Everest Kanto Cylinder
RESEARCH: Citigroup
RATING: Buy
CMP: RS 187
Citigroup retains its positive fundamental bias and `Buy’ rating on Everest Kanto Cylinder (EKC) for investors looking at key long-term beneficiaries of the gas theme in India. However, it reduces the target price to Rs 175. EKC’s Q4 PAT of Rs 27.8 crore was flat y-o-y and well below estimates.
The slowdown in demand from OEMs, though cyclical in nature, has taken its toll on revenues and margins. With Q4 weakness likely to spill over into the next couple of quarters, combined with delays in the jumbo (1Q), billet (2Q), and Kandla (3Q) plants, Citigroup cuts the FY10-11 E earnings by 33-35 %.
While these issues may constrain near-term stock performance, the cycle should correct in H2 as economic activity improves and domestic demand from gas distribution companies picks up. Q4 EBITDA margin of 21% was down from 34% in 9M due to: (i) higher proportion of industrial sales (45% in 9M versus 62% in Q4) as CNG sales to OEMs were impacted and (ii) price cuts on CNG cylinders due to rising competition despite RM (raw material) costs not declining.
Blue Star
RESEARCH: Standard Chartered
RATING: Sell
CMP: RS 273
Standard Chartered maintains `Sell’ rating on Blue Star, however, it raises the target price to Rs 135. During the quarter, Blue Star’s order inflows witnessed the steepest fall in seven quarters and reached a low of Rs 226 crore.
For FY09, order inflows were flat at Rs 2,601 crore. StanChart estimates order inflows during FY10 to fall 46% y-o-y to Rs 1,395.9 crore. StanChart revises the revenue estimate for FY10 onwards on the back of higher-than-estimated revenue during FY09. However, it continues with its earlier EBITDA margin estimates. There is a marginal increase in estimated EPS for FY10 to Rs 13 from Rs 12.5 on the back of a higher revenue estimate.
Godrej Consumer
RESEARCH: Merrill Lynch
RATING: Buy
CMP: RS 161
Merrill Lynch retains the `Buy’ rating on Godrej Consumer with a revised price target of Rs 175. It estimates EPS growth of 37% in FY10 to Rs 9.2 and 12% in FY11 to Rs 10.3 driven by modest sales growth and sharp margin expansion due to lower input costs. An expected dividend yield of 4% in FY10 further improves risk/reward balance.
Double-digit volume growth is to be sustained, driven by strong rural demand where Godrej is expanding its reach with appropriate price points. However, risk of increased competitive activity from HUL is to revive its sagging soaps market share. This could force price cuts or higher ad spends from Godrej. But lower input costs should still support strong margin expansion.
Maruti Suzuki
RESEARCH: Morgan Stanley
RATING: Overweight
CMP: RS 960
On the back of an improving outlook for the macro environment and earnings for auto financing, Morgan Stanley raises the domestic market volume growth estimates for Maruti from 7% in FY10 to 11%. It raises its FY2010-11 earnings estimates by 10% and 9%, respectively.
The Rs 980 price target is based on the weighted average of scenario values, and implies 16% upside potential. A premium of 8% to the index, as implied by the price target , is justified. Even on an absolute basis, the stock does not look expensive and trades at 13.5x one-year forward earnings, a 4-5 % discount to the historical average.
Given its pan India presence and strong brand loyalty, Maruti has benefited from strong demand from the semi-urban segment, and over the last four months, it has gained 290-bps share in the domestic car category. The company has launched a new hatchback, Ritz, with both petrol and diesel options. Given better fuel efficiency and competitive pricing , Ritz will consolidate
United Breweries
RESEARCH: Indiabulls Securities
RATING: Sell
CMP: RS 124
Indiabulls Securities maintains `Sell’ rating on United Breweries (UBL) by revising the target price to Rs. 78 from Rs. 70. UBL’s Q409 net sales grew 20.9% y-o-y , above the expectation, to Rs. 460 crore primarily on the back of improved market share. Besides, EBITDA margin improved by 526 bps y-o-y to 18.6% in Q409.
The improvement was largely due to a fall in employee cost and advertisement cost as percentage of sales. Considering the improved operating performance, Indiabulls has revised revenue growth, margin estimates and target price. However, due to high leverage levels and expensive valuation, it maintains `Sell’ rating. The stock appears expensive at the current market price considering UBL’s low RoE (return on equity) of 12% with a current P/E of 54x when compared to FMCG companies, which command RoE of 60-65 % and trade at relatively lower P/E of 20-22 x.
