RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 121 Citigroup maintains ‘Sell’ rating on Omaxe with a target price of Rs. 68. Omaxe’s debt to equity ratio remains high at 1.13x with gross debt amounting to Rs 1,700 crore, of which Rs 99 crore is payable to Indiabulls Financial. The company is working on restructuring substantial portion of its debt.
Average interest cost is down to 14%; however, Citigroup sees high debt levels adversely impacting earnings, with overall profitability under pressure. Omaxe’s over-dependence on North India raises risks of a pre-sales slowdown with sluggish demand environment and tight liquidity conditions resulting in significant execution delays. With a move in the right direction, response to these projects will be crucial.
Factoring in easing liquidity, lower cost of capital of 14% and roll-forward to March-10 E, Citigroup has raised the target price to Rs 68 on a lower discount of 35%. It believes the company’s fundamentals are still weak, with the stock up 71% over the last one month.
HPCL
RESEARCH: MERRILL LYNCH
RATING: UNDERPERFORM
CMP : RS 350 HPCL’s share price is up 40% since the election results on 16 May on hopes that auto fuel pricing may be freed up. Even as investors turn bullish , the FY10E earnings outlook has deteriorated. Auto fuel marketing margins were at supernormal levels until March ‘09, but have collapsed and turned negative. Even if auto fuel prices are freed up, only a normal auto fuel margin is likely in FY10E. HPCL’s new target price of Rs 291, based on base-case FY10E EPS, implies 19% potential downside. Thus, Merrill Lynch downgrades HPCL from `Buy’ to `Underperform’ .
It has already assumed weak refining margins and significant LPG and kerosene subsidies in FY10E and was earlier assuming a supernormal auto fuel margin of Rs 2/l (US$7/bbl) in FY10E. A lower auto fuel margin would have meant an EPS of just Rs1.3.
Assuming Rs 1360 crore of oil bonds, limits our FY10E EPS cut to 20% to Rs29. Target price based on base and worst-case EPS implies 19-81 % potential downside. Target price based on best-case EPS implies 18% potential upside. However, the best-case EPS, which assumes a supernormal auto fuel margin of Rs 2/l and Brent at US$50/bbl, is improbable.
IVRCL INFRASTRUCTURE
RESEARCH: HSBC
RATING: NEUTRAL
CMP: RS 366 HSBC upgrades IVRCL Infrastructure’s rating to `Neutral’ with a target price of Rs 347. IVRCL reported sales of Rs 1,630 crore in Q4 against the expectation of Rs 1,600 crore. Net profit was Rs 79.9 crore, higher than the estimate of Rs 68.8 crore owing to falling interest costs and a lower effective tax rate. Order book reported flat growth q-o-q to Rs 14500 crore (3x FY09 sales).
While HSBC expects the company to report an about 26% top line growth, margin guidance of 9.75-10 .25% in FY10 seems stretched given its historical margin movement in its order book mix. With net debt to equity comfortable at 0.7x, IVRCL is to achieve an about 34% profit CAGR over FY09-11 .
HSBC’s expectations of a positive change in business conditions has led it to change the valuation methodology to a standalone PE approach. It values the core construction business at 15x one-year forward earnings and value subsidiaries at Rs 61 leading to a target price of Rs 347.
SOBHA DEVELOPERS
RESEARCH: DEUTSCHE BANK
RATING: SELL
CMP: RS 243 Deutsche Bank maintains `Sell’ rating on Sobha Developers with a target price of Rs. 119. As of 31 March ‘09, Sobha’s net debt is Rs 1900 crore and current market cap is Rs 1500 crore. Hence, significant equity dilution is necessary to improve its balance sheet. Unlike peers, its a laggard in raising equity and probably does not have assets that are monetisable in these liquid markets. Its major markets are yet to show demand buoyancy. While Sobha has been able to reschedule its debt and sell stake of project; its ability to raise equity at parent level has yet to bear fruit.
It has proposed to raise a Rs 1,500-crore funding compared to its net debt of Rs 1900 crore as on 31 March ‘09 and current market cap of Rs 1500 crore. Deutsche Bank maintains the major assumptions and estimates. With improving liquidity, Deutsche Bank reduces weighted average cost of capital by 100 bps to 17.5 and reduces the discount to gross asset value from 55% to 50%. It then excludes liabilities to arrive at the revised target price of Rs 90 for its real estate business. By adding Rs 29 for its other businesses, the target price results in Rs. 119.
