India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Tuesday, June 19, 2007
RCOM in talks with Accenture to float JV
Telecom operator Reliance Communications (RCOM) is in talks with IT services and consulting giant Accenture to float a joint venture to manage and operate the Anil Dhirubhai Ambani Group’s IT infrastructure services and processes.
The JV will be largely owned by RCOM and will have control over a business worth $1.5-2 billion, a person close to the negotiations said.
“Talks have been on for nearly two months for the joint venture. The proposed JV will also have an exit clause giving RCOM the opportunity to buy out Accenture in the future,” said sources.
ADAG’s IT team now employs about 600 people to cater to the IT needs of RCOM and other group companies such as Reliance Capital and Reliance Natural Resources. This task is expected to be done by the new JV, said sources.
RCOM is also said to be in talks with Hewlett Packard (HP), Germany’s T-Systems and French IT consulting giant Capgemini. HP declined to comment while Accenture was unreachable for comment. An RCOM spokesperson said, “We do not comment on speculation.”
Accenture, however, is learnt to be taking its time in responding to the RCOM offer because globally, it does not work on the JV model. Discussions with HP are in very early stages, sources added.
Telecom operators such as Bharti Airtel and Idea Cellular have shed non-core functions such as IT and network management to multinational giants such as IBM and Nokia in order to focus on the main function of selling services.
Accenture and HP, both globally renowned names in outsourcing, have not bagged any contract in the booming Indian telecom space. IBM is servicing Bharti Airtel as well as Idea Cellular in contracts worth over $1.2 billion and $600-800 million, respectively.
While IT outsourcing refers to hiring an outside agency to provide IT services to a company, insourcing is the in-house management of technology. ADAG is well known for not outsourcing its call centres, IT or networks management requirements despite industry trends to the contrary. Bharti Airtel, Hutchison Essar and Idea have outsourced most of these functions to specialists.
“Another model under consideration is hiving off the IT division and selling a minority stake to Accenture or any other interested party on the lines of the telecom tower business. The JV can then get business outside the ADA group too,” said industry sources.
With RCOM looking at cashing in on its IT assets, it floated a proposal to outsource IT services nearly three-four months back. Some firms including Accenture, Hewlett Packard and Germany’s T-Systems expressed interest in the contract, valued at around $1.5 billion. Subsequently, some officials in RCOM felt that they should consider some other models.
“As a result, the concept of JV was mooted where Accenture could give its services and expertise to RCOM’s manpower. It will give a steady revenue stream to the company’s JV partner and bring latest technological expertise to th
Indiainfoline - Intraday Stock Ideas
NIFTY (4147) SUP 4114 RES 4173
BUY CANDC (185.8)
SL 181 T 193, 195
BUY EUROCERA (160.10)
SL 156 T 168, 170
SELL BAJAJHIND (163)
@ 165 SL 169 T 154, 152
SELL CANBANK (238.8)
@ 241 SL 245 T 231, 229
@ 267 SL 271 T 256, 253
STRATEGY INPUTS FOR THE DAY
Avoid all that glitters
Weak eyes are fondest of glittering objects.
A little weakness and suddenly you may find some scrips very attractive. Resist such temptations. We warned you about a morning trap on Monday and right enough the bulls failed to hold on to their gains made in the first half. In fact they succumbed to the selling pressure in the latter half despite a strong rally across Asian markets. Today, we expect a weak start and another choppy day.
IT shares continue to be under pressure. Whether it is a stronger rupee or just some offloading, there are no clear answers. All we know is IT caused a drag on the key indices yesterday. FIIs have been reluctant this month to add to their tally of strong inflows seen in the previous two months. High valuations coupled with volatile global markets could have proved to be the main deterrents. The latest issue that could hit foreign capital inflows is the latest CBDT circular on the classification of earnings from the sale of shares.
Plus, there are concerns about interest rates going up across global markets, sucking out liquidity that has driven equity markets to record levels. Crude oil prices have been rising off late and are now hovering around the $69 per barrel mark. Higher energy prices might weigh on the markets as we still have to contend with the summer in the US and the hurricane season. To add to the woes, OPEC is refusing to increase output.