Moreover, UBL’s free cash flow per share is likely to remain low at Rs. 1.8 in FY10 on account of heavy capex plans, which represents a tiny FCF (free cash flow) yield of 1.5%.
Larsen & Toubro
RESEARCH: Goldman Sachs
RATING: Neutral
CMP: RS 1301
Goldman Sachs initiates coverage on Larsen & Toubro with a `Neutral’ rating and the 12-month target price of Rs 1,327 implies a potential upside of 4% from current levels. L&T is India’s largest engineering and construction (E&C ) firm with an exposure to core manufacturing and infrastructure sectors . The company’s growth has a high leverage to the rollout of around $500-billion infrastructure spend planned over the Eleventh Five Year Plan.
The recent tough credit environment and slowdown in demand have affected order inflows, especially in the metals and oil and gas segments over the previous two quarters. However, strong inflows in the power and infrastructure segments are offsetting this weakness. The 12-month target price of Rs 1,327 is based on a 1-year forward target P/B (price to book) multiple of 4.1x for L&T’s standalone business, which is the mean P/B multiple over the past five years.
Thermax
RESEARCH: Edelweiss
RATING: Accumulate
CMP: RS 372
Edelweiss maintains ‘Accumulate’ recommendation on Thermax. The company’s Q4FY09 results were significantly above expectations, both on revenue growth and profitability fronts. For the quarter, standalone revenues grew 2.8% y-o-y to Rs 950 crore, driven by higher-than-expected growth in the energy segment.
For the quarter, standalone PAT grew 17.1% y-o-y to Rs 94.3 crore. While depreciation expenses increased 64.5% y-o-y to Rs 10 crore, effective tax rate was lower by ~1,000 bps y-oy at 30.3%. Edelweiss revises up its estimates for FY10 and FY11 for the company on the back of an increase in order accretion assumptions for FY10. In spite of the upward revision, we are still projecting a 7% y-o-y decline in order accretion in FY10. Subsidiaries contributed Rs 0.25 to consolidated EPS in FY09. If Thermax bags a few orders in the utility segment in FY10, its order backlog at FY10-end could be higher than expectations.
Maruti’s position in the high realisation diesel segment .
RESEARCH: Citigroup
RATING: Buy
CMP: RS 187
Citigroup retains its positive fundamental bias and `Buy’ rating on Everest Kanto Cylinder (EKC) for investors looking at key long-term beneficiaries of the gas theme in India. However, it reduces the target price to Rs 175. EKC’s Q4 PAT of Rs 27.8 crore was flat y-o-y and well below estimates.
The slowdown in demand from OEMs, though cyclical in nature, has taken its toll on revenues and margins. With Q4 weakness likely to spill over into the next couple of quarters, combined with delays in the jumbo (1Q), billet (2Q), and Kandla (3Q) plants, Citigroup cuts the FY10-11 E earnings by 33-35 %.
While these issues may constrain near-term stock performance, the cycle should correct in H2 as economic activity improves and domestic demand from gas distribution companies picks up. Q4 EBITDA margin of 21% was down from 34% in 9M due to: (i) higher proportion of industrial sales (45% in 9M versus 62% in Q4) as CNG sales to OEMs were impacted and (ii) price cuts on CNG cylinders due to rising competition despite RM (raw material) costs not declining.
Blue Star
RESEARCH: Standard Chartered
RATING: Sell
CMP: RS 273
Standard Chartered maintains `Sell’ rating on Blue Star, however, it raises the target price to Rs 135. During the quarter, Blue Star’s order inflows witnessed the steepest fall in seven quarters and reached a low of Rs 226 crore.
For FY09, order inflows were flat at Rs 2,601 crore. StanChart estimates order inflows during FY10 to fall 46% y-o-y to Rs 1,395.9 crore. StanChart revises the revenue estimate for FY10 onwards on the back of higher-than-estimated revenue during FY09. However, it continues with its earlier EBITDA margin estimates. There is a marginal increase in estimated EPS for FY10 to Rs 13 from Rs 12.5 on the back of a higher revenue estimate.
Godrej Consumer
RESEARCH: Merrill Lynch
RATING: Buy
CMP: RS 161
Merrill Lynch retains the `Buy’ rating on Godrej Consumer with a revised price target of Rs 175. It estimates EPS growth of 37% in FY10 to Rs 9.2 and 12% in FY11 to Rs 10.3 driven by modest sales growth and sharp margin expansion due to lower input costs. An expected dividend yield of 4% in FY10 further improves risk/reward balance.
