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Lehman Overweight on Redington India

Wednesday, October 31, 2007

Lehman Brothers equity research which was the first to boldly come out and downgrade the Indian IT Outsourcing companies is overweight on the prospects of Redington India Ltd. Redington is the second-largest IT distributor in India and the largest IT distributor in the Middle East. It has a very good Supply Chain expertise.

The company is poised to exploit the strong and secular growth of IT industry in India and Middle-East. Robust systems and stable management team have led to impressive track record in operating performance. Inventory write-downs have been only 0.03-0.04% for last couple of years whereas bad debts have averaged only 0.08% of sales in last five years. PC market in India is witnessing faster growth of branded computers. High value segments like storage & networking equipments are growing faster (47% growth in FY07) than the industry average (19% growth in FY07). The services business with much higher margins (OPM of around 15%) will continue to gradually increase its share of revenues.

The company has opportunities to expand its supply chain platform to goods like mobile handsets, consumer durables etc. It has initiated businesses in these areas which are pretty nascent. The company has registered revenue CAGR of 50% for FY05–07. EPS CAGR is expected to be around 31% during FY07–10. On DCF based valuation, Lehman sets a target price of Rs 455. The stock is trading at P/E multiple of 15.5x FY09E which compares well with international peers like Ingram Micro (11x CY08E), Synnex (19x CY08E) etc. especially given the high growth prospects and healthy ROE.
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Published by Webmaster @ 9:09 AM IST. ,

Kotak Mahindra Bank - Stronger as Expected

Monday, October 29, 2007

Kotak Mahindra Bank stunned analysts on the street with results recording a PAT growth of 147% YoY. Broking profits up 215%+ (100% yoy rise - slight market share gains), and investment banking profits up 218%; and high league table positions. Buoyant primary/secondary markets key drivers;

Asset management group now manages almost $10b in assets - across domestic MF, portfolio management - domestic and offshore, and the more recent, alternative asset class. Key growth area - fees, potential performance fees upsides, business generating synergies and value generator. The core banking business to grow rapidly, and without any fuss; 50% loan growth, margins stable at 5%+.

Consensus EPS estimate is now at Rs 24.35 and Rs 29.82 for FY08 and FY09 respectively. Citi puts a price target of Rs 1110 based on EVA methodology. Macquarie research set a target price of Rs 1150.
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Published by Webmaster @ 9:45 AM IST. ,

Conflicting Ideas on Idea Cellular

Sunday, October 28, 2007

Idea Cellular released disappointing results for 2Q FY08, with key disappointments on ARPU, network operating expenses, subscriber acquisition costs and deferred tax. Due to a sharp fall in ARPU, revenue grew 5.7% QoQ and 54.7% YoY to Rs15.6bn against our estimate of Rs16.4bn (expected growth of 11.3% QoQ). EBITDA margins also disappointed and fell 202bp on QoQ basis to 32.7%. A sharp reduction in margins led to a marginal reduction in EBITDA, which fell 0.4% QoQ to Rs5.1bn. EBITDA was 11% lower than estimates. PAT fell 28.6% QoQ to Rs2.2bn.

All the brokerage houses have conflicting ideas about Idea cellular. Macquarie wireless research expects the company to report an EPS of Rs 5.20 and Rs 6.75 for FY08 and FY09 and has set a target price of Rs 192.

UBS expects EPS to be Rs 3.82 and Rs 4.63 for FY08 and FY09 and has a target price of Rs 175 which is very expensive compared to its EPS projections.

Citigroup expects Idea to report an EPS of Rs 5.1 and Rs 6.0 for FY08 and FY09 and has set a target price of Rs 155.

Conflicting to all the above views, Sharekhan/SSKI and Credit Suisse estimate Idea to report very poor results and EPS of Rs 3.44 and 4.65 for FY08 and FY09. They have set a target price of Rs 108 based on DCF. Our analyst feels that this stock will likely under perform the Telecom sector, especially in the light of Reliance communications joining the GSM mobile operations.
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Published by Webmaster @ 9:26 AM IST. ,

Reduce NIIT - Citi

Saturday, October 27, 2007

NIIT reported revenue of Rs2.7bn (+33% yoy). EBITDA of Rs359m (+50% yoy). Higher taxes and depreciation, and lower equity income from NIIT Tech led to a net profit of Rs212 m (vs. estimate of Rs246m).

Individual business revenue grew 31% yoy (CIR est. 41%), while EBITDA margin of 23.8% was broadly in line. NIIT said that the price hike for career segment courses in non-metros was from Aug, vs. Jun for metros. Organic corporate business had slower revenue growth, while ElementK growth was in-line. The company introduced new courses for the insurance and financial planning segments; these businesses also saw EBITDA breakeven.

Weaker growth for the individual business and the stronger INR is affecting the corporate business.The sum of parts valuation for NIIT is as follows,
  • Core Training Business - Rs 100
  • ElemntK - Rs 16
  • NIIT Tech Stake - Rs 24
  • New Business Rs 5
NIIT is expected to report an EPS of Rs 5.67 and 8.33 for FY08 and FY09 respectively. Revised 12 month target price is Rs 145.
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Published by Webmaster @ 5:05 PM IST. ,

Tata Steel + Sterlite Upgraded

Wednesday, October 24, 2007

Commodity price forecasts are strong on the back of continued strong global demand growth and limited supply response from the mining
industry. The headwind in the US is unlikely to precipitate a sharp slowdown in demand because of the "decoupling" of the US economy from BRICs and other economies.

Tata Steel:
Estimates on greater visibility of synergy benefits from Corus and lower than expected equity dilution from the proposed equity issuances. This results in 1.3%, 8.2% and 20.7% higher net profit estimates for FY2008/09/10E estimates respectively. Following a sharp re-rating of regional steel peers, revise SOTP based 12-month Target Price of Rs1,092. At a 1-year forward EV/EBITDA of 5.2x, the stock is trading at a 19% discount to Indian peers and a 43% discount to regional peers. At our new TP, the stock would still be trading at a discount of 25% to regional peers. On EV per tonne, the stock trades at US$948, which is a discount of 38% to regional peers.

