Category: Equity Research

Citigroup has put a BUY on United Phosphorous Limited [UPL] with a target price of Rs 380. UPL’s acquisition of 2 brands from Dupont is another step to augment its product basket by inorganic means.

UPL is the only Indian play on the global crop protection market, with around 80% of
revenue coming from global markets. Citi forecast FY07-10E revenue and net profit CAGRs of 21% and 35%, respectively. Citi believes that P/E vs. earnings CAGR or EV/EBIDTA vs. EBIDTA CAGR is the correct metrics to value companies such as UPL.

Citi expects UPL to report an EPS of Rs 19.31 and 28.77 for for 2008 and 2009. Target price of Rs380 is based of average of FY08Eand FY09E FD EPS estimates.

Citigroup research has recommended a BUY on ABG Shipyard, Bharti Shipyard ONGC and Mphasis. We had a BUY on Mphasis much before Citigroup did.

ABG Shipyard and Bharti Shipyard:
Citi raiseed their target price for ABG Shipyard to Rs560 (Rs430 earlier) and Bharati Shipyard to Rs670 (Rs525 earlier) as we roll forward our target multiple for both companies to 12x FY09E PE (15x FY08E earlier), in line with valuations of similar-sized shipyards in the region.[Asia]

Both the companies are expected to report a EPS growth of 50% from 2008-10. Bharti Shipyard is expected to report a fully diluted EPS of Rs 38.53 and Rs 55.87 for FY08 and FY09. While ABG is expected to report EPS of Rs 29.92 and Rs 47.18 for FY08 and FY09.

The target multiple of 12x FY09E earnings for the Indian shipyards also compares favorably with the imputed target P/E (average 12.4x CY08E) of Korean shipyards.

ONGC:
Citi rates ONGC as Buy/Medium Risk (1M) with a target price of Rs1100. Despite near-term uncertainties on subsidy payouts, ONGC’s asset valuations have improved with higher net realizations and greater confidence in gas price deregulation.

The target price of Rs 1100 is based on a PER of 11x FY08E P/E (previously 10x) on account of greater confidence in adherence to a subsidy-sharing formula and the company’s recent successes in driving volume growth and potential improvement in reserve replacement. The new target price imputes EV/EBITDA of 5.5x FY08E. This is at the higher end of historical trading ranges – PER of 2.1x to 11.3x and EV/EBITDA of 0.8x to 5.6x – but in-line with regional peers.

Sorry the BHEL coverage was left out in the earlier post. Kotak is bullish on the prospects of BHEL and has set a price target of Rs 1,550 on the stock.

While there are likely to be strong order inflows in the next two years Kotak believes that XIIth plan with skew towards private sector and supercritical configuration would pose challenges for BHEL. BHEL may lose market share as well as face pressure on margins because of (a) heightened competition, (b) change in project profile and (c) shift of power generation sector to a competitive tariff based bidding regime. With a market share (57% overall market share) and operating margins (18-19%), Kotak arrives at a value of Rs1,550/share, on DCF based target price to Rs1,550 (from Rs1,350 earlier) as we rollover to March 09 basis.

Kotak Securities has maintained an Outperform rating on Wipro and recommended a BUY with a March 2009 DCF price target of Rs 655. [Not March 2008, its 2009 earnings on Discount Cash Flow Model]

• FY2008 organic revenue growth will likely be higher than FY2007
• Jun’ 07 quarter guidance may be conservative, expect further acceleration from Sep’ 07 quarter
• SEZ ramp ups progressing well, FY2010 tax impact would be the least on Wipro
• Kotak forecasts an EBIT margin decline of 60bps for Wipro’s Global IT business in FY2008 to 23.8%.

Kotak maintains Outperform rating with an end-March 2009 DCF based target price of Rs655/ share. Kotak assume Re/US$ rate of 42 for FY2008, 42 for FY2009 and 41 for FY2010. Wipro is expected to report an EPS of Rs 24.3, Rs 30.4 and Rs 33.4 for Fy2008, 2009 and 2010

Dalal Street Research Analyst Update:
Indian Rupee is expected to average Rs 41 for FY2008 though Citigroup has pegged it at Rs 40.

