Category: Economy, Markets and Macro Views

As India celebrates her 60th independence day, Deutsche Bank [DB] equity research has upgraded Reliance Industries from Hold to BUY with a price target of Rs 2130. DB is far more bullish on the prospects RIL’s refining business.

RIL is on the cusp of strong growth in refining and E&P. Timely expansion through its export-oriented refining subsidiary, Reliance Petroleum (RPL), should help RIL capitalize on the capacity crunch and demand for upgraded fuels, which we view as positive for RIL’s refining operating rates and margins.

RIL’s earnings should get a boost from production start-ups in KG D-6 gas and RPL’s new highly complex refinery, which should support higher GRMs. DB expects RIL’s refining business (including RPL) to get re-rated, as did Indian cement stocks over the past 4 years. Potential growth in oil and gas reserves in its large E&P portfolio, and visibility in cash flows from Reliance Retail which is capitalizing on India’s booming consumer-spending theme. Reliance Retail is also positive for RIL’s longterm ratings as it can sustain long-term growth and mitigate the cyclical risk in RIL’s current portfolio.

The Sum of Parts Valuation of Reliance Industries Ltd is as below,
RIL Petchem Rs 441
IPCL Petchem (post merger) Rs 126
RIL Refining Rs 651
RPL Refining Rs 296
KG D6 (based on DCF) Rs 161
Miscellaneous E&P portfolio Rs 79
Reliance Retail Rs 108
Miscellaneous [Less Debt etc]

Dalal Street Analyst Note:
It is never too late to BUY Reliance. Keep adding in small quantities as and when you get an opportunity. Here is an earlier coverage of Reliance Industries by Goldman Sachs.

Enam Securities Research has recommended a BUY on ICICI Bank with a price target of Rs 1260, potential upside of 42%.

ICICI Bank’s stock has recently underperformed the banking sector, largely due to the huge equity offering along-with a relatively weak Q1 results. Higher Gross NPAs, pressure on NIMs, low ROE, impending risk of a slowdown in credit growth are other dampeners on the stock price.

NIM has likely bottomed out, fee-income growth remains on track and asset growth of 25-30% is achievable. New premiums in Life Insurance are likely to show better growth in coming months with base effect tapering off from Q2 onwards.

ENAM arrives at a stock price of Rs 1260 based on the Sum of Parts Valuation of ICICI Bank which is as follows,

ICICI Bank 833
Mutual Fund Business 19
Life Insurance 225
General Insurance 31
I-Sec (Group) 27
Overseas Banking subsidiaries 77
Other investments 48 – ICICI Venture/ NSE/ FirstSource

Also read value of insurance subsidiaries in Bajaj Auto and HDFC .

Comments and Suggestions maybe sent to “feedback @ DalalStreet.Biz”

India’s over hyped IT consulting firm MindTree consulting will under perform the IT sector performance according to research initiated by SSKI. They have set a target price of Rs 510, potential downside of 12% from current levels.

Kindly read about MindTree’s Management and Business Operations in our coverage during IPO. MindTree experienced slow revenue growth of 31.5% yoy in FY07 against and 82% in FY06, 89% in FY05 and 58% in FY04. MindTree has the lowest billed employees per client at just 15 while Satyam and Wipro have the highest at 51. MindTree’s EBITDA margins, at 18.6% in FY07, appear quite low compared to those of peers. At 65% of revenues in FY07, the share of development revenues is high for MindTree compared to peers.

At 65% of revenues in FY07, the share of development revenues is high for MindTree compared to peers. A high share of development services leads to lower utilization. A 100-people team, working on creating IP, is not billed. IP licensing revenues constituted only 1.2% of the overall revenues in FY07.

Due to lower margins and a higher tax rate, the strong revenue growth would result in only 15% CAGR in net profit. The management to cut its original net profit guidance of $25.1m-25.2m (25.9-26.4% yoy growth) to $22.5m-22.6m, a growth of just 14%. MindTree revised its EPS guidance to Rs 24.5 for FY08.

Tech Mahindra is expected to post net profit CAGR of 43% over FY07-09 while MindTree would post an 11% CAGR (for better comparison, taking into account Bloomberg estimates for MindTree as well). However, MindTree trades at 17.4x FY09E earnings compared to 13.5x for Tech Mahindra (superior growth prospects). SSKI recommends an Underperform rating on MindTree with a target price of Rs 510.

