15 Stocks with Potential to double in 15 Months - Kotak
Wednesday, March 25, 2009
Kotak has identified stocks that show steep increases in earnings over the next two years and / or stocks that are trading at very low multiples. 15 stocks with the potential to yield 50-100% returns over the next 18 months and examine the drivers required for these returns. In most cases, these are a sharp rebound in earnings (select commodity stocks), a potential re-rating of multiples led by better than expected operating and financial performance (largely banking stocks) and potential positive catalysts (RIL).
Commodity Stocks:
The earnings of several commodity stocks led by improved global demand for global commodities on the back of a global economic recovery, higher sales volumes from expansion by several Indian companies and improvements in balance sheets leading to lower interest expenses. The Picks are, Hindustan Zinc, Sterlite Industries, Reliance Industries, Tata Steel and United Phosphorous.
Banking & Finance:
The maximum scope for a re-rating of multiples in banking stocks given their currently low multiples (P/B or P/E). The low multiples reflect the market's concerns about a potential steep increase in NPLs over the next 18 months led by the economic slowdown. The picks are - Punjab National Bank, Axis Bank, Federal Bank and IndiaInfo Line.
Power Utilities:
Reliance Infrastructure and Tata Power
Real Estate:
DLF, IndiaBulls Real Estate and JaiPrakash Associates [If Mayawati is in the new Central Govt. expect good news for JP Associates]
Midcap Pick:
Biocon
These are the stocks that have the potential to yield high returns over the next two years according to Kotak Sec.
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Published by Webmaster @ 12:39 PM IST.
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Respite for Ranbaxy - US Still a concern
Tuesday, March 24, 2009
Corporate FreePress of India broke the news that, Ranbaxy's Paonta Sahib plant has received GMP certifications from MHRA, UK and TGA, Australia. Certifications have been issued following a joint audit conducted in October 2008. The MHRA certification is valid for three years, and covers product filings across the EU, while the TGA certification is valid for two years.
Europe remains a key market for Ranbaxy, accounting for 20% of total sales in CY08 US$328m), while Australia accounted for c.1%-2% of overall revenues. These now appear secure, at least from a regulatory standpoint.
American Concerns Remain:
With the AIP being invoked and data generated from the plant under scrutiny, we believe the onus rests with Ranbaxy to demonstrate that the issues which led to such data have been resolved and this could take some time. Futher, A one time penalty / fine cannot be ruled out.
The US FDA has approved three ANDAs filed from Ranbaxy's Ohm Labs facility (Sumatriptan, Ramipril & Quinapril+HCTZ) over the past two months. While higher costs of manufacturing in the US would suppress profitability, it supports our view that Ranbaxy's larger opportunities (barring Valtrex) appear safe as DMF filings are from Toansa (unaffected) and we believe it has enough time to switch sites and/or correct ANDA filings.
Ranbaxy is expected to report an EPS of Rs 9.47 for 2009 and Rs 13.29 for 2010.
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Published by Webmaster @ 9:26 AM IST.
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Investors View of L&T 's Satyam Bid
Thursday, March 19, 2009
The winning bidder for Satyam takes a 31% stake, via newly issued shares, and then makes a public offer for 20% of the enhanced capital at same price. Post close of the public offer, if an investor has <51% stake, it has option to subscribe to additional new shares, such that they will not have more than a 51% stake. Press reports suggest that Larsen & Toubro (L&T) is a serious contender in the fray.
L&T has Rs45.5bn of resources to bid for Satyam. In the event of a winning bid it may have to spend between Rs15bn (Rs30/share of Satyam) to Rs45bn (Rs90/share of Satyam). It is difficult to quantify the stake value in Satyam post a potential win given lack of clarity on: Financials, Business continuity, Client losses, and Liabilities. Satyam's trading band of Rs40–50 over the last 2.5 months could be an indication of the market expecting a winning bid.
