HPCL, IVRCL, IOC, Larsen Tourbo, BHEL

Merrill Lynch in their report on HPCL,

Attractive dividend yield, P/BV of 0.99; retain Buy HPCL's FY07 EPS, at Rs46.4, is almost 4x FY06 EPS of Rs12. Quality of FY07 earnings is admittedly poor as it is entirely attributable to oil bonds. There is also uncertainty on FY08E earnings. However, recent government decisions suggest bond issue may be generous even in FY08. HPCL's dividend yield is attractive - 6.5% for FY07 and 5.4% for FY08E. It is also cheaper than peers on PE and is trading marginally below estimated NAV. We retain our Buy rating on HPCL.


Merrill Lynch on IVRCL

Key Triggers: Growth, Margin Expansion & IVR Prime IPO IVRCL, our top pick in the mid-cap E&C space, reported solid 4QFY07 on all fronts. Sales were up Rs10bn +67%YoY; EBITDA margin expanded by 140bpsYoY & PAT of Rs732mn, +67%YoY. PAT was ahead of MLe due to better margins & non-prov of full tax (25% v/s MLe 32%) pending appeal in tribunal. Order backlog remains robust at ~3x FY07 sales. Value creation through the listing of IVR Prime, and 42% earnings CAGR in core business are potential triggers ahead. Buy, PO Rs450.

ENAM on Mahindra & Mahindra

While outlook for the subsidiaries remains buoyant, we are concerned about a likely moderation in the core business and the high capex outlined by M&M and its JVs (details on pg2). We continue to maintain our sector Neutral rating on the stock. At CMP of Rs 765, the stock trades at 10x FY08E and 9.2x FY09E core EPS of Rs 34.6 and Rs 38.5 respectively. Our target price of Rs 825 is based on 12x FY08 core EPS + value of subsidiaries at Rs 410/ share.


ENAM on Larsen and Tourbo

L&T’s management has guided for 25-30% revenues as well as order intake growth and 11% margins for the E&C business. Further, its tie up for supercritical technology in thermal power, foray into shipbuilding, defense and aerospace are likely to drive long term growth for L&T. Value unlocking of its IDPL and Infotech subsidiaries will be the icing on the cake. We maintain our earnings estimates. At CMP (Rs 1,857), the stock trades at 12.0x FY08E and 8.5x FY09E EV/EBIDTA (adj. for investments Rs 218). Maintain sector Outperformer and a target of Rs 2200

ENAM on IOC

Maintain Outperformer, retain price target IOC in our opinion is a low risk play in the OMC pack, given its diversified revenue stream. Also, given its relatively low regulatory
exposure to earnings, its valuations are likely to be at a premium to its domestic peers. We maintain our sector Outperformer rating and a target of Rs 525

ENAM on HPCL

HPCL reported profits largely on the back of oil bonds and upstream subsidiary assistance. Going ahead in FY08 profits remain leveraged to - (1) issuance of oil bonds and (2) sustained assistance from the upstream subsidiary. We still await clarity on the subsidy sharing mechanism as well as on the issuance of oil bonds. Given this weak
regulatory outlook, earnings uncertainty remains high and therefore HPCL is likely to trade at a discount to regional peers. HPCL has declared a final dividend of Rs12/share (in addition to an interim dividend of Rs 6/share) thereby offering a yield of 4.5% on the final dividend. This is likely to offer support for the stock. We maintain our
sector Underperformer rating. Target of Rs 280.

ENAM on BHEL

A healthy order backlog of Rs 550bn provides a strong near-term growth visibility. BHEL has an estimated outlay of Rs 44bn over FY08-09E taking its total capacity from 6000MW to 15000MW. Factoring in the higher than estimated order inflows in Q4FY07, we raise our FY08 earnings estimates by 10% to Rs 31.2bn and introduce a FY09 earnings estimate of Rs 36.3bn. We believe that order intake traction is likely to significantly slow down going forward due to increasing competitive intensity, technology gaps in the high rating hydro, nuclear and 765kv T&D space, and limited visibility in the fast growing super-critical technology space. Despite this, BHEL has set a target of doubling revenues in 3 years and reaching USD 10bn in revenues by FY12. This implies that BHEL may end up servicing unfavorable international contracts.
Hence, we believe that a premium in valuations is not justified given the uncertainties cited above. At CMP (Rs 2,856) the stock trades at a 13.2x FY08E EV/ EBIDTA. We maintain our sector Underperformer with a target of Rs 2500