Double-digit volume growth is to be sustained, driven by strong rural demand where Godrej is expanding its reach with appropriate price points. However, risk of increased competitive activity from HUL is to revive its sagging soaps market share. This could force price cuts or higher ad spends from Godrej. But lower input costs should still support strong margin expansion.
Maruti Suzuki
RESEARCH: Morgan Stanley
RATING: Overweight
CMP: RS 960
On the back of an improving outlook for the macro environment and earnings for auto financing, Morgan Stanley raises the domestic market volume growth estimates for Maruti from 7% in FY10 to 11%. It raises its FY2010-11 earnings estimates by 10% and 9%, respectively.
The Rs 980 price target is based on the weighted average of scenario values, and implies 16% upside potential. A premium of 8% to the index, as implied by the price target , is justified. Even on an absolute basis, the stock does not look expensive and trades at 13.5x one-year forward earnings, a 4-5 % discount to the historical average.
Given its pan India presence and strong brand loyalty, Maruti has benefited from strong demand from the semi-urban segment, and over the last four months, it has gained 290-bps share in the domestic car category. The company has launched a new hatchback, Ritz, with both petrol and diesel options. Given better fuel efficiency and competitive pricing , Ritz will consolidate
United Breweries
RESEARCH: Indiabulls Securities
RATING: Sell
CMP: RS 124
Indiabulls Securities maintains `Sell’ rating on United Breweries (UBL) by revising the target price to Rs. 78 from Rs. 70. UBL’s Q409 net sales grew 20.9% y-o-y , above the expectation, to Rs. 460 crore primarily on the back of improved market share. Besides, EBITDA margin improved by 526 bps y-o-y to 18.6% in Q409.
The improvement was largely due to a fall in employee cost and advertisement cost as percentage of sales. Considering the improved operating performance, Indiabulls has revised revenue growth, margin estimates and target price. However, due to high leverage levels and expensive valuation, it maintains `Sell’ rating. The stock appears expensive at the current market price considering UBL’s low RoE (return on equity) of 12% with a current P/E of 54x when compared to FMCG companies, which command RoE of 60-65 % and trade at relatively lower P/E of 20-22 x.
Moreover, UBL’s free cash flow per share is likely to remain low at Rs. 1.8 in FY10 on account of heavy capex plans, which represents a tiny FCF (free cash flow) yield of 1.5%.
Larsen & Toubro
RESEARCH: Goldman Sachs
RATING: Neutral
CMP: RS 1301
Goldman Sachs initiates coverage on Larsen & Toubro with a `Neutral’ rating and the 12-month target price of Rs 1,327 implies a potential upside of 4% from current levels. L&T is India’s largest engineering and construction (E&C ) firm with an exposure to core manufacturing and infrastructure sectors . The company’s growth has a high leverage to the rollout of around $500-billion infrastructure spend planned over the Eleventh Five Year Plan.
The recent tough credit environment and slowdown in demand have affected order inflows, especially in the metals and oil and gas segments over the previous two quarters. However, strong inflows in the power and infrastructure segments are offsetting this weakness. The 12-month target price of Rs 1,327 is based on a 1-year forward target P/B (price to book) multiple of 4.1x for L&T’s standalone business, which is the mean P/B multiple over the past five years.
Thermax
RESEARCH: Edelweiss
RATING: Accumulate
CMP: RS 372
Edelweiss maintains ‘Accumulate’ recommendation on Thermax. The company’s Q4FY09 results were significantly above expectations, both on revenue growth and profitability fronts. For the quarter, standalone revenues grew 2.8% y-o-y to Rs 950 crore, driven by higher-than-expected growth in the energy segment.
For the quarter, standalone PAT grew 17.1% y-o-y to Rs 94.3 crore. While depreciation expenses increased 64.5% y-o-y to Rs 10 crore, effective tax rate was lower by ~1,000 bps y-oy at 30.3%. Edelweiss revises up its estimates for FY10 and FY11 for the company on the back of an increase in order accretion assumptions for FY10. In spite of the upward revision, we are still projecting a 7% y-o-y decline in order accretion in FY10. Subsidiaries contributed Rs 0.25 to consolidated EPS in FY09. If Thermax bags a few orders in the utility segment in FY10, its order backlog at FY10-end could be higher than expectations.
Maruti’s position in the high realisation diesel segment .
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