Business Standard Analysts corner - May 25

Bharat Forge
Reco price: Rs 160
Current market price: Rs 161.15
Target price: NA
Brokerage: Angel Broking

Bharat Forge (BFL) reported a 46.8 per cent year-on-year (y-o-y) fall in consolidated net sales to Rs 611.4 crore in the March quarter. Its operating profit margins (OPMs) also fell by 1,317 bps to 2.9 per cent. Net profit including forex gains of Rs 101 crore, fell 68 per cent to Rs 20.3 crore. BFL’s consolidated numbers do not include FAW Bharat Forge and its joint venture in China.

Revenues from the CV segment and from US and European geographies are expected to be weak, going ahead. BFL is however, confident of growing its non-auto business faster thus derisking its business model. FCCB loans make up a major portion of the company’s loan book. Of the total Rs 730 crore FCCB loans, Rs 410 crore is due in April 2010. However, with the conversion price way above the current market price, the company may have to raise fresh loans. The brokerage downgraded its 2009-10 EPS estimates to Rs 5.2 from Rs 7.6 earlier. At Rs 160, the stock is trading at 30.5x and 16.6x its 2009-10E and 2010-11E consolidated adjusted EPS, respectively and 2x 2010-11E adjusted BV.

Godrej Consumer Products
Reco price: Rs 160
Current market price: Rs 160.90
Target price: Rs 165
Upside: 2.6%
Brokerage: Motilal Oswal Securities

For the March 2009 quarter, net sales grew 26 per cent y-o-y to Rs 340 crore ahead of estimates. Gross margin declined 850 bps y-o-y to 49.1 per cent. However, lower ad-spend pushed earnings before interest, depreciation, tax and amortisation (EBITDA) margin up to 19.3 per cent versus the estimated 18.3 per cent. Adjusted profit after tax grew 45 per cent y-o-y to Rs 59.4 crore on higher interest income and lower tax rate.

Toilet soap volumes grew around 34 per cent y-o-y, while realisations increased 12 per cent; Godrej No 1 has been the key growth driver. However, competitive intensity could increase in the category, as the market leader HUL tries to regain market share. Hair care sales increased 20 per cent as benefits of the trade push and price increases got reflected. The management aims at increasing market share in hair colours through new launches and increasing its distribution reach.

The company also plans to exploit synergies with other FMCG companies of the Godrej group to accelerate growth in coming years. The management is confident of margin expansion in H1 2009-10 even as international operations are likely to remain under pressure. The EPS estimates are revised by 14 per cent for 2009-10 and 11 per cent for 2010-11 to factor in stronger volume growth. The stock trades at 17.5x its estimated 2009-10 EPS and 15.1x 2010-11 EPS.

Punj Lloyd
Reco price: Rs 182
Current market price: Rs 182
Target price: Rs 240
Upside: 31.9%
Brokerage: Ambit Capital

During March 2009 quarter, Punj Lloyd (PLL) registered consolidated operating income of Rs 3,220 crore, a growth of 37 per cent as compared to Rs 2,350 crore in March 2008 quarter. It reported a loss of Rs 78.51 crore at the EBIDTA level, as against a profit of Rs 248.6 crore in March 2008 quarter. EBIDTA is adjusted for Rs 207crore cost over-run and Rs 223.5 crore for the SABIC bank guarantee as well as cost over-run in ONGC’s Heera project. PLL reported a net loss of Rs 257.8 crore as against Rs 112.96 crore during March 2008 quarter. This was higher on the back of SABIC-related losses in Simon Carves and rationalisation measures to reduce costs.

PLL changed accounting policies resulted in higher profits to the tune of Rs 46.3 crore. The brokerage has revised upwards the EBIDTA margins by 110 bps and 80 bps for 2009-10 and 2010-11, respectively. With the decisive political mandate, infrastructure projects are likely to be fast tracked . The stock is trading at 14.4x its estimated 2009-10 earnings.