Locally, there are short term worries regarding the impact of large public issues of DLF and ICICI Bank on the secondary market. Then there is the confusion over the CBDT circular, record high open interest in the F&O segment, an erratic start to the monsoon and the usual uncertainty about corporate earnings. Most importantly, the bulls seem to be suffering from fatigue after having bounced back from the lows of February-March. Investors are not willing to take high risks with the main indices near all-time highs. As a result, the market has turned volatile yet range bound. The ongoing yo-yo trend may continue in the near term, though medium- to long-term outlook remains strong. Once again keep some cash handy for better bargains in the coming days.
There is a new listing today. Decolight Ceramics Ltd. will make its stock market debut. The offer price fixed at Rs 54 per share. HTMT Global Solutions will also list today following the demerger of Hinduja TMT's ITES-BPO business into a separate company.
US stocks fell on Monday for the first time in four days after oil prices jumped to a nine-month high and confidence in the homebuilding industry dropped to a 16-year low. The losses were limited as energy shares rallied on higher crude oil prices. The Standard & Poor's 500 Index fell 1.86 points, or 0.1%, to 1531.05. The Dow Jones Industrial Average decreased 26.50 points, or 0.2%, to 13,612.98. The Nasdaq Composite Index finished flat at 2626.60.
US light crude for July delivery settled up $1.09 to $69.09 a barrel. The front-month contract was trading 16 cents lower at $68.93 a barrel in extended trading in Asia. COMEX gold for August delivery added $1.20 to $659.90 an ounce. Treasury prices edged higher, putting the yield on the 10-year note at 5.14%. In currency trading the dollar eased against the euro and was higher versus the yen.
European stocks traded modestly lower. The Dow Jones Stoxx 600 ended 0.4% lower at 397.89. The UK's FTSE 100 declined 0.4% to 6,703.50 and the French CAC 40 shed 0.3% to 60.87.15 and the German DAX 30 rose 0.1% to 8,036.12.
In the emerging markets, the Ibovespa in Brazil rose 0.4% to 54,730 while the IPC index in Mexico gained 0.3% to 32,218 and the RTS index in Russia added 0.2% to 1896.
Asian stocks fell this morning, dragging the Morgan Stanley Capital International Asia-Pacific Index from a record high, after confidence in the US homebuilding industry dropped to a 16-year low and metals prices declined.
The MSCI APAC index slipped 0.1% to 153.14 as of 10:37 a.m. in Tokyo, ending a three-day, 2.6% rally that lifted the index to a record yesterday. China's CSI 300 Index swung between gains and losses.
In Japan, the Nikkei 225 Stock Average was little changed at 18,141.71, while the broader Topix index dropped 0.3%.
Australia's S&P/ASX 200 Index slid 0.3%. Benchmarks swung between gains and losses elsewhere in the region. Markets in Hong Kong and Taiwan are closed for holidays.
Markets ended lower extending its downward run in the first day of the new week, as bulls seem to be running out of steam and finding it hard to find direction at higher levels. Today again after opening at a high both the key indices pared its intra-day gains as selling pressure in the IT, Auto and Capital Good stocks dragged the markets down. However, the select Banking stocks managed to hold on to its gains.
Even the Mid-Cap and the small cap indexes closed in red. Spice Jet hogged the limelight following stake sale reports. Recently listed Time Techno also was in focus as the scrip was up by over 10% to Rs525. Finally, the 30-share Sensex slipped 82 points to close at 14080. NSE-50 Nifty dropped 24 points to close at 4147.
Spice Jet surged by over 3.5% to Rs59 on stake sale reports. The scrip touched intra-day high of Rs60 and a low of Rs58 and recorded volumes of over 13,00,000 shares on NSE.
Aurobindo Pharma edged lower by 0.2% to Rs744. The company announced that it secured tenth approval from MCC South Africa. The scrip touched intra-day high of Rs760 and a low of Rs741 and has recorded volumes of over 1,00,000 shares on NSE.
PFC marginally gained 0.2% to Rs144 after Government granted Navratna status to PFC. The scrip touched intra-day high of Rs149 and a low of Rs143 and recorded volumes of over 19,00,000 shares on NSE.
Geodesic Information was locked at 10% upper circuit to Rs274.50 after the company recommended bonus issue in the ratio of 1:2. The scrip touched intra-day high of Rs274.50 and a low of Rs260 and has recorded volumes of over 1,00,000 shares on NSE.
Cranes Software surged by over 4% to Rs132 after the Board of Directors of the company approved acquisition of US Dunn Solutions. The scrip touched intra-day high of Rs133 and a low of Rs128 and recorded volumes of over 1,00,000 shares on NSE.