TATA MOTORS
RESEARCH: MORGAN STANLEY
RATING: UNDERWEIGHT
CMP: RS 389 Morgan Stanley retains `Underweight’ rating on Tata Motors as the stock is trading at the high end of the valuation curve. While the improving macro environment appears to augur well for the commercial vehicle business, the balance sheet issues in terms of JLR debt repayment appear to be behind us.
Morgan Stanley believes high debt and volatile non-core business, mainly JLR, will keep overall consolidated earnings subdued. Tata Motors posted standalone operating profit of Rs 440 crore, down 442% y-o-y , but 13% above the estimates. Operating margin came in at 6.6%, up from the December ‘09 low of 1.9%, primarily because of savings on raw material costs, down 230 bps q-o-q at 73% of sales. High depreciation and interest costs drove adjusted income down to a loss of Rs 110 crore.
The depreciation charge at Rs 0.29 crore was up 63% y-o-y as the company added capacity at Pantnagar and Dharwad (15K), and interest expense came in at Rs240 crore, up 17x y-o-y . The company should report consolidated earnings including JLR by June-end . The trend in auto volumes remains weak, and in addition, all benefits from scrappage incentives elude luxury car makers like JLR.
SUN PHARMA
RESEARCH: STANDARD CHARTERED
RATING: SELL
CMP : RS 1342 Standard Chartered maintains the EPS estimate for FY10 at Rs 52.4 and reiterates `Sell’ rating on the stock with a target price of Rs 810. Sun Pharmaceuticals has reported 10% degrowth in net sales for Q4FY09 and 27% y-o-y growth in sales for FY09, which is above the estimate. The reported net profit is down 45% in Q4FY09 and increased by 22% in FY09. The company has experienced a stupendous growth of 81% in domestic formulation sales in Q4FY09 and 33% in FY09.
Growth in domestic sales is untenable and raises a possibility of inventory pile-up at distributors’ level. The US subsidiary of the company, Caraco Pharmaceutical, has reported a dismal performance both in topline and bottomline. While the company has given a guidance of 13-15 % growth in net sales for FY10, StanChart believe this is largely unachievable as there is a nonrecurring business of $120-140 million in Caraco Pharma in FY09. However, it continues to observe the performance of the domestic business following the introduction of the changed distribution policy.
A weak US dollar against currencies in the emerging markets, further USFDA action, and deterioration of macroeconomic fundamentals in global markets including India are the key risks.
RATING: SELL
CMP: RS 121 Citigroup maintains ‘Sell’ rating on Omaxe with a target price of Rs. 68. Omaxe’s debt to equity ratio remains high at 1.13x with gross debt amounting to Rs 1,700 crore, of which Rs 99 crore is payable to Indiabulls Financial. The company is working on restructuring substantial portion of its debt.
Average interest cost is down to 14%; however, Citigroup sees high debt levels adversely impacting earnings, with overall profitability under pressure. Omaxe’s over-dependence on North India raises risks of a pre-sales slowdown with sluggish demand environment and tight liquidity conditions resulting in significant execution delays. With a move in the right direction, response to these projects will be crucial.
Factoring in easing liquidity, lower cost of capital of 14% and roll-forward to March-10 E, Citigroup has raised the target price to Rs 68 on a lower discount of 35%. It believes the company’s fundamentals are still weak, with the stock up 71% over the last one month.
HPCL
RESEARCH: MERRILL LYNCH
RATING: UNDERPERFORM
CMP : RS 350 HPCL’s share price is up 40% since the election results on 16 May on hopes that auto fuel pricing may be freed up. Even as investors turn bullish , the FY10E earnings outlook has deteriorated. Auto fuel marketing margins were at supernormal levels until March ‘09, but have collapsed and turned negative. Even if auto fuel prices are freed up, only a normal auto fuel margin is likely in FY10E. HPCL’s new target price of Rs 291, based on base-case FY10E EPS, implies 19% potential downside. Thus, Merrill Lynch downgrades HPCL from `Buy’ to `Underperform’ .
It has already assumed weak refining margins and significant LPG and kerosene subsidies in FY10E and was earlier assuming a supernormal auto fuel margin of Rs 2/l (US$7/bbl) in FY10E. A lower auto fuel margin would have meant an EPS of just Rs1.3.
Assuming Rs 1360 crore of oil bonds, limits our FY10E EPS cut to 20% to Rs29. Target price based on base and worst-case EPS implies 19-81 % potential downside. Target price based on best-case EPS implies 18% potential upside. However, the best-case EPS, which assumes a supernormal auto fuel margin of Rs 2/l and Brent at US$50/bbl, is improbable.