Sterlite Industries:
Key catalysts for Sterlite's re-rating are, Volume growth across zinc, copper and aluminium businesses on the back of recently completed/ongoing expansions; further debottlenecking in zinc and aluminium; lowering of operating costs from better economies of scale and commissioning of the captive power plant in zinc; material progress in resolution of the bauxite mining project for Vedanta Alumina;

Goldman Sachs in a report expects base metal prices to be rock solid. Consequently, they raise net profit estimates for FY2008E and FY2009E by 0.3% and 42.5%, respectively (which are 16% behind consensus for FY2008E and 17% ahead for FY2009E). They also raise 12 months SOTP based target price by 62% to Rs 1,044.
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Published by Webmaster @ 8:10 PM IST. ,

HSBC Underweight on GMR Infra

GMR reported 2Q FY08 results, with revenue up 26%, to INR3.95bn against estimate of INR4.2bn. The revenue growth has been predominately due to the additional contribution from the airport business (INR753mn) and higher PLF of the two power plants (INR223mn). However, the net profit has been down 7.5% yoy, to INR495mn , due to INR343mn loss of Vemagiri power project (VPGL). VPGL has been non-operational since September 2006, due to the non-availability of gas and this will remain a drag on profitability for the full year.

DIAL reported 49% growth in revenue on 24% passenger traffic growth and revenue contribution from a new concession agreement. The development of Phase I capacity is on underway and the project cost is now pegged at INR89bn. Hyderabad [HIAL] airport is expected to be operational by March 2008 (85% of the construction completed). HIAL has indicated that the two SEZ (of 250acres each) are not a part of the earlier 1000 acres of commercial development.

GMR's projects are conducted over fixed durations of 15-60 years. After the concession period, the assets are handed back to the government at no cost. DCF is the most suitable approach to value the company. GMR's entire current business is valued at INR197.1bn, translating into INR119 per share, 25.5% below the current share price level.
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Published by Webmaster @ 1:06 AM IST. ,

United Spirits + Radico Khaitan

Tuesday, October 23, 2007

Kingfisher Boss, Vijay MallyaUnited Spirits Ltd - USL, despite its dominance and 5x the size of the next competitor, operates at EBITDA margin of merely 14% (in FY08E), far lower than market leaders in other parts of the world. Whyte & Mackay bulk scotch supplier, is benefiting from the up-cycle in scotch prices. We estimate W&M accounts for 1/3rd of Group EBITDA. Expect EPS CAGR of 60% over FY07-09E. USL trades at P/E of 28x FY09E. Expect USL to report an EPS of Rs 32.35 and Rs 62.35 for FY08 and FY09 respectively.
USL has run up 37% over the last three months. It now trades at P/E of 28x FY09E. Buy with a target price of Rs2200, which is based on target multiple of 35x FY09E. This implies a PEG of 0.7x in FY09E which is lower than India consumer sector at ~1.2x.


Radico Khaitan:
Radico Khaitan is India's second largest spirits company has a larger share of mass market brands which imply volume growth will be slower than USL's. Radico's key growth driver is Magic Moments vodka, which will grow strongly led by huge on-going marketing investments. But risks are high to our EPS growth forecast of 44% over FY07-09E. The stock appears to be fully valued at 26x FY09E. Personally we don't invest in Tobacco and Spirits stocks.
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Published by Webmaster @ 7:51 PM IST. ,

Suzlon Energy + Bajaj Auto Review

Suzlon's EBITDA margin rose to its long term guidance of 16% (7.2% in 1QFY08) led by a 76%YoY growth in volumes led by resolving of law & order issues in the domestic market, improved deliveries in the international market and sell-down of inventory (140MW of the total 683MW). On the back of record deliveries of 683MW and resultant operating leverage, led to 68% YoY growth in PAT at Rs3.9bn, much ahead of the Street estimate of Rs2.5bn. The company also has a strong order book position.

Suzlon's exceptionally strong 2Q08 marks an inflexion point in execution and margins, after four successive quarters of disappointment. Suzlon is expected to report an EPS of Rs 45.19 and Rs 68.95 for FY08 and FY09 respectively. Merill Lynch rates the stock a BUY with a Target Price of Rs 2,150. JP Morgan's Target is Rs 1,960.

Bajaj Auto:
Bajaj Auto's Q2FY08 performance has been higher than expectations, because average price realizations were higher by 11.8% yoy and 4.2% qoq mainly due to a relatively stronger growth in the executive and premium segment motorcycles. Though net sales declined by 3.0% yoy to Rs23.62bn on the back of a 13.0%yoy decline in total volumes, EBIDTA margin (adjusted) for the quarter stood at 15.5% (higher 50bps yoy, 190bps qoq). Net profit before extraordinary and special items (export incentive of Rs140m pertaining to Q1FY08) remained flat yoy at Rs3.3bn.

Bajaj Auto is expected to report an EPS of Rs 125.50 and Rs 155.30 for FY08 and FY09 respectively. On the basis of Sum of Parts Valuation, HSBC rates the stock as neutral with a price target of Rs 2,650.
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Published by Webmaster @ 2:29 PM IST. ,

Tech Mahindra + Ultratech Cement - SELL by Citi

Monday, October 22, 2007

Citigroup in a recommendation released minutes ago have downgraded the stock of Ultratech Cement and recommend a SELL after reviewing Q2 results.

UltraTech (ULTC) reported net sales of Rs11.7bn (in line) in 2QFY08, driven by 12% higher domestic realizations. PAT (Rs1.86bn) was 11% below our forecasts. A continuing focus on the domestic market helped ULTC's domestic volumes grow 12.5% yoy to 3.15m tonnes. Exports fell 13% yoy to 0.2m tonnes. Costs were higher as materials, labor and other expenses were all higher than forecasts. Material and labor costs are expected to remain high, the former due to growth in the RMC business.

Sell with a target price of Rs740. ULTC has been hard hit by higher costs recently, particularly for coal and freight. ULTC is running at full utilization, and expect only 2% yoy volume growth in FY08. EPS of ULTC is expected to be Rs 79.7 for FY08 and Rs 69.4 for FY09.

Tech Mahindra:
Tech Mahindra reported another disappointing quarter with revenues growing only 4.7% qoq. Growth was led by BT, while non-BT business remained flattish. Margins fell ~30bp qoq. Net profit of Rs.1.8b was up 7% qoq due to higher other income and lower taxes.

Tech Mahindra indicated that its two top clients (BT and AT&T) are undergoing restructuring. This could delay recovery in Tech Mahindra's business. Tech Mahindra is expeted to report an EPS of Rs 58.97, 78.36 and 91.08 for FY08, 09 and 10 respectively. The stock trades at 17x FY09E EPS. Revised target price of Rs.1330 is based on 17x FY09E EPS.

DalalStreet Analyst Views: Tech Mahindra has assured contracts and one need not panic and SELL. You can hold it if you have bought it at lower levels on our recommendation earlier.]

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Published by Webmaster @ 7:29 AM IST.

