Gulf Oil Corp on a growth trajectory
Sunday, December 30, 2007
Gulf Oil Corp (GOCL) is engaged in a blend of diverse business areas such as industrial explosives, lubricants, mining services and specialty chemicals, where almost 59% of revenues comes from lubricants. Strong organic growth is expected across segments driven by increased prices and robust economic growth. New mining policy will attract the investments in the sector benefiting the companies like GOCL. Government wants the contribution from mining sector to grow from current 2% of GDP to 5% of GDP in the next five years, which will boost the segmental revenues tremendously. Further, new mining contracts and venture into limestone mining will fuel growth.
GOCL planning to set-up an IT and ITES park at its Bangalore land and a knowledge city at its Hyderabad land with the investment of about Rs 10bn and Rs 8bn, respectively. These projects, when kick off, will unlock the shareholders' wealth significantly. New product addition and venturing into new locations will provide a huge growth to its specialty chemicals business unit. The company expects the segment to be break even by FY09.
Using the Sum of the parts valuation [SOTP] approach, existing businesses are valued at Rs 162/share on EV/Sales multiple basis, while land bank at Rs 315/share. Religare initiates coverage with Buy with a target price of Rs 477.
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Published by DalalStreet Business @ 12:31 PM IST.
Manappuram General Finance & Leasing - BUY
Friday, December 28, 2007
Manappuram General Finance & Leasing is mainly involved in Loans against Gold. Almost 85% of its folio.The combined size of the loan portfolio (of MAGFIL and Manappuram Finance (Tamil Nadu) Pvt Ltd) could be Rs. 750 cr., (inclusive of off-balance sheet items) as of March 2008. As per the method of accounting followed by MAGFIL, Interest received/accrued on account of gold loan receivables assigned to its institutional lenders is credited to interest account net of interest paid /credited to these lenders on accrual basis. This portfolio size could increase by 30%+ in the coming year i.e. FY09.The average cost of funds for advancing gold loans is close to 12% and the average interest earned is around 21% - 23%. This leads to a healthy spread of 9% - 11%.MAGFIL set up a 100% subsidiary Manappuram Insurance Brokers Pvt Ltd in 2006, which carries out life and non-life insurance broking business. MAGFIL has increased its number of offices from less than 220 as on March 2007 to 450+ across 12 states in India.The company also received convertible funds of Rs.70 cr into both these companies from private equity players like Sequoia and Hudson:
MAGFIL can be bought in the Rs.143-151 band and added on declines to Rs.114-121 band for a 12 month target of Rs.204 i.e.12 times its FY09 (E) EPS.
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Published by DalalStreet Business @ 10:32 AM IST.
2 Wheeler Automobile to Underperform
Thursday, December 27, 2007
In several research notes on the Indian 2 Wheeler industry, it is observed that the sector will underperform in the near term. In Q3FY08 the environment for the two wheelers was negative. Banks had tightened the credit norms and increased the down payment requirement, which has rendered a large number of potential two wheeler buyers ineligible for obtaining loans. The competitive intensity in the industry has also increased.Total vehicle sales during the quarter are expected to increase by 2.6%.Bajaja Auto is the only market performer and that to due to the de-merger of Bajaj Allianz Insurance / Finance company. TVS and hero Honda are market underperformers.
Bajaj Auto Ltd:
Bajaj Auto currently trades at 18.1x and 16.3x FY09E and FY10E earnings. As it is one of the strongest player in the sector and its ability to launch new product on the back of it is strong R&D capabilities make it an attractive investment and hence our Accumulate.
Hero Honda:
Hero Honda currently trades at 13.7x and 12.7x FY09E and FY10E earnings. Although Hero Honda has underperformed the market and also de-rated, it still trades above its average historical trading band at a time when earnings growth is set to slow and its competitive position is weakening. Bajaj has considerably narrowed the technology gap with Hero Honda and poses a serious threat to Hero Honda's dominance in the executive segment. Avoid Hero Honda.
TVS Motors:
Its low single digit margins make earnings very sensitive to a change in margins. Any reasonable improvement in margins will provide a trading opportunity – but the timing is hard to predict. However, it is the weakest players in the segment and there is little to suggest that it will improve its position. AVOID any fresh Investments, HOLD if you have already invested.
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Published by DalalStreet Business @ 1:26 PM IST.
