Citigroup - Unitech, Mahindra & Mahindra, Nagarjuna Construction

Citigroup in their report on Nagarjuna Constructions,

Revenues up 36% YoY, but below expectations — Nagarjuna reported Q407 revenues of Rs8.7bn up 36% YoY, but 16% below our expectations. Full-year revenues of Rs28.7bn were below CIR expectations and their target of Rs30bn.

Positive guidance — Management has guided for FY08 revenues of Rs40bn (~39% growth), EBITDA and net profit margins of 9.5% and 5.5% respectively.

Our sum-of-the-parts-based target price for NJCC of Rs272 per share is based on its four distinct parts: cash contract business, BOT projects, real estate projects, and landbank. We value the core construction business at a P/E of 19x FY08E FD EPS to derive a value of Rs221 per share. We value its BOT projects at Rs19 per share, using the P/BV method to value its share in these projects. We then value its real estate projects at Rs22 per share based on book value. Finally, we value its 130-acre and 248 acres NCC Urban landbank at Rs11 per share, using management's estimates of its current market value.

Citigroup in their report on Unitech,

Results beat expectations — Unitech's consolidated FY07 revenues of Rs33bn and net profit of Rs13bn were ahead of estimates, largely due to higher-thanexpected one-time profit of Rs~6.5bn from 60% stake sale in six IT Parks to Unitech Corporate Parks (UCP), listed on AIM, and increased other income.

Our target price of Rs430 is based on 10% premium to our NAV value of Rs391 (excluding SEZs). The premium is attributed to: 1) Unitech's competitive advantage of large diversified land bank, while peers are still aggregating land; 2) dynamic business model with thrust on recycling capital faster; 3) strong brand positioning and proven track record. Our assumptions are: a) current market price levels to sustain with no price inflation; b) development volume of 471m sq.ft (~19mn recognized as revenue in FY07); c) all projects undertaken will be completed largely as per schedule though given the scale of the roll-out, we expect risk of delays; d) average cost of capital of 14%; e) tax rate of 28%; and f) does not include any value attributed towards SEZs.

Citigroup in their report on Mahindra & Mahindra

4Q results — Adjusted PAT (excluding one-time prior-period adjustment and exceptional items) at Rs2.36 bn (up +35% YoY) was in line with our estimates. Higher other income and lower-than-expected tax rate offset the weak operating performance. EBITDA margins at 11.4% (60 bps below our expectations) declined 60 bps q/q indicating impact of rise in commodity costs and higher other expenses.

Our target price of Rs1,032 is based on a sum-of-parts methodology. We value M&M's core business at Rs543 (11x FY08E core CEPS). We also incorporate value for M&M's listed subsidiaries (Rs402/share), its auto component business (Rs57/share) and M&M's investments in other subsidiaries (including Mahindra Holidays at Rs30/share). Our core multiple of 11x, is supported by an 18% CAGR in core cash earnings (excluding dividends from group companies) for M&M over FY07E-09E. We value the key subsidiaries / associates / auto component initiatives at Rs459/share. At our core target price (of Rs543) the stock would trade at around 13.6x FY08E core EPS (excluding dividends from subsidiaries) and should be supported by 16% CAGR in earnings over FY07E- 09E. We have chosen to use P/CEPS as our primary valuation metric to ensure proper comparison with historical trading bands — the company is undertaking a significant product development and capital expenditure program, and also undertook a restructuring of the balance sheet in FY02. We believe valuations will also be supported by: a) management’s continued
efforts to unleash value from investments in group concerns (we believe that the listing of the group's hotel / resorts venture is next on the anvil); and b) new initiatives announced in the passenger cars, commercial vehicles and auto components segments, which should fructify over the next 2-3 years.