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Monday, March 26, 2007
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.
Research Calls
SAIL
| KR Choksey Research recommends a �buy� on Steel Authority of India (SAIL) at a price of Rs 103, as it expects that rise in prices of steel internationally will lead to improved realisations for the company. |
| Globally, steel prices have risen about 7-8 per cent over the last couple of months and are expected to remain strong following healthy demand in Asia, Europe and the US. |
| SAIL is the largest integrated steel company in India, with a hot metal production of about 15 million ton and a market share of 25 per cent. It operates four integrated steel plants and three special steel plants in the country. |
| Further, it also has its own captive iron ore, dolomite and limestone miles. It now plans to increase its hot metal production capacity from the existing 14.6 million ton to 23 million ton a year by 2012. |
| In addition, to meet the increased power requirement due to augmented capacity, it plans to set up two power plants of 500 mw each in two separate joint ventures with NTPC at Bhilai and with Damodar Valley in Jharkhand. At the price of Rs 103, the stock is valued at about 8 times its trailing twelve month earnings. |
| Shasun Chemicals |
| Angel Broking recommends a �buy� on Shasun Chemicals at a price of Rs 101, with an 18-month target of Rs 145. Shasun Chemicals is a generic drug-maker with a small foray in active pharmaceutical ingredients (APIs) and plans to enter the formulations exports, especially in regulated markets of Europe and the US. |
| The company has forged an alliance to market 22 products of Glenmark Pharmaceuticals and Alpharma, and expects a United States Food and Drug Administration (USFDA) approval of its facilities in order to launch its products by the first half of FY08. |
| In FY07, the company acquired assets of Rhodia�s custom synthesis business along with some proprietary technologies. The assets included USFDA and Medicines and Healthcare Regulatory Agency, UK (MHRA) approved contract manufacturing and custom synthesis manufacturing units, and technologies like hydrolytic kinetic resolution (HKR), aromatic bond formation (ABF) and trifluoro methylation. |
| This business clocks sales of �40 million (approximately Rs 343 crore) and has a pipeline of around 14 products in advanced stages of clinical trials and about 20 products in the preclinical phase. |
| The company is expected to grow at a compound rate of 45.1 per cent and 24.3 per cent in sales and net profit over FY06-FY09. At Rs 101, the stock is valued at 8.8 times and 7 times its expected FY08 and FY09 earnings respectively. |
| KPIT Cummins Infosystems Emkay Private Client Research recommends a hold on KPIT Cummins Infosystems at a price of Rs 114 with a target price of Rs 144. |
| Despite the negative impact of the appreciating rupee and lower billing days, EBITDA (earnings before interest, tax and depreciation) margin for the quarter has marginally declined by 30 basis points to 15.2 per cent. |
| On the other hand, lower effective tax rate of 3.2 per cent, on accounts of deferred tax assets, resulted a 10 per cent growth in the net profit to Rs 137.23 million. |
| Overall the December quarter proved to be quite a mixed bag. In revenue terms there was decent growth, however rupee appreciation and lower number of billing hours dampened the growth in the rupee term. |
| However a strong positive has been the company's ability to maintain its margins. Going forward strong medium term growth drivers are discerned from the strong ramp up in the non-Cummins Star customers accounts and improved performance from the acquired companies. |
| Emkay expects KPIT Cummins revenue and profit to grow at a CAGR of 37 per cent and 46 per cent to Rs 4,682 million and Rs 6006 million and Rs 535 million and Rs 698 million respectively. |
| KPIT Cummins trades at a P/E of 14.6 times estimated FY08 earnings. Adjusted for the recently concluded bonus issue and stock split, at the target price of Rs 144, the stock is valued at 15.5 times for estimated FY08 earnings. |
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Deutsche Bank pays $1 bn for 5% in Emaar-MGF
Firm is gearing up to float an IPO and has now raised its targetted mop-up to Rs 25K cr.
New Delhi-based real estate company Emaar-MGF, which is gearing up to float an initial public offering, has sold under 5 per cent of its equity for $1 billion (Rs 4,500 crore) to Deutsche Bank, which has the right to buy more.
With the Deutsche money in its kitty, Emaar-MGF is raising the estimated mop-up from its IPO from Rs 13,000 crore to Rs 25,000 crore, said a top executive of the company. As per the earlier plan, the IPO was to dilute 10 per cent of its post-issue capital. This has trebled to 30 per cent in the new plan.
So far, the IPO of another Delhi-based company DLF, which has been waiting for Securities & Exchange Board of India’s approval, was billed as the largest in India’s capital market history. It was intended to raise about Rs 13,000 crore. The biggest IPO to have hit the market so far was that of Reliance Petroleum, which raised Rs 8,000 crore last year.
When contacted, the Emaar-MGF spokesperson declined to comment.
Last year, the company had brought in Rs 4,500 crore as foreign direct investment. It already has an investment kitty of about Rs 18,000 crore.
The company has also put in place a new organisational structure under which the group’s head of strategy, Dinesh Jain, will head the special economic zones initiative. The retail business will be overseen jointly by Susil Dungarwal, group vice-chairman, and Shravan Gupta, the managing director.
Gupta will look after the north Indian side of the business, with Dungarwal taking care of west and south. The township business will be headed by Gupta’s younger brother Siddharth, while Sanjay Malhotra will head the commercial realty business.
The hotels and leisure businesses will be headed by Sanjay Rai. The company is looking for someone to head its retail business in the east as well as two other persons to take charge of its education and hospital businesses.
The company is still in the process of acquiring land around metros, while it has bought land in around 30 second and third tier towns and cities. It has acquired 12,000 acres of land, which could be valued at Rs 36,000 crore.
It is working on a strategy on building a large land bank over the next 18 -24 months and developing it in a phased manner as satellite townships in and around tier 2 and tier 3 cities to accommodate its planned business streams, SEZs, hospitals, education, retail (both malls and retail), hospitality and leisure, townships and commercial real estate. Each of these businesses will operate as a separate profit centre, to be headed by a senior executive.
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