BHEL + Reliane Energy to Power Investments

Bharat Heavy Electricals (BHEL), the country’s biggest power equipment maker, plans to scale up its manufacturing capacity to 20,000MW by 2012 at an investment of about Rs 6,500 crore as it seeks to gear up for the massive requirement of the electricity sector in the next few years.

Anil Ambani- managed Reliance Energy (REL) announced that its wholly owned subsidiary Reliance Power will go public soon. Reliance Power is expected to mop up $3.5 billion (Rs 14,000 crore) from the market, which will be the biggest public float in recent times after the DLF IPO.

Citigroup has a SELL on the stock of Reliance Energy. Even on Sum of Parts Valuation the stock is quoting at abnormally high price and we agree with Citi’s recommendation of SELL. Book profits only if you hold, don’t short because operators in the counter are directly backed by Ambani circles said company sources.

Analysis on Lupin’s Rubamin Acquisition

We reported that Lupin has acquired Rubamin Pharma.[RLL]

RLL is a research driven organization with 145 employees, of which 30% are involved in R&D. The company’s R&D capabilities encompass activities such as Product Development and Optimization, and NCE Development Support. This acquisition would provide Lupin access to RLL’s customer base of innovator and generic companies in the US and Europe and various technology platforms, which Lupin does not have. We believe that Lupin would be able to use this customer base, and technology platforms to leverage its own CRAMS initiatives. Lupin will also fill gaps, which RLL has in terms of scale-up and forward integration. Apart from this, we expect Lupin to initiate operational restructuring to reduce cost and improve profitability.

Currently, RLL has sales less than Rs500 mn and EBITDA margin lower than Lupin’s margin. However, ASK India expects sales of RLL to grow to Rs2.5- 3 bn in three years and significantly improve profitability. ASK maintains a BUY on Lupin with a price target of Rs 807. Fully diluted EPS expected for FY08 and FY09 are – Rs 36.9 and Rs 44.8.

I-Sec Maintains BUY on Sun Pharma Advanced Research Company

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.

Gulf Oil expansion plans

India’s third largest blended lubricant manufacturer, has firmed up plans for two construction projects in Bangalore and Hyderabad and it is eying a couple of mining projects as well this year.

The 100-acre knowledge city in Hyderabad will need an investment of Rs 800 crore. It will be used for the company’s in-house R&D work on robotics for the explosives division and research for the speciality chemicals division. The construction cost of the Bangalore IT and IT enabled services hub, covering 40 acres, is estimated at around Rs 1,000 crore.

Reportedly, the company also plans to invest around Rs 400 crore in two mining projects that it hopes to bag during this fiscal.

The report indicated that the long-term plan of the company is to strengthen the four verticals and hive them off into separate entities

India not an Emerging Market Favorite – UBS

UBS Equity research is underweight on the prospects of Indian market compared to others globally. It has rated India at position 15 amongst 16 countries.
Rank of India across various parameters in the UBS Report are as follows, [1=Highest Score, 16=Lowest Score]

  • Country Risk Rank – 15
  • Economic Rank – 16
  • Political Rank – 9
  • Budget Deficit – 15
  • Current Account – 13
  • Tariffs – 16
  • Currency – 13
  • Inflation – 14
  • Sovereign Credit Rating – 14
  • Economic Rank – 16
  • Contract enforcement – 16
  • Investor protection – 4
  • Liquidity – 5
  • Size of Government – 3
  • Corruption – 11
  • Reforms – 9

The sectors UBS is globally looking for are Banking, Telecom and Consumer Services and Goods.

Target Price of Reliance Capital Raised – Merill

Merill Lynch has raised the stock target price of Reliance Capital [R-Cap] to Rs 1850. R-Cap is expanding its distribution at a very rapid pace which could result in growth, ahead of Merill’s estimates, remaining very strong through FY10 and possibly beyond. Based on FY10E sum of parts valuation, a value of Rs 2033/share, the target price for Mar’09 (18 months from now), a 36% upside. Hence, 12 month PO is Rs 1850.

By Dec’08, it is likely to have 10,000 touch points in retail in 1 year (v/s 4,000 now), 5,000 locations (v/s 700), 300,000 agents in life insurance (and 400 cities) and +1500 dealers.

  • Consumer loan book [Housing, Auto, Personal etc] to expand 10-fold to US$4.1bn by FY10, delivering ROE of +20%.
  • General insurance too is likely to show +100% growth through FY09 and 75% in FY10.
  • R-Money is likely to be the other strong growth driver as it expands distribution and customers hit 1 million mark.
  • Overall, life insurance should, however, remain the biggest contributor at 37% of target value with premia income forecast to rise 7-fold from FY07 levels.

Reliance Capital is likely to emerge amongst the top 3-4 players in the financial services segment. R-Cap is expected to report an EPS of Rs 41.16 for FY 08 and Rs 59.27 for FY09.

In a separate report, Merill Lynch’s most preferred stocks are – BHEL, Bharti Airtel and Grasim Industries. While the least preferred are Hindalco, Tata Motors and Pantaloon Retail India Ltd.