The US Sub-Prime Woes is having Ripple effect on the Indian Stock Market. BSE-SENSEX is down 390 points. Major losers in the Sensex are – Bharti Airtel Ltd, HDFC, ICICI Bank, NTPC and State Bank of India.

Adding to market woes is the Indian inflation which shot to 4.45%.

Asian stocks tumbled across the board, following a rout in global markets as credit jitters flared up, after France’s biggest listed bank BNP Paribas froze three funds that invested in US subprime mortgages.

The French bank’s move on Thursday, 9 August 2007, spooked global financial markets and prompted action from major central banks to calm markets, with the European Central Bank injecting record amounts of cash to prevent a financial system seizure.

In a newsflash, The Bank of Japan added 1 trillion yen ($8.5 billion) to the financial system and the Reserve Bank of Australia lent the most in more than three years, joining U.S. and European central banks in responding to a credit crunch.

Indian Economic Data:
INDIA JUNE INDUSTRIAL GORWTH AT 9.8% VS 9.7% YOY

INFLATION FOR THE WEEK AT 4.45% VS 4.36%

Tags: Invest India, Global Markets, Stock Market, Indian Inflation

Citigroup Research has downgraded Hexaware Technologies Ltd [Formerly Aptech], Sasken Communications and KPIT Cummins Ltd.

Hexaware Technologies:
Company reported 2Q07 results – revenue of Rs.2.62b (-1% qoq) and net profit of Rs.261 m (-26% qoq) – was disappointing and significantly below our expectations on net profit.

Company clearly lacks margin levers especially when it had triple whammy – a) Strong INR, b) wage hikes (higher than usual) and c) tepid sales outlook due to client specific issues. Revise estimates now factor weak 2Q, cloudy outlook from a few clients and integration issues at FocusFrame – we cut our earning estimates by 11-18% for CY07-09. With lower earnings CAGR, Hexaware is now valued at 15x CY09E EPS (against 17x earlier) – thus, new target price is Rs.155 from Rs.214 earlier.

Sasken Communications Limited:
Sasken’s 1QFY08 numbers came in below street expectations. Services revenues grew only 2% qoq ($ terms) while margins declined sharply by ~800bp sequentially. Product business had an inline quarter – revenues ($2m) were in line with expectations.

Management cut the guidance for services revenues – 20-25% growth in $ terms as against the 30-35% guidance earlier. This implies $132 – 137m of revenues (against $100m in FY07). EBITDA margin outlook was reduced to 15-17% from the earlier 20-23%.

The disappointing 1Q results, weakness in telecom services and higher than expected INR impact has resulted in a 24% and 12% cut in FY08 and FY09 estimates. Revised target price is Rs.505 (from Rs.643) as the services business is now valued at 10x EV/EBITDA (against 11x earlier) to reflect lower earnings growth and deteriorating comparable valuations for mid-cap Indian IT.

KPIT Cummins Limited:
Company reported 1Q08 results – revenue of Rs.1.35b (+3.8% qoq) and net profit of Rs.127 m (-10% qoq) – was broadly in-line with expectations. Recognizing revenue at hedged rate, inflates revenue figure and EBITDA line in appreciating quarter.

KPIT Cummins recognizes revenue at hedged rate (against spot rate done by several other Indian IT companies) – this recognizes hedging gains/losses with revenue. lower our earnings estimates by ~7-10% for the delayed currency impact and amortisation of upfront payment.

New target price of Rs.154 (earlier Rs 180) is based on 15x FY09E EPS (against 16x earlier) to factor in lower earnings growth. Stock trading at 17x FY08E and 12x FY09E earnings.

Indian companies can now borrow only $20m offshore for use onshore; overall company cap at $500m remains but only for expenditure offshore. The RBI/government’s objective – stem $s into the market.

Higher loan demand, lesser liquidity, stable rates – 1] there should be some shift of loan demand from offshore to the domestic market; and 2] deposit growth should slow – we believe some offshore borrowing was being arbitraged into deposits. Both these developments should translate into 3] lesser surplus liquidity in the system, and a bias toward firmer rates – do not see them going up, but should arrest falling deposit rates and segment-specific lending rates.

This is probably a positive in the near term – higher loan growth, better liquidity balance and lesser offshore competition. Structurally however, it probably is a negative that the market is getting closed rather than opened up. Bank specific – the domestic-only banks – both private sector and Government, as relative beneficiaries. Banks with relatively large offshore operations – which are likely large investors in offshore Indian corporate players – ICICI, SBI and BOI, relatively disadvantaged in their international operations.