Punjab National Bank
Reco price: Rs 677.55
Current market price: Rs 663.25
Target price: Rs 420
Downside: 36.7%
Brokerage: Citi Investment Research

Punjab National Bank’s (PNB) net profit was up 59 per cent y-o-y for March 2009 quarter, about 48 per cent ahead of estimates. The P&L (profit and loss) was well rounded with strong fees and treasury gains offsetting moderation in margins.

PNB’s net interest margins (NIM) declined 30 bps, but at over 3.50 per cent, they remain the highest amongst peers. Fee income growth was healthy at 24 per cent y-o-y, riding on its large technology platform. The P&L was boosted by treasury gains and portfolio write-backs, which made room for relatively higher loan loss charges, employee provisions and cushioned the NIM dip (largely in-line with peers).

PNB’s loan book is growing rapidly (9 per cent sequentially; 29.5 per cent y-o-y), and appears to carry relatively higher sectoral (real estate, SME, Agri) and concentration risks. However, these risks have been contained. Restructured loans are at 3 per cent of book, slippages account for 1.5 per cent of loans and loan loss coverage of 90 per cent is amongst the highest relative to peers.

Citi has a sell on the stock as it expects the bank to increasingly come under pressure due to a deteriorating funding franchise, greater mid-market and agriculture focus, relatively greater dependence on treasury gains; and inability to grow fee incomes rapidly.

Sun Pharmaceutical
Reco price: Rs 1,302
Current market price: Rs 1,289.75
Target price: Rs 1,510
Upside: 17.1%
Brokerage: Macquarie Research

The US Court of Appeals for the Federal Circuit unanimously affirmed a September 2007 ruling that denied a motion filed by Wyeth and Altana for a preliminary injunction (PI) related to Protonix generic. Teva and Sun are currently involved in patent litigation with Wyeth and Altana concerning this product. A trial date has not been set for the same, and further ruling is not expected before 2010. A PI win does not necessarily translate into a victory for generic players in the trial, as the onus would now be on generic players to prove non-infringement.

Given the favourable PI ruling, Sun may decide to be a bit more aggressive on capturing additional upside in this product. However, as this is an ‘at-risk’ launch, it does not build any potential upside for this product going forward. Macquarie has maintained an outperform on the stock as Sun offers an unique defensive play in the Indian pharma space with lower earnings risk backed by a superior business model. It has a given a 12-month price target of Rs 1,510 based on sum-of-parts methodology. A positive catalyst will be the resolution of Taro acquisition.

Business Standard Analysts corner - June 01

Bajaj Auto
Reco price: Rs 941
Current market price: Rs 1,028.60
Target price: Rs 800
Downside: 22.2%
Brokerage: Macquarie Research

Bajaj Auto’ net sales for March 2009 quarter stood at Rs 1,880 crore, however profit after tax (pre-exceptional items) came in at Rs 200 crore, ahead of estimates.

The operating profit margin at 16 per cent was also ahead of expectations on account of lower raw material costs, which were down by around 360 basis points (bps) quarter-on-quarter (q-o-q). A higher realisation on its forward contracts should translate into higher operating margins for the company’s exports, which accounts for 33–36 per cent of sales.

After the launch of XCD 135, the company plans to launch a new range of Pulsar next month, and a brand new motorcycle in the executive segment in July 2009.

Bajaj Auto also plans to launch two 3-wheelers, one each in the cargo and passenger segment, targeted to appeal to suburban markets. The success of these launches is critical to arrest loss of market share and return to a growth trajectory.

The product development pipeline is on track. It includes a small car, new 2 wheelers in partnership with KTM and indigenous cargo 4-wheeler, which are proposed to be introduced in the next 2–3 years. The brokerage has raised its FY10 and FY11 estimates by 23 per cent and 24 per cent, respectively, and increased target price to Rs 800 from Rs 405. The stock is expensive at one-year forward PE of 14x. Maintain underperform.

