Bull's eye: Pantaloon Retail, NIIT, Glenmark Pharma, Sesa Goa, Parsvnath Developers, Voltas

Pantaloon Retail
Research: Morgan Stanley
Rating: Overweight
CMP: RS 323

Morgan Stanley reiterates 'Overweight' rating on Pantaloon Retail with a target price of Rs 422. It also maintains the investment thesis regarding improving business outlook and availability of capital to fund growth plans.

Consumer demand has picked up sharply in the last two weeks, and the company has various alternative funding plans to expand its business. The management has also expressed its intention to improve transparency through better communication with investors. According to the management, consumer spending in categories is nearly back to the peak witnessed in the last 18 months.

Home Retail had been particularly badly hit in this downturn; it is now witnessing a sharp reversal in growth trend, particularly in the furniture and furnishings segments. PRIL is also evaluating various plans that include private equity investments in subsidiary companies and/or restructuring the group to ensure that Pantaloon Retail does not need to fund non-retail, finance subsidiary companies.

NIIT
Research: Citigroup
Rating: Sell
CMP: RS 59

Citigroup recommends a 'Sell' rating for NIIT with a target price of Rs 50, given concerns of a US/global economic slowdown. NIIT, an acknowledged leader in IT and IT-enabled training, provides learning and knowledge solutions in more than 30 countries.

NIIT's business is not recession proof as: (1) NIIT feeds into the IT industry and hiring has slowed (particular in Tier-IIs ) due to cautious demand. (2) Corporate business is ~60% of revenue and ~80% of this is US exposure; training budgets

face pressure amid the slowdown . NIIT’s margins in individual businesses have expanded from 0% to ~20% in three years.

If revenue momentum slows, the high share of fixed cost in business will lead to a sharp erosion in profitability. Corporate business profitability will be affected by the appreciating rupee. Institutional and new businesses are too small to change the company’s prospects. Citigroup values NIIT at Rs 50 based on 10x average of FY10-11 E consolidated EPS.

Glenmark Pharma
Research: Goldman Sachs
Rating: Neutral
CMP: RS 232

Goldman Sachs maintains 'Neutral' rating on Glenmark Pharma with a 12-month target price of Rs. 263. Glenmark announced that Melogliptin, its novel molecule for diabetes, is set to enter global Phase III trials by end- ’09.

It stated that Phase IIb trials were completed successfully and achieved 1% average HbA1c reduction and a positive safety profile. With implications in the patient group with higher baseline HbA1c, the study reported a reduction of 0.88% and 1.05% (at different doses) thus reducing HbA1c levels to the range of 7.5%-9 %.

Note that for glucose control, the Intl Diabetes Federation recommends HbA1c values below 6.5%. Goldman Sachs believes this increases the statistical likelihood of Melogliptin entering the market, in which case sales peak a $1 billion per annum. Note that treatment has progressed from monotherapy to combination therapy (with Metformin).

As a reference, Alogliptin (another DPP-IV ) has been delayed by two years as the FDA has asked for combination trials. This implies longer trials and increases the need for an outlicensing partner. Also, safety continues to be a key issue, as some DPP-IVs have seen significant adverse effects. The next pipeline milestone is Phase IIb results for GRC3886 from Forest Labs in July.

Sesa Goa
Research: BNP Paribas
Rating: Reduce
CMP: RS 192

BNP Paribas downgraded Sesa Goa to 'Reduce' as the stock runs ahead of the fundamentals. Sesa is currently trading at 13.1x FY10 PE and 6.5x FY10 EVEBITDA, a 151% and 110% premium to its eight-year average PE of 5.2x and EVEBITDA of 3.1x, respectively.

With the onset of the monsoon in India, the first two quarters of FY10 will be seasonally weak for Sesa due to lower sales volumes. Sesa sold 30.8% of its yearly sales volumes in 1HFY09 and it is to sell 6.0 million tonnes in 1HFY10, or 33% of FY10 target. Sesa has recently entered into an agreement to acquire the mining assets of Dempo Group for Rs 1,750 crore in an all cash deal.