Great Offshore - BUY Indiainfoline

Sunday, October 21, 2007

Indiainfoline Equity Research recommends a BUY in Great Offhsore Ltd with a price Target of Rs 1,029. Key points for the recommendation are as follows,

Great Offshore Ltd (GOL) reported 19.9% yoy growth in net sales to Rs1,523mn in Q2 FY08 as against Rs1,271mn in Q2 FY07. The jump was primarily on account of higher number of vessels operational. Other income jumped from Rs9mn in Q2 FY07 to Rs173mn in Q2 FY08 on account of implementation of AS-11 with effect from April 1, 2007.

GOL has a presence across the entire offshore value chain via its fleet composition of two drilling vessels, 23 offshore logistics vessels, two fire fighting vessels, 11 harbour tugs and one construction barge. Focus on the EPC business has become a part of the company's business strategy only in the recent past. Currently, the company has an order book of Rs600mn, which is to be executed over a period of six to eight months. With huge investments lined up in domestic E&P sector, there could be increased order flows for the company. Expect GOL to earn revenues close to Rs800mn in FY08 from EPC segment.

EPS estimate for FY09 is Rs 73.5. BUY with a target price of Rs1,029.
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Published by Webmaster @ 9:27 AM IST.

Indo Borax and Chemicals

Friday, October 19, 2007

Indo Borax and Chemicals Ltd. (IBCL), is in the business of manufacturing inorganic chemicals like boric acid, borax and 2 new value-added products - eco borax and glaze bore.

Falling prices of its main raw material - imported boron ore - due to the appreciating Rupee and new mines opening up in East European countries could help IBCL boost its EBIDTA margins. IBCL caters to diversified fast growing user industries like glass, ceramics, pharmaceutical, electroplating, leather, etc, each of which is on a high growth path. IBCL has raised prices of all its products by 15-25% since Oct 01, 2007. This could push its revenues and margins significantly from 2HFY08 onwards.

IBCL has strong in-house technology development skills, this has also enabled them to come up with 2 new high margin value added products – Eco Borax and Glaze Bore. IBCL is one out of 6 manufacturers across the world to be manufacturing Boric Acid.

At the current price of Rs. 173.75, IBCL is available at 6.64 times its FY08 (E) EPS and 5.78 times its FY09 (E) EPS. We expect IBCL to record 32% and 21% growth in sales in FY08 and FY09 aided by volume and realisation growth. IBCL could quote at 8 times its FY09 EPS in 9 months time - at a price of Rs 250.
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Published by Webmaster @ 2:28 PM IST.

Jaiprakash Associates Stock Revaluation

Morgan Stanley has taken the lead to re-rate JP Associates shedding the conservative valuations it enjoyed. They have changed 12 month target price to Rs 1,461 and earnings estimate for FY08 and FY09 are Rs 22.7 and Rs 29.2.

The company reported F2Q08 results in line with estimates, with revenue and net profit growing 11% and 16%, respectively, led mainly by the cement business. Expect construction and real estate to pick up the growth mantle as cement starts to struggle in F2009 . Also incorporated a 7.4% dilution due to the conversion of the second tranche of FCCBs (euro-denominated) issued by Jaiprakash, which results in our EPS numbers for F2008 and F2009 moving up by only 9.1% and 1.8%, respectively, despite increases in net profit forecasts of 12.9% and 9.1%

Sum of Parts Valuation of JP Associates,
On the back of value in its sum of the parts, which includes option value for full development of Taj Expressway implies upside of 47% from current levels.

DSP Merill Lynch also said, raised Price Objective to Rs1,530 from Rs985 based on the value creation across businesses.

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Published by Webmaster @ 10:43 AM IST.

Buy Allahabad Bank for Long Term

Allahabad Bank's profit growth of 14% Y-o-Y at INR 2.4 bn in Q2FY08 was ahead of expectations. However, this growth was buoyed by lower tax provisioning (10%) and higher treasury gains (INR 359 mn). Core business performance remained muted with merely 17% Y-o-Y growth in advances and lower-than-expected growth in net interest income at 13% Y-o-Y. The bank’s pre-provisioning operating profit grew by 23% supported by strong treasury gains and a 40.9% growth in the trading income yoy.

The operating expenses grew by a moderate 11.1% yoy which helped the bank in reporting a better operating profit growth of 23.2% yoy. The core operating profit growth was at 19.3% yoy but declined by 13% sequentially. The asset quality remained stable on a sequential basis with the net non-performing asset (NPA) at 0.75% as in September 2007.

At the current market price of Rs95, the stock is quoting at 4.4x its FY2009E EPS, 2.8x PPP and 0.9x BV. One can BUY the stock with a price target of Rs125 and can also hold for long term.
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Published by Webmaster @ 10:16 AM IST.

Sona Koyo Steering Systems - Hold

Sona Koyo Steering Systems (Sona Koyo) declared another set of good numbers with an 18.8% growth in revenues at INR 1.65 bn in Q2FY08. EBITDA stood at INR 177 mn, up 33% Y-o-Y, with EBITDA margins improving 110bps Y-o-Y and 20bps Q-o-Q. The company's net profit for the quarter stood at INR 87.9 mn, up 38.2% Y-o-Y.

Capex for its greenfield plants at Singur and Uttaranchal is on track; the company expects them to come on stream by H2FY09E. It is also setting up a third plant at Bawal, Haryana, as part of its recent 49:51 JV with JTEKT, called JTEKT Sona Automotive India.

The company has shifted its focus towards the more profitable European markets, and deferred some export orders to the US. Valuations for Sona Koyo are still attractive given its healthy topline growth with improving margins. At CMP of INR 44, the stock is trading at a P/E of 11.5 and 8.8 on our EPS estimate of INR 3.8 and INR 4.9 for FY08 and FY09, respectively.

Existing investors can hold and add on market corrections.
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Published by Webmaster @ 9:12 AM IST.

Kotak Upgrades CONCOR + Gateway Distriparks

Thursday, October 18, 2007

Kotak has upgraded the stocks of Container Corporation of India Ltd [CONCOR] and Gateway Distriparks Ltd after the Q2 results.

CONCOR:
You can see the Q2 results flash in our earnings news section. Here is the rationale behind the upgrade. Accommodating for lower average realizations, lower operating margins, higher other income and lower then expected average tax rates, Kotak revises earnings estimates and expect the company to report EPS of Rs.125.0 in FY08E and Rs.145.1 in FY09E as against earlier estimates of Rs.126.7 and Rs.149.3, respectively.

At Rs.1885, the stock trades at 3.0x book value, 13.0x earnings and 11.4x cash earnings based on FY09E. Concor has a tremendous advantage in terms of its scale of operations consisting of volume of traffic, network of terminals across the country, strong base of low cost assets like hi-speed wagons and containers, which would ensure its No.1 position in India in the visible future for transportation of containers through rail. Kotak reiterates BUY on Concor with a revised price target of Rs.2875.