Dishman Pharmaceuticals
Reco price: Rs 185
Current market price: Rs 191.30
Target price: Rs 217
Upside: 13.4%
Brokerage: Religare Hichens, Harrison

The March 2009 quarter results of Dishman were above expectations. On a year-on-year (y-o-y) basis, net sales increased by 21.3 per cent driven by increase in contract research and manufacturing (CRAMs) revenues.

The EBITDA margins expanded 681 bps driven by improvement in raw material costs; thus, EBIDTA increased by 65.8 per cent y-o-y. The gross margins expanded by 827 bps due to improvement in product mix and favourable foreign currency. The adjusted profit after tax grew at 17.7 per cent.

The company has guided for 15 per cent revenue growth for FY10 with similar improvement in margins. The customers have not seen any demand fall in prescriptions. Hence, the inventory pipeline adjustment process is likely to get over by Q1 FY10, and from Q2, the growth in the CRAMs business is likely to recover.

The brokerage has revised FY10E earnings by 31.5 per cent on account of strong growth in Q4 FY09 and better outlook. The stock is currently trading at 8.7x FY10 estimated earnings. The brokerage has upgraded the target PE multiple from 8x to 10x to arrive at a new target price of Rs 220.

Jet Airways
Reco price: Rs 280
Current market price: Rs 302.65
Target price: NA
Brokerage: IDFC-SSKI Securities

The current operational fleet (86 aircrafts under Jet and 23 aircrafts under Jetlite) is expected to be maintained as of now. Jet is in talks with Boeing over cancelling or finding another buyer for the Boeing 777 that is due for delivery in August 2009. Post a 22 per cent decline in Jet’s domestic capacity, there is still 20 per cent over capacity in the system. Coupled with declining passenger traffic, the pressure on yields is slated to continue in the near term.

Almost all the international routes (except UK) are close to breakeven. While FY09 saw a 5 per cent decline in domestic operations at Rs 5,450 crore, international operations grew 98 per cent to Rs 6,020 crore. This has taken the current domestic-international mix to 52:48.

Albeit some tailwinds - a fall in ATF prices, refinancing to the tune of Rs 2,000 crore in January and international operations achieving close to break-even; headwinds continue to persist. However, pressures in the domestic operations would continue to depress yields. While Jet continues to defer any capacity addition for the year, it needs to fund the losses and fulfil its obligations for the current year under the pressure of an overleveraged balance sheet. Maintain neutral.

OnMobile Global
Reco price: Rs 392
Current market price: Rs 445.80
Target price: Rs 490
Upside: 9.9%
Brokerage: Ambit Capital

OnMobile’s deal with Vodafone group to provide mobile value-added services in emerging markets is expected to be revenue accretive for the company. The monetisation of the deal is expected once OnMobile completes its deployment in these countries like India, Bangladesh and Pakistan. The expansion in new geographies is expected to enhance the company’s addressable market.

OnMobile’s revenues are expected to increase by 30 per cent CAGR over the next three years, driven by the large pent up demand in the domestic market and incremental revenues from the international markets.

The company’s operating margins, however, are likely to remain at the same level due to continuous deployment in various markets and new product development. It recently launched Music Search Services on Taslima’s speech recognition technology.

Other services launched by the company include MRadio, launch of “* to copy” service between four major operators, and development of four new foreign languages. The company is also expected to go live with its AdRBT services in the next few months.

Over FY09-11E, OnMobile’s EPS is expected to grow at 29 per cent CAGR. At Rs 392, the stock trades at 16x FY11 earnings. Maintain buy.

LIC Housing Finance
Reco price: Rs 447
Current market price: Rs 528.65
Target price: Rs 610
Upside: 15.4%
Brokerage: Edelweiss Securities

LIC Housing Finance (LICHF) has improved its market share to around 9 per cent in FY09 from 6 per cent in FY08. After muted disbursements over FY05-07, LICHF has been gaining market share, growing its disbursements by 38 per cent in FY08 and 24 per cent in FY09. The company’s loan book is also expected to grow at 22 per cent over FY09-11E.

