Weekly Stock Recommendations

IDFC
CMP: Rs 131.80
Target price: Rs 162
Morgan Stanley has maintained its ‘overweight’ rating on IDFC, but increased its price target for the stock from Rs 130 to Rs 162. “

Strong infrastructure spending should enable IDFC to book healthy revenues across businesses – lending, syndication, investment banking products, private equity and proprietary trading,” the Morgan Stanley note to clients said.

“While valuations appear full – 25.3 times F2008(estimated) earnings and 3.1 times book – in line with private banks, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 40% of value. Hence, core valuations are lower and could rise, given strong earnings growth expectations,” the note added.

TVS Motor
CMP: Rs 60.90
Target price: na
Motilal Oswal Securities has maintained its ‘neutral’ rating on TVS Motor, saying its performance for the latest quarter has been below expectations. “In the motorcycles segment, in particular, sales have been impacted by higher interest costs and stringent norms being followed by retail financiers,” the Motilal note to clients said.

“TVS is working on putting a strong product portfolio in place, which is likely to drive growth going forward. However, pressure on margins remains a concern,” the note added. Motilal has forecast an earnings per share of Rs 7.3 and Rs 8.7 for the company for FY08 and FY09, respectively.


Nava Bharat
CMP: Rs 180.80
Target price: Rs 268
Religare has initiated coverage on Nava Bharat Ventures with a ‘buy’ rating and a price target of Rs 268. Nava Bharat Ventures has realigned its business strategy towards the rapidly growing power sector. Power generation capacity is being ramped up from 125 MW to 237 MW by FY09. Also, a 1,050 MW power plant is to be set up by 2010-11, with power purchase agreements secured for 75% of the power generated.

According to Religare, the highly volatile ferro alloy business has been derisked by power sales since the company can close down its ferro alloy operations in times of fluctuating prices and sell power instead. Religare has forecast an earnings per share of Rs 21.1 and Rs 27.8 for the company for FY08 and FY09, respectively.

Deepak Fertilisers
CMP: Rs 90.55
Target price: Rs 123
Emkay Share and Stock Brokers has maintained its ‘buy’ recommendation on Deepak Fertilisers & Petrochemicals with a price target of Rs 123. “Deepak Fertilisers & Petrochemicals is expected to be one of the key beneficiaries from the commissioning of Dahej Uran Pipeline (DUPL), a gas pipeline which will increase the availability of LNG for the DFPCL along with other players in the region,” the Emkay note to clients said.

“DFPCL at present suffers from lower operating levels at its DNA plant (capacity utilisation 71%), methanol plant (64% capacity utilisation) and ANP plant (24% capacity utilisation) due to inadequate gas availability,” the note added.


LIC HsG Finance
CMP: Rs 206.40
Target price: Rs 246
SBI Cap Securities has initiated coverage on LIC Housing Finance with a ‘buy‘ rating and a 12-month price target of Rs 246.

“The (mortgage) industry offers a great potential for growth given Indian demographics and LIC housing finance would be able to reap benefits with its marketing network and enhanced operational set-up,” the SBI Cap Securities note to clients said. SBI Cap has forecast an earnings per share of Rs 33.7 and Rs 39.8 for the company for FY08 and FY09, respectively.

Stocks you can pick this week

Unity Infra
CMP: Rs 521.20
Target price: Rs 609

Emkay Share and Stock Brokers has recommended a ‘buy’ on Unity InfraProjects with a price target of Rs 609. “Given the robust growth in infrastructure spending, significant experience & strong track record of the company in executing turnkey and design-build projects resulting in higher EBITDA margins, we feel Unity InfraProjects is well positioned to bid and win more complex and higher value-added projects,” the Emkay note to clients said. “Company’s focus on entering the BOT projects and real estate space as a contract builder holds good opportunity for the company,” the note added.

Hotel Leela
CMP: Rs 52.25
Target price: Rs 67

Citigroup Global Markets has maintained its ‘sell’ recommendation on Hotel Leela Venture with a price target of Rs 67. “Leela’s high dependence on the Bangalore market (where average room rate growth is peaking), limited room inventory and lack of presence in key growth markets — Hyderabad, Pune, Chennai and Delhi — remain our concerns in terms of growth prospects for the next two years,” the Citigroup note to clients said. “While growth momentum is strong, with stock trading at 15 times FY08 (estimated earnings), near-term growth upside appears priced in. The stretched valuation does not leave much margin for error from potential execution delays for upcoming hotel projects, in our view,” the note added.

Indusind bank
CMP: Rs 48.70
Target price: NA

First Global has initiated coverage on IndusInd Bank with an ‘outperform’ rating, citing a turnaround in the bank’s performance as the key trigger. “We think that IndusInd is gradually witnessing a transformation and the change would be far more visible in the coming quarters,” the First Global note to clients said. “In the worst-case scenario, if IndusInd is unable to address its key concerns of NPAs and low-NIM (net interest margin), then, to our mind, it would become an ideal candidate for a takeover post-2009, once the Indian banking sector is opened to foreign players,” the note added. According to the brokerage, at a price to book value of 1.1 times estimated FY09 earnings, the stock is cheap, considering that the best bank in the industry is available at 3.8 times,” the note added.

IDBI
CMP: 110.05
Target price: Rs 129

KR Choksey Shares & Securities has rated IDBI as a ‘buy’ with a price target of Rs 129. “The bank has shown paradigm shift in its business model; moving from development financial institution to universal bank providing a whole gamut of financial products,” the KRC note to clients said. “The bank has substantial amount of investments in listed and unlisted equities of various companies. Market value of few of these investments (which includes Sidbi, NSE, ARCIL, IDFC and IFCI and subsidiaries of IDBI) stands at Rs 3772.8 crore, amounting to Rs 52.2 per share of IDBI. Interestingly, value of the bank will increase manifold once the bank starts booking profits from these investments,” the note added.

Nucleus Software
CMP: Rs 990.10
Target price: NA

Edelweiss Capital has initiated coverage on Nucleus Software with an ‘accumulate’ rating. “With 250-plus product implementations, for its flagship product — FinnOne™ - Nucleus has credibly positioned itself as a retail banking packaged software player,” the Edelweiss note to clients said. “We expect Nucleus’ revenues and profits to grow at 42% and 41% (compounded annually), respectively, between FY07 and FY09 (estimated). Given Nucleus’ strong forte in the BFSI (banking, financial services, insurance) vertical, high pedigree management, strong clientele, and excellent return ratios, its prospects appear bright,” the note added.

Stocks you can pick up this week

Bhel
Research: ASK Securities (June 18, ’07)
Rating: Hold
CMP: Rs 1,440.2 (Face Value Rs 10)

Bhel had a strong outstanding order book of Rs 55,000 crore by the end of FY07, resulting in strong earnings visibility until FY09E. ASK Securities expects the order inflow and backlog to grow further on orders worth 31,000 mw, which are yet to be placed in FY08-09 for the 11th Plan period.

This is likely to help Bhel bag more orders worth Rs 50,000 crore in the power sector alone (Rs 29,000 crore in FY08E and Rs 21,000 crore in FY09E). Further, Bhel will continue to enjoy the legacy of 10% purchase preference up to March ’08. Bhel’s equipment are technologically superior to those supplied by its Chinese counterparts in the 100/110/125 mw segment. This keeps Bhel ahead of competition.

Also, capacity constraints have been alleviated due to swing capacities/enhancement from 6,000 mw/year to 10,000 mw/year in FY08E and 15,000 mw/year by FY10E. This positions Bhel to exploit impending growth opportunities. The stock trades at 22.9x FY08E EPS and 17.4x FY09E EPS. ASK Securities has advised investors to accumulate the stock below Rs 1,300.

ONGC
Research: Kotak Securities (June 18, ’07)
Rating: Buy
CMP: Rs 908.7 (Face Value Rs 10)

ONGC has made several oil and gas discoveries in the domestic market, as well as abroad, over FY07. It added proven reserves of 65.6 million tonnes oil equivalents (MTOE) in contrast to production of 48.28 MTOE during FY07, resulting in a reserve replenishment ratio of 1.36:1.

The new discoveries of 18 MTOE at 5x EV/BOE (enterprise value/barrel oil equivalent) add $0.6 billion to the EV. The company’s gas in-place reserves of 5-10 trillion cubic feet (tcf) in the Mahanadi basin will add $1.2 billion to the EV, once it’s approved by the Director General of Hydrocarbons (DGH). With new discoveries in FY07, ONGC’s proven reserves are expected to be close to 1,000 MTOE.

For FY08, ONGC is expected to clock higher production and realisation for oil and gas. However, ONGC’s discount compared to its global peers has risen, due to increased subsidy burden in FY07 to 33% from 28% in FY06. At 30% gross under-recoveries, FY08 subsidy losses are expected to be $11.9/bl compared to $17.2/bl in FY07.

Hindustan Construction
Research: Motilal Oswal (June 11, ’07)
Rating: Buy
CMP: Rs 114.6 (Face Value Rs 1)

HCC’s FY07 performance was impacted by lower-than-expected revenues (Rs 2,360 crore versus expectations of Rs 2,500 crore), loss of Rs 71 crore on the Bandra-Worli Sealink, mismatch in terms of revenues and costs, and projects not crossing the margin recognition threshold.

As several hydro-power projects were awarded during FY06, they required quick mobilisation in terms of equipment and manpower, which in turn, increased operational, depreciation and interest costs. HCC’s order book as in March ’07 stood at Rs 9,310 crore, v/s Rs 9,670 crore during March ’06.