Buy Mercator Lines - Religare
Wednesday, December 26, 2007
Mercator Lines Ltd [MLL] is in the business of dry and liquid bulk cargo. MLL derives 70% of its revenues from long term contracts of 3 to 7 years. MLL recently raised $140 million and listed itself on the Singapore Stock Exchange.NLL has a fleet size of 24 of which 11 are operated by its subsidiary in Singapore.Current robust economic demand in China and India is driving imports of COAL and hence the rise in shipment of DRY BULK CRARGO. Iron Ore is another commodity that is seeing bulk transportation in the region directly benefiting MLL.
Sum of the Parts Valuation:
MLL is expected to report an EPS of Rs 12.5, 13.6 and Rs 19.0 for Fy08, Fy09 amd Fy2010 respectively. The stock is trading at a P/E of 8.4 and P/BV of 1.8x.
Value of MLL's share in Holding company - Rs 84.3/share
Value of 72% stake in Mercator singapore - Rs 92.7 / share
Thus on the basis of sum of the parts valuation a target price of Rs 177 is recommended.
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Published by DalalStreet Business @ 2:17 PM IST.
Royal Orchid Hotels - BUY
Monday, December 24, 2007
Royal Orchid Hotels Ltd, ROHL acquired Multi Hotels, Tanzania, which owns 30 acres of prime beachfront land worth $2 Mn. The company would further spend $25 Mn (to be funded 60% thru equity) to build a 200-room resort (EV/room ~ Rs 5Mn). The project is expected to commence work in next 4 months and then require 20 months for completion. The debt/equity is a meager 0.16 (FY07) and hence the expansion would impact debt equity only marginally.ROHL through its subsidiary M/s Icon Hospitality Pvt Ltd, acquired Royal Orchid Central (earlier only managed) for a consideration of Rs 820 Mn (EV/Room ~ Rs 6.3Mn). The hotel is in the heart of Bangalore and is clocking ARRs of Rs 5,500.
ROHL reported 48% growth in topline to Rs 380 Mn, mainly led by a strong growth in Q2FY08. The operating margins slid 1150bps to 34.2%, mainly due to a rise in other overheads. The company is expected to report a strong EPS of Rs 11.8 and Rs 14.2 in FY08 and Fy09 respectively. Buy with a target price of Rs 185.
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Published by DalalStreet Business @ 11:02 AM IST.
Indian Economic Indicators
Friday, December 21, 2007
We would like to share the Economic Indicators that we have been mining over several years. We will cover, GDP growth,WPI, Exchange Rate, Fiscal Data, Money Supply, Balance of Payment and Foreign Debt and Reserves.
India GDP Growth:
India's GDP in %ge was languishing at 3.8% in 2002 and saw a remarkable jump to 8.5% in 2003 with the beginning of Golden Quadrilateral and other reforms set on fire by then Government under Atal B. Vajpayee.
GDP growth in 2004 - 7.5%
GDP growth in 2005 - 9.0%
GDP growth in 2006 - 9.4%
GDP growth in 2007 - 9.0%
GDP growth in 2008 - 8.5% [Expected]
GDP growth in 2009 - 8.81% [Expected]
Indian Population and Per Capita:
The population is expected to touch 1.14 billion by 2009 and GDP Per capita [$] is expected to touch 1,265. Latest figures 2007 - 1.153 billion population with GDP Per Capita - $898.5
WPI Inflation:
Inflation was the lowest in 2001 at 1.6% and since then it has been hovering in the range of 4.0 to 6.5% [2002 and 2006] It is expected to vary between 3.75 and 4.25 in the following 18 months.
USD Exchange Rate:
The dollar has been continuously falling against Indian Rupee since 2001 when George Bush in the Whitehouse. From a record level of Rs 48 against a Dollar it is expected to slide to Rs 36.0 a dollar by 2009.
Money Supply and Credit:
broad Money supply as a % of GDP has been maintained at 25% in the last 3 years and is expected to be around 26% for the next 2 years.
Balance of Payments:
Exports which is at 25% to the GDP is expected to fall to 20% in 2009. While imports which is currently around 27% of GDP is expected to be 25% in 2009. Current account balnace is expected to be -$18.4
Foreign Debt and Reserves:
For the current year, India's foreign debt is expected to be $180 bn while reserves are expected to touch $296 bn. By 2009, foreign debt will be around $220 bn and forex reserves excluding gold will be $350 bn.
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Published by DalalStreet Business @ 12:24 PM IST.