Technology stocks were again under pressure as the Indian rupee strengthens against the US Dollar. Satyam Computer has slipped by 1.2% to Rs475, Infosys was down 1% to Rs1989 and Wipro declined by 1.5% to Rs523. Mphasis BFL, NIT Ltd and Polaris were the major losers among the Mid-Cap stocks.
Pharma stocks were in poor health. Ranbaxy dropped by 3.8%t o Rs359, Glaxo was down by 2.7% to Rs1275, Sun Pharma slipped by 1.1% to Rs1046 and Cipla lost 1% to Rs207. However, Cadila surged by over 5% to Rs366.
Select metal stocks also were on the receiving end. Tata Steel slipped by 1.8% to Rs589, SAIL was down by 1.7% to Rs133. However Nalco was up by 0.8% to Rs889 and Hindalco added 0.4% to Rs161.
Securities in ban period:
The derivative contracts in the underlying BRFL, Parsvnath and Nagarjuna Fertilizers have crossed 95% of the market-wide position limit and are currently in the ban period.
Results Today:
Aarti Industries, Cambridge Solutions, Chettinad Cement, Gujarat Fluorochemicals, Indian Hotels, Kavveri Telecom Products, Lumax Industries, SREI Infrastructure Finance, Shalimar Paints and Tide Water Oil.
Major Bulk Deals:
Citigroup has picked up Prime Securities and Goldman Sachs has purchased Vakranjee Software.
Insider Trades:
Cipla Ltd: Life Insurance Corporation of India has purchased from open market 46531512 equity shares of Cipla Ltd on 13th June, 2007.
Gujarat NRE Coke Ltd: HSBC Global Investment Funds - A/C HSBC Global Investment Funds (Mauritius) Limited has purchased from open market 250000 equity shares of Gujarat NRE Coke Ltd on 12th June, 2007.
Housing Development Finance Corporation Ltd: N M Munjee, Director has sold in open market 1000 equity shares of
Housing Development Finance Corporation Ltd on 11th and 12th June, 2007
Shringar Cinemas Limited: Mr. Balkrishna Shroff, Director has purchased from open market 7216 equity shares of Shringar Cinemas Limited on 14th June, 2007.
Lower Circuit:
IKF Technology, Crazy Infotech, Yashraj Securities, UB, Raj Tele, Dawn Mills, IID Forgings and BF Utilities.
Upper Circuit:
Marksans Pharma, Asian Electronics, Chola DBS, Swan Mills, Geodesic Information, Ruby Mills, Shaw Wallace and Ess Dee Aluminum.
Delivery Delight (Rising Price & Rising Delivery):
AIA Engineering, Asahi India, Ashok Leyland, Century Textiles, EIH, Gujarat NRE Coke, GSPL, HCC, Indraprastha Gas, ITC, Nestle India, ONGC, Sterlite Industries, Union Bank of India and Welspun Gujarat.
Abnormal Delivery:
LIC Housing, Dishman Pharma, VSNL, MLL, India Cement, M&M, Mahindra Gesco, Ranbaxy, Unitech, Orchid Chemicals, UTI Bank and Wockhardt.
Major News Headlines:
HCL Tech secures $15mn contract from Alenia Aeronautics
Vikash Metal inks MOU with Bihar State Electricity Board
Aurobindo Pharma gets tenth approval from MCC South Africa
Cranes Software Board approves acquisition of US Dunn Solutions
Government grants Navratna status to PFC
Geodesic Info recommends bonus issue in the ratio of 1:2A lackluster day for US Market
Stocks lose steam going into close as crude kisses $69 mark
US market witnessed a lackluster trading session today without any major catalyst rocking the market. Surprisingly, all the three indices ended in red in spite of the yield on the 10-year note dropping back to 5.14%. New concerns about subprime lending further made stocks stumble.
A report in a London paper that BHP Billiton is believed to be reconsidering a $40 billion bid for Dow component Alcoa cheered investors for a little time as oil prices kissing the $69/bbl mark pulled out steam from the stocks going into close.
Almost half of the 30 Dow stocks retreated into red in the final trading hour today. The Dow Jones Industrial Average closed lower by 26.5 points at 13612.98. Nasdaq slipped marginally by 0.11 points to close at 2626.6 and S&P 500 went down by 1.86 points to close at 1531.05.
