states in India. Adoption of the same by other states will ensure better realisations for the by-products. If blending ratio is increased to 10%, this will further boost the revenues of sugar companies.

By-products: Apart from ethanol, power, molasses, rectified spirit also generate revenues for sugar companies. Indian manufactures stand to gain from the integrated model. For example, in FY06, Balrampur Chini earned 86% of its revenues from sugar, while the remaining came from the power and distillery divisions.

Visible capacity expansions: Most of the sugar companies are expanding their capacities. Bajaj Hindusthan is taking its crushing capacity from the current levels of 56,200 TCD to 1,00,000 TCD in the next 2 years. Balrampur Chini is not too far behind. It is also increasing it capacity from 47,500 TCD to 70,500 TCD during this period. These companies are also expanding their distillery capacities in anticipation of higher ethanol demand.

Conclusion The sugar industry in India is supply-deficient, with production shortfalls being met out of past years' inventory and imports (though miniscule). Also, the sugarcane cultivation currently occupies only 2.7% of the cultivable land in the country and that the per capital consumption of sugar is low, there exists a huge potential for the sector to grow strongly in the future. The companies are also gradually transforming themselves from being conventional sugar mills into multi-product businesses by realising the potential of value added revenue streams from ethanol manufacturing and power co-generation.

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