Dalal Street Investments

Buy ABB + Nicholas Piramal India – Citigroup

August 29, 2007

Citigroup Research which had a BUY recommendation on ABB has revised its target price upwards to Rs 1,266. Current market Price is Post Stock Split from Face Value Rs 10 to Rs 2.

Citi expects earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the ~37% level, driven by sales CAGR of 42%. Target price is based on a P/E of 30x FY09E at a ~30% premium to BHEL given: 1] EPS CAGR of 49%; 2] RoEs of ~37%; 3] Access to parent technology; and 4] ABB India’s importance in the ABB Group.

ABB China grew sales at a CAGR of 33% over a 7-year period between CY98 to CY05. ABB India may find it possible to repeat this feat in India given India is the fastest growing T&D market in the world, a fact corroborated by both ABB an Areva. India is not only a promising domestic market, where ABB is well-positioned as a market leader in power and automation technologies but also a global sourcing hub; global R&D centre; and regional excellence centre.

Citi has also recommended a BUY on Nicholas Piramal India as the stock will unlock the value from proposed demerger of R&D unit – NCE Research. NPIL’s focus on NCE R&D has been rising and it is working on 13 NCEs (3 in the clinic). R&D/sales was up from 1.2% in FY03 to 5.2% in FY07 (66% CAGR) and is set to rise to 5.7% in FY08E.

First-cut calculations indicate that a demerger would raise FY09E and FY10E EPS 12-16% and 11-15% respectively. Besides, the street has treated NPIL’s NCE R&D as a cost, thereby reducing the company’s overall valuation. On demerger, if the NewCo is listed, expect the Street to assign some value to this as well, thus unlocking value for shareholders. Citi sets a target price of Rs 345 on Nicholas Piramal India.

In a separate Research report, Sharekhan securities has set a Target price of Rs 326 on Nicholas Piramal India Ltd.


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