Alcoa, Caterpillar, Walt-Disney and Coco-Cola were the major Dow winners today. Boeing, Honeywell and P&G were the main Dow laggards.
Among other merger related news, General Electric is reportedly pairing up with Financial Times publisher, Pearson to make an offer for Dow Jones.
New data shows continuing deterioration in the housing market
When market opened in the morning, the indices were sporting modest gains despite a lack of concerted leadership. Dow was up by almost 13 points at one point.
But within one hour of trading, the indices reversed their course of action and Dow remained in the red for major part of the day. Nasdaq, though crossed the flat line a couple of times, also slipped into red going into close.
New data showed continuing deterioration in the housing market. The National Association of Home Builders said the outlook for home building is the worst in 16 years. The builders' housing market index fell by two points to 28 in June, the lowest since February 1991.
The yield on the 10-year note stood at 5.17% during the first half of the day after hitting 5.14% earlier in the morning.
Energy was the best-performing sector today due to the jump in oil prices. Technology and Financials were mixed.
Yahoo shares up 8% on CEO resignation
Crude oil futures rose substantially today to their highest levels since September 2006. crude oil futures for light sweet crude for July delivery closed at $69.09/barrel (higher by $1.09/barrel or 1.6%) on the New York Mercantile Exchange. Prices are down just 1.1% from a year ago.
Crude prices surpassed $69/bbl on news that Nigerian unions planned a strike this week, threatening supplies from Africa's biggest oil producer. The strike is called for 20 June to protest increases in taxes and domestic fuel prices.
Trading volumes showed 1.206 billion shares exchanging hands on the New York Stock Exchange and 1.732 billion trading on the Nasdaq stock market. Declining issues topped gainers by 17 to 15 on the NYSE and by 15 to 13 on Nasdaq.
In after market trading hours, Yahoo shares were up 8% on news that company’s CEO, Terry Semel has resigned. For tomorrow, the economic data expected before market opens is Census Bureau’s report on May Housing Starts and Building Permits. On the earnings front, Best Buy is a major name to come out with its report.
Angel - Nagarjuna Constructions
Angel Broking is bullish on Nagarjuna Construction and has recommended buy rating on the stock with the target price of Rs 201.
Angel Broking report on Nagarjuna Construction:
Investment Arguments
Fast emerging as diversified infrastructure behemoth:
We believe NCC is on track to emerge as a diversified infra heavyweight with about 20% of our sum-of-the-parts (SOTP) valuation coming from SPVs and real estate businesses. We believe NCC's new business model allows it to capitalise on the substantial infrastructure capex of around USD 350 billion mentioned in the XI five-year plan (FY2008-12).
Strong Order Book of 2.5x FY2007 Topline
NCC grew its order book at a strong CAGR of 61% over FY2005-07. The company's order backlog, currently at Rs 7,300 crore, comprises water and irrigation, transportation, buildings, etc. A strong order book gives higher visibility to the company's earnings over the next few years.
Aggressive strategy to bid for high-margin BOT/BOOT projects
BOT projects enjoy an IRR of 14-18%. Currently, BOT projects account for 10% of the total order book of NCC. We have valued NCC’s BOT projects using the DCF method, which works out to Rs 18.7 per share.
Realty to deliver real gains
NCC has total land bank of 529acres. A booming real estate sector is expected to percolate to construction as well, which is the core competency of NCC. We have valued NCC's real estate business at a net asset value (NAV) of Rs 20.6/share.
Valuation
At the CMP, the stock trades at 20.5x FY2008E, 15.9x FY2009E earnings. However, adjusting for the value of the BOT projects (Rs 18.7/share) and Real Estate (Rs 20.6/share), the stock trades at 15.5x FY2008E, 12.0x FY2009E earnings. Based on the SOTP methodology, we have arrived at a Target Price of Rs 201. We initiate coverage on the stock with a Buy recommendation.
Macquarie - Hero Honda
Macquarie Research is bearish on Hero Honda and has recommended an underperformer rating on the stock with 12 months target price of Rs 608.
Macquarie report on Hero Honda:
Initiate coverage with an Underperform
We initiate coverage on Hero Honda, India’s largest two-wheeler manufacturer, with an Underperform recommendation and a target price of Rs 608. Our target price reflects potential downside of 13% from the current market price.