The acquisition provides an additional 70 million tonnes to Sesa's existing reserves of about 240 million tonnes. BNP has increased the target price to Rs 147 from Rs 110 per share with Sesa being valued at Rs 123/share and Dempo at Rs 24/share. BNP expects the proportion of Karnataka and Orissa ore will increase to about 50% of sales volume in the later years in comparison to 30% now with expected new volume growth from these territories.

Parsvnath Developers
Research: Credit Suisse
Rating: Underperform
CMP: RS 84

Credit Suisse maintains 'Underperform' rating on Parsvnath Developers with a target price of Rs. 75. Credit Suisse revised the NAV estimate up by 83% to Rs 126 on the back of lowering weighted average cost of capital (WACC) and assumes a 5% p.a. hike in property prices from FY11 onwards.

They employ an average 40% discount to calculate the target price to reflect high gearing of 1x; its high concentration risk in tier III cities; focus on SEZ and commercial projects (47% of land bank); and unpaid land cost of Rs 1000 crore. With an EBIT/interest cover of 0.9x in FY09 and 0.6x in FY10, Parsvnath will find it difficult to meet its interest commitments let alone Rs 230 crore of debt repayments scheduled for FY10.

Further, Parsvnath's strategy to continue with its land acquisitions for the SEZ projects and not to exit from non-strategic land parcels will put considerable strain on its balance sheet. Parsvnath is looking to gain private equity investment in its projects.

Red Fort Capital, a private equity fund has recently invested Rs 90 crore ($18 mn) in a Delhi residential project. Credit Suisse estimates it needs at least a $170 million equity infusion to reach FY10 EBIT/interest cover of 1x.

We raise our revenue estimates for FY10 and FY11 by 15% and 13%, respectively , on the back of improved liquidity and a better macro environment. FY10E EPS is expected to decline 30% y-o-y to Rs 4.20 and thereafter increase to Rs 5.14 in FY11E. Parsvnath is trading at a 34% discount to forward NAV and 20x FY10E P/E and 16x FY11E P/E and 0.74x forward P/B.

Voltas
Research: Edelweiss
Rating: Buy
CMP: RS 132

Edelweiss maintains 'Buy' rating on Voltas. Voltas' engineering and agency services (EAS) and unitary cooling businesses (UCL) bore the biggest brunt of domestic slowdown, with 2% decline and 11.3% growth in revenues respectively. The UCL division is estimated to have a better FY10 compared with H2FY09 due to a severe summer and better realisation on high-end products.

But primary sales growth for Voltas has been slower than the industry due to its conservative stocking policy, leading to stock run-outs in a few models. Among the three segments, recovery in EAS is likely to be the slowest, despite improvement in mining and materials, and construction equipment segments. On current estimates, the stock is trading at a P/E of 16.6x and 13.9x for FY10E and FY11E respectively.

While upsides to current valuations may not be immediate, expectations of positive surprises on order wins could support valuations. Further valuation upsides could be driven by higher order accretion and faster execution, leading to higher FY11E estimates.

Even after the recent run-up in the stock price, Edelweiss advises investors to initiate fresh positions and build existing ones as triggers in the form of order wins and improved macro scenario are likely to support valuations.

Voltas - Cooling effect

A recovery in demand and robust order book augur well for Voltas.

Synonymous with air-conditioning, Voltas once again proved its mettle in the electro-mechanical project business when it bagged two larger orders worth Rs 300 crore pertaining to the Chennai and Kolkata airports. This comes immediately on the back of a good set of results declared on May 29. These events have led to the stock rising 35 per cent as against the BSE Sensex’s four per cent gain since then. For those who think they might have missed the bus, don’t lose hope as there is scope to make healthy returns in the long-run.

Larger than perception
Many people view Voltas as an air conditioning (AC) company. Yes, it is a dominant player in the commercial and residential AC segment, but there’s a lot more to it. Post it’s restructuring in 2003, Voltas increased its focus on the engineering segment to emerge as a niche player in the electro-mechanical projects (MEP) and services business. This segment includes complete turnkey solutions for work related to central air-conditioning (airports, malls, offices, etc), refrigeration and solutions for water treatment and management.

The move helped Voltas de-risk its revenues as well as reduce its dependence on the low margin business, where stiff competition and seasonality were among concerns. It has also helped the company reach higher scale and tap upcoming opportunities in the projects business, where profit margins are relatively better.

