Stocks you can pick-up this week

Reliance Communications
Research: JM Morgan Stanley (April 10, ’07)
Rating: Overweight
CMP: Rs 422 (Face Value Rs 5)

Reliance Communications has written off 15% of its wireless subscriber base. i.e. 56 lakh wireless subscribers from its 336 lakh subscriber base as on March 31, ’07. The re-verified subscriber base stands at 280 lakh subscribers. The write-off is meant to comply with the requirements of the Department of Telecom (DoT), which made it mandatory for all operators to re-verify 100% of their subscribe base by March 31, ’07.

The company added 12 lakh wireless subscribers in March ’07. The company is continuing with the re-verification process and will re-activate the 56 lakh wireless subscribers written off, once they are verified. This will impact RCOM’s net adds in future months, which may increase once the written-off subscribers are re-verified. JM Morgan maintains its ‘overweight’ rating on the stock. However, there could be near-term pressures on RCOM’s share price.

ITC
Research: Macquarie (April 09, ’07)
Rating: Outperform
CMP: Rs 153 (Face Value Rs 1)

ITC has under-performed the Sensex over the past four months, due to uncertainty regarding VAT on cigarettes, which contribute 80% to the company’s profits. A 12.5% VAT has been proposed in three state budgets; the remaining 25 states are expected to follow suit.

ITC is a strong defensive play due to limited operational exposure to three key risks — a slowdown in the US economy, rising interest rates and softening commodity prices. It is also a play on a bullish sub-plot emerging in India — the consumption boom, driven by emerging demographic trends.

ITC’s shares currently trade at a PER of 23x FY08E EPS. However, Macquarie notes that FY08E will be the first year when the company will feel the pain of VAT implementation. It forecasts that ITC will resume normalised earnings growth of 20% CAGR over three years from FY09E. Additionally, FY08E multiples do not capture the growth potential of the other businesses, such as hotels, paper, other FMCG and agri-business.

iGate Global
Research: Edelweiss (April 11, ’07)
Rating: Buy
CMP: Rs 360 (Face Value Rs 4)

iGate’S Q4 FY07 results were ahead of expectations. Revenues, at Rs 210 crore, were muted (sequentially flat), but net profit, at Rs 22.6 crore — up 41.7% QoQ and 379.8% YoY — was ahead of estimates. EBITDA margins for Q4 FY07 stood at 15.3%, the highest since Q3 FY01.

This quarter completes a strong turnaround story for the company through FY07; profits grew nearly 200% in FY07, with EBITDA margins of 11.4% in FY07 (up 180 bps from the FY06 level). The company has established a robust clientele, which is likely to sustain its growth at healthy levels, going forward.

At current market price, the stock is valued at a P/E of 14.2x and 9.8x for FY08E and FY09E earnings, respectively. The company’s valuation on EV/EBITDA and EV/revenue for FY08E continues to be attractive at 7.4x and 1.2x, respectively.

Over the next two years, iGATE is likely to earn cumulative cash profits of Rs 310 crore and post a cash-earnings growth of 41.4% CAGR over FY07-09. Edelweiss expects the company’s EPS growth to be among the highest in its set of companies over FY07-09E. At a PEG of 0.25, the current valuations look compelling.

Jet Airways
Research: Citigroup (April 10, ’07)
Rating: Sell
CMP: Rs 626 (Face Value Rs 10)

Jet has acquired Air Sahara for a total purchase consideration of Rs 1,450 crore (including Rs 500 crore paid earlier). Rs 400 crore will be paid shortly, while Rs 550 crore will be paid in four annual instalments, commencing on or before March ’08.

The current value of the deal is Rs 1,200 crore. Prima facie, the deal appears more reasonable (in valuation terms); immediate cash outflows will also be lower. Jet is the country’s largest airline with a market share of more than 30%. Economic growth and liberalisation have stimulated demand for air travel, and the sector has been averaging growth of around 20% for the past two years.

Given the positive trend in key demand drivers, Citigroup expects growth rates to accelerate in the medium term. The government’s policy of gradually opening up international routes has opened up another substantial growth opportunity for local airlines such as Jet.

The situation of irrational pricing will persist in the near term. In the long term, it will accelerate the consolidation process in the industry, but the timing and extent of consolidation remain uncertain. For the next 2-3 years, the domestic aviation sector could witness conditions last evidenced in the mid-1990s, when some start-up airlines had to close down.

The discount to Asian airlines is justified given: a) the very competitive domestic landscape; b) delays in stabilisation in Jet’s international operations; and c) soaring fuel costs (which Indian carriers cannot hedge).

Eicher Motors
Research: Merrill Lynch (April 12, ’07)
Rating: Sell
CMP: Rs 231 (Face Value Rs 10)

Eicher’s sales beat estimates in FY07, driven by the medium tonnage segment (9-11 T trucks), where the company enjoys exceptional franchise. However, overall growth at 18.8% was below industry average, despite its beneficial low base. Absence of heavy tonnage tractor trailers was the key reason for this.

Merrill Lynch’s views on long haulage trucks remains negative (flattish growth estimated in FY08, tonnage 2% YoY growth). Eicher’s sales are expected to follow industry trends, at best. In FY09, new competition will hurt Eicher more than relatively larger incumbents like Tata Motors and Ashok Leyland.

Given the company’s strong performance in the last fiscal, Merrill Lynch is tweaking its volume assumptions upwards. Other notable revisions include higher tax rate assumption for FY07 (having liquidated some of the tax-free investments), and postponing sale of the motorcycle business to the next fiscal.

The stock trades at 11.6x FY08E and 10x FY09E EPS, which is reasonable and in line with the sector. However, given the company’s marginal position in trucks and its high vulnerability, Merrill Lynch maintains ‘sell’ rating on the stock.

ABG Shipyard
Research: Citigroup (April 12, ’07)
Rating: Buy
CMP: Rs 373 (Face Value Rs 10)

ABG Shipyard has secured an order worth $139 million from Essar Shipping for construction of four bulk carriers. This follows the $13-million repeat order that the company recently won for construction of one APS tug vessel for Lamnalco, Cyprus.

ABG’s total unexecuted order book now stands at Rs 3,300 crore (5x FY07E sales) compared to Rs 2,500 crore earlier. With the order backlog extending well into FY10 and orders for the company’s upcoming Dahej facility yet to be completely tied up (five slots are still available even after the recent order wins), earnings visibility for the company over the next three years has improved significantly.

Citigroup expects ABG to deliver an EPS CAGR of 46% over FY07-09E. ABG’s expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle.