Houseview – ITC, TCS and Cosntruction Stocks

The impact of budget on the bottomline of many companies is getting more clear now.

Merill Lynch is bullish on ITC and TCS and is bearish on the prospects of ACC. Merill added ITC to its top buys list in India and increasing its weight in their model portfolio. Fears of VAT had driven a de-rating of the stock. Post the budget these fears are behind us and look for the
stock to deliver a strong return over the next year.

Merill expects profit growth of 20% over next 2 years: ITC earnings remain insulated from rising interest rates, slowing global economy and worries on inflation. Key assumptions are cigarette volume growth of 7-8% and EBIT margin expansion of 150bp. Merill has set a price target of Rs200 which is based FY08 P/E of 22.5x. A one-year forward multiple of 22.5x would also put ITC in line with Indian consumer sector average.

MAT will impact the bottomlines of Infosys and HCL Technologies more than TCS and Wipro. However, FBT on ESOP is likely to have a deeper impact on Infosys, Medium impact on Wipro and no impact on TCS. Merill is bullish on TCS with a price target of Rs1,600 – at 23x 1-yr rolling forward EPS. This is at a 5% discount to our target multiple for Infosys at 24x and lower than TCS’ current 1yr forward PE of 26x.

Citigroup published a report on the impact of withdrawal of Tax benefits for construction companies. Recall my last night posting on the cost of doing business in India because you never know when tax laws will nail your company. Citi says that the tax impact may also lead to liquidity crunch. Gammon India will have an one time impact of Rs 35 crore, Nagarjuna Constructions of Rs 26 crore and IVRCL of Rs 58 crore. I had already told you yesterday that this will have no impact on Punj Lloyd and L&T and Citi report confirms the same 🙂

Citi maintains a BUY with Low Risk rating on Gammon India with a Price Target of Rs 461. Nagarjuna Constructions BUY with Medium Risk for a price target of Rs 272 based on sum of parts evaluation. Citi downgraded Hindustan Construction to SELL Low Risk with a price target of Rs 105.

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