Citigroup Research Analyst Ashish Jagnani in a research report released just a while ago has put a BUY recommendation on Tata group controlled Indian Hotels Company Ltd. Indian Hotels reported an excellent FY2006-07.

Indian Hotels plans to add five hotels to its portfolio in FY08 – two new hotels at Bangalore (ITPL) and Chennai (Mount Road) and three management contracts for hotels in Vijayawada, Trivandrum and Langkawi Malaysia). In addition, the company plans to increase the number of ‘Ginger’ Hotels [Budget Hotel Chain from Taj Group] to 30 by March 2009, up from eight at present.

Citi projects strong earnings growth of 21% for FY08E and consider valuations of 17x FY08 P/E, at par with sector, as attractive with a 12-month target price of Rs187 is based on 22x FY08E P/E, a premium to average sector valuations of 18x.

The stock is currently trading at 17x FY08E P/E, toward the median of its three-year historical range of 15-22x P/E, largely on par with domestic peers, which Citi believe is unwarranted given: 1) IHC’s market leadership and advantage of large room inventory; 2) The company’s premium brand positioning with ‘Taj’; 3) Expectation of strong earnings

Historically, Hotel Stocks have been valued on their earnings potential However, one should also consider the value of the properties they own which most analysts don’t. A Re-rating in this stock is due for a long time now. Punters Target for the Stock is Rs 200.

Tech Mahindra is a Mahindra Group and British Telecom promoted company.

Total consolidated revenue was Rs 2929 crore in FY 2007. This was 136% higher compared with FY 2006. Operating profit margin (OPM) expanded 350 basis points (bps) to 25.1%, aided by a dip of 390 bps to 15% in selling, general and administration (SG&A) expenses. Operating profit was up 175% to Rs 736.60 crore. Other income declined 77% to Rs 7.70 crore on account of exchange fluctuations. Profit after tax (PAT) surged 160% to Rs 612.70 crore.

TML wrote off the Rs 524.90-crore upfront discount, treated as extraordinary item (EO). PAT after this EO dipped 63% to Rs 87.80 crore. Also, there was writeback of prior-period tax of Rs 33.90 crore in FY 2007. The resultant net profit after minority interest dipped 48% to Rs 121.60 crore.

Revenue contribution from North America was unchanged sequentially at 19%; Europe’s contribution increased to 76% from 73%, and rest of world (RoW) dipped 300 bps to 5%. [This means Tech Mahindra is not impacted like Infosys and TCS because of the fall in USD against INR]

Though TML saw a drop in OPM from 26.9% to 25.4% in Q4 March 2007 over Q3 December 2006, it increased from 21.6% to 25.1% for FY 2007. However, the margin is expected to be stable due to increasing utilisations (currently at a very modest level of 67%), increased offshoring (at 59% in Q4), more hiring of freshers, and SG&A leverage (50-100-bp improvement expected). These levers would provide substantial cushion against margin erosion due to the appreciation of rupee.

The $1-billion British Telecom Global Services (BTGS) deal is expected to commence in May 2007. Sizable revenue from the contract would be realised only end Q3 December 2007. The FY 2008 revenue from this deal could be around US$ 100 million.

In addition to the revenue potential from BTGS, BT is also contemplating jointly bidding with TML for the global rollout of 21 century networks (CN), which could open up larger revenue streams from 21CN (currently the company has over 1,000 resources on 21CN).

Non-BT customers such as AT&T and Alcatel are also expected to pick up momentum. The company has recently added new clients in both the telecom service providers (TSP) and telecom equipment manufacturers (TEM) segments in new geographies such as France, Italy, Australia, New Zealand and Egypt, which could lead to broadbasing of growth over the forthcoming quarters. The company is investing in new businesses such as managed services, BPO and testing, which could also add to the pace of growth from non-BT clients over the next few quarters.

TML is expected to register sales and net profit of Rs 4604.84 crore and Rs 926.5 crore, respectively. On a fully diluted equity of Rs 130 crore and face value of Rs 10 per share, EPS comes to Rs 71.2. The share price trades at Rs 1504. P/E works out to 21.1. As the company has fully written off upfront discount given on the BTGS deal, OPM from this deal will be better than market expectation.

Merill Lynch also has a BUY on Tech Mahindra with a Price Target of Rs 2,125.