Structural decline in product mix
The proportion of high-margin products in Hero Honda’s portfolio – notably, its cash cow, the Splendor – has been declining. Going forward, we believe new low-profit products will cannibalise the existing product range. Competition has been directly targeted at Hero Honda’s most profitable motorcycles in the executive segment, further affecting profitability.
Market share losses – competition to the fore
Recent market share gains notwithstanding, Hero Honda has consistently lost market share over the past three years. With competitive intensity set to increase, we expect the company to lose market share over the medium term. Ironically, Honda’s subsidiary, Honda Motorcycles and Scooters India, could be its biggest competitor in near to medium term.
Operating margins under pressure
Our earnings estimates for FY3/08 and FY3/09 are roughly 10% and 7% below consensus, respectively, which reflects our bearish view on EBITDA margins. We expect operating margins to decline by another 100bp to 10.9% in FY3/08, but to rebound marginally in FY3/09 and FY3/10 as irrational pricing subsides. Apart from increasing competitive pressures, we expect rising royalty costs and marketing expenses to impact profitability.
Valuations – still too high
Despite the recent underperformance, we believe the stock price does not completely factor in the lower growth prospects for Hero Honda. The stock is trading at a low PER compared with its recent trading history. However, its lower growth prospects (FY3/07–10E CAGR of 7.6% vs FY3/01–07 CAGR of 25%) warrants the lower multiple, in our opinion. We value the stock at Rs 608 on a two-stage DCF methodology. At our multiple, the stock would trade at 12x FY3/09E earnings, which we believe would reflect the weaker growth prospects.
Key risks and catalysts
Apart from the macroeconomic factors, key upside risks for Hero Honda include exceptional success of a new model, curtailment in Honda Motors’ product plans and an increase in the value of investments. Key catalysts include a further decline in market share, an increase in interest rates and a further decline in operating margins.
Macquarie - Bajaj Auto
Macquarie Research report on Bajaj Auto:
Initiate with an Outperform; value in the parts
We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.
Core business remains weak…
While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.
…but is available cheaply
Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.
Insurance provides strong value
Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.
Key risks and potential catalysts
Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.
Macquarie - Bajaj Auto
Macquarie Research report on Bajaj Auto:
Initiate with an Outperform; value in the parts
We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.
Core business remains weak…
While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.
…but is available cheaply
Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.
Insurance provides strong value
Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.
Key risks and potential catalysts
Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.
SKP Securities - HEG
SKP Securities report on HEG:
Company Profile:
HEG, a premier company of the LNJ Bhilwara Group, is India's leading graphite electrodes manufacturer. HEGL has its graphite manufacturing plant located in Mandideep (Madhya Pradesh) with a capacity of around 52,000 MT per annum. The Company also operates a sponge iron plant, a steel billets plant, and captive power genaration units totaling 56.3 MW.
Investment Rationale:
Unalleviated demand from the steel industry:
Steel manufacturing companies with electric arc furnace are the only consumers of graphite electrodes. With the increase in the adoption of electric arc furnace method to produce steel and limited number of graphite manufacturing companies, the demand for graphites is expected to rise in future, thereby ensuring constant growth in revenues and profitability for the company.
Escalating Margins:
HEGL's Operating Profit Margins (OPMs) has improved significantly since FY04 after it spinned-off its textile unit. HEGL has been able to maintain the OPMs over 21% for the last two years due to higher realizations from the graphite electrodes and we expect the company to continue to do so in the future.
Continuous expansion to meet the growing demand:
HEG Ltd. had increased its graphite manufacturing capacity from 33,600 mtpa in FY05 to 52,000 mtpa in FY06. This will be further increased to 57,000 mtpa in the current financial year by de-bottlenecking the production process.
Captive power plant to lower the overall production cost:
HEGL has its captive power generation facilities with a total capacity of 51.3 MW and it plans to set up another power plant with a capacity of 30MW. This will save a considerable amount of power cost thereby improving the overall margins.
Management's stewardship to drive the company to growth path:
HEGL is a part of LNJ Bhilwara group of companies, which has its interest in diverse fields i.e, Textiles, Graphite & Steel and Power Generation & Consultancy. Being a part of such a management, which has an experience in managing the businesses over several decades, assures the best of operations for HEGL.
