Reco price: Rs 85
Current market price: Rs 83.85
Target price: Rs 110
Upside: 31.2%
Brokerage: Sharekhan
On September 22, 3i Infotech decided to close the bid period for qualified institutional placement (QIP) and raised Rs 317.8 crore. The company would use the funds to retire debt, which would bring down its debt to equity ratio from 2.1 to 1.4. In terms of the equity base, the QIP issue would expand the fully diluted equity base by 23.4 per cent to 19.7 crore shares.
Consequently, 3i Infotech's 2009-10 and 2010-11 earnings are expected to get diluted by around 15-17 per cent. Considering the expanded equity and the likely interest expense savings, the 2009-10 EPS has been revised to Rs 12.8 and 2010-11’s to Rs 14.6.
Though the earnings dilution through QIP is likely to remain an overhang on the stock in near term, the company has taken necessary steps such as the QIP issue and sharp reduction in DSO days (121 days in 2008-09 v/s 151 days in 2007-08), which has allayed concern over its weakening balance sheet.
This coupled with an improvement in demand environment make 3i Infotech a strong case for re-rating. The brokerage has upgraded the stock with revised price target of Rs 110, assigning a target multiple of 7.5x, which is in line with its long-term average PE multiple since its listing in April 2005.
IPCA Labs
Reco price: Rs 721
Current market price: Rs 755
Target price: Rs 1,045
Upside: 38.4%
Brokerage: IDFC-SSKI
The newly-acquired scale, on the back of 70 per cent growth in revenues and 130 per cent jump in EBITDA between 2005-06 and 2008-09, imparts critical mass for IPCA Labs (IPCA) to grow.
Along with 18 per cent CAGR between 2008-09 and 2010-11 in domestic formulations sales, API momentum (at 13 per cent) and increasing formulation exports (22 per cent), the brokerage expects revenue growth of an average 18 per cent in the same period.
Given the high revenue growth visibility, IPCA would register 60 basis points expansion in its operating margins to 20.6 per cent by 2010-11. Adjusted net profit would likely see a 22 per cent CAGR over FY09-11 to Rs 238 crore in 2010-11.
With limited capex of around Rs 70 crore and operating profits in excess of Rs 300 crore per year, IPCA would start generating free cash from 2009-10. With 27 per cent return on equity (RoE) and high earnings visibility over FY09-11E, IPCA is trading at 9 times 2009-10 estimated earnings.
While frontline pharma stocks are trading at 18-20 times 2009-10 estimated earnings, IPCA is expected to get re-rated as the market starts valuing its growth visibility and healthy balance sheet. At the target price of Rs 1,045, the stock would trade at 11x 2010-11 estimated earnings. Reiterate outperformer.
Sesa Goa
Reco price: Rs 276
Current market price: Rs 256.8
Target price: Rs 325
Upside: 26.6%
Brokerage: Motilal Oswal Securities
Sesa Goa’s promoters have increased their stake in the company by 2.11 per cent to 57.12 per cent through open market purchases. Earlier in the year, the promoters had hiked their stake a little before the acquisition of Dempo. Sesa continues to look for opportunities of inorganic growth in Goa.
Iron ore prices have started strengthening. The imports of iron ore by China are expected to pick up in the coming months because Chinese mills will have to start re-stocking for winter months. Iron ore prices have also bottomed once again.
Exports from India have suffered in recent months due to prolonged monsoon and procedural hiccups post change of royalty to ad-valorem rate of 10 per cent. A strong demand-driven iron ore prices in China augur well for Indian iron ore exporters like Sesa Goa. Weaker freights due to commissioning of new cape-size bulk carrier would result in higher realisations for exporters.
The brokerage has raised its price assumption from $55 per tonne free-on-board at Indian ports for 63 per cent Fe grade iron ore to $65 per tonne. As a result, the EPS estimates for 2009-10 and 2010-11 has been raised to Rs 21.1 (earlier Rs 17.9) and Rs 27.7 (earlier Rs 20.2). The stock trades at 10 times 2010-11 estimated EPS and an EV of 5.3 times 2010-11 estimated EBITDA. Maintain buy.
Taj GVK Hotels & Resorts
Reco price: Rs 127
Current market price: Rs 126.95
Target price: NA
Brokerage: Angel Broking
Taj GVK is the market-leader in the Hyderabad market, where it has a share of 29 per cent in premium-segment rooms. In order to strengthen its foothold further and to tap mid-market room demand, the company is coming up with a 189-room property in Begumpet.
In 2007-08, about 78 per cent of Taj GVK's room inventory was located at Hyderabad. To diversify its presence, the company came up with Taj Mount Road in Chennai, in December 2008. It is planning to enter Bangalore and exploring the possibility of entering the mid-market segment through tie-ups with Indian Hotels.
As the economic revival gathers steam, tourist arrivals are expected to increase from Q2 2009-10. Moreover, Taj GVK is on an asset-light expansion strategy to strengthen its grasp on the Hyderabad market.
Moreover, Indian Hotels (one of Taj GVK’s promoters), the industry leader, currently has an EV per room of Rs 1.2 crore, which makes the risk-reward unattractive for an investment in Taj GVK. The brokerage remains positive on the industry, but considering Taj GVK's valuations, it maintains a neutral rating.
Zee News
Reco price: Rs 47
Current market price: Rs 47.05
Target price: NA
Brokerage: Edelweiss Securities
Zee News (ZNL) expects growth in advertising revenues from regional GEC channels. But, revenues from news channels are likely to be flat in Q2 2009-10. Also, increasing adoption of DTH and incremental revenues from analogue are expected to boost subscription revenues.
Till now, ZNL had three strong driver channels – Zee News, Zee Bangla and Zee Marathi. Zee Telugu competes closely with Eenadu and Maa Telugu for the second spot in viewership. Zee UP, launched in April 2009, too is performing well. Zee Kannada is also close to breaking even. Zee Business is likely to benefit from the strong IPO advertising pipeline. Going forward, Zee Telugu, Zee Kannada and Zee Business channels are to become other growth drivers for ZNL.
Unlike its competitor Star Jolsha, which is resorting to disruptive programming, Zee Bangla has continued with its strategy of gaining sticky viewership through low cost programming, which is likely to be a more sustainable strategy.
It has multiple drivers---strong bouquet of news and regional channels, improving viewer-ship, likely overall improvement in advertising industry from H2 2009-10, successful new shows, and strong management in place. The company is expected to benefit from likely revival in advertising spends in H2 2009-10.
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