Category: Economy, Markets and Macro Views

Arvind Mills will undertake a major restructuring exercise. The group will merge its strategic business units (SBUs) into two main divisions: apparels and textiles. The move entails job cuts and cost cutting of up to 30%, an initiative to address the rupee crisis.

Reportedly, the strategic business units in the fabrics division, including denims, shirting, khakis, knitwear and voiles, will now be merged and controlled by one business head. Similarly, the businesses in the apparel division, including brands and retail, will be merged as well. This will lead to proper integration among different businesses, focused and joint initiatives and streamlined operations.

Reliance Money has initiated coverage on Ahmednagar Forgings, a Amtek group company and Ratnmani Metals and Tubes with a BUY rating.

Ahmednagar Forgings Ltd: [AFL]
Amtek Auto Limited holds 51% equity stake in AFL thereby making it a subsidiary. AFL manufactures various forged products like connecting rods, gear blanks, shafts, transmission components, flanges, hubs and is a Tier 1 vendor to OEMs in all major segments i.e. two wheeler, passenger cars, tractors and commercial vehicles. It earns around 80% of total revenue from auto business and 20% from non-auto business.

AFL’s net sales went up by 60% YoY to Rs.6,002mn backed by strong domestic and exports growth. For FY07, AFL reported export revenue to the tune of Rs.2bn, up by almost 10x. AFL’s EBITDA soared by 68% YoY to Rs.1,191mn and its EBITDAmargins grew by a whopping 193bps YoY to 21% from 19% in Q4FY06. It’s noteworthy that AFL’s margins went up despite raw material costs as a percentage of net sales went up by 411bps YoY. For FY07 AFL’s EBITDA jumped by 69% YoY to Rs.1,234mn and its EBITDA margins went up by 108bps YoY to 20.6%.

AFL is expected to report strong net sales and net profit growth at a CAGR of 37% and 36% respectively during FY07-09E.AFL stock currently trades at 12x FY07E and 8x FY08E which is attractive. Reliance is positive on the long term prospects of the company and recommend investors a BUY with a target price of Rs. 337.

Ratnamani Metals and Tubes Ltd: [RMTL]
RMTL is a Tier I supplier of project pipes which have applications mainly in petrochemicals, oil refineries, power plants, sugar refineries, water projects, fertilizer industry, and core engineering industries.

RMTL reported Net sales for Q1FY08 grew by 116% YoY to Rs.1,900mn backed by partial execution of healthy order book and higher capital expenditures incurred in oil & gas industry. The impressive jump in sales in Q1FY08 was mainly because of strong growth in exports from Kutch SEZ which reported export revenue to the tune of Rs.793mn. The net sales growth was driven by both the segments, stainless steel pipes and carbon steel pipes reported strong growth of 142% YoY to Rs.1135mn and 93% YoY to Rs836mn. RMTL is currently sitting on an order book of around Rs.4.31bn (65% -stainless steel pipes and 35% – carbon steel pipes) which will be executed within next 6-8 months. RMTL continue to get healthy order book in FY08E and FY09E as well mainly because of big capex plans announced by oil and gas industry players.

RMTL’s EBITDA grew by 123% YoY to Rs423mn and its EBITDA margins improved by 72bps YoY to 22.3%. RMTL would be able to maintain its EBITDA margins in the range of 21-22% in FY08E & FY09E as well. RMTL stock currently trades at 9x FY08E and 7x FY09E which is attractive. RMTL stock has good potential upside from this level and recommend a BUY with target price of Rs 1361 based on DCF approach. At target price the stock would trade at a P/E multiple of 10x on FY09E earnings.

Edelweiss Equity Research is Bullish on the prospects of Rolta India and Infotech Enterprises both Midcap software companies.

Rolta India Ltd:
All-time high order book and pipeline bids. Order book stands at INR 8.4 bn. All business segments witnessing strong traction. A pleasing guidance issued for the first time in the company’s corporate history guiding towards a 33-35% growth in revenues and 33-36% growth in net profits for

Citigroup Research which had a BUY recommendation on ABB has revised its target price upwards to Rs 1,266. Current market Price is Post Stock Split from Face Value Rs 10 to Rs 2.

Citi expects earnings CAGR of 49% (from 42% earlier) over CY06-09E with RoEs at the ~37% level, driven by sales CAGR of 42%. Target price is based on a P/E of 30x FY09E at a ~30% premium to BHEL given: 1] EPS CAGR of 49%; 2] RoEs of ~37%; 3] Access to parent technology; and 4] ABB India’s importance in the ABB Group.