Indian Sugar Stocks Turn Bitter - Bajaj Hindustan + Balrampur chini
Thursday, December 20, 2007
The recent rally in stock prices seems to be building in near best-case scenario on cane prices, for which there is still no certainty. Expect sugar price cycle to start turning up from FY09E, margin expansion will still depend on FY09E cane prices, on which there is little visibility given the current policy uncertainty. Further, cane price increases in FY09E could outpace sugar price increases, which would squeeze margins in FY09E. Bajaj Hindustan and Balrampur chini are downgraded to SELL.Bajaj Hindustan:
Company's profits will largely depend on sugarcane prices set by UP state govt. Currently the price fixation process is under litigation and there is not much clarity on the final outcome. The company is expected to report an EPS of Rs 18 for Fy2008 and Rs 11.9 for Fy2009. Citi maintains a SELL with a Target price of Rs 229.
Balrampur Chini:
The company looks well positioned to benefit from the strong growth in sugar demand in India (+4%, 2x global demand). However, in the current weak sugar price environment, as well as uncertainty on sugar policy, we expect profits to be under pressure. The company is expected to report an EPS of Rs 6.1 for Fy08 and Rs 8.96 for Fy09. Citi has set a target price of Rs 88 based on a replacement cost of assets.
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Published by DalalStreet Business @ 1:31 PM IST.
Top Wealth Creators in India for Shareholders
Tuesday, December 18, 2007
Who are the top wealth creators in India for their shareholders ? Here is a compiled list on various factors. First list is about Top Wealth Creators and the second is about Consistent Wealth Creators for their shareholders. The sectors in which these companies operate is enclosed in brackets for non Indian audience. We do not consider companies such as MMTC and NMDC whose share price is nothing but a scam.Top 10 Wealth Creators in India:
- Reliance Industries [Diversified Petrochemicals, Retail, Telecom, Finance, Energy]
- Oil and Natural Gas Corporation [Oil / Refining]
- Bharti Airtel [ Telecommunications]
- Infosys Technologies [IT Outsourcing]
- ICICI Bank [Retail and Industrial Banking and Insurance]
- Bharat Heavy Electricals [Electrical Equipment and Turnkey Projects]
- Steel Authority of India Ltd [Iron and Steel]
- Larsen & Toubro [Construction + Turnkey Projects + Cement + IT Outsourcing]
- State Bank of India [India's largest bank network]
- Wipro [Information Technology]
- Wipro
- Cipla [Pharmaceuticals]
- Reliance
- Hero Honda [2 Wheeler Automobile]
- Dr Reddys Labs [Pharma]
- HDFC [Housing Loans + Big Holding in Banking and Insurance + Financial Products]
- Asian Paints [Paints]
- Ranbaxy Labs [Pharma R&D]
- ITC [Cigarettes + Hotels + FMCG]
- Nicholas Piramal [Pharma]
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Published by DalalStreet Business @ 11:39 AM IST.
Movie Buys - PVR
Monday, December 17, 2007
The multiplex industry is set to witness strong volume growth on the back of rising consumerism, entertainment tax exemptions, advent of organized retail and overall multiplex underpenetration in India. PVR's dominant market share at the box-office, diversification into movie production and aggressive but selective geographical expansion plans bode well for the company's prospects.Through aggressive capacity expansion plans, PVR is looking at geographical diversification (beyond Delhi/NCR, its dominant pocket) and also target market broadening through its low - cost offering, PVR Talkies. PVR has aggressive expansion plans and intends to scale up its operations to 195 screens in FY09E and 248 screens by FY10E from the current 95 screens.
PVR has been looking at de-risking its business model by backward integrating in the movie value chain through its fully owned sub "PVR Pictures". PVR's entry into film distribution and production as integrated movie exhibition houses is a good move.
At current price levels of Rs.328 the stock is currently trading at 18x FY09E earnings. On an EV/EBITDA basis the stock is currently trading at 10x FY09E EV/ EBITDA. At target price of Rs 415 the stock will trade at 23x FY09E earnings and 12x FY09E EV/EBITDA, backed by an estimated 94% consolidated EPS CAGR over FY07-09E.
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Published by DalalStreet Business @ 10:28 AM IST.