It has submitted tenders for nine bids, valued at Rs 4,510 crore and plans to bid for 24 new projects worth Rs 17,900 crore in the near future. It has submitted pre-qualification bids for nine projects worth Rs 3,800 crore. Motilal Oswal expects HCC to report a net profit of Rs 100 crore for FY08 (up 77.3% YoY) and Rs 180 crore for FY09 (up 74.8% YoY).
Inox Leisure
Research: Edelweiss (June 18, ’07)
Rating: Accumulate
CMP: Rs 131.7 (Face Value Rs 10)

Inox posted a 29.3% YoY growth in net revenues to Rs 33.2 crore in Q407. The growth was driven by an increase in the number of seats under operations. EBITDA margins declined on account of higher entertainment tax and lease rentals.

But, the decline in PAT margins was lower due to higher other income and lower interest expense. For FY07, net revenues grew 38.2% to Rs 140 crore, while PAT grew 41.3% to Rs 24.8 crore. During the quarter, Inox opened one multiplex each in Chennai and Jaipur. At the end of FY07, Inox had a total of 58 screens, including seven screens from the CCPL acquisition.

However, like other players in the multiplex and retail space, Inox is also facing considerable delays in setting up new multiplexes due to delay in handover of properties by developers. Against the expectation of 103 screens by the end of March ’08, Inox is likely to set up 92 screens.

This figure is expected to rise to 127 screens by March ’09. To factor in this delay, Edelweiss has revised the FY08 PAT estimates downwards to Rs 31.3 crore. It estimates that Inox will have EPS of Rs 5.1 and Rs 6.7 in FY08 and FY09, respectively. The stock trades at a P/E of 19.1x FY09E.

Ambuja Cement
Research: Enam Securities (June 19, ’07)
Rating: Outperformer
CMP: Rs 113.4 (Face Value Rs 2)

Enam Securities has covered Ambuja Cements with an outperformer rating, stating Holcim’s consolidation as a trigger for a further upswing in the share price. A 20% reduction in minority holdings of Ambuja boosts Holcim’s earnings by 3%. Enam expects Ambuja to become a key element in the overall business growth of Holcim.

Ambuja Cements is cash-rich. This will support volume growth in future through brownfield expansion. It is also highly profitable on account of cost competitiveness and retail market focus. Enam expects Ambuja’s cement volumes to rise from 16 million tonnes in FY06 to 20 million tonnes in FY08. Realisations are expected to increase from Rs 2,878 per tonne to Rs 3,021 per tonne.

Reliance Communications
Research: Citigroup (June 20, ’07)
Rating: Buy
CMP: Rs 513.1 (Face Value Rs 5)

Reliance Communications is an integrated player and the second-largest player in the mobile segment. The company has an 80,000-km-long India-wide optic fibre network and owns the FLAG submarine cable network. It plans to launch IPTV and retail broadband in FY08. Citigroup recommends the scrip as it believes the company will be able to capture its due market share and profitability, which will be a recurring theme.

Despite lower revenue yields, the wireless business has maintained its returns. Most regulatory approvals are also in place and the company is yet to realise the benefit of full utilisation of its network infrastructure.

Reliance Communications’ accelerated tower roll-out target (20,000 in FY08) — despite lack of clarity on GSM spectrum — could be due to growing realisation of the ‘first mover’ advantage in a nascent industry likely to be dominated by 1-2 mega tower companies. Hence, Citigroup has undertaken tower company valuation for Reliance Communications, estimated at $6 billion (Rs 60/share). The scrip trades at a P/E of 21.8x and 17x its FY08 and FY09 earnings, respectively.

Jet Airways
Research: ICICI Securities (June 19, ’07)
Rating: Buy
CMP: Rs 810 (Face Value Rs 5)

ICICI Securities has revised Jet Airways’ earnings upwards on the back of emerging clarity on the cost structure for US routes and alignment of aviation turbine fuel (ATF) price assumption with current price (corresponding to crude price of $68-70/bbl).

Also, the improving load factor trend is likely to boost international earnings on the back of increasing product acceptance. Jet will be the only private domestic operator to fly the Gulf route beginning CY08, when routes are opened to private airlines.

Further, with the culmination of two mega consolidations in the domestic circuit, ICICI Securities believes the sector will witness the return of pricing power. On EV/sales multiple and greater chances of an early turnaround, it finds that Jet’s acquisition of Air Sahara (now JetLite) is relatively cheaper compared to Kingfisher’s valuation of Air Deccan.

Stocks you can pick up this week

Videsh Sanchar Nigam
Research: ICICI Securities (June 8, ’07)
Rating: Sell
CMP: Rs 451.15 (Face Value Rs 10)

Tariff pressure, coupled with declining market share in the voice segment, will affect VSNL’s domestic operations. The company’s international operations and new initiatives in the retail segment will continue to hamper profits in the near to medium term. ICICI Securities initiates its coverage on VSNL with a ‘sell’ rating and estimates that though its international presence and retail venture may provide impetus to the topline, it will hamper margins in the medium term. Competitive pressures, coupled with a decline in tariff, also will dent VSNL’s margins. Although the company has taken some initiatives on cost management, EBITDA margins could improve marginally from 12.2% during FY07 to 14% during FY09. Higher debt to fund capex on account of low profitability and high interest will keep the free cash flow under pressure.

ITC
Research: CLSA (June 7, ’07)
Rating: Underperform
CMP: Rs 150.70 (Face Value Re 1)

Itc has underperformed the market by 6% over the past 10 days following news that Uttar Pradesh (UP) is levying higher tax on cigarettes. The 32.5% trade tax levied by UP is not a big cause of concern as it merely raises the weighted average value-added tax (VAT) from 12.5% earlier to 13.7%. However, this raises doubts about whether other states will follow suit. While this is unlikely, given the spirit of the VAT regime, there is potential for more negative news. UP is one of the few states that has still has not joined the VAT regime. This regime was introduced to ensure a unified tax regime across states However, states always enjoy the power to change the tax rate on individual product categories in an asynchronous manner. UP’s example may embolden some of the rogue states to follow suit and raise taxes on tobacco. Hence, the worst may not be over for ITC.

NIIT
Research: Citigroup (June 7, ’07)
Rating: Buy
CMP: Rs 892.80 (Face Value Rs 10 )

The upswing in the domestic retail training business remains intact. NIIT’s quarterly result was lifted by strong growth in China. The company has raised fees for most of its courses — CATS by 8-15%, 3-year GNIIT by 18% and ANIIT by ~15%. The recently launched NetworkLABS has received good response and the company plans to roll this out in large cities during this fiscal. NIIT expanded its capacity by 18% during FY07 and expects to further expand capacity by 10-12% over the next two years. This capacity expansion supports Citigroup’s thesis of industry upturn as NIIT has expanded its capacity for the first time in the 4-5 years. The company looks well-positioned to benefit from growing concerns over the supply of talent. In this context, Citigroup expects strong business momentum in the retail training business in India.

Glenmark Pharmaceuticals
Research: HDFC Securities (June 6, ’07)
Rating: Buy
CMP: Rs 675.70 (Face Value Rs 2)

HDFC Securities expects the company to achieve remarkable growth in revenue and net income in coming years due to a strong research pipeline, which will fetch it high returns from out-licensing deals. At the end of FY07, the company had 13 products in the US market and 36 ANDAs pending approval. These will help sustain its growth in the US market. With acquisitions expected in central and eastern Europe, revenues will start flowing in from FY08. The changing business mix will also help improve its margins, going forward. Based on an estimated EPS of Rs 39.2 for FY08 and Rs 50.3 for FY09, the stock currently trades at a forward P/E of 17.4x and 13.6x, respectively. Looking at the company’s capabilities and strong business prospects, the stock is cheaply valued, as per HDFC Securities.

Strides Acrolab
Research: Kotak Securities (June 6, ’07)
Rating: Buy
CMP: Rs 329.55 (Face Value Rs 10)

Strides Acrolab (SAL) is engaged in the manufacture of ethical pharmaceuticals products, over-the-counter products and neutraceuticals. Its products include soft-gel and hard-gel capsules, tablets and dry and wet injectables. Kotak Securities initiates coverage with a ‘buy’ rating and estimates that revenues will grow by 25% in FY08, led by export growth. Operating margin is expected to improve by 370 bps due to improved product flow and higher capacity utilisation. The company has capex plans of about $30 million over the next two years. SAL’s focus on the HIV AIDS, TB and malaria businesses, its big product pipeline in soft-gel capsules and capacity expansion plans are its key growth triggers.

Aban Offshore
Research: Merrill Lynch (June 6, ’07)
Rating: Buy
CMP: Rs 2842.25 (Face Value Rs 2)

Merrill Lynch forecasts that Aban’s earnings will jump 18x in FY07-FY10E, driven by an expanding rig fleet and rising day rates. There may be upside risk to day rates and therefore, to earnings and valuation. The global rig market is in the midst of a recovery since ’04. The drivers are high oil prices, rising exploration budgets and no major additions to an ageing fleet. Rig utilisation rate has risen to 90% and day rates are at record levels. New rigs are being built, but incremental demand will still be twice the new supply up to ’08. Merrill Lynch expects Aban’s EPS to surge to Rs 499 in FY10E from Rs 27 in FY07E. Expansion of the rig fleet from eight to 20 by FY09E will be one of the company’s earnings drivers. The other triggers will be rising day rates on existing rigs under new contracts and on new high quality rigs being added to the fleet. An income tax holiday enjoyed by its Singapore-based subsidiary ASPL, will also boost earnings. All new rigs are in ASPL.

