Stock Picks

Reliance Energy
CMP: Rs 1,349.40
Target Price: NA

SSKI has upgraded Reliance Energy (REL) to outperformer on account of the expected value unlocking through the public offer of its 50% subsidiary, Reliance Power (RPL). Incidentally, the board of REL has already given its approval for the IPO of Reliance Power. RPL holds all the new power generation assets of REL such as Dadri (7,480 MW), Rosa (1,200 MW), Shahpur (4,000 MW) and Sasan UMPP (4,000 MW) among others.

The total power capacity being set up by RPL is around 25,000 MW. According to reports, the IPO is likely to raise around Rs 80-100 billion at a dilution of 15-20%, implying a valuation of Rs 400-667 billion for RPL. “We believe the IPO is positive for REL shareholders as it unlocks the value for its power assets. The capex of power assets is funded through the IPO funds as well”, said the report in a note to its clients.

Overall, we like REL’s strategy of backward integration of its distribution business by setting up generating capacity across various fuels such as gas, coal and hydel, it adds. Fifty per cent of RPL is held by REL and the balance 50% is held by ADAG.

Arvind Mills
CMP: Rs 63
Target Price: NA

Merrill Lynch has maintained a sell rating on Arvind Mills as it feels that the valuations are expensive and the near-term earnings outlook remains extremely weak. “We have cut our earnings estimates by 28-29% over FY’08-09 to factor in a deteriorating second half with costs set to escalate further. We have also factored in slower than expected growth from the garment exports business on the back of a rising rupee”, says the report.

Further, cotton prices are likely to rise at least 10-15% by the time the company runs out of low-cost inventory. Power cost is also set to shoot up November onwards when the gas contract for captive power generation expires. A hardening rupee is making matters worse, with the company having to put on hold its jeans capacity expansion, notes the report.

Meanwhile, the company has issued 50.6 million warrants to promoters, convertible into equity shares at Rs 52 per share over a period of 18 months. This will result in a 24% increase in share capital and the promoter holding will rise from 33.9% to 46.8%. “We assume the funds, aggregating to Rs 2.6 billion, will be utilised for debt repayments over FY’08-10. As a result, we estimate the gearing will fall to 1.2 times in FY’08 and 1 time in FY’09”, says the foreign brokerage.

Yes Bank
CMP: Rs 211.30
Target Price: Rs 230

Citi has initiated coverage on YES BANK with a buy rating due to the bank’s focused asset portfolio, apart from a strong treasury and advisory income businesses. The brokerage has set a price target of Rs 230 for the country’s youngest private sector bank.

According to the foreign brokerage, the key catalysts for the stock’s medium-term performance are likely to ease domestic interest rate and liquidity environment that will provide a respite to margins and bolster quarterly performance over the next two to three quarters, along with fresh capital and strong growth in investment banking fees.
“We expect YES BANK to grow significantly more than peers, in part, due to its smaller absolute size, with advances and total assets estimated to grow at 70% and 64% CAGR, respectively, over FY’08-10 estimates. We also estimate earnings to increase 56% and profits by 61%, driven by strong loan growth, continued momentum in fee incomes (51% CAGR), and relatively lower (though increasing) provisioning charges”, adds the report.

Ennore Foundries
CMP: Rs 181.60
Target Price: Rs 480

ICICI Securities has initiated coverage on Ennore Foundries with an 18-month price target of Rs 480, factoring in the high-growth trajectory and capacity expansion that, according to the brokerage, will make it the largest foundry in Asia.

“Ennore Foundries has embarked on an aggressive capex plan of Rs 3.5 billion over the next three years. This would treble its capacity to 210 TPA from 75 TPA in FY’07. Post completion of its capex, EFL would emerge as the largest foundry in Asia”, notes the report. Meanwhile, the company staged a smart turnaround FY’04 onwards by registering a 29.8% revenue CAGR and 430 basis points EBITDA margin improvement over FY’04-07.

“We believe the company will be on a high-growth trajectory through FY’08-11 (estimates), clocking in 34.8% revenue CAGR and 73.4% recurring net profit CAGR after a subdued FY’08 due to high depreciation and interest charges”, says the report. The company is also aggressively exploring inorganic growth avenue for expanding global footprint.