Gateway Distriparks Ltd: GDL
Q2FY08 results of Gateway Distriparks were above expectation on the revenues side. However, the margins have disappointed us. On the profitability side, the results were below expectations.

On a consolidated basis net sales for Q2FY08 were at Rs.640.3 mn, up 67.8% on YoY basis and up 32.5% on sequential basis. EBIDTA for Q2FY08 was at Rs.255.5 mn, up 16.6% YoY and up 15.9% on sequential basis. Consolidated PAT for Q2FY08 was at Rs.188.8 mn, down 10.4% YoY and up 1.6% on sequential basis thereby translating into quarterly EPS of Rs.1.6 and quarterly CEPS of Rs.2.2.

Gateway Rail Freight Ltd, subsidiary of GDL, has acquired its first own container train and subsequently it deployed two of its own rakes on the domestic route. The cold chain business of the company through Snowman Frozen Foods has done well as the revenues grew by 10.1% on sequential basis to Rs.71.4 mn.

Expect GDL to report EPS of Rs.7.2 in FY08E and Rs.9.5 in FY09E, as against earlier estimates of Rs.8.2 and Rs.10.7, respectively. Revised Target price is Rs 170.

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Published by Webmaster @ 12:19 PM IST.

Citi Upgrades Jubilant Organosys

Jubilant's 2QFY08 results were very strong, with a robust trend in revenues as well as profitability. The high margin PLSPS business (especially CRAMS) was the key growth driver and now contributes c60% of revenues.

2QFY08 was stronger than expected, with sales growth of 33% YoY (16% organic) & 169 bps expansion in EBIDTA margins leading to a
49% increase in recurring PAT. Reported PAT was buoyed by forex translation gains (Rs289m). CRAMS was the key growth driver while the legacy industrial and performance products business benefited from lower molasses prices.

Citi raised FY08E, FY09E and FY10E net profit estimates by 41%, 5% and 3% respectively. The company is expected to report an EPS of Rs 17.37, 22.11 and 27.00 for FY08, 09 and 10 respectively. Citi also raised the stock target price by 8% to Rs 415/share.
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Published by Webmaster @ 12:03 PM IST.

Kotak Favors Infotech Enterprises in Midcap Software

Though the IT pack is out of the HOT favorites amongst investors, Kotak favors Infotech Enterprises a Midcap IT company.

The company exhibited sustained volume growth during the quarter. The results were broadly in line at the EBITDA level. A higher other income component resulted in modestly above estimate profits. Revenue visibility remains strong for FY08 and encouraging for FY09. 'Offset clause' can bring in potentially large business in the defense and aerospace areas.

Infotech is cash-rich post the recent private placement. Strategic acquisitions are possible in the near term.FY08 and FY09 earnings are estimated at Rs.16.1 per share and Rs.20.9 per share, respectively, based on fully diluted equity. Kotak recommends a BUY on the stock with a price target of Rs.354.
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Published by Webmaster @ 11:47 AM IST.

Telefolio Recommendation - Esab India

Esab India is the latest recommendation from Capital Market Telefolio. Esab is a MNC with 56% stake held by UK parent. The parent company had come out with an Open Offer to more than double its holding by acquiring 37.69% stake in the company at Rs 505 per share. However, the Parent company failed to gather the entire 37.69% shares, through the Open Offer and managed to get only 18.25% shares. However, this took the Parent's stake in the company to 55.56% from 37.3%.

The company is focused on equipments for infrastructure projects. Electrodes and welding/cutting equipment are integral requirement for any kind of fabrication required in engineering and construction. With major investments expected in steel, oil & gas pipelines and ship building industries (which are the key driving force for the welding industry) along with strong capex in power and construction sectors, welding industry has strong growth prospects ahead.

For the Half year ended Jun'07, sales of consumables division increased 27% to Rs 121.29 crore and PBIT rose by 30% to Rs 33.80 crore. This division accounted for almost 72% of the total sales and 80% of total PBIT.

For the Half year ended Jun'07, the PBIT of the equipment division recorded 98% growth to Rs 8.70 crore (contributing to 20% of the total PBIT) on segment sales of Rs 47.19 crore (up by 48%) and contributing to 28% of total sales.

For the FY2007[Dec-07], the company reported an EPS of Rs 37. The share price trades at Rs 468, P/E works out to just 12.6 [trailing EPS]. Investors can take exposure to the stock for handsome returns.
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Published by Webmaster @ 10:20 AM IST.

Tata Consultancy Services - Review

Wednesday, October 17, 2007

TCS reported good 2QFY08 results - revenues grew 10.8% qoq to $1.42b (our exp: $1.38b) and EBITDA margins at 26.3% (exp: +26.1%) were up 80bp qoq. Net profit for Q2 was Rs12.15b (exp: Rs12b). Volumes in the international business were up 9% qoq.

TCS reported another quarter of pricing increase - realizations improved by ~85 bp qoq. Offshore proportion of revenues increased by ~190bp qoq. Pricing increase and higher offshore proportion resulted in margin expansion despite INR appreciation.

Management remains confident of strong deal flows and improved client mining over the next few quarters. Pricing trend continues to remain positive with 5-8% hikes in new deals and 3-5% hikes in renewals.

Kotak Research expects EPS growth of 22% YoY for FY08 at Rs.51.5. FY09 EPS has been
estimated at Rs.60. The rupee is assumed to be at Rs.38.50 per US dollar by FY09 end. BUY TCS with a price target of Rs.1297, implying a P/E of about 22x on FY09 estimates.

Citigroup Researach estimates a fully diluted EPS of Rs 51.55, 62.65 for FY08 and FY09 respectively. Target price of Rs1,460 is based on a P/E of 24x FY09E EPS, derived from a 4% discount to our target 25x FY09E EPS for Infosys.

Motilal Oswal revised EPS estimate of Rs51 and Rs61.8, the stock trades at a P/E of 21x FY08E and 17.4x FY09E respectively. Valuations at 17.4x FY09E earnings offers room for upside. Maintain Buy with a target price of Rs1,360.

CLSA expect underperformance to continue for some more time. Current 16-18% EPS Cagr for FY07-10 remains the key drag on the stock. CLSA has set a price target of Rs 1,135 for the stock.

DSP Merill Lynch says the stock is attractively valued and has a Price Objective of Rs1360 to Rs 1480 is at a rolling forward multiple of 20x 12 months earnings ended Sep 09 at a 10% discount to Infy's median PE or an implied FY09e target multiple of 21x.

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Published by Webmaster @ 11:35 AM IST.