If L&T loses/does not bid for Satyam, and instead repays ~Rs40bn of debt, then L&T parent EPS could increase 7% and cons. EPS by 6%. Using our current valuation metrics the fair value would go up to Rs658 (from Rs622). In our view, L&T has de-rated quite a bit due to Satyam concerns, and some investors might view Scenario 2 positively.
Keeping aside, short term stock performance, if L&T is able to Win Satyam Computers at a reasonable Rs 30 to Rs 40 bid and able to convert big clients from Satyam into L&T Infotech [its own subsidiary] it will be in the long term interest of L&T shareholders.
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Published by Webmaster @ 11:07 AM IST.
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Neutral on Banking Sector - Nomura
Monday, March 16, 2009
Nomura of Japan has initiated coverage of the Indian banks sector with a NEUTRAL view. Key drivers of bank earnings - loan growth, interest rates (bond yields) and asset quality - have turned negative in 4QFY09 and are likely to deteriorate further in FY10E. Nomura expects earnings growth of Indian banks to drop 6% in FY10 after a robust CAGR of 21% over FY05-08. While banks are faced with these challenges, there is some comfort in state-owned banks' valuations, which are trading at below book values, and fast-growing private banks, which are trading at 1-2x FY10E P/BV.
Nomura initiates a BUY on Punjab National Bank and Axis Bank. Reduce on SBI and HDFC. Neutral on ICICi Bank, HDFC Bank, Union Bank and Bank of India.
SBI:
SBI is most vulnerable to an economic slowdown, as it has grown its loans aggressively, especially over the past four quarters, and has high incremental exposure to sensitive sectors. SBI is expected to report an EPS of Rs 130 for FY10.
HDFC:
HDFC is among the best managed finance companies in India, with a sound management team, strong risk management practices, strong earnings growth and impressive asset quality. However, like the rest of the sector, HDFC's earnings growth and asset quality will be affected by the economic slowdown. EPS for FY10 is expected to be Rs 87.
HDFC Bank:
HDFC Bank’s profit growth to moderate to 19% over FY09-11E, from 30% in FY05-08, but it is still the strongest earnings growth compared with the other Indian banks under our coverage. EPS for FY10 is expected to be Rs 64. Price target is based on 1.8x FY10E P/BV, which is lower than its mean multiple of 3.2x in the past two years and its trough multiple of 2.2x.
ICICI Bank:
A severe slowdown in the life insurance business has caused valuation multiples and consensus growth forecasts to contract sharply. Rs 36. Price target of INR295, based 0.6x FY10E P/BV for the banking business and INR135 for subsidiaries.
Bank of India:
Expect earnings to decline 27% in FY10, driven by higher credit costs, lower trading gains, lower recoveries and pressure on margins. Net profit growth of 80% and loan growth of 26% in FY05-08. Price target of INR175 based on 0.7x FY10E P/BV.
Union Bank of India:
Union Bank of India has been delivering strong operating performance over the past two years, driven by a substantial improvement in deposit mix and focus on brand building. The bank's provisioning cover is among the highest at 93%. Price target of INR130 at 0.7x FY10E P/BV is based on a target RoE of 11%, substantially lower than the bank's last reported RoE of 27%, due largely to high credit costs and lower leverage going ahead.
Axis Bank:
Expect flat (2%) earnings growth in FY10E and 13% in FY11E, substantially slower than the 9MFY09 growth rate of 73%, due to a moderation in loan growth to 25% over the next two years, rising credit costs and slower fees. Price target of INR400 is based on 1.1x FY10E P/BV, suggesting 42% potential upside.
PNB:
The bank's earnings is likely to decline 9% in FY10E, due to higher credit costs, declining margins and lower trading gains, and then recover 16% in FY11E. PNB has the highest proportion of low cost savings deposits at 31%. Price target of INR420 is based on 0.9x FY10E P/BV and suggests 38% potential upside.
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Published by Webmaster @ 10:12 AM IST.