ABB China grew sales at a CAGR of 33% over a 7-year period between CY98 to CY05. ABB India may find it possible to repeat this feat in India given India is the fastest growing T&D market in the world, a fact corroborated by both ABB an Areva. India is not only a promising domestic market, where ABB is well-positioned as a market leader in power and automation technologies but also a global sourcing hub; global R&D centre; and regional excellence centre.

Citi has also recommended a BUY on Nicholas Piramal India as the stock will unlock the value from proposed demerger of R&D unit – NCE Research. NPIL’s focus on NCE R&D has been rising and it is working on 13 NCEs (3 in the clinic). R&D/sales was up from 1.2% in FY03 to 5.2% in FY07 (66% CAGR) and is set to rise to 5.7% in FY08E.

First-cut calculations indicate that a demerger would raise FY09E and FY10E EPS 12-16% and 11-15% respectively. Besides, the street has treated NPIL’s NCE R&D as a cost, thereby reducing the company’s overall valuation. On demerger, if the NewCo is listed, expect the Street to assign some value to this as well, thus unlocking value for shareholders. Citi sets a target price of Rs 345 on Nicholas Piramal India.

In a separate Research report, Sharekhan securities has set a Target price of Rs 326 on Nicholas Piramal India Ltd.

ICICI Direct Research has put a BUY recommendation on Man Industries with a price target of Rs 306 within a time frame of 3-6 months.

Man Industries (India) Ltd, the flagship company of the Man Group, UK, manufactures steel line pipes for high and medium pressure applications such as oil and gas, petrochemical and water transportation, anti-corrosion coating systems and aluminum extrusion products.

Demand for SAW pipes is likely to remain firm in next five years due to burgeoning crude prices and depleting oil reserves. Global demand is expected to be in the range of 67 million tonnes with around 66% flowing in from Middle East, Asia & US, the key markets for the Indian players. While demand in Europe and Russia would be met by internal supplies, demand in Middle East and US is likely to be met through imports. This high demand, coupled with supply constraints, would keep prices firm at for least two years through CY08 and 09, escalating to mid 2010, where after it may start softening.

Man Industries is in capex mode and post expansion, its capacity of 1 million tonnes would be more than 2x the existing capacity, equally distributed between LSAW and HSAW pipes. This would reduce the risk and increase the size of addressable market. With a robust order book position of Rs 2,400 crore, the top line is expected to grow at a CAGR of 51% over FY07-09E and net profit by 67%. Capacity utilization should be at about at 40% in FY09E.

Man Industries is set to capitalize on the rising global demand for pipelines. At the current price of Rs 255, the stock is trading at 4.42x the FY09E EPS.

Citigroup Research in a detailed research report released just a while ago has initiated coverage on India’s premier and best Infrastructure Financial institution – Infrastructure Development and Finance Corporation – IDFC. Citi has recommended a BUY with a Target Price of Rs 140 from current levels of Rs 110.

IDFC is the most levered and broad-based infrastructure play in the Indian financial sector. IDFC brings to the table,

• Integrated offering as a lender, advisor and investor,
• Management – track record, defined strategy and pedigree
• A broadening business model – trending towards more annuity and risk-linked fees,
• Risk management systems – proven asset quality record, and
• Capital – to leverage and invest.

Citi expects IDFC’s profits to grow at a strong 26% CAGR over FY07E-10E, backed by asset expansion and stronger asset management-driven fee income growth. ROEs, is likely to remain moderate at 14-15%, with leverage and fee incomes the driver beyond.

Citi recommends a BUY on IDFC with Rs140 target price implying a 27% expected total return from current price levels. Target price is based on a sum-of-parts methodology with the core lending business valued at 2.5x FY09E PBV or Rs113 per share. The asset management business is valued at Rs17 per share based on DCF analysis. Finally, the unrealized investment gains at Rs10 including NSE and SSKI stakes.

DalalStreet Analyst Views:
Yes, you can take exposure to this stock at Rs 110 level and blindly add more when it falls. IDFC is backed by Deepak Parekh who indirectly had told Citigroup executives to sell their stake in HDFC if they were not happy with HDFC’s performance. [The issue was just Citi wanted HDFC to be little bit more aggressive but then Deepak Parkeh may have misunderstood and reacted sharply].

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