Outlook & Recommendation:
Visualizing the demand for graphite in the steel industry, HEGL had increased its manufacturing capacity over the period. HEGL being the leading graphite manufacturer in India will be able to realize the benefits of the rising demand and increasing prices. At the current level of Rs 164.40 HEGL is trading at 6.90 x FY08E earnings and 5.77 x FY09E earnings of Rs 23.83 and Rs 28.48 respectively. We rate the stock a BUY with a 1-year target price of Rs 225 at 8x FY09E earnings, giving it an upside potential of 35.14%.
Sharekhan Investor's Eye dated June 18, 2007
Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs342
Zen(sar) and the art of growing
Key points
- Strengthening its portfolio of service offerings: Zensar Technologies (Zensar) has effectively utilised the inorganic route to gain the required critical mass in the fast growing enterprise solutions segment (through the acquisition of OBT Global and ThoughtDigital), to strengthen its footprint in under-penetrated geographies such as Japan (through joint venture with Eza, Japan), and to gain access to marquee clients.
- Maintaining the growth momentum: Zensar is well poised to report a healthy growth of over 40% in FY2008. It is witnessing a strong traction in its organic business and the incremental revenues of Rs110 crore from the recent inorganic initiatives would only add to the overall growth momentum in its revenues. Consequently, even after factoring in the adverse impact of the rupee appreciation, the company is expected to achieve its stated revenue guidance of Rs850 crore in FY2008.
- Margins are sustainable: Zensar is also expected to buck the general declining trend in margins in FY2008. That's because some of its relatively new businesses of ITS and BPO that have been in the investment mode are expected to show a substantial improvement in their margins. It also has other margin levers like a favourable revenue mix and lower overhead costs to cushion against the adverse impact of wage hikes, the appreciation in the rupee and the consolidation of the relatively lower-margin revenues of ThoughtDigital.
- Key concern of stake sale by Fujitsu has been dispelled: The acquisition of the entire stake of Fujitsu in Zensar by the RPG group has eliminated a key concern that was a drag on the stock's valuations.
- Attractive valuations: At the current market price the stock trades at 10.6x FY2008 and 8.2x FY2009 estimated earnings; the valuations are extremely attractive considering the estimated earnings growth of 33% CAGR over FY2007-09. We recommend Buy on the stock with a price target of Rs484.
STOCK UPDATE
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs918
Preferred play on insurance boom
Key points
- India's largest private sector lender ICICI Bank plans to raise Rs20,125 crore ($5 billion) through a follow-on public offer (FPO). The FPO is to be equally distributed in the domestic and foreign markets. The FPO would remain open from June 19- 22, 2007 and the offer price band is at Rs885-950 with a Rs50 discount offered to retail bidders. Further issue details are provided on next page.
- The bank's management has indicated that the pace of growth in the economy as well as the bank's business in the past few years is unprecedented and the FPO tries to address the increased capital requirements of the bank for the next three years.
- The life insurance sector has been growing at a scorching pace for the past few years and ICICI Prudential Life Insurance is the private sector leader with a 30% market share among the private players and a 10% market share in the overall insurance market. The insurance sector is considered to be a sunrise sector and currently there are no listed insurance companies to play on the boom in the insurance sector. Hence, ICICI Bank, which has a 74% stake in ICICI Prudential Life Insurance, remains our preferred choice to play on the insurance story.
- In the past the bank has had to divert a significant amount of the capital raised through its earlier issues to fund its insurance subsidiaries. However this time we feel the difference is that ICICI Bank has already made arrangements for continuous funding of its insurance businesses. Thus with the funding of the insurance businesses taken care of, we feel, there will be more capital available to the bank to grow its core banking business without frequent dilutions in future. However, the huge FPO would take its toll on the return on equity (RoE), which is expected to come down to 10.3% and 10.5% in FY2008 and FY2009 respectively from 13.3% in FY2007.
- We feel one of the concerns pertaining to the bank revolves around its subsidiary ICICI Financial Services (IFS). The formation of the subsidiary is still in the conceptual stage and the bank has only received a firm commitment of Rs2,650 crore for a 5.9% stake sale. To fully materialise and be executed in black and white from the conceptual stage the deal would require regulatory clearance from the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and Foreign Investment Promotion Board (FIPB).
- We feel the stock will continue to consolidate around the current levels, as has been the case in the past after the announcement of any equity issuance. This provides a good opportunity to buy the stock. At the current market price of Rs918, the stock is quoting at 20.1x its FY2009E earnings per share (EPS), 8.9x its pre-provision profits (PPP) and 2.0x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the price target of Rs1,173.
Subscribe to:
Posts (Atom)