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Hindustan Zinc - Large reserves + low costs to Help
Friday, March 13, 2009
The recent sharp 33% qoq drop in zinc metal prices has led to a sharp cut-back in zinc mining output and led to a spate of mine closures. Cumulative reported mine closures have been to the order of 1.6 mn tons so far, which represent about 15% of global output. Zinc prices are expected to remain subdued in the near term owing to current surpluses and high inventories, we believe swift supply side response would help restore market equilibrium.
Rampura Agucha zinc mine which is the largest zinc mine globally with an annual output of 5 mntpa which is being expanded to 6 mntpa and at US$100/ton its cost of production is among the lowest. It has a large proven resource and reserves base of more than 100 mn tons which, at expanded output, would last more than 15 years.
Chanderiya Smelter - Largest single location zinc smelting complex has a production capacity of 525,000 tons of zinc, 85,000 tons of lead and a captive power plant of 234 MW. About 105,000 tons of zinc is produced through the Pyro smelting process.
HZL is setting up a new silver refinery having an annual of 350 tons (11.3 mn ounces) taking up total capacity to 500 tons (16.1 mn ounces) by 2012, making it Asia's largest primary silver producer and would have 2.5% of global silver output.
Earnings and Valuations:
Zinc, lead and silver prices are based on imported parity prices and hence a weaker rupee helps boost realizations.
HZL has significantly outperformed the broad market over the past month and was up by 4% as compared to the BSE Sensex which was down by 15%. FY2010 and FY2011 EPS is estimated to be Rs64 and Rs81, respectively. The stock continues to trade at inexpensive valuations at less than 2X EV/ EBITDA and 5.5X PE
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Published by Webmaster @ 2:30 PM IST.
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Sesa Goa - Cheap on valuations
Thursday, March 12, 2009
Sesa Goa is India's largest iron ore producer exporter with an expected annual output of 16 mn tons in FY2009 and would go up to 25 mn tons by FY2012 following recent expansion initiatives. According to Sesa, with its average cost of production of US$24/ton, it is in the first quartile of the global cost curve and the cost of production at its Goa operations at less than US$15/ton are the lowest in the world.
Sesa Goa has operations in Goa, Karnataka, and Orissa. Logistics costs greatly impact performance across geographies. Currently, the company has reserves and resources of 180 mn tons and it plans to announce discoveries and acquisitions of more than 300-500 mn tons shortly, significantly improving the longevity of the business.
Sesa has historically engaged in iron ore mining from its own mines as well as third party mines where the lease ownership rests with other parties and they are generally paid royalty which is indexed to the prevalent iron ore prices. The Sonshi mines in Goa and the Thakurani mines in Orissa are on third party basis.
Strategy during Slowdown:
Sesa is selling more than 80% of its sales on the spot markets as the long-term customers are refusing to accept deliveries due to lower spot prices and demand erosion for steel forcing them to idle their blast furnaces. Sesa is looking to increase sales of ore on a CFR basis instead of the usual FOB basis, this would fetch it an additional couple of dollars on the spread. Sesa is trying to gain market share by offering ore at benchmark prices using the lower freight from Australia-to-China instead of the usual India-to-China freight.
Valuations:
Sesa is trading at inexpensive valuations of 1.4X EV/EBITDA and 3.9X PE its estimated FY2010 earnings. Sesa has Rs37 bn (Rs43/share) in cash. Sesa is expected to report an EPS of Rs 19 for FY10 and Rs 22.5 for FY11.
Sesa Goa is 51% is owned by Vedanata, the flagship holding company of Mr. Anil Aggarwal. Anil is associated with Sterlite group.
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Published by Webmaster @ 11:01 AM IST.
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Bosch Ltd - Affected by Auto Slowdown
Tuesday, March 10, 2009
The slump in automobile sales in Q408 adversely affected Bosch's performance and accordingly sales declined by 15% y-o-y to INR10.4bn. A higher contribution from the non-automotive business affected EBITDA margins which declined sequentially by 200bps to 16.8%.PAT declined by 24% y-o-y to INR942mn.