LICHF’s exposure to corporate developers has gone up to 8.8 per cent in FY09 (from 3 per cent in FY07). However, the NPA risk on the corporate developer book has abated with improved capital availability.

Moreover, with anticipated economic recovery and increased property deals in the second half of FY10, expect gross NPAs to remain below 2 per cent over FY09-11E. The return on equity (RoE) stood at 26 per cent in FY09 and even after post equity dilution, RoE will range between 21-22 per cent.

Over the next one year, the brokerage expects the stock to get re-rated and trade in the range of 1.8-2.0x its book value. It has revised upwards its EPS estimates by 4 per cent for FY10 to Rs 73.5 and by 5 per cent for FY11 to Rs 84.7. The stock is trading at 1.4x FY10E book and 6x earnings. The brokerage has upgraded its recommendation from accumulate to buy.

Business Standard Analysts corner - June 08

SI Team / Mumbai June 08, 2009, 0:49 IST

MADRAS CEMENTS
Reco price: Rs 115
Current market price: Rs 113.20
Target price: 128
Downside: 13.1%
Brokerage: Sharekhan

For March 2009 quarter, Madras Cement’s revenues grew by 20 per cent year-on-year (y-o-y) driven by 12.6 per cent increase in cement realisation to Rs 4,027 per tonne; volumes grew by 7 per cent to 1.6 million tonne. The operating profit margin contracted by 437 basis points (bps) to 26.4 per cent due to higher power and fuel costs, as the supply of power from the captive windmill declined sharply during the quarter. The adjusted net profit declined by 3.4 per cent, and is in line with expectations.

Accounting for a higher than expected volume growth in the cement division (commissioning of two million tonne capacity at Ariyalur) and expectations of higher spending by the new government on infrastructure, the brokerage has upgraded its earnings estimate for 2009-10 by 3 per cent to Rs 14.7. It has introduced EPS estimates of Rs 13.50 for 2010-11.

At Rs 115, the stock trades at 7.8x and 8.5x its estimated 2009-10 and 2010-11 earnings, respectively and an enterprise value (EV)/EBIDTA of 5.1x for 2010-11. The price target of Rs 128 is based on 5.5x EV/EBITDA (and EV/tonne of $60). Maintain hold as cement stocks could underperform in the short term.

BAJAJ AUTO
Reco price: Rs 370.40
Current market price: Rs 356.05
Target price: 369
Downside: NA
Brokerage: Citi Investment Research

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Aided by a benign West Bengal Electricity Regulatory Commission and its reasonable tariff orders, CESC’s power business continues to create value. The power business has turned around from losses of Rs 130 crore in 1998-99 to profits of Rs 410 crore in 2008-09. CESC is currently evaluating projects to expand into an electric utility with national footprint. This includes the 1,300 mw Haldia Phase – II project, 1,000 mw Jharkand project and 1,000 mw Orissa project. CESC expects to spend Rs 450 crore by FY11 to enhance its transmission capacity and Rs 300 crore of annual maintenance capex in the next three years.

CESC extended loans of Rs 250 crore to Spencer’s retail in 2007-08. The brokerage estimates another Rs 550 crore and Rs 800 crore will be extended in 2008-09 and FY10-12, respectively. In the absence of Rs 800 crore of investments over FY10E-12E, CESC would be worth Rs 58 per share. CESC’s retail business will be a drag on any upside in the power business. A look at CESC alone shows that it is trading at an inexpensive PE multiple of 10.3x 2009-10E. However, considering the retail business losses, it looks expensive at 17.9 times. While hiking its target price to Rs 369 from Rs 290 earlier, the brokerage recommends a sell.