Gail
Research: ASK Securities (June 5, ’07)
Rating: Buy
CMP: Rs 294 (Face Value Rs 10)

The domestic natural gas supply scenario is expected to improve (more than 240 mmscmd) over the next three-five years. Gail has already entered into MoUs with RIL and ONGC for marketing and supply of natural gas. Gail’s pipeline business is a cash cow for the company. Citing the improving gas supply scenario, Gail has announced a Rs 18,000-crore capex to increase its pipeline capacity from the current 130 mmscmd to 360 mmscmd in 4-5 years. Cash flows from new pipelines are expected to contribute around Rs 65/share to Gail’s fair value, making it an attractive long-term bet. Funding the pipeline capex will not be an issue for Gail, considering its low 0.1x debt-to-equity ratio. Even after factoring this capex (0.1x debt/equity for FY09E), Gail will be comfortably placed to finance its additional capex (around Rs 7,000 crore) for the proposed Assam gas cracker complex (Rs 5,600 crore capex) and exploration and production (E&P) over the next five years.

Stocks you can pick up this week

Gail
CMP: RS 294
TARGET PRICE: RS 379

ASK Securities has rated Gail a ‘buy’ with a one-year price target of Rs 379. The recommendation is based on factors like doubling of pipeline capacity and a favourable supply environment. “Domestic natural gas supply scenario is expected to show a marked improvement over next 3-5 years as gas discoveries at KG basin by exploration majors Reliance Industries (RIL), GSPC and ONGC are likely to go on stream.

Gail has already entered into MoUs with RIL and ONGC for marketing and supply of natural gas,” notes the report. Further, the company has also announced a capex of Rs 180 billion to more than double its pipeline capacity.

According to the report, the new pipeline will lead to a cash flow of Rs 65/share to Gail's fair value, “making it an attractive long-term bet on the buoyant domestic gas sector”. However, on a different note, the report adds that there are some areas of concern in the form of subsidies, tariff regulation, delayed gas production and competition.

Amtek Auto
CMP: RS 422
TARGET PRICE: RS 510

Emkay Share and Stock Brokers has rated Amtek Auto a ‘buy’ after the company's acquisition of JL French Witham's assets for $35 million. The report notes that Amtek has acquired the foreign company at attractive valuations of 0.6 times sales and 5 times operating profit, and that “(JL French's) good existing customer base like Land Rover, Jaguar, Trellborg, Ford and PSA (Peugeot) in Europe would be served by AAL in near future”.

“JLF's assets would give AAL an incremental capacity of 20,000 MT to its existing aluminium foundry in Pune and the total installed capacity after addition of these lines would go up to 40,000 MT. Further, the company is sitting on a cash chest of Rs 13.5 billion (Rs 97 per share) that can be utilised for further inorganic growth and expansion opportunities,” the report added.

TNPL
CMP: RS 94.50
TARGET PRICE: RS 135

ICICI Direct has assigned an ‘outperformer’ rating to Tamil Nadu Newsprint and Paper (TNPL) after the company improved its operational efficiencies moderately during FY07. Despite raw material prices remaining firm, the company was able to improve its operating margins by 100 basis points. “Post the mill development programme, which is slated to come on stream by August 2007, we expect significant improvement in the margins in FY08,” says the report.

Meanwhile, the company has been shifting its revenue mix from lower-value products like newsprint to higher realisation products like copiers. “This strategy has benefited the company through increase in its average realisation by Rs 2,795 per tonne of paper,” the report adds. The company is also planning to foray into cement production and set up an IT park.

Welspun Gujarat
CMP: RS 178.60
TARGET PRICE: NA

Prabhudas Lilladher has rated Welspun Gujarat Stahl Rohren an ‘outperformer’ based on the company's growing order book and volume expansion. According to the brokerage, the company is gearing to meet the growing order book by capacity expansion at its Anjar plant coupled with backward integration by commissioning of 1 million tonnes per annum plate mill sometime in December 2007.

The company has an order book of Rs 4,000 crore as on April 1, 2007, to be executed over the next 12 months. “Almost 80% of orders are export orders, largely from the Middle East and USA. Domestic orders include those from Reliance Industries,” notes the report. The company has also entered into a 60:40 joint venture with the US-based Lone Star Technologies to set up 3,00,000 tonnes per annum saw pipe plant.

“This is a very good move, as it will give the foothold in highly lucrative US market,” says the report. Meanwhile, the plant is expected to start production by April 2008. However, the brokerage has also pointed out the fact that since about 80% of revenue comes from exports, rupee appreciation can have an adverse impact on the financials.

Stocks you can pick up this week

Matrix Laboratories
Research: Merrill Lynch (April 18, ’07)
Ratings: Buy
CMP: Rs 192 (Face Value Rs 2)

Matrix’s significant 53% and 37% relative underperformance over the past year and six months respectively reflects the likely 55% earning de-growth in FY07E due to write-offs in the European generics business, revenue loss from certain contracts in European generics business (DocPharma), sharp increase in R&D spend, and rising interest cost.

Merrill Lynch estimate Q4 net profit of Rs 13 crore, a sharp 63% decline over the previous corresponding quarter largely due to high R&D spend and lower margin in the DocPharma business. Based on the refreshed estimates Matrix is trading at 20x FY08 and 14x FY09 earnings. This is in line with the pharmaceutical sector average on FY08E earnings and about 15% discount to the sector average on FY09E EPS.
On EV/EBITDA, Matrix trades at 15% discount to the sector average on FY08E estimates. The price target of Rs 229/share is based on 18x FY09E EPS, nearly in line with the stock’s six-month historical average, which reflects the period post announcement of acquisition by Mylan. Further, the stock’s current 40% discount to Mylan’s acquisition cost makes it an attractive candidate for a possible complete buyout by Mylan.

Cairn India
Research: Goldman Sachs
Ratings: Neutral
CMP: Rs 131 (Face Value Rs 10)

Cairn India was formed in August ’06 by the acquisition of Indian assets from Cairn Energy Plc. It is a pure E&P play, the assets of which could be bifurcated into a development block and 12 exploration blocks. Prior to the initial public offering in ’06, Cairn India acquired the Indian upstream assets from Cairn UK Holdings (100% subsidiary of Cairn Energy Plc.) with consideration of cash and shares amounting to $6 billion.

In the absence of information on the fair value of the assets acquired by Cairn India, Goldman Sachs have assigned book value to these assets based on consolidation of the statements of the three unlisted subsidiaries of Cairn Energy Plc which were holding them. The book value thus calculated works out to $213 million. This is low compared with $6 billion that Cairn India paid for these assets because the book value does not reflect the full reserve potential.

Notably, Petronas Malaysia has taken 10% stake in Cairn India at Rs 160/share — in line with the $6 billion valuation. Cairn India’s valuation multiples in the near term appear stretched as benefits from monetization of the Rajasthan block will impact earnings only ’09E onwards. However, the current share price has value built in for the Rajasthan asset, as the company has announced the reserve size and production targets.

UTI Bank
Research: Macquarie (April 17 ’07)
Ratings: Outperform
CMP: Rs 465 (Face Value Rs 10)

UTI Bank announced its 4QFY3/07 results. PAT was up 39% YoY to Rs 220 crore (20% ahead of the estimates) and NII was up 48% YoY to Rs460 crore. The key surprises were lower NPA provisions and lower tax rates. NPA provision was a major surprise and reduced 61% YoY to Rs 8.2 crore for the quarter (which was 40% below the estimates). According to the management, this reflects a dramatically improved performance on additional slippages in the current quarter.

Additional general provision of Rs 45 crore in the current quarter was marginally below the estimates of Rs 52 crore. Another surprise was the effective tax rate which, adjusted for general provision, stood at 29% for Q4 compared to our estimate of 33.5%. Finally, wage costs were 11% below Q4 estimates due to a 22% QoQ fall. There seems to have been one-offs in Q3 on which we have not received details.

Results for Q4 were a positive surprise to us. Over the long term, Macquarie continues to like the stock, as UTI Bank continues to ride deepening penetration to make rapid market share gains. As the branch network continues to expand rapidly, high growth is expected to be the key driver for the bank’s stock price performance and continue to retain the Outperform rating on the stock with a target price of Rs 621.

ACC
Research: Citigroup (April 19, ’07)
Ratings: Buy
CMP: Rs 791 (Face Value Rs 10)

ACC’S net sales grew 25% YoY to Rs 1,670 crore, in line with expectations. However, both EBITDA and PAT came in about 10% below expectations at Rs 510 crore (+55% YoY) and Rs 360 crore (+55% YoY) due to higher costs than anticipated. Sales volumes declined 2% YoY to 4.9 million tonnes.

ACC expects to add over 7 million tpa of capacity with 3.1 millio expected in CY07, 1.4 million in CY08 and the balance 3 million tpa in CY09. Around 130MW of captive power is also being added. ACC’s board has approved the transfer of its ready mix business (sales Rs 300 crore in CY06) to a new wholly owned subsidiary. On its own and along with its group company, Gujarat Ambuja Cements, it enjoys a strong market presence in several key markets.

