Author: CP

Citigroup Research has upped the target price of State Bank of India in a report released just a while ago to Rs 1,825. Citi has also upgraded the EPS earnings estimate to Rs 102.64 and Rs 121.18 for FY2008 and FY2009 respectively.

SBI is India’s largest bank with around 20% market share in deposits and loans, 9,038 branches and more than 90m customers. Target price for SBI is Rs1,825 based on our EVA model, which captures the long-term value of the business and is a standard valuation measure for Citigroup’s India Banking universe.

Citi has revised target price from Rs1,235 previously, as they now incorporate new earnings, lowered the risk-free rate to 8% (8.5% previously) in line with the market level, increased the valuation of its subsidiaries to Rs525 (Rs231 previously) as we
have moved valuation benchmarks to FY09E and we have factored in the Insurance and asset management business.

Federal Bank – Earnings Estimate and Target Price Upgraded:
Citi has also upgraded the earnings estimate and price target of Federal Bank as well. Federal’s 1Q08 profits were up 67%yoy; pre provision profits were up 66%, ahead of estimates. Increased coverage levels (88%) with low net NPLs (>0.4%) provide comfort.

Federal Bank is expected to report a fully diluted EPS of Rs 40.58 and Rs 49.53 for FY2008 and FY2009. Raising estimates 11-17% for FY08-09E, target price to Rs 438 and target P/BV multiple to 1.7x FY09E (from 1.5x Sep 07) to reflect premium over average PSU banks.

Central government of India owns a 90.40% stake in Engineers India (EIL). EIL renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects. The company derives nearly 90% of its revenue from the oil and gas sector.

Of the two segment in which it operates – consultancy and engineering and turnkey projects – the consultancy segment earns high margin, while the turnkey project division’s margin is low.

There has been a consistent improvement in the growth of the consultancy business. The business grew 5% in FY 2005, and 15% in FY 2006 and FY 2007. Also, margin continued to show improvement. The profit before interest and tax (PBIT) margin of this division improved from 28% in FY 2005 to 36% in FY 2007. EIL’s consultancy revenue is expected to grow 20% and at least maintain the margin, going forward. This is in spite of the sharp rise in salaries effected in early 2007.

New order inflow to the domestic consultancy and engineering division stood at Rs 900 crore in FY 2007 (Rs 485 crore in FY 2006). Export consultancy & engineering orders stood at Rs 68 crore in FY 2007 (Rs 325 crore in FY 2006). New-order flow from the international markets was exceptionally large in FY 2006 due to receipt of two big orders in that year. A Rs 250-crore backlog will be executed in FY 2008 and beyond. The company expects two big export orders to come by December 2007.

Recently, EIL received a Rs 900-crore contract from IOC for another refinery in Panipat. This will contribute Rs 250 crore to topline and the same margin earned in its previous contract in FY 2008.

EIL is expected to register net sales and net profit of Rs 835.60 crore and Rs 198.50 crore in FY 2008. The turnkey-project revenue is expected to be Rs 250 crore (up from Rs 82 crore in FY 2007) and consultancy business to grow 20% in FY 2008. This gives an EPS of Rs 35.3. At the current market price of Rs 478 (52-week high/low: Rs 610/ Rs 405), the scrip is available at a P/E of only 13.6 times its FY 2008 earning. With more than Rs 1000-crore liquid funds (Rs 178 per share) and strong order book, both for consultancy as well as turnkey projects.

Ranbaxy Labs, Wockhardt and Nicholas Piramal have had a good quarter which has led their stocks to be upgraded by Citigroup.

Ranbaxy Labs:
As the settlement of the Valtrex patent litigation with GSK comes as a much needed catalyst for the stock. Ranbaxy has been out of favour on the bourses despite a steady improvement in fundamentals. However, with earnings momentum likely to remain strong & valuations looking attractive at 17.6x CY08E earnings, expect a re-rating over the next 6-12 months.

The street is ignoring Ranbaxy’s improving business profile reflected in: a) rising share of high margin emerging market sales; b) tie-ups to enhance pipeline in niches like biogenerics, oncology & peptides; c) integration & rapid scale up of Terapia; d) robust growth in base US business.

Buy with a target price of Rs505/share, 35% upside potential from current levels. The stock price now factors in most negatives.

Wockhardt:
Sales up 53% and PAT up 61%, driven by partial consolidation of the recently acquired Negma Lerads business. EBITDA margin of 24% (up 238bps YoY) is higher by c270bps due to capitalization of some R&D cost that was expensed in 2QCY06. Adjusted PAT was up 43% YoY. US formulations are up 50% YoY with 5 launches in 2Q; Healthy double-digit growth in Germany as 3 launches offset the pricing pressure in the market; Steady growth in UK & India.

Wockhardt continues to combine organic and inorganic growth drivers optimally. The stock has been out of favor for some time. Wockhardt as Buy/Low Risk (1L) with a target price of Rs529. Wockhardt as an emerging global bio-generics company with strong earnings growth potential over the long term. The company has had several disappointments over the past 2 years – especially related to its US market initiatives. However, with most of these being addressed, one can expect improving fundamentals and earnings growth to once again drive good upside over the long term. At 16xJune’08E earnings, Wockhardt has a price target
of Rs529/share.

Nicholas Piramal India Ltd [NPIL]:
NPIL not only maintained FY08 guidance but also disclosed several qualitative positives related to the CRAMS franchise. Citi raises target price to Rs345/share and recommend using the post-results decline as an opportunity to buy the best Indian play on innovator CRAMS.

1Q results were weak as PAT fell 19% YoY despite 16% sales growth. EBIDTA margins fell 296bps to 13.8%. Besides 41% sales growth, 1Q had fresh evidence of the traction in NPIL’s CRAMS foray: a) 3 new clients & more business from Pfizer at Morpeth; b) 2 contracts shifted from Avecia to India; c) 1 big API deal across Digwal & UK; d) 10% staff reduction in Avecia & Morepeth.

Raising target price – to Rs345/share as we roll forward our valuation to September 2008E earnings and maintain NPIL as one of Citi’s top sector picks.