Monnet ISPAT AND Energy

Monnet Ispat and Energy's (MIEL) Q2FY08 results were better than expectations due to greater-than-anticipated increase in ferro alloy sales volume and realisation. Sales volume of ferro alloys increased 70% Y-o-Y and 10% Q-o-Q. Net revenue, EBITDA, and net profit grew 92%, 45%, and 36% Y-o-Y, respectively, led by higher sales volume in sponge iron and ferro alloys and improved sales realizations across all products (sponge iron, steel, and ferro alloys).

Key disappointments were in terms of: (i) lower-than-expected sponge iron production, which at 118,081 MT was 14% below our expectation; and (ii) the second captive power plant not commencing in September 2007.

At CMP of INR 390, the stock is trading at an EV/EBITDA of 8.0x FY08E and 5.6x FY09E, and P/E of 9.5x FY08E [Rs 41 EPS] and 6.8x FY09E [Rs 57 EPS] on a fully diluted basis.
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Published by Webmaster @ 11:30 AM IST.

Buy Tata Sponge Iron - Indiainfoline

The strong infrastructure spending will boost demand for steel, which will lead to higher sponge iron demand in the near future. The surge in demand for sponge iron led to a rise in prices by 50% over the last two years. Expect demand in India to witness 12-14% CAGR over the next five years and prices are likely to rule firm.

TSIL in FY07, increased its sponge iron capacity to 0.39mn tons with the addition of a third kiln of 0.15mn tons. Improving capacity utilization should lead to higher production by 18% and 10% in FY08 and FY09 respectively. Expect it to expand its operating margin to 23.4% and further to 26.1% in FY08 and FY09 respectively. TSIL's strategic tie up with Tata Steel secures its future iron ore requirement. 100% of TSIL's iron ore demand is met by ore mined from Tata Steel's Khondbond Mine, Orissa.

TSIL should post revenue and profit CAGR of 36.4% and 78.6% over FY07-09E respectively. At the current price it trades at 7.3x and 5.6x FY08E and FY09E EPS of Rs33.8 and Rs44 respectively. Indiainfoline Research recommends a BUY with a price target of Rs286.
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Published by Webmaster @ 9:43 AM IST.

Credit Suisse's Picks MICO + HPCL + Satyam + Dr Reddy + Canara Bank

Tuesday, October 16, 2007

Credit Suisse is in love with 5 stocks which are being ignored by the market and which have also underperformed the market.

1. MICO:
The stock is attractively valued (20.2x CY08E). Three catalysts for MICO's business and share performance: 1) increasing popularity of CRS powered diesel cars; 2) an increase in exports of engines and cars from India and 3) production of Tata Motors' proposed mini-car. MICO being a key supplier of injection systems to engine and car manufacturers is likely to be a beneficiary of all these.

2. HPCL:
In the medium to long term though, the company is expanding capacity and working hard on improving service quality at its outlets, putting it in a good position for the day when price distortions are removed. Meanwhile, decreasing international crude prices can imply better earnings for the company.

3. Satyam Computers:
While the exchange rate is a real concern, demand slowdown may not become evident till the end of 2007, in our view. Sound September 2007 results and an increase in guidance would be strong triggers for the stock in the near term. For long-term investors, however, its attractiveness is both in valuations and long-term growth.

4. Dr Reddy's Laboratories:
Dr Reddy's performance has suffered primarily due to four reasons: 1) uncertainty over the changes in Germany and the possible impact 2) currency – 80% of revenues are exports, and it has a low natural hedge. 3) a lack of immediate catalysts in the US pipeline – Dr. Reddy's is known to be a stock driven by one-offs in the US market. 4) removal from the Sensex will be a dampener until 19 Nov. Stock is trading at its lowest forward multiple since 2004; For the long-term investor, this provides an excellent entry point.

5. Canara Bank:
With uncertainty looming large over whether the RBI will hike CRR, many banking stocks have underperformed the Sensex. A stable earnings growth over the next two or three quarters after a relatively weak 1Q and cheaper valuations could be the catalysts for the stock to outperform.
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JSW Steel + Gujarat NRE Coke - Macquarie Research

JSW Steel: Global commodities team has revised steel price forecasts upward by 6% and 2% for FY3/09 and FY3/10, respectively, while also increasing iron ore forecasts by 20% each year, and for coking coal by 8% and 5% for FY3/09 and FY3/10, respectively. JSW has recently been allocated 69% in a coking coal mine with mineable reserves of 250mt while it explores for more reserves in Mozambique. It expects to reach 50% self sufficiency in the next 3–4years.

Revising EPS estimates for FY3/08–FY3/10 by 7.5%, 29.2% and 0.3% to Rs100.6, Rs120.3 and Rs160.2 respectively. Increasing the target price to Rs1,203, based on a PER of 10x FY3/09E EPS.

Gujarat NRE Coke:
Global commodities team has upgraded coking coal price forecasts for FY09-11 by 13%, 10% and 6% to US$135/t, US$110/t and US$95/t, respectively.GNC is looking to double its coking coal production to 1mt in FY09, with the completion of purchase of Elouera mine by December 2007. GNC is merging its two mining subsidiaries listed in Australia. This, we believe, will lead to reduction of discount, as the merged entity will be a multi-mine, multi-location company with lower risks.

Revising EPS estimates for FY3/09–FY3/10 by 7.5% and 12.2% to Rs8.1 and Rs8.8 respectively. 12-month price target: Rs140.00 based on a DCF methodology.

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JP Morgan on NTPC + HDFC Bank

Monday, October 15, 2007

NTPC: JP Morgan [JPM] initiates coverage on NTPC with Neutral rating and Rs228 DCF-based Price Target. Stripping out financial assets, NTPC trades at FY08E 23.5x P/E and 16.0x EV/EBITDA, in line with regional growth IPPs, especially in China. The sum of Parts valuation is as follows,
Revised estimates and DCF model assume smooth execution of NTPC's plans to grow installed capacity to 75GW from 26GW by March 2017. NTPC's strategy/structure are different from those of private IPPs; further re-rating unlikely: IPO announcements/private equity deals have energized Indian utilities' stock performance.

NTPC is Asia's third-largest utility company. JPM suggests that to maximize shareholder value, and unlock US$15B value for equity shareholders in an ideal scenario: NTPC can take the following measures (1) explore SPV structure for new projects; (2) optimally leverage future projects; (3) more merchant power projects, given current market environment; (4) better use of B/S potential for organic/inorganic growth; (5) explore carbon credits for supercritical coal, gas and hydro projects.