Most of its capacity creation in ’06-08 is at a low capex. ACC has come a long way from its high debt equity of 1.64x in FY02. The combination of low-cost capex and strong cash flows in CY06 has resulted in ACC becoming a net cash company. Citigroup believe that EV/EBITDA is a better valuation parameter than P/E to get a proper perspective on valuation of Indian cement companies.

Additionally, P/E is not so useful in ACC’s case, because in the past 12 years, ACC has made minimal profits or even losses on three occasions. ACC’s average EV/EBITDA over the past 11 years, which encompasses three cement cycles, has been 13x. Using a shorter time frame (seven years) gives an average of 11x. At the target price of Rs ,260 EV/EBITDA would trade at 10x, a discount to its 10-year average EV/EBITDA, justified keeping in mind the historic high in valuations.

Ashok Leyland
Research: HSBC (April 19, ’07)
Ratings: Underweight
CMP: Rs 38 (Face Value Re 1)

Ashok Leyland is the second largest manufacturer of medium and commercial vehicles in India, with 28% market share in FY07. In addition, it also manufactures engines for industrial, generator sets and marine applications. Its products range from 18-seater to 82-seater double-decker buses, to 7.5 tonnes to 49 tonnes haulage vehicles, to special application vehicles.

Ashok Leyland’s earnings to remain flat in FY08e and decline by 15% in FY09e, following declines in volume and profit margin. The company is likely to benefit from reductions in tax paid on raw materials and components following the introduction of the value added tax regime and removal of turnover tax from January 2007 in the state of Tamil Nadu, where Ashok Leyland has its vehicle production units.

It would also get tax benefits once it starts production in Uttaranchal, in April 2008. However, rising fixed costs as a percentage of sales following our forecast decline in sales is likely to lead to a decline in net profit margin in FY08e and FY09e. The fair value of Rs 30 is below the share price of Rs 38 on April 16, hence HSBC initiate coverage on Ashok Leyland with an Underweight rating.


At the target price, the stock would trade at 5.8x FY08e EV/EBITDA, which is marginally lower than the last five year average of 6.0x one-year forward EV/EBITDA. Also, the FY08e price-to-book ratio of Ashok Leyland at the target price is likely to be 1.7x compared to the five-year average price to book ratio of 1.9x, based on actual book value per share of the last five years.

Stocks you can trade upon this week

Karnataka Bank
CMP: Rs 164.10
Target price: Rs 220

Deutsche Bank’s global markets research has initiated coverage on Karnataka Bank with a ‘buy’ and price target of Rs 220.

In its recent research note, Deutsche said, “We like KBL’s strategy of controlled loan growth, effective use of excess SLR securities and shedding of high-cost liabilities — features which further much-needed stability in the current volatile interest rate scenario, and potentially continued good asset quality.”

Deutsche estimates Karnataka Bank’s earnings per share (EPS) for 2006-07 at Rs 18.49 and for 2007-08 at Rs 20.59. In 2004-05, its EPS was at Rs 14.52.

Dishman Pharma
CMP: Rs 244.75
Target price: Rs 270

Motilal Oswal Securities has initiated coverage on Dishman with a ‘buy’ citing robust earnings growth prospects as the key trigger. The brokerage estimates Dishman’s EPS for 2006-07 at Rs 10.3 and for 2007-08 at Rs 15.5. In 2004-05, its EPS was at Rs 5.80. “

Dishman is likely to be one of the key beneficiaries of the increased outsourcing from India, resulting in 32% earnings CAGR (compounded annual growth rate) over FY07-FY09,” the brokerage said in a recent report to clients. “

Partnerships with large innovators like GSK, Merck, Astra Zeneca, J&J and Novartis imply good long-term potential for the CRAMS business, resulting in 25% revenue CAGR (excluding Carbogen-AMCIS ) for FY06-09,” it said.


Jet Airways
CMP: Rs 688.85
Target price: Rs 900

CLSA Securities has retained ‘buy’ rating on Jet Airways with a 12-month price target of Rs 900 post the announcement of its buyout of Air Sahara.

“We believe the new deal helps Jet to get out of a sticky situation; an early dispute resolution will likely help in accelerating the fund raising program and staggered payment will ease potential stress on cash flows,” the French brokerage said in a note to clients. “

We also believe aircraft addition plans of some airlines have slowed down and the infrastructure constraints are currently at peak. Hence, additional slots, trained manpower and additional aircraft on order by Air Sahara will all come in handy for Jet,” it said.

UTI Bank
CMP: Rs 465.05
Target price: NA

SSKI Securities has reiterated ‘outperformer’ rating on UTI Bank, post its fourth-quarter earnings. The brokerage has raised UTI Bank’s EPS estimates for 2007-08 by 3% to Rs 29.3 and by 3.8% to Rs 36.7 for 2008-09 on pre-dilution basis citing higher-than-expected increase in core earnings.

“Though the current adequacy numbers are comfortable, we expect the bank to raise equity capital in FY08. We believe that the bank has entered a successful chain of growth, enabling it to raise fresh equity capital at every stage at richer valuations to fund its strong loan expansion,” SSKI said in a recent research note.


HCL Technologies
CMP: Rs 335.20
Target price: Rs 358

Ask Raymond James has maintained a ‘buy’ on HCL, while downgrading its price target to Rs 358 from Rs 370 after the company’s January-March earnings announcement, citing “compelling valuations”.

“In view of the better-than-expected results, we have revised our FY07E (estimated) EPS to Rs 17.1 (+2.5%) and FY08E EPS to Rs 19.9 (+1.5%),” ASK said in a recent report to clients. “In-line with the recent downgrades that we had for the exit multiple for the top tier companies, we are reducing the target PE multiple for HCL Tech from 19x (times) to 18x,” it said.

Stocks you can pick-up this week

Reliance Communications
Research: JM Morgan Stanley (April 10, ’07)
Rating: Overweight
CMP: Rs 422 (Face Value Rs 5)

Reliance Communications has written off 15% of its wireless subscriber base. i.e. 56 lakh wireless subscribers from its 336 lakh subscriber base as on March 31, ’07. The re-verified subscriber base stands at 280 lakh subscribers. The write-off is meant to comply with the requirements of the Department of Telecom (DoT), which made it mandatory for all operators to re-verify 100% of their subscribe base by March 31, ’07.

The company added 12 lakh wireless subscribers in March ’07. The company is continuing with the re-verification process and will re-activate the 56 lakh wireless subscribers written off, once they are verified. This will impact RCOM’s net adds in future months, which may increase once the written-off subscribers are re-verified. JM Morgan maintains its ‘overweight’ rating on the stock. However, there could be near-term pressures on RCOM’s share price.

ITC
Research: Macquarie (April 09, ’07)
Rating: Outperform
CMP: Rs 153 (Face Value Rs 1)

ITC has under-performed the Sensex over the past four months, due to uncertainty regarding VAT on cigarettes, which contribute 80% to the company’s profits. A 12.5% VAT has been proposed in three state budgets; the remaining 25 states are expected to follow suit.

ITC is a strong defensive play due to limited operational exposure to three key risks — a slowdown in the US economy, rising interest rates and softening commodity prices. It is also a play on a bullish sub-plot emerging in India — the consumption boom, driven by emerging demographic trends.

ITC’s shares currently trade at a PER of 23x FY08E EPS. However, Macquarie notes that FY08E will be the first year when the company will feel the pain of VAT implementation. It forecasts that ITC will resume normalised earnings growth of 20% CAGR over three years from FY09E. Additionally, FY08E multiples do not capture the growth potential of the other businesses, such as hotels, paper, other FMCG and agri-business.

iGate Global
Research: Edelweiss (April 11, ’07)
Rating: Buy
CMP: Rs 360 (Face Value Rs 4)

iGate’S Q4 FY07 results were ahead of expectations. Revenues, at Rs 210 crore, were muted (sequentially flat), but net profit, at Rs 22.6 crore — up 41.7% QoQ and 379.8% YoY — was ahead of estimates. EBITDA margins for Q4 FY07 stood at 15.3%, the highest since Q3 FY01.

This quarter completes a strong turnaround story for the company through FY07; profits grew nearly 200% in FY07, with EBITDA margins of 11.4% in FY07 (up 180 bps from the FY06 level). The company has established a robust clientele, which is likely to sustain its growth at healthy levels, going forward.

At current market price, the stock is valued at a P/E of 14.2x and 9.8x for FY08E and FY09E earnings, respectively. The company’s valuation on EV/EBITDA and EV/revenue for FY08E continues to be attractive at 7.4x and 1.2x, respectively.

Over the next two years, iGATE is likely to earn cumulative cash profits of Rs 310 crore and post a cash-earnings growth of 41.4% CAGR over FY07-09. Edelweiss expects the company’s EPS growth to be among the highest in its set of companies over FY07-09E. At a PEG of 0.25, the current valuations look compelling.

Jet Airways
Research: Citigroup (April 10, ’07)
Rating: Sell
CMP: Rs 626 (Face Value Rs 10)

Jet has acquired Air Sahara for a total purchase consideration of Rs 1,450 crore (including Rs 500 crore paid earlier). Rs 400 crore will be paid shortly, while Rs 550 crore will be paid in four annual instalments, commencing on or before March ’08.

The current value of the deal is Rs 1,200 crore. Prima facie, the deal appears more reasonable (in valuation terms); immediate cash outflows will also be lower. Jet is the country’s largest airline with a market share of more than 30%. Economic growth and liberalisation have stimulated demand for air travel, and the sector has been averaging growth of around 20% for the past two years.