MMTC and NMDC Price Rigging Scam
Thursday, December 13, 2007
Who is rigging the prices of Government Owned and Controlled companies - MMTC and NMDC ? What is the Market watchdog, SEBI doing ? Does the SEBI want's to be synonymous with the Police in Bollywood movies, arrive after all the damage has been done ? We present a complete analysis of price rigging in MMTC and NMDC and yet the Finance Ministry and SEBI are mere spectators :-) [Nothing New] MMTC:
The Government of India holds 99.33% of the shares in MMTC according to BSE India. Two Mutual Funds hold 0.65%. 919 shareholders (106 Bodies Corporate, 808 individuals and 5 NRIs who hold 9 shares), hold 7,369 shares.
Lets take a look at the share price of MMTC over the past 12 months,
Dec-2006 - Rs 1,995
Aug-2007 - Rs 4,700
Sept-2007 - Rs 7,500
Oct-2007 - Rs 20,435
Nov-2007 - Rs 56,931
Dec-2007 - Rs 27,299
So going by the current trends, Government and Institutions are the unlikely candidates for manipulation. So the culprit is one/more of the 919 shareholders. Leaving the Corporate Bodies aside, we think it is a group of individuals amongst those 808. With such low floating stock, manipulation will be very very easy :-)
NMDC:
In case of NMDC, the Government holds 98.38% while institutions hold 1.39%. This leaves with 0.23% of the stock in the hands of 942 shareholders who have rigged the price. Look at the share price history of NMDC over a year,
Dec-2006 - Rs 1,995
Aug-2007 - Rs 3,700
Sept-2007 - Rs 4,700
Oct-2007 - Rs 8,105
Nov-2007 - Rs 12,831
Dec-2007 - Rs 9,399
Clearly some folks with vested interests have manipulated these stocks. We recommend our readers to stay away from MMTC and NMDC.
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Published by DalalStreet Business @ 7:51 PM IST.
Educomp + Everonn Outperformers - Credit Suisse
Behind the attractive India growth story lies a hidden truth the education system is in a sorry state. India's education sector could see long-term secular growth with rewards for early movers in the K-12 segment. Credit Suisee has initiated coverage on Educomp and Everonn with an OUTPERFORM rating.Inefficient spending by the government sector and restrictive regulations hobbling private participation has led to a significant demand-supply gap. The market is large, with an addressable population of 460 mn children and annual spending higher than US$50 bn.
New models are emerging for the private sector to participate in K-12 education. Strong growth would be driven by: 1) increased outsourcing by government and private schools in the near term (one to three years), 2) own school business in the medium term (three to seven years) and 3) the use of the Internet to impart education in the longer term. Over the next five years, this segment is expected to lead to an operating profit CAGR of 100% for Educomp and 72% for Everonn.
Educomp Solutions:
Educomp has consistently surprised the street on upside in its operating metrics. Since the company is in early stage growth phase, quarterly volatility could remain high, in our view. But the management has been promising less and delivering more consistently.
Based on DCF model, Credit Suisse arrives at a target price of Rs 5,235 for the company, representing 30% potential upside from current price. The company is likely to report an EPS of Rs 71.21 and 122 for FY08 and FY09 respectively.
Everonn Systems:
Current investor expectations are based on the very limited operating data available and management guidance for FY08. Hence the initial few quarters will play an important role in moulding investor expectation.
Due to the high growth profile of the company, Credit Suisse values the stock on a DCF model with 10.6% WACC, strong near-term growth, 12% medium growth and 3% terminal growth. The company is likely to report an EPS of Rs 17.20 and Rs 28.19 for FY08 and FY09 respectively. The target price for Everonn is Rs 785.
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Published by DalalStreet Business @ 10:34 AM IST.
Morgan Stanley Bearish on Indian Markets for Next 12 Months
Wednesday, December 12, 2007
After India's biggest Bull, Mr. Sanjiv Duggal turning bearish on the Indian equity markets, Morgan Stanley has come up with a Base case prediction of SENSEX going down in the next 12 months while the Bull case prediction leaves very little on the table for investors entering the market at this level.Some of the main factors for such a bearish view are as follows, Contrasting Situation at Home and Abroad Makes Way for Fat Tails.
Macro: Soft Landing Underway, Risks are Exogenous The Central Bank has engineered a soft landing and thus growth is likely to slow in 2008.
Earnings and Corporate Activity: A Bag Full of Surprises Corporate activity is unlikely to surpass its 2007 peak in 2008. M&A activity, especially overseas M&A, is likely to be constrained by a combination of high valuations and funding issues thanks to difficult credit markets.