HDFC Bank: HDBK
HDBK's net profit growth trajectory has decisively broken out of the 30-32% band seen over the past 20 quarters. Profits grew by 40% in 2Q08, about 8% higher than expected, driven by higher deposit growth and lower provisioning.

Despite the stock appreciating by 21% and marginally outperforming the Sensex over the past month, JPM set the target price to Rs1,610 for Sep-08, implying 13% upside. 150 branch approvals expected shortly is the likely stock catalyst. The shift out of the 30-32% net profit growth band is likely to be driven by: a) higher balance sheet growth trajectory at 35% CAGR over the next three years; and b) wholesale loans dominating growth over this period, leading to an incremental easing of provisioning requirements.

You can send your comments and suggestions to feedback @ dalalstreet.biz
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BUY Elder Pharma - Reliance Money

Reliance Money has initiated coverage on Elder Pharmaceuticals with a BUY recommendation and a target price of Rs 554.

Elder Pharma has been a India centric pharma company but of late it has forayed into the regulated markets of Europe by acquiring a strategic 20% stake in Neutra Health PLC (an UK based neutraceutical company) and a 51% stake in Biomeda (one of the top 10 manufacturing and distribution company in Bulgeria).

The company maintains its leadership positioning in Women's healthcare, wound care management and nutraceuticals. It has a fantastic folio of domestic Fast Moving Heath Goods (FMHG) segment with brands like – Fair One, Tiger Balm, AM PM Mouthwash etc.

Elder Pharma's revenues and profit grew at a CAGR of 19.3% and 50% respectively over last five years upto FY07. Going forward, RMoney estimates the revenues to grow at a CAGR of 18.3% during FY07-09E. As a result,profit growth is estimated to be @ 31.5% and 24.9% to Rs 647.10 mn and Rs 808.4 mn in FY08E and FY09E respectively.

At current price of Rs 416 the stock trades at a 9x EV/EBITDA of FY09E and trades at 10x EPS FY09E. R Money are initiates coverage on Elder with a target price of Rs 554, based on DCF valuations.

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Book Profits in Reliance Capital Limited - ISEC

Friday, October 12, 2007

ICICI has recommended all its investors to Book Profits in Reliance Capital with a target price of Rs 1,500, potential downside of 20%.

CardBhai writes to us that, Reliance Capital will kick off its Consumer Finance Business next week offering Personal Car, Home, Property and all different kinds of loans.

Reliance Capital has retained its leadership position in AMC which constitutes Rs 295 per share to Reliance Capital's valuation. Life insurance premium has increased by 120% to Rs 474 crore for period up to August 2007.General insurance premium grew 195% to Rs 807 crore during the same period.

Sum of Parts Valuation of Reliance Capital,
Total Value is Rs 1,500. The company is likely to report an EPS of Rs 31 for FY08 and Rs 37 for FY09. Valuations look stretched. Book Partial profits at current levels.

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HSBC Underweight on ING Vysya Bank

New equity likely to sustain recovery in loan growth. Capital adequacy ratio to improve to a comfortable level; has been the lowest among peers since 2005.

Consequent to the increase in capital adequacy, the loan growth will improve to 19.6% at the end of March 2008 as compared to the forecast of 18.0% we had assumed earlier for the same period. However, loan growth to continue to stay below the industry average of c23%.

Increase net profit forecasts by 4.1%, 10.3 % and 8.7% to INR1.1bn, INR1.5bn and INR 2.0 for FY08e, FY09e and FY10e respectively. Target price raised for Vysa from INR231 to INR249 per share. Potential downside of 6.2% from CMP of Rs 265, with an underweight rating for the stock.
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Lupin-Kyowa Pharma Acquisition - BUY

Thursday, October 11, 2007

Lupin is on an acquisition spree. Earlier it acquired Rubamin and now its Kyowa Pharma in Japan. Lupin has acquired 80% stake in Kyowa Pharma, Japan (will increase to 100% soon) at an enterprise value of US$110 mn (1.7x sales and 11.3x EV/EBITDA). Current sales will significantly scale up from US$65 mn to US$100 mn and profits from US$3-4 mn to US$10-12 mn over the next 2-3 years. This would mainly be led by the increased number of product launches from Lupin, higher genricisation of the market and operational and sourcing efficiencies.

Taking this into consideration, the acquisition is a good opportunity for Lupin from a strategic point of view. The stock is trading at 15.9x FY08E and 13.1x FY09E earnings. ASK Securities reiterates a Buy rating on the stock with a target price of Rs 807.

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TCI + Deccan Chronicle Reports

Wednesday, October 10, 2007

ICICI Securities in a research report has put a BUY recommendation on Transport Corporation of India Ltd and a SELL on Deccan Chronicle.

Transport Corporation of India [TCI]:
TCI is one of the largest players in the domestic logistics industry, has transformed itself from a transportation company to an integrated logistics solution provider. The company has a presence across the entire logistics value chain and is enhancing its role in the high-value supply chain solution (SCS) business.

TCI is the largest integrated player having a 15% market share of the organised logistics industry. Apart from transportation, it operates one of the largest warehousing facilities of about 6.5 million sq. ft. The company has lined up an aggressive Rs 340 crore capex to scale up its business in order to meet increased demand.It plans to increase its warehousing space, buy new trucks, invest in cold chains, and boost its ship fleet strength over the next three years.

At the current price of Rs 115, the stock discounts its FY09E EPS of Rs 7.11 by 16.1x. Given TCI's leadership position in the organised logistics sector, and transformation to an integrated player, the stock can be valued at 22x its FY09E earnings. Rate the stock an OUTPERFORMER with a target price of Rs 155, an upside potential of 35% from current levels.

Deccan Chronicle Holdings Ltd [DCHL]:
With the entry of Times of India in Chennai, ICICI has downgraded DCHL to SELL from BUY. DCHL would be faced with tough competition in both Chennai and Bangalore from the Times of India (ToI), which is set to foray into the Chennai market in Q4FY08; ToI is the leader in print in India. DCHL's success strategy of low cover pricing and increasing colour inventory in Chennai is likely to be challenged in Bangalore, which is currently a two-player market post ToI acquiring Vijay Times and Deccan Herald.

ICICI downgrades DCHL from Buy to Sell with a target price of Rs.182 and believe any rise in stock should be used to liquidate positions given the looming aggressive competitive scenario.

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ICICI Bank Retail Expansion - BUY

Tuesday, October 09, 2007

Just a while ago ICICI bank (ICBK) received permission from the Reserve Bank of India to add 400 branches and 2500 ATMs to its current network of 950 branches and 3500 ATMs.