Penetration of diesel cars in India (~20% in India vs. ~53% in Western Europe) is set to increase as OEMs plan to launch CRDi-powered diesel cars. Also, diesel is ~40% cheaper than petrol in India. Already we have seen that diesel powered cars areoutperforming petrol powered cars in the downturn in terms of sales. CRDi-powered cars are more fuel efficient than petrol cars, and are quieter than other diesel cars. Bosch Ltd., the leading supplier of CRDi systems, should benefit from the increasing penetration (40% by 2010e) of diesel cars in India.
BOSCH Ltd reported an EPS of Rs 197 for FY08 [Dec] and is expected to report an EPS of Rs 172 for FY09.
The company has strong and clean management, net cash position and strong balance sheet. The Promoter Group holds a ~70% stake in the company and is looking to increase this level. The limited free float and Promoter's willingness to increase its stake in the company acts as a defence against share price weakness in the wake of weak business performance.
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Published by Webmaster @ 11:31 AM IST.
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Bharat Forge - Obstacles Remain
Friday, March 06, 2009
Adverse macro environment affects domestic and international operations - Parent revenues affected by slowdown in CV sales (~40-45% of parent revenues). We expect muted recovery, spurred by pre-buying in 3/4Q FY10. Overall revenues and profit estimates at the parent level benefit from a weaker rupee and incremental non auto exports. In the subsidiaries, we now forecast losses at the EBITDA level over FY10 - given the expected c40% slump in European truck sales.
Non Auto Business: There is no visibility of revenues in the non-auto business. Management has maintained its target of Rs5 bn in incremental revenues from the non auto business over FY10-FY11E. We factor in 50% of the potential revenue in our estimates, given the decline in oil and gas capex due to the sharp fall in oil price, and the slowdown in marine and general engineering industries.
Citi has cut earnings by 1-27% over FY09EFY11E. European business is likely to incur a loss. Bharat Forge is likely to report an EPS of Rs 8.39 for FY09 and Rs 6.21 for FY10.
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Published by Webmaster @ 11:48 AM IST.
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Sell ONGC - Reiterates Goldman
Thursday, March 05, 2009
Goldman Sachs in a report reiterates a SELL on ONGC primarily due to 5 main reasons - overseas growth strategy has not been very effective, unexciting execution track record in domestic business, limited focus on cost control, corporate governance issues with cash withdrawals by promoter [Government], and ONGC being structurally unattractive with downside from lower oil price but limited upside from price rebound.
Goldman downgrades FY10E-11E EPS estimates to Rs 79 and differs with consensus, especially on lack of meaningful domestic exploration successes, production decline in overseas assets; price cuts in retail fuel, and announcement of any expensive overseas acquisition.
Goldman recommends a sell on ONGC, with P/B-based 12-month target price of Rs574, implying potential downside of 14%. Target multiple of 1.4x FY09E P/BV, based on 2003 trough multiple, is actually generous.
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Published by Webmaster @ 9:32 AM IST.
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Marico Limited - Strong Growth Visibility - Morgan
Wednesday, March 04, 2009
Morgan in a report released just minutes ago has upgraded Marico Ltd to OVERWEIGHT with target price revised upwards.
Copra prices (Marico's key input cost) have declined 10% in recent days. Similarly, Safflower oil prices, a key input for its edible oil business, have fallen 25% over the past couple of weeks. We believe this sharp fall in key input costs improves the probability for margin expansion in Marico's hair care business and higher volume growth in its edible oil business.
Marico has transformed itself into a Beauty and Wellness company by repositioning its brands, media campaigns and new product offerings to meet evolving consumer needs. This is likely to help the company not only deliver sustainable high growth but also better valuations.