Valuation: Relative Multiples Could Be Headed Lower India's valuation gain in 2007 has been a key driver to the equity market’s relative performance. India started the year with a trailing P/E of 23 times (MSCI India) and is now trading at 30 times consensus earnings.
Market Outlook: Get Ready for a Bumpy Ride. Residual income model projects a fair value of 14,864 as at December 2008, implying 26% downside potential from current levels in 12 months from today. At base case fair value estimate, the BSE Sensex would trade on a F2009E P/E of 14.3x (Morgan Stanley estimates) vs. the F2008E multiple of 21.8x at which it currently trades. Bull case estimates of 21,622 represents 8% upside from current levels, while bear case implies downside risk of 45% to December 2008 to 11022. Attaching a 55% probability to base case and a 20% probability each to bull and bear case.
Dalal Street Analyst Expectations:
We have been recommending investors to BOOk Profits wherever they find them. However, do not EXIT completely. Base Case Analysis of SENSEX hitting 15,000 once in the next 12 months is very likely.
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Published by DalalStreet Business @ 8:57 AM IST.
Kotak Upgrades SREI Infra
SREI proposes to capitalize on its project development business to scale-up project finance activity. SREI, along with project contractors, bids for development of infrastructure projects. It has development rights for six road projects and two ports. Srei proposes to provide a gamut of financial and advisory services for the projects under development.
SREI's investment banking business has earned fees of Rs79 mn in 1HFY08. The focus is on emerging infrastructure companies which are tapping equity markets. The company has a reasonable pipeline for its size and expects to close the year with about 10 deals. Kotak has upgraded SREI Infra on the basis of Sum of the Parts Valuation.
SREI proposes to set up two SEZs: 1. Auto and auto ancillary SEZ in Khadakpur, West Bengal (100 hectares);Srei will hold 89% in this company, with the balance held by the Government of West Bengal. 2.Engineering sector SEZ in Raigarh, Maharashtra (81 hectares). Srei will own 50% in this company and Quipo the balance 50%. Srei’s direct and indirect holding therefore will be 58%.
SREI currently manages Rs9 bn of private equity - Rs1.5 bn in equity and Rs8 bn in debt. These investments have been fully invested and the company now proposes to raise additional Rs12 bn (US$300 mn) of equity. The management has highlighted that it has already received interest from several investors and the commitments will likely be firmed up over the next few months.
Quipo telecom, (Srei's economic holding of 12%) has set up about 1,500 towers over the last ten months. Expect the company to have 3,000 towers by March 2009E.
Sum of the Parts Valuation of SREI Infra:
Parent company Rs 96
JV with BNP Rs 81
Asset Management Rs 8
Investment Banking Rs 8
SEZs Rs 6
Road Projects Rs 6
Telecom Projects Rs 13
Kotak has set a Target price of Rs 240 on the stock, higher than the sum of the parts valuation.
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Published by DalalStreet Business @ 8:17 AM IST.
Godawari Power and Ispat Ltd - BUY
Tuesday, December 11, 2007
Godawari Power and Ispat Ltd [GPIL] completed its second phase of expansion. With this the company increased its capacity of sponge iron to 495,000 tpa (110%yoy), steel billets to 400,000 tpa (60%yoy) and HB wire rod to 120,000 tpa (90%yoy). With demand expected to remain strong in the next two years, expect GPIL's output to register 66.1% CAGR for sponge iron, 30.5% CAGR for billets, 26.7% CAGR for HB wires and 17.5% CAGR for ferro alloys over FY07-09.
At prevailing price of Rs14,700/ton, which is higher by 15% yoy, GPIL earns a contribution of ~25-28% on sponge iron sales as compared to ~15-18% on billet sales due to high cost of power in the value addition process.Expect sponge iron sales contribution in revenues to significantly increase from 9.2% in FY07 to 17.1% in FY08 and 14.9% in FY09.
GPIL's focus has been on securing captive resources. GPIL has received the mining license for iron ore at Boria Tibbu and Ari Dongari in Chattisgarh with reserves of 15mn tons, which is expected to decrease iron ore costs by ~Rs1,500/ton. Company expects to start commercial production within six months after receiving the forest clearance.
Valuation and Recommendation:
At CMP of Rs312, the stock trades at P/E of 8.1x and 6.1x on consolidated EPS of Rs38.9 in FY08E and Rs52.4 in FY09E respectively. IndiaInfo Line recommend a BUY with a target price Rs 420, which implies a P/E multiple of 8x on FY09E consolidated EPS.