MAHINDRA & MAHINDRA
Reco price: Rs 698.00
Current market price: Rs 689.75
Target price: 633.00
Downside: 8.2%
Brokerage: Religare Hichens, Harrison

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Mahindra & Mahindra’s (M&M) March 2009 quarter results were ahead of expectations due to the consolidation of Punjab Tractor’s (PTL) financials. Its automotive revenues increased by 5.1 per cent y-o-y to Rs 2,190 crore, driven by an 8 per cent growth in utility vehicle (UV) volumes. The PTL amalgamation helped the farm equipment segment to grow by 47 per cent y-o-y to Rs 1,450 crore.

For 2008-09, key businesses like farm equipment, Tech Mahindra, M&M Financial Services drove consolidated topline by 10 per cent. Net profits (down by 10.5 per cent) were hurt largely due to margin pressures in the automotive and auto ancillary businesses.

M&M would be a play on the rural India story as both UVs and tractors enjoy the strongest demand in rural areas. The brokerage forecasts a volume growth of 8 per cent growth in UVs and 4 per cent in tractors and expects M&M’s recent outperformance in UVs to be sustained; EBITDA margins could improve by 110 bps in 2009-10. The core business and subsidiary holdings are valued at Rs 422 and Rs 211, respectively with a target price of Rs 633. Due to expensive valuations, the stock has been downgraded from hold to sell.

PVR
Reco price: Rs 133.00
Current market price: Rs 135.25
Target price: NA
Brokerage: Angel Broking

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For March 2009 quarter, PVR declared muted top line growth of a mere 6.2 per cent on a standalone basis impacted by lower occupancies leading to 2.5 per cent y-o-y growth in footfalls to 3.8 million. Average ticket price (ATP) and spend per head continued to register modest growth of 6 per cent to Rs 140 and Rs 36 respectively, driven by higher ATPs across newly opened PVR Premiere properties. PVR’s standalone operating margins declined by 297 bps y-o-y to 10.1 per cent. For the quarter, the company reported a net loss of Rs 1.1 crore (versus a profit of Rs 2.7 crore in March 2008 quarter) owing to margin contraction and interest costs.

No new properties were added during the quarter. Thus, PVR currently operates a network of 108 screens located at 26 locations across 14 cities. The brokerage has revised its top-line estimates downwards by 19 per cent for 2009-10 and expects margins to dip by 67 bps. It expects 15.6 per cent growth in top-line over FY2009-11E. The screen count is seen increasing to 153 screens in 2010-11. At Rs 130, the stock is trading at 10.2x its estimated 2010-11 EPS of Rs 12.8. Maintain neutral.

NAGARJUNA CONSTRUCTION
Reco price: Rs 139.10
Current market price: Rs 137.55
Target price: 121
Downside: 12%
Brokerage: Macquarie Research

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For March 2009 quarter, net revenues for Nagarjuna Construction Company (NCC) came in at Rs 4,150 crore (below expectations) - a decline of 12 per cent y-o-y. The topline was dented by order cancellations from Bharat Oman Refineries and Karnataka government. The slowdown in the real estate market also negatively affected revenues. The March quarter and full-year EBITDA margin stood at 7.6 per cent (the lowest in the last four years) and 9.0 per cent, respectively. After considering the cancelled oil and gas order, the order inflows stood at Rs 5,370 crore (down 29 per cent y-o-y). The management guided for Rs 6,500 crore of new orders in 2009-10.

The brokerage expects revenue growth to hover around 10–15 per cent and margins at around 9 per cent in the next couple of years. NCC requires Rs 450–500 crore of funding in the next 12 months and may resort to a stake sale in infrastructure subsidiaries or look at QIP to raise funds. The debt-equity levels are manageable at 0.7x, but there is limited room to expand. The brokerage has reduced its standalone 2009-10 and 2010-11 earnings estimates by 19 per cent and 20 per cent, respectively. The stock has been downgraded to underperform with a 12-month target of Rs 121 (earlier Rs 85). Current market price as on June 4, 2009