Category: Equity Research

Sharekhan Research has released a list of top stock picks. However, we are not comfortable with the entire list and here the ones which we recommend from it.

HCL Technologies:
At the current market price the stock trades at 14.3x FY2008 and 12.5x FY2009 estimated earnings (which is around 33% discount to valuation of Infosys). Target Price Rs 396.

Bharti Airtel Ltd:
At the current market price the stock trades attractively at 26.0x FY2008 and 20.6x FY2009 earning estimates. Target Price Rs 1,100.

HDFC Bank:
At the current market price the stock is quoting at 20.9x FY2009E earnings per share, 8x FY2009E pre-provision profits and 3.1x FY2009E book value. Buy with a price target of Rs 1,355.

ITC:
At the current market price the stock trades at 21.2x FY2008 and 17.5x FY2009 estimated earnings. Target Price Rs 200.

JP Associates:
The company is the largest private sector hydropower player and is currently sitting on a huge construction order book of Rs7,200 crore. Taking cognisance of the government’s target of achieving 50,000MW in hydropower electricity by 2012. Target Price Rs 1,061

Maruti Suzuki Udyog:
At current levels, the stock is trading at 11.5x its FY2009E and is available at an EV/EBIDTA of 6.8x. Buy with a price target of Rs 921.

Citigroup has downgraded the stock of HT Media to SELL from BUY after a disappointing first quarter of FY-2008 with a Target Price of Rs 212.

Earnings growth for HT Media is slowing, partly because of new investments, but also because fixed costs have continued to increase rapidly. In 1Q FY08 it reported the slowest growth of the last two years.

HT Media’s fixed cost base compares unfavorably to other Indian media companies. While it has made some new investments, the extent of increase in fixed costs is too high. Employee costs rose 400bps over the last three years, despite revenues doubling, which is surprising given high operating leverage inherent in media businesses.

1QFY08 results were below expectations. Even after adjusting the 500bps impact on margins due to new investments, EBITDA grew only 7.1% (33% adjusted for new business investments), the slowest over the last two years.

Citi reduced EPS estimates for FY08-09E by 10.3-12.2%. At 27xFY09E P/E, HT Media trades at an 80% premium to its regional print media peers, which is excessive. HT Media is likely to report an EPS of Rs 6.64 and Rs 8.49 for FY-2008 and FY-2009 respectively.

Gokaldas Exports Q1-FY08 revenues grew a healthy 18% YoY, but EBITDA and earnings declines of 7% and 22% yoy, respectively, were lower than estimates. EBITDA margin also declined 220bps YoY to 8% – adverse impact of 9% appreciation in rupee in the quarter.

Gokaldas has taken steps to counter the rupee appreciation 1) Negotiating higher prices for future orders, 2) increase usage of imported raw materials, benefit is expected to flow from 2Q, 3) focus on a richer product mix. Gokaldas management is focused on Building order book of Rs2.5bn for 2QFY08, contrary to sector’s decline and Enriching product mix with entry into suits, innerwear, workwear.

Gokaldas Exports offers the best exposure to the garment outsourcing theme. With Gokaldas’ large capacity, good relationships with global brands and healthy order-book position, we believe the company is well positioned for growth. Target price of Rs285 is based on 12x FY-08E P/E. EPS estimates are Rs 23.8 and Rs 27.5 for FY08 and FY09 respectively.

Citigroup has initiated coverage on Sterlite Industries with a BUY 1M [Medium Risk] rating and a price target of Rs 910, potential upside of 45% from CMP of Rs 621.

Sterlite is a conglomerate producing non-ferrous metals – zinc,aluminium and copper. Zinc is Sterlite’s best-performing business. Prices have been relatively subdued this year, but supply from China to moderate over the coming months, enabling prices to recover in 2HFY08 to ~US$4,400/t. Citi sees upside to FY09E forecasts, based on buoyancy in zinc and lead prices. Despite flat aluminium prices, Citi expects moderate earnings growth in Balco, in which Sterlite currently owns 51%.

Sterlite operates a copper smelter for which the key profit driver is TC/RC margins, which are expected to halve from FY07 levels to 14-15c/lb, and EBITDA from Rs11.6bn in FY07 to ~Rs8bn in FY08E-FY09E. Given this, and sector re-rating, Citi values Sterlite Industries stock at a P/E of 10x FY09E, a premium to historical valuations.

Hindustan Zinc Ltd [HZL]:
Citi has initiated coverage on Hindustan Zinc with a BUY recommendation and a price target of Rs 1155, potential upside of 62%.

HZL is a fully integrated, low-cost zinc producer which meets all zinc concentrate requirements internally; offering exposure to the robust zinc price outlook. HZL also offers volume growth, scope for cost cutting, and exposure to buoyancy in lead prices.

Production costs are low as 90% of ore is sourced from its low-cost Rampura Agucha mine. Ongoing capex should enhance zinc capacity by 63% from 411,000t to 669,000t by 1Q FY09, useful at a time when zinc prices are likely to revive.

Based on outlook and sector re-rating due to global M&A, our target is Rs1,155 based on a P/E of 10x FY09E.

Comments and Suggestions can be sent to – feedback @ DalalStreet.Biz

Citigroup Research reiterates a BUY on Indraprastha Gas Ltd while Merrill Lynch has retained a SELL on the stock. So what do you do when their are such conflicting recommendations ? I was watching Wizzards of Dalal Street – Prashant Jain and believe in his theory.

• You have to model the company financials yourself.
• Then see what are the influencing factors that will affect the company in the next few quarters
• Once you have all the required data – Ask yourself what happens if this is the scenario or if that is the scenario and you have the answer in front of you. Mr. Jain took some bold decisions like exitting IT stocks before the Dot Com BUST in 2000 because his model told him something was not right and recommended a SELL

Here is what Citigroup has to say on Indraprastha Gas:
Steady CNG conversions driven by the rapid pace of private car conversions (c.3,000 per month), increasing PNG penetration, and geographical growth in newer areas (Greater Noida, Ghaziabad) would result in a 14% volume CAGR over FY07-10E. IGL’s 1QFY08 net income of Rs384m was ahead of expectations and up an impressive 39% yoy. Adjusting FY08E and FY09E earnings by +3% and -1% respectively after factoring in FY07. Any increase in prices of the gas will be passed on to consumers.

Target price of Rs160 for IGL is based on DCF. DCF is used because it captures the value of the projects over their lifetime. IGL’s near-term cash flow is affected by its aggressive expansion. Target P/CEPS of 8.2x FY09E is still at a small discount to current multiples of other gas utilities.

Merill Lynch Report:
The biggest risk to IGL is competition from likely new entrants like Reliance Industries (RIL). It as imminent. Competition from an aggressive player like RIL is a serious threat to IGL’s volumes as well as super-normal margins. If gas cost rises gradually as expected it will worsen IGL’s outlook. Merrill therefore maintains a Sell on IGL despite its encouraging 1Q result.

DalalStreet Research Analyst Views:
Merrill Report about selling this stock is purely based on RIL entering this segment. Reliance also entered the Telecom business under Mukesh Ambani but Bharti is till the PAN India leader. It is difficult to BUY Merrill’s argument on “if RIL” enters this business. We endorse Citi’s views.

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.