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Published by DalalStreet Business @ 2:30 PM IST.
JP Morgan Overweight on Maharashtra Seamless
Monday, December 10, 2007
Maharashtra Seamless (MHS) has announced the acquisition of a 0.2MT seamless pipe plant in Romania. The company plans to bring the mill to India, although the finer details are still being worked out. The total transaction size is estimated to be Rs2.5B, which would be funded through internal accruals.MHS was trading at a significant discount to its peers in the Indian pipe sector as the company lacked growth drivers. The acquisition increases the earnings growth visibility and strengthens the company's position as India's largest seamless pipe company. After this acquisition the company still has a cash balance of Rs3.1B, giving it flexibility to pursue further organic/inorganic growth.
Expect FY08 to remain challenging, we do believe margins will recover in FY09. Expect the benefit of the acquisition to flow through in FY10. JP Morgan increases EPS estimate by 5% for FY09 (due to higher realizations) and 12% for FY10 (due to the benefit of new mill). The company is expected to report an EPS of Rs 34.2, Rs 45.1 and Rs 56.2 for FY08, 09 and 2010 respectively. JP Morgan is overweighto n the stock and has set a Dec-08 price target of Rs 675 based on 15x FY09E P/E.
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Published by DalalStreet Business @ 11:22 AM IST.
India's Biggest Ever Bull is Cashing Out
Friday, December 07, 2007
Indian speculators god, Rakesh Jhunjunwala is just a pawn when compared to the biggest ever Bull Dalal Street had in its history. Presenting, Sanjiv Duggal, Sr. Fund Manager, CIO and Director of HSBC Holdings Plc overlooking US $ 11 Billion of investments, the World's largest holding of Indian equities.Here is what Sanjiv Duggal has to say about the future course of investing in Indian markets,
Investors aren't factoring in earnings and news flows, but valuing people's dreams. The market is pricing in a lot of growth for the next two to three years.You can interpret this kind of reference for stocks like Reliance Power /Energy which doesn't even have the land, capital nor resources.
Cashing Out:
Power equipment manufacturers, for example, are seeing revenue growth of 25 percent to 30 percent a year and their stock prices assume the rate will continue, he said.
...is considering inviting investors to take some of their money out of the fund and seek better-valued equities elsewhere. He is cutting back on L&T and BHEL. He expects Indian stocks to decline over the next 18 months to 24 months.
Selling Banks
Overall earnings growth will slow to between 10 percent and 15 percent for the next three years to March 31, 2010, Duggal estimates, from about 30 percent in the previous period. Duggal said,
The fund has reduced holdings in banks to less than the benchmark, the S&P/IFC Emerging Markets Investable India Index. High interest rates will dent demand for loans and the central bank will lift reserve requirements. I have a cautious view on India as it's become increasingly difficult to find value. Markets will struggle to perform over the next year
Via [Bloomberg]
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Published by DalalStreet Business @ 11:44 AM IST.
Book Profits in Saregama
Thursday, December 06, 2007
Saregama India Ltd (SIL) reported disappointing results for Q2FY2008. While the operating revenues fell by 2.7% year on year (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to Rs2.7 crore. Consequently the net profit before extraordinary items decreased by 44.7% yoy to Rs2.6 crore.SIL's share in acquiring new music rights declined to 9-10% from about 30% in the past. With competition setting in, the cost of acquiring these rights has gone up substantially. The current scenario wherein music rights are awarded on minimum guarantee as against revenue sharing in the past has increased the risk for music companies.
Increasing competition, lack of aggression on the part of the management and sharper decline in physical sales raise concerns. The company is expected to report an EPS of Rs 11.1 and Rs 15.5 for FY08 and 09 respectively. The current market price of Rs293.1 fully factors the risks and rewards associated with SIL's business and thereby advice investors to book profit.
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Published by DalalStreet Business @ 11:30 AM IST.
Lehman Coverage on PNB + Canara + BOB + UBI + IOB
Wednesday, December 05, 2007
Lehman Brothers equity research has initiated coverage on Goldmines of the Indian Capital Market, PSU banks. Lehman has a OVERWEIGHT rating on Punjab National Bank, Canara Bank, Bank of Baroda, United Bank of India and Indian Overseas Bank.