IVRCL INFRASTRUCTURE
RESEARCH: HSBC
RATING: NEUTRAL
CMP: RS 366 HSBC upgrades IVRCL Infrastructure’s rating to `Neutral’ with a target price of Rs 347. IVRCL reported sales of Rs 1,630 crore in Q4 against the expectation of Rs 1,600 crore. Net profit was Rs 79.9 crore, higher than the estimate of Rs 68.8 crore owing to falling interest costs and a lower effective tax rate. Order book reported flat growth q-o-q to Rs 14500 crore (3x FY09 sales).
While HSBC expects the company to report an about 26% top line growth, margin guidance of 9.75-10 .25% in FY10 seems stretched given its historical margin movement in its order book mix. With net debt to equity comfortable at 0.7x, IVRCL is to achieve an about 34% profit CAGR over FY09-11 .
HSBC’s expectations of a positive change in business conditions has led it to change the valuation methodology to a standalone PE approach. It values the core construction business at 15x one-year forward earnings and value subsidiaries at Rs 61 leading to a target price of Rs 347.
SOBHA DEVELOPERS
RESEARCH: DEUTSCHE BANK
RATING: SELL
CMP: RS 243 Deutsche Bank maintains `Sell’ rating on Sobha Developers with a target price of Rs. 119. As of 31 March ‘09, Sobha’s net debt is Rs 1900 crore and current market cap is Rs 1500 crore. Hence, significant equity dilution is necessary to improve its balance sheet. Unlike peers, its a laggard in raising equity and probably does not have assets that are monetisable in these liquid markets. Its major markets are yet to show demand buoyancy. While Sobha has been able to reschedule its debt and sell stake of project; its ability to raise equity at parent level has yet to bear fruit.
It has proposed to raise a Rs 1,500-crore funding compared to its net debt of Rs 1900 crore as on 31 March ‘09 and current market cap of Rs 1500 crore. Deutsche Bank maintains the major assumptions and estimates. With improving liquidity, Deutsche Bank reduces weighted average cost of capital by 100 bps to 17.5 and reduces the discount to gross asset value from 55% to 50%. It then excludes liabilities to arrive at the revised target price of Rs 90 for its real estate business. By adding Rs 29 for its other businesses, the target price results in Rs. 119.
TATA MOTORS
RESEARCH: MORGAN STANLEY
RATING: UNDERWEIGHT
CMP: RS 389 Morgan Stanley retains `Underweight’ rating on Tata Motors as the stock is trading at the high end of the valuation curve. While the improving macro environment appears to augur well for the commercial vehicle business, the balance sheet issues in terms of JLR debt repayment appear to be behind us.
Morgan Stanley believes high debt and volatile non-core business, mainly JLR, will keep overall consolidated earnings subdued. Tata Motors posted standalone operating profit of Rs 440 crore, down 442% y-o-y , but 13% above the estimates. Operating margin came in at 6.6%, up from the December ‘09 low of 1.9%, primarily because of savings on raw material costs, down 230 bps q-o-q at 73% of sales. High depreciation and interest costs drove adjusted income down to a loss of Rs 110 crore.
The depreciation charge at Rs 0.29 crore was up 63% y-o-y as the company added capacity at Pantnagar and Dharwad (15K), and interest expense came in at Rs240 crore, up 17x y-o-y . The company should report consolidated earnings including JLR by June-end . The trend in auto volumes remains weak, and in addition, all benefits from scrappage incentives elude luxury car makers like JLR.
SUN PHARMA
RESEARCH: STANDARD CHARTERED
RATING: SELL
CMP : RS 1342 Standard Chartered maintains the EPS estimate for FY10 at Rs 52.4 and reiterates `Sell’ rating on the stock with a target price of Rs 810. Sun Pharmaceuticals has reported 10% degrowth in net sales for Q4FY09 and 27% y-o-y growth in sales for FY09, which is above the estimate. The reported net profit is down 45% in Q4FY09 and increased by 22% in FY09. The company has experienced a stupendous growth of 81% in domestic formulation sales in Q4FY09 and 33% in FY09.
Growth in domestic sales is untenable and raises a possibility of inventory pile-up at distributors’ level. The US subsidiary of the company, Caraco Pharmaceutical, has reported a dismal performance both in topline and bottomline. While the company has given a guidance of 13-15 % growth in net sales for FY10, StanChart believe this is largely unachievable as there is a nonrecurring business of $120-140 million in Caraco Pharma in FY09. However, it continues to observe the performance of the domestic business following the introduction of the changed distribution policy.
A weak US dollar against currencies in the emerging markets, further USFDA action, and deterioration of macroeconomic fundamentals in global markets including India are the key risks.
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