Morgan has set a target price of Rs 84, which is 43% upside based on DCF based intrinsic value for Marico's core business. Marico is expected to report an EPS of Rs 3.60 for FY10 and Rs 4.2 for FY11. Marico's earnings growth compares quite favorably with expected earnings degrowth of (-)1% and (-)10% for Sensex companies, as estimated by our India strategist.
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Published by Webmaster @ 1:10 PM IST.
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Reliance Industries - Post Merger Analysis and Views
Tuesday, March 03, 2009
Post Merger of Reliance Petroleum with Reliance Industries Ltd, here is what various brokerage house expect and recommend to investors.
ABN Amro:
RPET assets are likely to be taken over at their current book value. Expect minimal cost savings arising from the merger given that key cost elements like crude sourcing will have been optimised. Proforma post-merger EPS for FY10/11F drops by 1-3% due to the rise in RPET's project costs rather than because of the merger itself.
Finally, ABN Amro recommends a SELL on Reliance Industries Ltd with a target price of Rs 1,050 as margins in both these segments could fall to trough levels in FY10. From a stock price perspective, the merger is largely a non-event; refining and petrochemical margin movements are far more relevant.
Merrill Lynch:
Merrill thinks otherwise and recommends a BUY. It also expects RIL's FY10-FY11 EPS by 1-3% post-merger. Post merger RIL can use RPL's cash more tax efficiently for funding its E&P and other capex projects. If RPL had remained a subsidiary a part of the cash flow sourcing from RPL would have been paid by way of dividend on which 15% dividend tax would have to be paid.
Retains a BUY on RIL with a target of Rs 1,581 and EPS expectations of Rs 137 and Rs 176 for FY10 and FY11.
HSBC:
HSBC is Overweight on RIL. The key benefit of the merger is increased flexibility in utilising RPL's operational cash flow for RIL's planned growth projects in E&P and other areas. Another benefit is that RIL may combine some of the secondary processing capabilities of both refineries to optimize combined product yields in line with market conditions, thereby supporting RIL's higher gross refining margins.
HSBC has set a target price of Rs 1,640 with EPS expectations of Rs 123 and Rs 170 for FY10 and FY11.
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Published by Webmaster @ 8:03 AM IST.
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L&T Historical Performance in March
Monday, March 02, 2009
L&T has been in the news for wrong reasons - Hostile bid for Satyam Computers which has eroded its stock price as Satyam's Scam unfolded.
Investors who have destroyed wealth in the past 12 months in L&T have been asking about the performance of the stock in the month of March. Credit Suisse analyzed the historical performance of the stock in the past 16 years and it has outperformed the SENSEX only 6 times all of it during upcycles.
The following Graph shows L&T's Performance in the Month of March over the last 16 years.
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Published by Webmaster @ 10:18 AM IST.
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OnMobile Global - Performance disappointing
Sunday, March 01, 2009
OnMobile Global reported 3Q FY09 revenues of Rs1157MM, up 19% Q/Q (due to seasonality of revenue recognition) and 44% Y/Y but 5% below our estimate. The EBIT margin of 25% jumped Q/Q but was also lower than expected – this seasonal jump is due to a large proportion of international revenues being booked in 3Q without the associated costs.
YTD (9M FY09) revenue growth was a creditable 51%; however, margins have come off sharply, leading to absolute EBITDA being flat Y/Y. Margins have fallen 1500bp Y/Y. We believe that the margin decline is due to pressure on VAS tariffs and limited success of new VAS services from OnMobile.
Furthermore, management indicated that growth could come off going forward and hence it had decided to reduce capital expenditure from 20-25% of revenues to 12-15% of revenues.
Pricing pressure on VAS due to competition, limited pickup of VAS services, and increased investments in content acquisition and product development is likely to limit any potential upside surprises in our view.
OnMobile is expected to report an EPS of Rs 14.4 for FY09 and Rs 15.75 for FY10.
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Published by Webmaster @ 5:11 PM IST.
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