Deposit mix has been inferior to peers among new banks with the proportion of savings bank deposits being about half the average of its peers. This seems to correlate with the slow expansion of branches. At end of March 2007 only 12.5% of the aggregate deposits of ICICI Bank were low-cost savings bank deposits. This proportion changed very little after FY2003 and was substantially below that of peers such as HDFC Bank and Axis Bank. In the four year period ended March 2007 the CAGR in ICICI's branches was only 14% compared with 31% for the other two.

ICICI Bank is expected to report a fully diluted EPS of Rs 35.54 and 45.15 for FY08 and FY09 respectively.

Fund Manager Recommendations on ICICI Bank:
Sharekhan has a Price Target of Rs 1,175 with a BUY recommendation.
HSBC Has a price Target of Rs 1,084 with NEUTRAL recommendation.
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Small Cap Multibaggers - Edelweiss

Monday, October 08, 2007

Indian Multibagger StocksEdelweiss Capital has announced the list of Multibaggers in the Small Cap which have a growth story to beat ace investors as well. Here is the list and small coverage on the same.

ABC Bearings:
ABC Bearings (ABC) is amongst the leading players in tapered roller bearings. It supplies to most of the commercial vehicle OEM's, who form ~45% of the total Indian bearings demand. Spurred by higher manufacturing growth and improved road infrastructure we believe demand for commercial vehicles (CVs) would continue to grow strongly in the future, in turn fuelling demand for ABC's products as well.

ABC has the potential to double its revenues over the next 3-4 years with its capacity expansion initiatives. At the CMP of INR 105, ABC is trading at 6.0x its FY07 earnings, which is at a steep discount to the average industry P/E of 13x TTM, inspite of its high margins and return ratios.

Ador Welding:
Ador Welding (Ador), one of India's largest welding equipment manufacturers, has over five decades of experience. Ador’s strong relationships with clients and superior product offerings place it well to exploit opportunities arising in the welding industry. At a growth of 11.3% Y-o-Y, FY07 saw the Indian IIP grow at its fastest since FY96.

Ador is targeting revenues of INR 4.5 bn over the next three years with total investments of ~INR 700 mn over FY05-FY08 to achieve this target. We expect good traction for each of Ador's businesses, on the back of its linkages with the IIP and a robust outlook for the Indian economy. At CMP of INR 265, the stock is attractively valued at 11.1x its FY07 earnings with a 5% dividend yield.

Automobile Corporation of Goa:
Jointly promoted by Economic Development Corporation of Goa (EDC) and Tata Motors Ltd. (TML), Automobile Corporation of Goa (ACGL) started commercial production of bus bodies for TML in 1989. The company’s bus body division, which contributed 70% of FY07 sales, has registered a volume growth of 38% CAGR since FY03 on the back of strong export sales of TML's bus division which grew at 50% CAGR over the same period. ACGL has increased its installed capacity from 1,200 units in FY04 to 4,200 units in FY07 and plans to further augment it to 10,000 units by FY10E. Since ACGL currently meets only ~35-40% of TML's export requirements.

ACGL's revenues and profits have grown at 43% and 31% CAGR respectively over FY04-07. We expect the company to post a 22.2% CAGR growth in revenues over FY07-10E. At the CMP of INR 385 the stock trades at 9.4x FY07 EPS of INR 41.1.

Bajaj Electricals:
Bajaj Electricals (BEL) is among the leading providers of home appliances, high masts and poles, luminaries, and fans in India. It commands a 65% market share in the high masts and poles segment and is a market leader in OTG, water heaters, and irons segments. BEL is primarily focused on marketing and believes in creating a strong distribution network rather than investing in manufacturing facilities. The company has a strong marketing and distribution network comprising 19 branch offices with over 120,000 retail outlets in India.

BEL is on a high growth trajectory, given its dominant position in most of the product segments, strong distribution network, and focus on high-margin premium products. Post the "Odyssey 1001", through which the company embarked its journey to achieve sales of INR 10 bn in FY07, the company has now set its eyes to achieve sales of INR 20 bn by 2009-10 through the theme "Zoom ahead".

Fem Care Pharma:
Fem Care Pharma (Fem), has been one of the pioneers in the domestic women's bleach market. Fem currently controls ~ 90% of the INR 460 mn women’s bleach segment in India, which is expected to grow by ~15% over the next three years. The company has recently launched its premium variant Oxybleach at the retail level, which contributed ~12% of bleach sales in FY07.

The company expects to triple its turnover over the next four years on the back of expanded capacities coming on stream, cashing in on its dominant position in the women's bleach market, and new product launches, thereby expanding its addressable market. Also, there will be tax benefits accruing from its Himachal plant, and excise benefits accruing from its export focused unit at Nashik which would enhance its net margins and EBITDA margins, respectively. At CMP of INR 505, the stock is trading at just 13.4x its FY07 earnings.

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The Indian Power Sector Report

Saturday, October 06, 2007

Tata Power: Tata Power management in its recent presentation in September 2007 stated that they expect power generation capacity to grow five times in the next five years. The company is already implementing projects of 5,763MW and another 4,700 MW is planned and therefore expect 10,313MW to be installed by FY13.

The stock has had a decent run of 50.4% appreciation over the last month and is now trading at 12.1x FY09e earnings, which is substantially lower than the Indian utilities average of 20.1x. It is attractive given its high growth potential compared with the Asian utilities universe. On the back of higher visibility of the implementation of its power projects, we forecast its net profit to grow at 58% CAGR over the next five years.

Given the higher visibility over the implementation of its power projects and backward integration in coal production, our cash flow estimates in FY12 and FY13 increase substantially. DCF valuation from INR871 to INR1559. As we move on from FY08 to FY09 as the base year for our sum-of the parts valuation, we raise our S-o-P valuation from INR817 to INR837 and raise the target price from Rs 843 to Rs 1,198.

Power Grid Corporation of India Ltd: The stock just had a fantastic listing on the bourses. It is a major customer to the following companies.

KEC International:
Compared to peers like Jyoti Structures and Kalpataru Power, KEC International has underperformed its peers and the Sensex, the merger announcement with its two group companies – RPG Transmission and National Information Technologies (NITL) – being the key reason. The order backlog consisting of 75-80% of international orders, which is the largest such percentage among its peers.

A combination of PE multiple and DCF approaches to determine the target price for KEC: the DCF model yields a value of INR730 and based on our September FY08e EPS forecast and assuming rolling one-year forward PE of 18x, our PE multiple approach yields a fair value of INR 810. The mid point - INR770 - of the two valuation approaches is the revised target price.

Kalpataru Power:
Kalpataru Power has a diversified business. Apart from power transmission line business it is also present in infrastructure and biomass power. The company has a strong order backlog of INR23bn in the transmission line business.

