Kotak - Ranbaxy, Nagarjuna Constructions, VSNL, Mahindra & Mahindra, Indian Oil Corporation

Kotak Instutional Recommendations

Indian Oil Corporation

IOCL reported 4QFY07 standalone adjusted net income at Rs29.1 bn (reported Rs16.1 bn) versus our estimated Rs30.7 bn. The difference between adjusted and reported net incomereflects decrease in value of investments in IBP (Rs13.2 bn), which has been merged withIOCL. 4QFY07 results include FY2007 financials of IBP and thus are not comparable withresults of 3QFY07 or 4QFY06. FY2007 reported net income is Rs75 bn (Rs56.2 bnadjusted) versus Rs49.2 bn (without IBP). We see little merit in analyzing quarterly resultsgiven (1) merger of IBP with IOCL and (2) quarterly volatility in the amount of oil bondsand payment from upstream companies. We have fine-tuned FY2008, FY2009 andFY2010 consolidated EPS estimates to Rs63.6, Rs62.7 and Rs55.2 versus Rs62.8, Rs62.1and Rs59.7, respectively, previously. We retain our 12-month target price of Rs500, whichis based on a 30% discount to our 5X normalized EBITDA. Key downside risk is higherthan-expected subsidy losses.

Mahindra & Mahindra

M&M reported 4Q recurring net profit at Rs2.3 bn ' a 33% yoy growth in-line with our estimate of Rs2.6 bn. Net sales for the quarter at Rs27.5bn increased 20% yoy. This was on account of a 15% increase in volumes and 5% increase in realisations. 4Q EBITDA margins at 11.4% declined 30 bps yoy and 60 bps qoq. There was an exceptional profit of Rs100mn during the quarter on account of sale of certain long term investments. We maintain our consolidated fully diluted EPS estimates for M&M for FY2008 at Rs67.8 and for FY2009 at Rs85.0. We maintain our OP rating on the stock with a SOTP based target
price of Rs1,000 based on Rs613 for M&M stand-alone at 7.1X FY2009 EV/EBITDA equivalent to 11.4X FY2009 P/E and Rs387 for value in key subsidiaries of the company (valued at 20% discount to market value of holding). We shall be revising our numbers shortly.

VSNL


VSNL's 4QFY07 reported net income (standalone) of Rs1.31 bn was 4% ahead of our estimates of Rs1.26 bn. EBITDA declined 6% qoq to Rs2.4 bn, 6% lower than our estimate of Rs2.6 bn. Year-end seasonality along with one-off items to the tune of Rs600 mn such as provision for doubtful debts, legal and professional charges and R&M costs impacted EBITDA performance. Voice and data business demonstrated robust performance. We have fine-tuned FY2008E and FY2009E EBITDA to Rs10.4 bn and Rs11.7 bn from Rs10.4 bn and Rs11.2 bn, respectively previously. We will wait for FY2007 annual report and full consolidated accounts to convert our earnings model to consolidated basis. Our 12-month SOTP-based target price of Rs560 faces risk from continued delay in unlocking of land value and aggressive pricing competition

Nagarjuna Constructions

Nagarjuna construction has reported revenues of Rs8.7 bn in 4QFY07 versus our expectation of Rs10.5 bn and EBITDA (before other income) of Rs737 mn versus our expectation of Rs901mn respectively. EBITDA margin at 8.4% was about 20 bps lower
than our expectations. Order backlog at the end of FY2007 was Rs73 bn, providing a visibility of 1.8 years based on forward 12 month revenues. We revise our FY2008 EPS estimated downwards based on lower execution versus our earlier expectations. We revise our DCF based target price to Rs204/share from Rs198 earlir based on higher valuation of investment in Land bank/BOT projects. We maintain out perform rating based on strong macro outlook and value unlocking in real estate and infrastructure holding subsidiary.

Ranbaxy

Ranbaxy has acquired from Bristol-Myers Squibb (BMS) the US rights to a group of 13 dermatol/asaogy products. These brands have revenues of US$15 mn and have been acquired for US$26 mn. Clearly, these are small tail-end brands, which were not being promoted by BMS. Ranbaxy hopes to grow these brands by promoting them (through its existing dermatology sales force) and thereby improving profitability. The acquisition will add about 4% to US revenues (1% to total revenues) and is likely to be EPS neutral for the next two years, assuming that deal price will be amortised over ten-years. We have an OP rating on the stock.

Indian Banks

Key highlights of the financial results of Indian banks for 4QFY07 are:
a) Most banks maintain margins, despite fall in CASA for a few
b) Credit growth remained robust and led to increased reliance on bulk deposits for most
banks,
c) Non-interest income remained robust aided by fee income and loan loss recoveries,
d) Higher provisions (NPL, standard asset and investment depreciation losses) impacted
overall PAT growth.
e) Some banks like Indian Bank, PNB and Federal Bank made higher provisions than
mandated by RBI regulations to strengthen their balance sheets.

We continue to maintain preference for banks focusing on moderate asset expansion and funding their loan growth through core deposits. PNB, IOB, Andhra Bank, SBI, Federal Bank and J&K Bank are our favored stocks in this space given their valuations and growth outlook.