Given the positive trend in key demand drivers, Citigroup expects growth rates to accelerate in the medium term. The government’s policy of gradually opening up international routes has opened up another substantial growth opportunity for local airlines such as Jet.

The situation of irrational pricing will persist in the near term. In the long term, it will accelerate the consolidation process in the industry, but the timing and extent of consolidation remain uncertain. For the next 2-3 years, the domestic aviation sector could witness conditions last evidenced in the mid-1990s, when some start-up airlines had to close down.

The discount to Asian airlines is justified given: a) the very competitive domestic landscape; b) delays in stabilisation in Jet’s international operations; and c) soaring fuel costs (which Indian carriers cannot hedge).

Eicher Motors
Research: Merrill Lynch (April 12, ’07)
Rating: Sell
CMP: Rs 231 (Face Value Rs 10)

Eicher’s sales beat estimates in FY07, driven by the medium tonnage segment (9-11 T trucks), where the company enjoys exceptional franchise. However, overall growth at 18.8% was below industry average, despite its beneficial low base. Absence of heavy tonnage tractor trailers was the key reason for this.

Merrill Lynch’s views on long haulage trucks remains negative (flattish growth estimated in FY08, tonnage 2% YoY growth). Eicher’s sales are expected to follow industry trends, at best. In FY09, new competition will hurt Eicher more than relatively larger incumbents like Tata Motors and Ashok Leyland.

Given the company’s strong performance in the last fiscal, Merrill Lynch is tweaking its volume assumptions upwards. Other notable revisions include higher tax rate assumption for FY07 (having liquidated some of the tax-free investments), and postponing sale of the motorcycle business to the next fiscal.

The stock trades at 11.6x FY08E and 10x FY09E EPS, which is reasonable and in line with the sector. However, given the company’s marginal position in trucks and its high vulnerability, Merrill Lynch maintains ‘sell’ rating on the stock.

ABG Shipyard
Research: Citigroup (April 12, ’07)
Rating: Buy
CMP: Rs 373 (Face Value Rs 10)

ABG Shipyard has secured an order worth $139 million from Essar Shipping for construction of four bulk carriers. This follows the $13-million repeat order that the company recently won for construction of one APS tug vessel for Lamnalco, Cyprus.

ABG’s total unexecuted order book now stands at Rs 3,300 crore (5x FY07E sales) compared to Rs 2,500 crore earlier. With the order backlog extending well into FY10 and orders for the company’s upcoming Dahej facility yet to be completely tied up (five slots are still available even after the recent order wins), earnings visibility for the company over the next three years has improved significantly.

Citigroup expects ABG to deliver an EPS CAGR of 46% over FY07-09E. ABG’s expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle.

Stocks you can pick-up this week

Firstsource
cmp: Rs 75.25
target price: Rs 95

Merrill Lynch has initiated coverage on BPO firm Firstsource Solutions with a buy rating and a price target of Rs 95.
“FS’s key strengths are domain expertise, integrated offshore-onshore delivery and ability to complement organic growth through acquisitions/alliances, with a history of retaining acquired clients/people,” the Merrill note to clients said.

“Our 44% revenue CAGR over FY07-09 assumes mining of FS’s marquee client base eg BSkyB, Vodaphone, CapitalOne and new wins, also helped by inorganic moves like the partnership with US bank tech major, Metavante. We believe revenue visibility is high, given the annuity nature of BPO,” the note added.

PFC
cmp: Rs 107.25
target price: Rs 100

Kotak Securities has initiated coverage on PFC with an underperform rating and a price target of Rs 100, saying pressure on margins would make it unattractive relative to PSU banks.

“We expect buoyancy in the power sector to grow PFC’s loan book by 19% and operational income by 15% CAGR in FY06-09. However, the company is likely to generate a return on equity (RoE) of 12% close to its cost of equity, given the low spreads in its lending business,” the Kotak note to clients said.

“Key risks to PFC’s model are any slowdown in the reforms process, increase in competition and development of a vibrant debt market,” the note added.


Britannia Inds
cmp: Rs 1,245.40
target price: Rs 1568

Anand Rathi Securities has initiated coverage on Britannia Industries with an outperformer rating and a 12-month price target of Rs 1,568.

“We expect Britannia to record revenue CAGR of 20% over FY06 to FY09. Sharp rise in raw material prices forced many unorganised players to exit from the category,” the Anand Rathi note to clients said.

“On the other hand increased advertisement spends by organised players expanded the category, resulting in growth in volumes,” the note added, saying it expected the company to hold on to its market share in excess of 38%.


Indian Overseas
cmp: Rs 97.85
target price: Rs 124

HDFC Securities has initiated coverage on Indian Overseas Bank with an outperformer rating and a price target of Rs 124.

“The bank has one of the best net interest margins (3.91%) in the industry,” the HDFC Securities note to clients said. The brokerage has conservatively estimated a 27 basis point and 5 basis point decline in IOB’s NIM for FY08 and FY09.

“However, the bank is expected to comfortably maintain an undemanding RoE level of 18.73% in spite of the adverse business environment, which entitles it to be considered at a fair book value multiple of 1.5 times,” the note added.

Cinemax India
cmp: Rs 133.50
target price: Rs 193

Emkay Share & Stock Brokers has initiated coverage on Cinemax India with a buy rating and a price target of Rs 193.
“We believe with incremental seats addition of around 24,000 in the next two years and with marginal increase in average ticket price and conservative occupancy rate, Cinemax can comfortably drive ticket sales CAGR (compounded annual growth rate) of around 60% over FY07E (estimated)-09E, which drives growth in other business segment like gaming, F&B (food and beverages) and advertising,” the Emkay note to clients said.

“Cinemax being a part of renowned real-estate group is in better position to leverage the advantage and complete its scheduled futures plans,” the note added.

“However, the bank is expected to comfortably maintain an undemanding RoE level of 18.73% in spite of the adverse business environment, which entitles it to be considered at a fair book value multiple of 1.5 times,” the note added.

Cinemax India
cmp: Rs 133.50
target price: Rs 193

Emkay Share & Stock Brokers has initiated coverage on Cinemax India with a buy rating and a price target of Rs 193.
“We believe with incremental seats addition of around 24,000 in the next two years and with marginal increase in average ticket price and conservative occupancy rate, Cinemax can comfortably drive ticket sales CAGR (compounded annual growth rate) of around 60% over FY07E (estimated)-09E, which drives growth in other business segment like gaming, F&B (food and beverages) and advertising,” the Emkay note to clients said.

“Cinemax being a part of renowned real-estate group is in better position to leverage the advantage and complete its scheduled futures plans,” the note added.

Stocks you can pick up this week

MOST OF THESE REPORTS ALREADY AVAILABLE ON DP.

Hindalco
Research: Citigroup (March 22, ’07)
Rating: Sell
CMP: Rs 136 (Face Value Rs 1)
12-Month Price Target: Rs 142

Hindalco is a low-cost integrated aluminium producer with access to captive power and bauxite. It paid a high valuation for Novelis, whose profits are not expected to improve substantially over the next couple of years. Hence, the profits will not be able to compensate for Hindalco’s high interest outgo, resulting in earnings dilution.

In copper, TC/RC margins averaged US37c/lb in H1 FY07, benefiting from high copper prices and price participation. But these are already trending down and are expected to average US15c/lb in FY08 and FY09. For a copper smelter like Hindalco, profits are determined largely by TC/RCs rather than copper prices.

For aluminium, average prices are likely to decline 7% YoY in FY08 to $2,480/tonne and remain around that level in FY09. The target price of Rs 142 is based on: (1) 7x FY08E earnings (Rs 128); and (2) adding the value of Hindalco’s investment holding in associate companies and discounting it by 25. The proposed acquisition of Novelis raises its risk profile, increases gearing and reduces consolidated margins.

Based on consensus earnings and preliminary analysis, Citigroup sees no substantial improvement in Novelis’ earnings in ’07 and ’08. Additionally, Citigroup does not see any upside trigger to the stock price based on its outlook of falling global aluminium prices and substantial decline in copper TC/RCs.

Canara Bank
Research: HSBC (March 21, ’07)
Rating: Overweight
CMP: Rs 202 (Face Value Rs 10)
12-Month Price Target: Rs 312

As for most Indian banks, the first three quarters of FY07 saw a fall in the net interest margin (NIM) of Canara Bank. Yield on loans rose by 56 bps YoY, but interest expense grew faster than interest income. The bank reported a 22 bps fall in NIM, relative to FY06. The weakness in NIM is partly due to slow growth in low-cost deposits compared to new private banks.

HSBC lower its forecast for Canara Bank’s FY07 net profit by 8.5% to Rs 1,308 crore (-2.6% YoY). The revision is driven by decrease in forecast of net interest income and non interest income. For the nine-month period ended December ’06, the latter decreased by 9.6% YoY.

This revision pulls down HSBC’s DCF-based target value from Rs 327 to Rs 311. During ’06, the bank’s P/E ranged between 5.7x and 10.7x with a mean of 8.3x. Its P/B ranged between 1.0x and 1.7x with a mean of 1.4x. Applying the mean P/E and P/B to the forecasts for FY08 results in target prices of Rs 324 and Rs 300, respectively.

