Category: Economy, Markets and Macro Views

Just a while ago JM Morgan Stanley hasdowngraded Bajaj Auto to Equal-Weight from OverWeight. he Target Price has also been downgraded from Rs 3,000 to Rs 2,600.

The research note said, investors should focus not only on the valuation of non-automotive operations if the de-merger proposal goes through, but, more importantly, the value of the underlying core automotive operations.

The downgrade essentially reflects concerns on core implied automotive operations. With core earnings (down to 17.3% CAGR F2007-09E from 20% CAGR in F2003-07) and volume (down to 10.9% CAGR F2007-09E from 21.4% in F2003-07) growth coming off, the valuation multiple on core operations could potentially get de-rated.

Merill Lynch [ML] in a report released just a while ago has retained a Buy on Tech Mahindra Ltd (TML) with a PO of Rs 2125, given strong earnings CAGR of 45% on adjusted EPS basis and robust spend by Telecom service providers.

Merill Lynch has established a Price Objective of Rs2125 is at 0.7PEG (FY08PE to FY07-09e) vs our target PEG of ~1 for leading majors like Infosys, implying a target P/E of 21x. ML believe this is fair given sharp earnings growth of 45% (FY07-09e), robust IT spends by telecom service providers and increasing trend in offshoring. This is the only big league IT company that will grow at such momentum.

ML expects Tech Mahindra to report an EPS of Rs 76 and Rs 106 for FY08 and FY09.

The Bajaj Auto stock had risen 1.7% to Rs 2609 on Thursday, 10 May 2007, ahead of the announcement by the company that its board would meet on 17 May to consider dividing the company into manufacturing and financial services businesses to unlock shareholder value. The news hit the market after trading hours.

Dalal Street Business Analysts have valuation of Bajaj’s Financial Services Business here.

The market has been agog with talks of a split since the last two years. Transferring some of the Rs 6500-crore cash will improve the finance and insurance businesses, chairman Rahul Bajaj had said in the past.

Bajaj Auto is in both general as well as life insurance businesses through Bajaj Allianz General Insurance Company and Bajaj Allianz Life Insurance Company, respectively. Bajaj Auto holds a 74% stake in both firms with the rest held by Allianz. Bajaj Auto is also into the business of lending money through Bajaj Auto Finance, a listed entity. Bajaj Auto holds over 38% stake in Bajaj Auto Finance.

Bajaj Auto sales are on decline and the company will also announce its FY 2007 results on 17 May 2007.

Ansal Properties & Infrastructure just a while ago announced that it has signed a memorandum of understanding (MoU) with Deyaar Development PSC, a real estate company in UAE. The MoU is for developing a mixed township, comprising of residential, commercial, institutional and industrial properties in India. As per the MoU, Deyaar would hold up to 40% stake in the project.

Ansal API was badly looking for a foreign partner with deep pockets and it has found one to scale and implement its ambitious projects.

Merill Lynch [ML] is adding Firstsource to top mid-cap picks. ML forecast a 38% EPS
CAGR growth (post IPO dilution) over next 2 years led by a 44% CAGR revenue growth which has high visibility given the annuity nature of BPO. ML is correspondingly removing Sasken which is likely to see poor stock performance till key product shipments start in 2HFY08.

ML forecast 50% PAT growth and 38% EPS CAGR over the next two years. 44% revenue growth driven by mining of existing clients as well as inorganic moves like the partnership with US banking tech major Metavante and the recent BPM Inc. acquisition in Jan 07. Q1FY08 is likely to be seasonally weak given wage hike and continued ramp costs of Hutch / Vodafone, a 4000 person account.

FirstSource is trading at 25x FY08 PE and 17x FY09 PE which we believe is reasonable given the high 50% PAT CAGR over FY07-09. Moreover, BPO is a more nascent business with high growth potential and operating leverage and is a sticky and annuity business model.

Other top Midcap picks from Merill Lynch are IVRCL, Welspun India, Biocon and Panacea Biotech.

JP Morgan [JPM] in a research note has downgraded Reliance Communications from Overweight to Neutral. The main reasons cited by the analysts are poor operating performance and higher valuations.

RCOM’s operating results were below estimates for the second consecutive quarter; 4Q FY07 consolidated revenues/EBITDA came in 2.7%/1.7% below estimates. JPM trims forecasts but raised price target to Rs525 from Rs475 previously, because of a 10% premium to DCF (to partly capture upside from the FLAG listing) and rollover to Jun-08 from Dec-07.

JPM forecast 2-year (FY07-09) EBITDA CAGR of 35% for RCOM versus 44% for Bharti. At JPM’s price target, RCOM would trade at a 16% discount to Bharti on FY08E EV/EBITDA. RCOM stock is likely to trade in a narrow range without further rerating in sector (Bharti) valuations or until the company starts exceeding consensus estimates. JPM downgrades RCOM to Neutral from Overweight noting unattractive relative valuations and only 10% absolute upside potential versus our revised target price of Rs525/share for Jun-08.

Buy RCOM stock at/below Rs400 level. On the other hand, if the share price were to exceed Rs500 level in the near term, book some profits.