Author: CP

Citigroup has initiated coverage on Sterlite Industries with a BUY 1M [Medium Risk] rating and a price target of Rs 910, potential upside of 45% from CMP of Rs 621.

Sterlite is a conglomerate producing non-ferrous metals – zinc,aluminium and copper. Zinc is Sterlite’s best-performing business. Prices have been relatively subdued this year, but supply from China to moderate over the coming months, enabling prices to recover in 2HFY08 to ~US$4,400/t. Citi sees upside to FY09E forecasts, based on buoyancy in zinc and lead prices. Despite flat aluminium prices, Citi expects moderate earnings growth in Balco, in which Sterlite currently owns 51%.

Sterlite operates a copper smelter for which the key profit driver is TC/RC margins, which are expected to halve from FY07 levels to 14-15c/lb, and EBITDA from Rs11.6bn in FY07 to ~Rs8bn in FY08E-FY09E. Given this, and sector re-rating, Citi values Sterlite Industries stock at a P/E of 10x FY09E, a premium to historical valuations.

Hindustan Zinc Ltd [HZL]:
Citi has initiated coverage on Hindustan Zinc with a BUY recommendation and a price target of Rs 1155, potential upside of 62%.

HZL is a fully integrated, low-cost zinc producer which meets all zinc concentrate requirements internally; offering exposure to the robust zinc price outlook. HZL also offers volume growth, scope for cost cutting, and exposure to buoyancy in lead prices.

Production costs are low as 90% of ore is sourced from its low-cost Rampura Agucha mine. Ongoing capex should enhance zinc capacity by 63% from 411,000t to 669,000t by 1Q FY09, useful at a time when zinc prices are likely to revive.

Based on outlook and sector re-rating due to global M&A, our target is Rs1,155 based on a P/E of 10x FY09E.

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Citigroup Research reiterates a BUY on Indraprastha Gas Ltd while Merrill Lynch has retained a SELL on the stock. So what do you do when their are such conflicting recommendations ? I was watching Wizzards of Dalal Street – Prashant Jain and believe in his theory.

• You have to model the company financials yourself.
• Then see what are the influencing factors that will affect the company in the next few quarters
• Once you have all the required data – Ask yourself what happens if this is the scenario or if that is the scenario and you have the answer in front of you. Mr. Jain took some bold decisions like exitting IT stocks before the Dot Com BUST in 2000 because his model told him something was not right and recommended a SELL

Here is what Citigroup has to say on Indraprastha Gas:
Steady CNG conversions driven by the rapid pace of private car conversions (c.3,000 per month), increasing PNG penetration, and geographical growth in newer areas (Greater Noida, Ghaziabad) would result in a 14% volume CAGR over FY07-10E. IGL’s 1QFY08 net income of Rs384m was ahead of expectations and up an impressive 39% yoy. Adjusting FY08E and FY09E earnings by +3% and -1% respectively after factoring in FY07. Any increase in prices of the gas will be passed on to consumers.

Target price of Rs160 for IGL is based on DCF. DCF is used because it captures the value of the projects over their lifetime. IGL’s near-term cash flow is affected by its aggressive expansion. Target P/CEPS of 8.2x FY09E is still at a small discount to current multiples of other gas utilities.

Merill Lynch Report:
The biggest risk to IGL is competition from likely new entrants like Reliance Industries (RIL). It as imminent. Competition from an aggressive player like RIL is a serious threat to IGL’s volumes as well as super-normal margins. If gas cost rises gradually as expected it will worsen IGL’s outlook. Merrill therefore maintains a Sell on IGL despite its encouraging 1Q result.

DalalStreet Research Analyst Views:
Merrill Report about selling this stock is purely based on RIL entering this segment. Reliance also entered the Telecom business under Mukesh Ambani but Bharti is till the PAN India leader. It is difficult to BUY Merrill’s argument on “if RIL” enters this business. We endorse Citi’s views.