The blended target price of Rs 312 is a weighted average, where the DCF is assigned a weight of 50% and the P/E and P/B derived forecasts are assigned weights of 25% each. It values the stock at 8x FY08f EPS and 1.5x March ’08f book. The stock has underperformed the Sensex over the past quarter. The discount in the P/E of Canara Bank, relative to the Sensex P/E, has deepened to 65% — near a two-year low.

VSNL
Research: Merrill Lynch (March 22, ’07)
Rating: Neutral
CMP: Rs 407 (Face Value Rs 10)
12-Month Price Target: NA

VSNL carries ~3.6bn incoming ILD minutes annually on a standalone basis. Assuming one quarter of full ADC savings on incoming ILD, Merrill Lynch estimates VSNL’s FY08E earnings upside at ~13% (i.e. ~Rs 54 crore). Over the medium term, however, VSNL may pass the entire ADC cut to customers via lower tariffs.

Trai has announced cuts in ADC across services — for incoming ILD, ADC from April ’07 has been lowered to Re 1/min, compared to Rs 1.6/min currently. Media reports suggest the government is reviewing its options with regard to surplus real estate of ~773 acres that it controls in VSNL. Reports suggest that the revenue department has recommended auction of the land.

Merrill Lynch recognises that there have been several false starts with regard to value unlocking of real estate and believes its valuation is conservative. Pricing pressures in VSNL’s core business of wholesale carriage (data & voice) and low visibility on cost synergies from Tyco & Teleglobe drive Merrill Lynch’s 12-month ‘neutral’ rating.

National Aluminium
Research: Citigroup (March 22, ’07)
Rating: Sell
CMP: Rs 231 (Face Value Rs 10)
12-Month Price Target: Rs 241

Nalco has a smelter capacity of 345,000 tpa in eastern India. It has enough deposits of bauxite to meet more than 50 years’ requirements of its expanded alumina capacity (2.1m tpa from 1.58m tpa by end-’08). Good quality bauxite, open cast mines and low bauxite transport costs make Nalco one of the lowest-cost producers of alumina in the world.

The company sells its surplus alumina (27% of FY06 sales) in international markets and it is India’s largest alumina exporter. In the power-intensive business of producing aluminium, Nalco’s 960-mw thermal power capacity meets all its in-house requirements at 33% of the grid cost, and surplus power is sold to the state grid.

Low costs for power, alumina and labour make Nalco one of the lowest-cost aluminium producers in the world. Prices have recovered in recent weeks due to a strike and martial law in Guinea, the world’s second-largest bauxite producer. Nalco is already operating at full capacity and there is limited scope for volume growth until FY10. In the past six years, the stock has traded at a P/E range of 6-8x.

During this period, it has decisively crossed 8x only three times. Merrill Lynch has valued Nalco at 8x, the top end of its historical P/E band, which gives a target price of Rs 241. This appears justified based on Nalco’s position among the lowest-cost producers of alumina globally.

Hotel Leelaventure
Research: Macquarie Research (March 21, ’07)
Rating: Buy
CMP: Rs 57 (Face Value Rs 2)
12-Month Price Target: Rs 79.9

The analysis of average room rates (ARR), occupancy and revenue per available room (RevPAR) of the company’s hotels from April 1, ’06 to March 15, ’07 shows that the company’s average RevPAR is likely to rise 16.6% YoY to Rs 8,794 for FY3-07. Its ARR is likely to improve by 17% YoY, while occupancy is likely to remain at 77%, the same as last year.

Leela’s Mumbai hotel is likely to be the star performer, with RevPAR up 43.2% YoY to Rs 7,454. Leela’s Bangalore hotel is likely to show only 6.8% YoY growth in RevPAR to Rs 13,481 because occupancy may decline by 5.7% to 74%. The company is sacrificing occupancy at the expense of higher ARR for its Bangalore hotel.

Hotel Leelaventure’s capacity is set to rise from four luxury hotels with 1,015 rooms to nine luxury hotels with 2,565 rooms in the next two years. Macquarie expects its 81-room Udaipur hotel to come on stream by January ’08; the 419-room hotel-cum-service apartment in Gurgaon is expected to come on stream by October ’07; the 300-room Hyderabad hotel, 380-room Chennai hotel and 260-room Pune hotel are expected to come on stream around April ’09.

Leelaventure trades at 12.1x its FY3-08E earnings, versus the hotel industry consensus average of 16.9x FY08E earnings.

Stocks you can pick up this week

M&M
CMP: Rs 731
TARGET PRICE: Rs 1,030

HSBC Securities has retained its ‘overweight’ rating on M&M with a 12-month price target of Rs 1,030. “M&M has overcome input cost pressures through a combination of factors: production in tax-free zones in H2FY06; benefits from consolidation in the tractor industry; greater contribution from diesel generator sales; the transfer of the light commercial vehicle business to a separate JV called Mahindra International; an increase in returns to scale and economies of scale after diversification into the auto parts business; and bargaining harder for raw material procurement,” the HSBC note to clients said.

Great Offshore
CMP: Rs 568.40
TARGET PRICE: RS 644

Ask Raymond James has rated Great Offshore a ‘buy’ with a 12-month price target of Rs 644. “Offshore explorations services industry is in for an exciting outlook over next 5-10 years, citing the recently concluded NELP VI round wherein 24 deepwater and 10 shallow water blocks were awarded (out of total 55 blocks),” the ASK note to clients said.

“With diversified nature of fleet, largest fleet size, most of the terms committed till FY10 (estimated), 35% CAGR in earnings for FY07-10E (27% for FY07- 09E) and low financial leverage, we believe that the stock is available at a very good risk reward ratio,” the note added.


ICRA
CMP: Unlisted
RECOMMENDATION: Subscribe to the IPO

HDFC Securities has recommended subscribing to the initial public offering by Icra. “At a price band of Rs 275 – Rs 330, the stock is offered at 15.2 times – 18.2 times FY07 fully diluted EPS,” the HDFC note to clients said. “Given the steady economic growth, visibility in revenues on account of consolidation and widening of services, one could see continued growth in topline and bottomline of the company.

The new segments like the information technology services and outsourcing services could bring in large contracts from the IT sector, thus giving a thrust to margins going forward apart from diversifying revenue streams,” the note said, adding that any move in future by Moody’s to hike its stake in the company from the current 28.1% (post-issue) could be a further trigger.

GMR Infra
CMP: Rs 373.60
TARGET PRICE: Rs 502

MotilaL Oswal Securities has initiated coverage on GMR Infrastructure with a ‘buy’ rating. “GMR Infrastructure has a portfolio of 11 SPVs (special purpose vehicles) with a combination of fixed (annuity-based road project), fixed and volume driven (power and airports portfolio) and pure volume-driven businesses (toll-based road project),” the Motilal note to clients said.

“Based on the net asset value of the SPVs and the cash balance as on March 2007, we arrive at a net present value estimate of Rs 16,600 crore, translating into a price target of Rs502/share (an upside of 35.2%). Of this, airports account for 78% of the valuation, roads 4.6%, power 7.4% and cash balance 9.6%,” the note added.

Tayo Rolls
CMP: Rs 133.05
TARGET PRICE: Rs 220

Anand Rathi Securities has rated Tayo Rolls as a ‘buy’ with a price target of Rs 220. “Tayo Rolls exports around 30% of the rolls to developed markets like Europe and USA, where due to high cost, quite a few such facilities are being closed down and company is exploiting the opportunity being a high quality roll maker. Company’s clients list includes players like — Posco, Corus, Thyssen, China Steel, SSAB etc,” the Anand Rathi note to clients said.

According to the brokerage, Tayo’s exports to Europe are set to rise following the acquisition of Corus Steel by Tata Steel. “For the March 2007, company is likely to report EPS of Rs 20-21, there by discounting this earnings by just 6 times, which is very attractive for a Tata company with high growth potential,” the note added.

Stocks you can pick up this week

Aurobindo Pharma
Research: Edelweiss
Rating: Buy
CMP: Rs 720 (Face Value Rs 5)
12-Month Price Target: NA

Aurobindo Pharma continued with its growth momentum in Q3 FY07 with Y-o-Y sales growth of 29%, EBITDA growth of 35% and net profit growth of 130%. While sales and net profit were in line with the estimates, EBITDA was significantly below estimates on account of: (1) Higher pen-g prices pulled down overall gross margin by 300 bps; and (2) some operating income was reported as other income.

The sharp 38% increase in pen-g prices did not allow Aurobindo to increase realisations on an immediate basis. However, in Q4 FY07E, realisations may improve to partially compensate for the loss, although the net impact on margins will still be negative.

The traction of growth drivers continues with formulations sales growing 19% Q-o-Q. Going forward, the US generics business is likely to see greater momentum with launches of Simvastatin and Sertraline in Q4 and likely launches of a couple of Cephalosporins in Q1 FY08E.

Sales of anti-retrovirals are also proceeding as per expectation and are on track to achieve a total of $100 million in FY07E. At current market price, the stock trades at a P/E of 13.9x its FY08E earnings.

Bhel
Research: Angel Broking
Rating: Neutral
CMP: Rs 2,509 (Face Value Rs 10)
12-Month Price Target: NA

Bhel reported net sales of Rs 4,339.7 crore in Q3 FY07 (Rs 3,326.7 crore). This was on account of 28.6% and 33.2% Y-o-Y growth recorded by the power and industry segments, respectively. For the nine months ended December ’06, the company posted 33.8% Y-o-Y growth to Rs 10,317.8 crore.