Kalpataru's target price is the mid-point - INR1960 - of DCF fair value of INR 1,810 and PE multiple based value of INR1,836 and INR137 derived from investment in its subsidiary, JMC Projects.

Jyoti Structures:
The current order backlog of the company is INR23bn. Management has indicated that the company has a tie up for the Western Region System Strengthening. Based on current order backlog and buoyancy in the power transmission line sector, expect sales CAGR of 30% for the period of FY07-10e.

HSBC downgrades the stock to Neutral with a new target price of Rs 262 - is the mid-point of our DCF fair value INR210 and PE multiple based fair value of INR314, which is higher than our earlier target price of INR 254.

HSBC is overweight on BHEL.
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India Portfolio + Strategy - Kotak

Friday, October 05, 2007

The opening sentence in Kotak's report on India Strategy expresses concern over expensive valuations. Most Large-Cap stocks are trading above aggressive earnings growth expectations for FY2009. The BSE 30 Sensex is trading at the top end of 14,750-18,500 band based on 12-15x FY09 earnings.

Changes in Kotak's Top 10 Model Folio,
Reliance Energy and Wipro are out. NTPC and Aditya Birla Nuvo are in. The new top 10 folio looks like, ICICI bank, L&T, ITC, Maruti Udyog, BHEL, Bajaj Auto, NTPC, Aditya Birla Nuvo and PNB.
We agree in most parts with Kotak except that of Telecom as Mobile Number Portability and slowdown are not likely to happen very soon, especially with Bharti Airtel and RCom.
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IndiaBulls Coverage of RCOM + Kotak Bank

Thursday, October 04, 2007

Here is a brief update from Indiabulls on the following Stocks.

Reliance Communications: With an expected increase in the subscriber base coupled with acquisition of Yipes Holdings, the Company's net sales are estimated to increase at a CAGR of 27.7% for FY07-FY09E. Moreover, the Company's initiatives in the form of possible listing of FLAG Telecom and RTIL and hive off of its BPO and Tower business will further add value to the stock. India bulls maintain a Buy rating on the stock with a target price of Rs. 665 over a period of 9-months.

Kotak Bank:The present economic scenario offers immense opportunities for Kotak to grow in scale and reach along with value creation. Commercial banking and life insurance businesses to be the future growth driver. Remain positive due to the Bank's high NIM, huge advances growth, diverse product base, and cross selling of financial products. India bulls values Kotak on sum-of-the-parts valuation on account of substantial benefits coming from subsidiaries. Banking business at Rs. 366 based on a target FY09E P/BV multiple of 3.5x and the different subsidiaries at Rs. 591 FY09E. Maintain a Hold rating on the stock with a target price of Rs. 957.
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Reliance Capital - Book Profits

Wednesday, October 03, 2007

Edelweiss is recommending investors to book profits in Reliance Capital.

The company's overall business performance and expect its asset management segment to grow by 45% over FY07-10E, market share in life insurance to improve significantly to 10% by FY09E and 11% in FY10E, and the GWP in general insurance to grow aggressively at 100% plus over FY07-09E. Moreover, we estimate the company's retail broking business to generate a profit of INR 1,050 mn by FY09E and INR 1,575 mn by FY10E, and its consumer finance book to grow to INR 115 bn by FY09E and INR 185 bn by FY10E.

Sum-of-the-parts (SOTP) framework gives us the base case fair value of INR 1,573 on FY09E and INR 1,874 on FY10E estimates and we believe the stock should hover in this range in the medium term. Investors can book profit at these levels and to view any weakness in the stock as an opportunity to re-enter.

Assigning a 100% probability to what the company seeks to achieve over the next two years, we arrive at the fair value of INR 1,894 on FY09E estimates and INR 2,482 on FY10E basis (best case).

Here is Merill Lynch's Coverage on Reliance Capital.

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Infosys EPS Estimates and Analysis - Edelweiss

Tuesday, October 02, 2007

Indian IT major, Infosys Technologies which mainly banked on large maintenance and lower end IT work is now going through mid life crisis. Founding member, Naryana Murthy who takes much credit is responsible for the current mess Infosys is in today. Had he been a visionary, he should have stepped down long before to pave wway for other Infoscions who have different vision apart from being mere consulting company. Unfortunately all those guys parted ways with Infosys to successfully build tech companies - OnMobile is one of them.


Scenario 1: Indian Rupee at 39 for FY09 and 3-4% appreciation from current levels.

In this scenario, our EPS estimate for FY2010 is INR 110 (considering the higher tax rate in 2010) and EPS is expected to grow at a CAGR of 25% between FY10-12.

1a. Assuming a historically traded PEG of 1, the stock price in 18 months should be INR 2,750 (25x FY10 EPS, upside of 44%).
1b. Assuming a lower PEG of 0.8 to factor in lower ROEs (31% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,197 (upside of 15%, 20x FY10 EPS).

Scenario 2: Indian Rupee at 38 for FY09 and 3-4% appreciation p.a. from there

In this scenario, we think FY10 EPS will be INR 104 (considering the higher tax rate) and EPS will grow at a CAGR of 25% between FY10-12.

2a. Assuming historically traded PEG of 1, the stock price in 18 months should be INR 2,599 (upside of 36%).
2b. Assuming a lower PEG of 0.8 to factor in lower ROEs (29% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,079 (upside of 9%, 20x FY10 EPS).

Assigning a 33% probability to scenario 1b and 2b and 17% to 1a and 2a (of course there can be more optimistic and pessimistic scenarios). 18 month target price comes to INR 2,314 (annualized return would be 14.5%). Therefore, it should be rated accumulate from the current levels. It becomes a buy only below INR 1,800
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I-Sec Maintains BUY on Sun Pharma Advanced Research Company

Monday, October 01, 2007

Sun Pharma Advanced Research Company (SPARC) was formed after the demerger of Sun Pharma Industries' (SPIL) innovative R&D business. SPARC, which got listed on July 18, '07, is an international research-based pharmaceutical company that discovers and develops new drugs / delivery systems. SPARC's innovation philosophy is based on finding drugs for unmet medical needs by focusing on validated targets, implying reduced risk, while not compromising much on the huge potential upside. ICICI is confident of NPV for the pipeline at ~US$700mn or Rs149 / share and expect significant value creation in the next 3-5 years.

SPARC is the only listed Indian company that focuses purely on pharma drug discovery research. SPARC's innovation philosophy of finding a drug and develop analogue NCEs is an appropriate and 'relatively lower risk yet higher returns' strategy. The current pipeline is an impressive mix of two NCEs, two pro-drug NCEs, and eight products under development using four distinct novel drug discovery system (NDDS) platform technologies.

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