Expect a positive delta in operating metrics vis-a-vis the trend seen in the past three years, supported by a benign operating environment. These banks are currently trading at a material discount to SBI, which we think is unjustified. Note that this valuation gap has emerged only since April 2007. These Public sector banks are trading at an unjustified discount to private sector banks which is unjustified.Over the medium term, we believe regulatory moves will be a key driver for the sector and especially public sector banks. Going by recent developments, expect regulatory moves to be benign for public sector banks. Peaking of interest rates provides a favourable background for stock performance, in our view. A turnaround in the interest rate environment will act as a trigger for stock performance.
Punjab National Bank:
Forecast high profitability driven by a 44% Current and Savings Account (CASA) ratio and strong fee income growth. Expect weak margins to rebound to 3.9% in FY08E as credit demand picks up and high-cost bulk deposits are re-priced. PNB runs a structurally sound franchise business characterized by a high CASA ratio and a strong fee income revenue stream. Near-term dampeners such as uptick in fresh slippages and drop in margins are likely to wear off over the next few quarters, in our view. Lehman expects the bank to report a 20% earnings CAGR on a 21% CAGR in advances over FY07-FY10E. On estimates, the bank will generate 18% ROE in FY10E. At 1.6x FY09E ABV and 8.2x FY09E earnings, current valuations are not demanding. Initiate coverage of the stock with a Overweight rating and a 12-month price target of INR720
Canara Bank:
Current weakness in margins has been driven by a low incremental C/D ratio in 1HFY08, but with no contraction in spreads. With credit growth likely to pick up strongly, we believe margins have bottomed, and we expect the bank to post healthy core earnings for 2HFY08. At 1.0x FY09E adjusted B/V and 6.4x FY09E earnings, current valuations are attractive, in our view.
Lehman expects Canara bank to report an EPS of Rs 34.6 and Rs 42.6 for FY08 and Fy09 respectively. Based on dividend discount model (DDM) and adding INR10 for value of investments in NSE and NCDEX, Lehman arrives at a 12-month forward fair value of INR340, at which price the stock would trade at 1.2x FY09E adjusted B/V and 8.0x FY09E earnings.
Bank of Baroda:
Bank of Baroda's current profitability is one of the lowest among its peers, expect some improvement, driven by rising cost and capital leverage. Estimate an ROE of 16% in FY10E, up from 11.5% in FY07. BOB offers potential higher reward, based on the valuations of 25% - owned UTI Asset Management Company (UTI AMC), which is seeking an initial public offering (IPO) in late FY08.
Despite factoring in lower profitability, believe Bank of Baroda's current valuations offer a favorable risk reward. Initiate coverage with a 1-Overweight rating and a 12-month PT of INR430, based on 1.2x FY10E adjusted B/V and 7.8x FY10E earnings, which are still at discounts to our valuations of other public sector banks, thus capturing the lower profitability of the bank.
United Bank of India:
Profitability is contingent on calibrating loan growth given the low Casa ratio. However, management's focus on profitability rather than growth is a positive.Reserve Bank of India (RBI) guidelines, which allow banks to shore up their tier-1 ratio through non-cumulative preference shares, is a big positive given the bank's capital constraint.
Building in a sustainable return on equity (ROE) of 14.5%. However, at 1.3x FY09E adjusted B/V, we believe current valuations are attractive even after factoring in lower profitability for the bank. Based on dividend discount model (DDM) methodology, arrive at a 12-month forward fair value of INR230; at which price the stock would trade at 1.5x FY10E adjusted B/V and 7.4x FY10E earnings.
Indian Overseas Bank:
Structural factors such as sector-leading NIMs, a low cost/income ratio and efficient capital utilization drive current profitability. Despite the high core profitability, the stock is yet to see any material re-rating and continues to move in a band with other public sector unit (PSU) banks on P/B multiples.
The stock is a strong candidate for re-rating. Based on dividend discount model (DDM), arrive at a 12-month price target of INR200. Based on the target price, the stock would trade at 1.5x FY10E adjusted B/V and 6.2x FY10E earnings.
Read the full article
Published by DalalStreet Business @ 11:59 AM IST.
India Model Portfolio - Morgan Stanley Vs Merill Lynch
Tuesday, December 04, 2007
Here is a Model Portfolio and weight ages across different scrips and sectors. Both Merill Lynch and Morgan Stanley have slightly different views when it comes to Industrials / Cement. Merill Lynch is more bullish on the segment than Morgan Stanley [MSCI]. Rest of the sectors both have comparable views.