The company’s order book till December ’06 has risen 38.2% Y-o-Y to Rs 46,700 crore. It has announced an investment of Rs 3,200 crore for expansion of brownfield capacity and modernisation of existing facilities. It will further expand its annual equipment manufacturing capacity to 15,000 mw.

Bhel is an ultimate power play. The government’s initiative of ‘Power for all by 2012’, APDRP and rural electrification programmes augur well for Bhel’s future growth. But competition from foreign companies and timely execution of projects pose a threat to growth.

Given the company’s track record, as well as its technological tieup with global power majors like Alstom and Siemens, Bhel may be able to counter these risks. At the current market price, the stock trades at 21.6x and 19.2x its FY08E and FY09E EPS. Though the valuation looks stretched, considering the sustained earnings momentum for the next few quarters, Angel Broking is neutral on the stock.

Bihar Tubes
Research: Religare Securities
Rating: Buy
CMP: Rs 116 (Face Value Rs 10)
6-Month Price Target: Rs 190

Bihar Tubes is a leading manufacturer of galvanised steel tubes, structural pipes, black pipes and pre-galvanised pipes. The company operates in a steel tubes industry which is likely to grow 30-35% in the coming years due to the government’s thrust on infrastructure development.

The company has been looking to cash in on this opportunity and is expanding its production facilities to a significant extent. Bihar Tubes has been making structural shifts in the production of pipes and is diversifying into specialty pipes manufacturing.

The company has already increased its production capacity and its fourth tube mill will be operational in the last quarter of FY07. Also, with the rise in demand for steel tubes, it is likely to post operating profits of Rs 11.5 crore and Rs 19 crore in FY07 and FY08, respectively.

The structural shift in products by entering into specialty products will allow the company to increase its operating profit margins to 5% in the coming years.

Due to increase in sales and margins, the company will be able to increase its PAT margins to 2.7% and 2.4% in FY07 and FY08, respectively. It is currently trading at P/E multiples of 6x and 8x of its FY07 and FY08 earnings. Hence, the stock is a good pick with a price target of Rs 190 with a time period of six months.

ITC
Research: SSKI
Rating: Outperformer
CMP: Rs 176 (Face Value Rs 1)
12-Month Price Target: NA

ITC continues to traverse a high growth trajectory, with Q3 FY07 revenues growing 24% to Rs 3,170 crore. EBITDA margins have remained stable at 34.2%. Adjusted PAT has increased by 23% to Rs 720 crore. The cigarettes business reported 13.8% growth during the quarter (fifth consecutive quarter of double-digit growth and over 7-8% volume growth).

ITC’s stock has underperformed the Sensex by 22% over the past three months, mainly due to the fear of bringing cigarettes under VAT net. While levying of VAT on cigarettes looks more probable this year (during the state budgets in April), there is lack of clarity over the rate (between 4% and 12.5%) and assessable value (MRP or net of excise).

While this will continue to drag stock performance in the near term, sustained volume growth of 7-8% in the cigarettes business indicates the strong traction and ability to take price hikes. SSKI believes that 7-8% of sustainable volume growth in the cigarettes business can potentially redefine the growth traction for ITC.

The company continues to scale each of its noncigarettes portfolio – this includes portfolio expansion in foods, hotel room addition through organic, as well as inorganic route, and capacity augmentation in the paper business.

Tata Steel
Research: JM Morgan Stanley
Rating: Overweight
CMP: Rs 463 (Face Value Rs 10)
12-Month Price Target: Rs 564

JM Morgan Stanley is cutting its target price to Rs 564 to reflect the post-Corus acquisition scenario, but is maintaining the overweight stance.

This implies about 21.5% upside potential for the stock. While the Corus acquisition can be a good long-term strategy for Tata Steel, the transaction valuation leaves little margin for error and poses risk.

Tata Steel is one of the fastest growing steel companies globally, with a strong geographical mix. Tata Steel has won the auction for Corus at an enterprise value of $12.9 billion (cash outflow $11.3 billion). At EV/EBITDA of more than 8x CY06E on consensus estimates and replacement value of $679/tonne, the valuation for the deal looks stretched.

However, if steel prices hold strong and Tata Steel can begin slab supply by early CY2010, the company could gain in the long term. Having acquired Corus, Tata Steel need not look outward for growth; instead, it can focus on integrating Corus and implementing its greenfield projects in India.

Tata Steel’s stock has underperformed its domestic peers by 46.1-71.6% since the first news of this transaction. This implies a $3.2-5. billion range for Tata Steel’s market capitalisation.

The net profit valuation analysis of the likely cost synergies indicates that Tata Steel shareholders are hit to the tune of $1.4 billion. JM Morgan concludes the stock has been penalised more than it deserved to be as a result of this deal.

Stocks you can pick up this week

Bajaj Auto
Research: Angel Broking
Ratings: Hold
CMP: Rs 2,730 (Face Value Rs 10)
12-Month Price Target: Rs 3,000

After an improved market share in price and premium segment, BAL is now targeting executive segment, which contributes almost 55% of the total motorcycle volume in the industry.

It is planning to launch a new line of aggressively priced bikes between 50 cc and 150 cc segments, which will offer higher performance and better looks in an attempt to pull the customer away from Hero Honda’s highly popular ‘Splendor’ and ‘Passion’.

BAL gained strong market share in FY06 and nine months of FY07, which was largely driven by its entry segment CT100, newly launched Patina in April ’06 and premium bike ‘Pulsar’. If BAL succeeds in gaining market share in the executive segment, then it will be a big gain in terms of volume for the company.

Based on the SOTP valuation of Bajaj Auto, the target on FY08E basis works out to Rs 3,200. Angel Broking maintains a hold on the stock and advises investors to enter the stock at lower levels with a long-term perspective.

Automotive Axles
Research: ASK Raymond James
Ratings: Buy
CMP: Rs 614 (Face Value Rs 10)
12-Month Price Target: Rs 730

Automotive Axles’ (AAL) Q1 FY07 results were in line with expectations. Revenues witnessed a growth of 44% to Rs 145 crore against the expectation of Rs130 crore. Rise in raw materials cost by 10% QoQ (raw materials to sales increased by 380 bps YoY) led to margin pressure of 80 bps YoY to 17.3%.

Reported PAT witnessed a growth of 39% to Rs 13.6 crore, which includes an exchange income of Rs 1.33 crore. When adjusted it leads to a PAT of Rs 12.3 crore (in line with our estimated figure of Rs 12.3 crore).

The company will manage to increase its margins and maintain the same at 18% as it will be able to pass on the raw material hikes to its customers in the next quarter. Also, the company’s axle sales to military vehicles, which reduced around 90% (high margin sales) due to postponement of orders from the customer side, is expected to flow from Q2 FY07E.

Moreover, with fresh export orders expected from Arvin Meritor, the company will achieve Rs 80 crore by FY07E and Rs 120 crore by FY08E. On the back of higher capacity expansion and higher export growth prospects, ASK Raymond upgrade the earnings from Rs 37.2 to Rs 40.8 for FY07E and from Rs 46.2 to Rs 52.9 for FY08E respectively.
HDFC Bank
Research: Enam Securities
Ratings: Underperformer
CMP: Rs 1,066 (Face Value Rs 10)
12-Month Price Target: Rs 944

HDFC Bank’s Q3FY07 results were largely in line with expectations, with stable margins and moderate asset growth. Net profit rose 32% YoY, driven by 38.5% growth in NII. Balance sheet growth moderated to 33% YoY levels with both deposit and credit growth moderating to 33% and 30% respectively.

Current account and saving account (CASA) bounced back to 55% after falling to 52% in Q2 FY07, which has been a function of moderation in deposit growth to 30%, coupled with improvement in current account proportion from 24% in Q2 to 26% in Q307.

It is noteworthy here that the bank added 48 branches in a very short span during the quarter, after being deprived of new branch licenses for a year. Enam believes that the bank’s net interest margin (NIM) will likely sustain, as CASA is likely to remain high.

While asset growth has moderated, it will pick up going forward, given the new branches being added. While the fundamentals remain intact, Enam believes that valuations at 4.2x FY08E BV offer limited upside from a one-year perspective.

Great Offshore
Research: BRICS PCG
Ratings: Buy
CMP: Rs 746 (Face Value Rs 10)
12-Month Price Target: Rs 900

Outfitted with a fleet of 37 vessels, Great Offshore is the country’s largest private operator of support vessels and harbour tugs. Great Offshore’s fleet comprises two exploratory drilling rigs, 23 offshore support vessels (OSV), 11 tugs and a barge.

The company aims to become a composite service provider in the offshore drilling, offshore oilfield support, marine construction and port terminal service segments. A large portion of the company’s income comes from its Indian operations, though it has expanded its reach to other countries as well.

It has set up representative offices in Dubai and Malaysia and is now providing services in markets like the Middle East, North Sea and South Africa. The average one-year forward P/E for global peers is estimated at 10x.

BRICS has assigned a 30% premium to the company’s offshore division due to its significantly higher revenue visibility vis-à-vis global peers. Applying the P/E multiple of 13 to FY08E EPS of Rs 48, BRICS has arrived at a fair value of Rs 623 for the offshore division.

Great Offshore will take delivery of a jack-up rig in Q3 FY09, the full benefit of which will arise in FY10. Therefore, drilling division is valued based on FY10 earnings and rolled this back to arrive at an FY08 target of Rs 277.

