Stocks you can pick up this week

SBI
Research: CLSA (May 14, ’07)
Rating: Buy
CMP: Rs 1,326 (Face Value Rs 10)

State Bank of India (SBI)’s Q4 FY07 reported earnings grew 75% YoY to Rs 1,490 crore, but this included certain one-time adjustments like write-back of Rs 950 crore excess amortisation on investment, Rs 170 crore interests on CRR balance, Rs 260 crore interests paid to the income tax department and early booking of dividend income.

Adjusting for these (and one-time income booked in Q4 FY06), net income has grown 26% YoY led by 24% YoY topline growth and improvement in operating efficiency. Despite a moderation in retail credit growth, SBI’s loan growth was stable at 29% YoY, driven by corporate and agricultural credit demand. SBI (consolidated and adjusted for life insurance subsidiary), trades at 1.0x FY09E adjusted book.

CLSA believes the stock, with its strong earnings growth trajectory (estimated to grow 18% p.a. for the next two years) and rising return on equity (estimated at 17% in FY09) could re-rate to 1.2x one-year forward. Its insurance subsidiary is valued at Rs 130 per share.


Jaiprakash Associates
Research: JM Morgan Stanley (May 17, ’07)
Rating: Overweight
CMP: Rs 671 (Face Value Rs 10)

With the inclusion of real estate in an already complicated portfolio of cement, construction and power assets, JM Morgan Stanley has reconsidered the valuation methodology for the company. The FY07E and FY08E reported EPS has fallen by 12% and 25%, respectively, mainly on the back of issuance of shares for the acquisition of Jaypee Greens (a dilution of 13%) and a lower cement price assumption (for FY08).

The company’s plans to double its cement capacity over FY07-09E will also help to sustain net profit levels, despite falling EBITDA margins. While Jaiprakash’s cement peers have been rated ‘equal-weight’ or ‘underweight’, JM Morgan Stanley continues to rate Jaiprakash as the top pick on the back of value in the sum of its parts.

Suzlon energy
Research: Merrill Lynch (May 16, ’07)
Rating: Neutral
CMP: Rs 1,132 (Face Value Rs 10)

A combination of higher-than-expected spillover of sales, resulting in transfer of Rs 230 crore (27% of PAT), the rupee’s appreciation and start-up costs of new facilities resulted in a lower-than-expected FY07 consolidated PAT for Suzlon (Rs 860 crore versus Merrill Lynch’s estimates of Rs 1,060 crore).
Merrill Lynch lowered Suzlon’s FY08E and FY09E earnings by 11% & 10%, respectively. Suzlon’s results were impacted by the following: a) 222 mw of sales-in-transit, including 50 mw in the domestic market (5% of domestic sales, which is the most profitable market), vs likely 120 mw; b) impact of rupee appreciation; c) start-up costs relating to the new international facilities in China and the US; and d) delay in stabilisation of production and outsourcing of higher cost towers in the US.

Merrill Lynch has lowered its earnings based on FY07 results to factor in: a) higher capex (Rs 5,000 crore over FY07-09E vs the earlier Rs 3,400 crore); b) increased cost of globalisation; c) launch of new products; and d) entry into new markets.

Jyoti Structures
Research: HSBC (May 8, ’07)
Rating: Neutral
CMP: Rs 198 (Face Value Rs 2)

Jyoti Structures’ Q4 FY07 sales grew 28% YoY and EBITDA margin expanded by 173 bps to 12.8%. PAT rose 58% YoY, but EPS grew 47% due to a higher number of shares outstanding than a year earlier. For FY07, sales grew 39% YoY and EBITDA rose by 192 bps to 12.3%. Overall, quarterly and annual results were strong, but HSBC believes that optimism has already been priced into the stock.

Under the research model, for stocks with a volatility indicator, the neutral band is 10 ppts above and below the hurdle rate for Indian stocks of 13.5%. This translates into a neutral band of 3.5-23.5% around the share price. HSBC has lowered the company’s rating to ‘neutral’ from ‘overweight’.

United Spirits
Research: Citigroup (May 16, ’07)
Rating: Buy
CMP: Rs 1,068 (Face Value Rs 10)

United Spirit’s (UNSP) acquisition of Whyte & Mackay (W&M) is full of positive surprises. The deal value of $1.2 million is lower than the estimate of $1.4 billion. Inventory valuation at $800 million is higher than estimates. EPS will be accretive from year one. The put options on inventory will secure future profits. W&M provides access to secure long-term scotch inventory and fits UNSP’s aspiration to cater to high-end segments in India, China and Russia.

Moreover, it has been acquired at reasonable valuations at 11.8x FY08E EV/EBITDA, at a significant discount to its peer group average and cheaper than recent deals in the liquor space. The UNSP management has a bullish outlook on scotch prices. Rising emerging market demand (22% YoY) and resurgence in the US market is fuelling 10% global scotch volume growth and has resulted in 75-120% increase in bulk scotch prices over the past few months. Citigroup incorporates W&M into the EPS estimates and raises FY08E-FY10E EPS estimates by 13.6-37%.
HDFC Bank
Research: First Global (May 17, ’07)
Rating: Outperform
CMP: Rs 1,072 (Face Value Rs 10)

First Global had moderated its rating on this stock a few quarters ago due to concerns on branch expansion and sustainable growth, especially in the context of the stock’s valuations. The stock has just been a market performer since then. First Global thinks that the worst of the interest rate cycle is behind us. In any case, HDFC Bank is not too leveraged to the rate cycle, given its low duration investment portfolio.

HDFC Bank currently trades at a forward P/E multiple of 22 of its FY08 earnings. The stock continues to be valued higher compared to the average P/E multiple of 19.9 at which Indian private sector banks are trading on their FY08 earnings. The stock trades at a forward P/B multiple of 4.4 its estimated FY08 book value, against 3.6 for private sector banks.

However, considering the bank’s high asset quality, above-average return on equity and strong management, First Global expects the premium valuations to sustain. Hence, First Global is upgrading its rating on the stock to ‘moderate outperform’.

Havell’s India
Research: Edelweiss (May 15, ’07)
Rating: Buy
CMP: Rs 487 (Face Value Rs 5)

Havell’s India reported yet another strong quarter, with its Q4 FY07 results being marginally ahead of expectations. Revenues, at Rs 440.3 crore, were up 23.5% YoY, led by 62% YoY growth in the cable and wire segment. EBITDA margins rose 60 bps YoY to 8.9%, despite a 1,000 bps YoY drop in EBIT margins of the cable and wire segment.

The EBIT margins of this segment reduced mainly on account of copper prices falling by 16% during the previous quarter on a sequential basis. This is a transient feature as copper prices have risen 34% on a sequential basis during the current quarter and output prices increased by 10% in April-end. Edelweiss expects EPS CAGR of 27% over FY07-09E.

At current market price, the stock trades at a P/E of 20.4x and 16.3x its FY08E and FY09E standalone earnings of Rs 24.5 and Rs 30.8, respectively. Assuming no synergy benefits from Sylvania, Edelweiss expects a consolidated EPS CAGR of 36% over FY07-09E.