The recently won orders worth Rs 300 crore for electro-mechanical work at the Kolkata and Chennai international airports is in addition to similar orders won in the past. For instance, while Voltas completed the project for the new Hyderabad international airport last year, it has completed similar projects for the world's largest passenger terminus of Hong Kong International Airport as well as the Mumbai airport. Going by the various estimates, the opportunities in this segment is huge as the government is also planning to invest in over 30 new non-metro airports besides, modernising existing airports of the country.

There are equally large long-term opportunities in segments like metro railways (stations), shopping malls, hospitals, hotels, education institutes, corporate buildings, high rise towers, multiplexes and cold storage. The company has already has a successful track record of having executed several projects in these segments. However, over the last one year, analysts were worried about the slowdown in these segments and the impact of high raw material prices on the company’s profit margins. But, the MEP segment, which accounted for 62 per cent of total sales, reported a revenue growth of 53.7 per cent year-on-year for 2008-09. This can be attributed to the company’s strong order book position. For now, the worries haven’t vanished totally and some concerns still exists, which pertain to the slowdown in the international operations (contributes 60 per cent to the project business); largely the gulf countries. For instance, during 2008-09, there was a 40 per cent contraction in flow of new orders from international markets, which analysts attributed to slow down in capital expenditure, particularly by crude oil producing countries due to lower oil prices.

In comfort zone
But, given the company’s current order book of Rs 4,700 crore, the same is good enough for the company to maintain a revenue growth at about 20 per cent this year. And, for the next year and beyond, if the recent improvement in the economic environment is sustained (including the rise in crude oil prices, which have crossed to $70 per barrel), then expect Voltas’ order book to swell further. Notably, the management, too, has guided for robust order inflows from countries like Qatar, Abu Dhabi and Saudi Arabia. In the domestic front, recovery in the industrial capex and near-term impetus provided by the government stimulus packages could further add to the kitty.

Equipment business
Additionally, the economic recovery will also augur well for the company’s engineering products business (13.4 per cent of total revenues), which primarily includes manufacture and distribution of equipments for materials handling, mining and construction and textiles industries. Here too, the company is among the leading domestic players. However, this segment reported a two per cent decline in revenue in 2008-09 as against nearly 30 per cent growth in the past few years. This business also reported significant erosion in operating profit margins, from 20.5 per cent in 2007-08 to 11.6 per cent in 2008-09. While a meaningful recovery could take another 2-3 quarters, analysts believe that the company’s move to cut down its inventory levels coupled with the recovery in industrial activity and winning of an Rs 210 crore order for mining equipment from Hindustan Zinc, are all good signs. Nevertheless, the segment holds good long-term prospects.

SOOTHING NUMBERS
in Rs crore	FY09	FY10E	FY11E
Revenue	4,033	5,100	6,100
EBIDTA	294	383	464
EBIDTA (%)	7.3	7.5	7.6
Net profit	228.0	270.0	329.0
EPS (Rs)	6.9	8.2	10.0
PE (x)	19.1	16.1	13.2
E: analyst estimates

Evolving opportunities
Meanwhile, the company’s second largest revenue contributor (22.5 per cent of sales) is the unitary cooling systems division, which includes residential and commercial ACs, commercial refrigeration and water coolers. This business is expected to report stable 10-12 per cent revenue growth on a sustainable basis. During 2008-09, revenues grew by 11.3 per cent, while operating profit margins were up at 7.4 per cent, albeit marginally. Although this is a highly competitive segment, the company is among the leading players (second in AC segment). In light of the rising income levels of individuals, increasing affordability, higher availability of electricity and demand from the commercial office and retail segments, the long-term prospects of this business too are good.

Outlook
The company operates in three growing segments, where the penetration levels are still low in India compared to some of the international markets. Its leadership in these segments and increasing focus on expansion into foreign markets should help it sustain healthy growth. Attributes like consistent revenue track record, regular dividend payments and negligible capex needs put the stock in better light. At Rs 133, the stock trades at 16 times and 13 times its estimated 2009-10 and 2010-11 earnings.