TTK Prestige
Research: Emkay
Ratings: Buy
CMP: Rs 137 (Face Value Rs 10)
12-Month Price Target: Rs 201

TTK Prestige is making aggressive efforts to become a total kitchen solution provider by outsourcing products requirement from other players. Also, with cost-cutting and operating efficiency measures, Emkay expects it to post a strong set of financials in the next two years.

The company posted a topline growth of 25% during the past two years and the management is confident of revenue growth of 30% over the next 2-3 years. Emkay expects it to post a 27% CAGR in terms of its revenue over the period of FY06-FY08E and 57% EPS CAGR during the same period. RoCE and RoE are expected to be 16% and 23 % for FY08E, respectively.

Kirloskar Oil Engine
Research: Edelweiss
Ratings: Buy
CMP: Rs 268(Face Value Rs 2)
12-Month Price Target: NA

Koel’s Q3FY07 results were in line with expectations in terms of sales growth and below expectations in terms of profitability. Net revenues grew by ~37% YoY to ~Rs 450 crore, driven by growth in the engine business. Engines and auto component segments grew by ~43% and ~18% YoY, respectively.

Engines formed ~83% of sales in Q3 FY07 compared with ~77% in Q3FY06. The business mix has been changing in favour of the engine segment, driven by robust demand for generators and diesel engines. Post Q3 FY07 results, Edelweiss continues to remain positive on the company as an infrastructure and agriculture sector play

Stocks you can pick this week

Hindustan Zinc
CMP: Rs 806.50
Target price: Rs 1,160

Macquarie Securities has retained its ‘outperform’ rating on Hindustan Zinc with a 12-month price target of Rs 1,160 following the company’s strong third-quarter numbers. “Given the bullish view on zinc prices in FY08 and expected 50% volume growth in FY09, we estimate sustained high profitability.

We expect earnings upgrades to drive the stock price,” the Macquarie note to clients said. “HZL — with one of the best mining assets, and huge possibility to add more reserves — is trading below its NPV (net present value) of Rs 804 and is one of the cheapest on this basis among its global peers,” the note added.

Reliance Industries
CMP: Rs 1,340.10
Target price: Rs 1,660

Goldman Sachs has upgraded its rating on Reliance Industries to ‘buy’ from ‘neutral’, saying the company’s new exploration and production (E&P) and organised retail ventures are of materially higher value than the market is currently factoring in.

“In our view, the current price factors in the company’s estimated total capex of $8 billion for these new ventures till FY2010E, but is not giving full value to the potential upside this expansionary capex could bring to the stock,” the Goldman note to clients said.

HCC
CMP: Rs 159.75
Target price: Rs 198

HSBC Securities has rated Hindustan Construction Company as ‘overweight’, with a price target of Rs 198. “Our valuation is based on sum-of-the-parts method, with the real estate business contributing 30% to total value,” the HSBC note to clients said.
“HCC is in a sweet spot, with the core construction business on a growth trajectory, driven by infrastructure investments.

To add to this, its foray into real estate would provide added value to the overall company,” the HSBC note to clients said. “

We expect HCC’s core earnings to record a CAGR of 41% over FY06-08(estimated), driven by 27% revenue CAGR (compounded annual growth rate) over the same period, and stable margin,” the note added.

Reliance Comm
CMP: Rs 433.75
Target price: Rs 508

JM Morgan Stanley Securities has raised its target price for Reliance Communications to Rs 508 from Rs 435, citing higher net subscriber additions, average realisations per unit, and higher data revenue. Between FY06-09, the brokerage expects the company’s operating profit to rise 69.3% 157.5%, respectively per year. Morgan Stanley is bullish on the telecommunications sector as a whole.

“Indian wireless penetration has risen 81% last year and is only 13% so far, versus China at 34%. Stable regulation, innovative products, increased capex by operators and falling equipment prices are key growth drivers,” the Morgan Stanley note to clients said.

Stocks you can pick up this week

Reliance Industries
Research:Enam Broking
Rating: Outperformer
CMP: Rs 1,254 (Face Value Rs 10)
12-Month Price Target: Rs 1,500

Reliance Industries’ revised field development plan for KGD-6 asset reasserts that its E&P business remains grossly undervalued. The FDP submitted factors in cumulative production of 11 TCF gas over 14.5 years (or a recovery rate of 22% over a 3 P reserves + resource base of 50 TCF).

As the consortium (RIL and Niko) intends to scale up gas-handling infrastructure capacity by almost 50% (to 120 mmscmd), it will lead to a significant increase in gas production. Netting of the ‘best case’ E&P valuations and investment portfolio from the current valuations translates into a payback of ~3.5 years for RIL’s core operations.

Niko expects production from MA-1 field to begin by ’08. A plateau production rate of 60 kbpd for 20 years could translate into 2 P reserves of ~1.4 billion bbl. Thus, the enterprise value of the oil field could be estimated at $7.5bn (or Rs 245/share), based on ONGC’s EV/BoE multiple.

At current valuations, assuming the ‘best case’ valuation scenario of E&P portfolio and market value of investment portfolio, RIL effectively trades at 3.5x FY07E EV/EBIDTA. This translates into a payback of ~3.5 years for the refining and petrochem assets, which are delivering value.

Gujarat Ambuja Cements
Research:CLSA
Rating: Buy
CMP: Rs 140 (Face Value Rs 2)
12-Month Price Target: Rs 142

Gujarat Ambuja plans to increase its capacity from 16 million mt currently to 21.5 million mt by December ’08 through a combination of greenfield expansions and blending of fly ash across seven locations. Increase in the ash content will account for 25% of capacity expansion.

Since conclusion of the monsoon, cement prices have moved up by Rs 6- 8 per bag (3-4%) at the retail level and the news flow on this front will remain positive. Holcim has recently bought the stock from the market at about Rs 139 per share.

As per a recent press interview with one of Holcim's directors, there are indications that the company may buy more stock. Gujarat Ambuja is the only large-cap cement stock without FII limit and remains one of CLSA's favourite picks in the sector.

IL&FS Investsmart
Research: Citigroup
Rating: Sell
CMP: Rs 207(Face Value Rs 10)
12-Month Price Target: Rs 161

The regulatory ban on opening new depository accounts has been lifted, but it has hit Investsmart hard. Management changes and transition to E*Trade suggests that the core businesses may remain in flux over the near term.

A fall in earnings reflects lower market volumes and market share, a shrunk margin book and slower investment banking. The worst is probably over, but the company does not appear positioned to benefit from any upswing yet.

E*Trade, which has raised its stake to 38% and is offering to buy another 20%, now appears positioned as a dominant shareholder. Over the medium term, this may drive strategy, positioning and growth.

But in the immediate term, this suggests transition. Citigroup believes the fundamental value is lower than the current price; supported by the expected open offer price of Rs 210. It recommends that investors should exit at the current price or during the offer period.

Tata Consultancy Service
Research: Ask-Raymond James
Recommendation: Buy
CMP: Rs 1,156 (Face Value Rs 1)
12-Month Price Target: Rs 1,350

Tata Consultancy Services (TCS) has been on a deal-winning spree. It has closed $500-million deals in 40 days. The management had mentioned in its Q2 FY07 earnings call that the deal pipeline looked robust, with the company pursuing five contracts above $50 million and another five worth about $100 million.

TCS is also in the final stages of five contracts above $50 million. Within a fiercely competitive environment, the company seems to have emerged as a winner in the large deals space. ASK-Raymond believes that there has been a structural change in the IT industry, with a marked polarisation towards larger players.

The stock trades at 29.1 times FY07E earnings and 22.1 times FY08E earnings. ASK-Raymond is revising its target price upwards to Rs 1,350 (25x FY08E earnings), from its earlier target price of Rs 1,240 (24x FY08E earnings).

Bombay Dyeing
Research: Motilal Oswal
Recommendation: Buy
CMP: Rs 725 (Face Value Rs 10)
12-Month Price Target: Rs 850

Motilal Oswal is upgrading price target for Bombay Dyeing to Rs 850, based on positive developments with respect to unlocking of hidden value from its two plants at Dadar and Lower Parel, Mumbai. There has been a significant increase in expected value accretion in its real estate at Dadar and Lower Parel.

Substantial changes in planned development have allowed the company to increase its developable area from 3.7 million sq ft at both its plants to 4.3 million sq ft — an increase of 16%.

Bombay Contrary to its earlier plans of selling a majority of its developable area outright, the company now plans to sell only 0.4 million sq ft at Dadar, while commercially leasing the remaining 3.9 million sq ft. This will be more value-accretive for the company.

Based on the SOTP valuations, Motilal Oswal arrives at the target price of Rs 850 per share, valuing the real estate rental business at Rs 615 per share, PV from sale of the Dadar property at Rs 101 share and its traditional businesses at Rs 134 per share.

Nucleus Software
Research: Sharekhan
Recommendation: Buy
CMP: Rs 558 (Face Value Rs 10)
12-Month Price Target: Rs 680

Nucleus Software Exports is a niche player offering software products to companies in banking and financial service. It has established itself globally with a product installation base of over 250 application modules in more than 30 countries.

The product business grew exponentially in FY06. It added 21 new clients and bagged orders for 38 new installations in FY06. In H1 FY07, it added 14 new clients; its order book stood at Rs 135 crore as on September ’06. Product revenues may grow at a CAGR of 67% over FY06-08.

Alliances with global technology giants could result in higher-than-expected order bookings. At the current price, the stock trades at 11x its FY08 earnings, which is relatively cheaper than its peers.