Portfolio Record Date Dec-04-2007.
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Published by DalalStreet Business @ 8:43 PM IST.
Add Gitanjali Gems + Pioneer Distilleries - HDFC
Monday, December 03, 2007
On the 17th of November, we initiated coverage on Gitanjali Gems Ltd. Now, HDFC Securities has initiated coverage on Gitanjali Gems and Pioneer Distilleries with a BUY rating.Gitanjali Gems Ltd [GGL] is an integrated diamond and jewellery manufacturing company with a leading position in India. The Indian gems and jewellery market was Rs 602 bn [2006] with organized retail at 2.9% at Rs 16.8 bn. The organized jewellery market is expected to grow at CAGR of 40% to Rs 64.5 bn in 2010.GGL has 12 branded jewellery verticals including sub-brands positioned across various segments. Strong retail and distribution networks support the jewellery brands and products across India. GGL has 112 distributors across the country with approximately 1,250 outlets. Some of the well known brands of GGL include Asmi, Gili, Nakshatra, D'damass etc. The company also approvals for 4 jewellery export SEZs and 2 Multi-Product SEZs. It has also comissioned a 80,000 sft export processing unit in SEEPZ Mumbai.
As a part of diversification, GGL is also focusing on Lifestyle products. GGL is expected to report a fully diluted EPS of Rs 18 and Rs 29 for FY08 and 09 respectively. HDFC puts a BUY recommendation with a 12 month target price of Rs 521. Morgan Stanley has a target price of Rs 550.
Pioneer Distilleries:
PDL started to set up a stand-alone distillery with the main objective to manufacture Extra Neutral Alc*hol (ENA), Rectified Spirit (RS) and Special Denatured Spirit (SDS) with a total capacity of 150 lakh litres per annum. Recent increase in plant capacity from 50KLPD to 100 KLPD (Kilo Litres Per Day) has brought benefits for PDL as it is experiencing higher volumes/capacity utilization after this expansion. PDL has obtained State Excise approval for expanding the capacity further from 1 lakh litres per day to 2 lakh litres per day. It is also contemplating an increase in capacity of ethanol plant from 30,000 litres to 1,30,000 litres per day.
Further, capex by way of 5 MW biogas based power plant and effluent treatment plant to be set-up by PDL to make use of the waste in the process of manufacturing its various products will add to the growing topline of the company and can help maintain / increase EBIDTA margins. The Government's mandatory direction of 5% blending of ethanol with petrol could improve the revenue visibility of PDL and further proposed 10% mandatory doping by October 2008 could add to PDL's topline.
PDL could grow its sales by 37% CAGR over FY07-FY09, Operating Profit by 61% and PAT by 83% over the same period. BUY in small lots at the CMP (Rs.90.5) and added on falls to Rs.77. The stock could reach a price of Rs.136 in the next 3 quarters.
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Published by DalalStreet Business @ 3:50 PM IST.
Garware Offshore cash in on E&P boom
India derives more than 37% of its primary energy requirements from hydrocarbons (crude oil and natural gas). Of the 165 blocks offered in the six rounds of NELP, 102 have been offshore blocks. This offering has resulted in a huge capital expenditure planned for the offshore segment.Garware Offshore Services Ltd (GOSL) currently has four Anchor Handling Tugs - cum - Supply Vessels (AHTSV) and three Platform Supply Vessels (PSV). Further, it has embarked upon an aggressive capex plan to acquire two PSVs, two 60-T AHTSVs and one construction barge (on lease).
PSVs command higher margins in comparison to AHTSVs. With increase in number of PSVs in GOSL's fleet from one in CY05 to five in CY08, operating margins for GOSL will increase substantially. GOSL has entered into a tie-up with Havyard, a Norwegian shipyard, to sell its ship designs and ships in India. The commission for the sale of a ship or a ship design ranges from 3-4%. GOSL is also setting up a KPO for designing ships for Havyard in India.
Consensus estimates GOSL to register a CAGR of 57.6% in revenues and 64% in PAT during CY06-CY09. The stock at CMP of Rs242 is available at 8.4x CY09 earnings. With long term contracts tied up for most of the vessels, we believe there exists high degree of visibility for future revenue growth. At 11x CY09E earnings of Rs28.9, the target price works out to Rs318, an upside of 31.5%.
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Published by DalalStreet Business @ 10:14 AM IST.