Category: Equity Research

Kotak Securities has initiated coverage on Sobha Developers Ltd. For the first time, I am very impressed by the way Kotak has covered the company. Kotak sets a price target of Rs 940 on Sobha Developers.

Kotak forward estimates Sobha’s Real Estate Business at Rs 855 / share and value of contractual business at Rs 85 / share. Sobha has a total Land Bank of 3,624 acres and a Land Arrangement of 3,558 acres. Bangalore’s IT & ITeS will be the key driver for Sobha’s growth. Interest Rate and decline in Real Estate prices can hurt Sobha’s prospects. Sobha is mainly dependant on Infosys for contractual work.

Read the entire report here.[PDF]

Sobha Developers Land Bank.
Sobha Developers IPO Coverage.

ConAgra Foods Inc of USA, the world’s third largest foods company, holds a majority stake of 48.3% in Agro Tech Foods, through CAG Tech Holdings, Mauritius.

Agro Tech Foods operates in two business segments: branded foods, and bulk and processed commodities. The company has two very successful foods brands: Sundrop edible oil and ACT II, the No 1 popcorn brand in the world. Some other brands include Crystal and Rath vanaspati oil. The company has stopped its non-profitable brands of chips and atta, and has developed a strategy of focusing only on products with a gross margin above 20%.

Bulk and processed commodities include oils and grains procured, processed and distributed; and seed buying operation. This segment is not the focus of the company.

Earlier, Agro Tech Foods was a group company of ITC and had its manufacturing plant at Mantralayam in Andhra Pradesh. Subsequently, the plant was sold to ITC and was leased back for 99 years to the company for Rs 16 crore. Subsequent to ConAgra taking a majority stake, the parent found this arrangement totally unviable as reflected in the poor margin and losses.After a long conflict between the company and ITC, a London court passed an order of settlement: the company had to pay Rs 43 crore to ITC in phases (as reflected in extraordinary items over the past few years).

Presently, Agro Tech Foods has no manufacturing plant. Manufacturing is outsourced to unorganised players under its quality control. Hence, there is no need for any capex or any other significant investment to increase volume.

Sundrop normally contributes nearly one-third of the total turnover of Agro Tech Foods. The brand continues to grow at 10%. The company is operating this brand at a gross profit margin of around 15%, which it intends to increase to 20% with deeper penetration and promotion. With growing consumption and income level, the shift towards premium quality will sustain the profitable growth of this brand.

Currently, ACT II brand is available at over 120 locations across the country, where hot, fresh and tasty popcorn is served. The target market for vending popcorn is cinema theatres, amusement parks, shopping malls, coffee parlors, college canteens or even railway stations and bus stands. Over the next 12 months, Agro Tech Foods plans to increase the availability of ACT 11 vending operations in more than 400 locations across the top 14 towns. The company’s ACT II ready-to-eat brand, launched six months ago, has also received a very positive response.

The ACT II brand contributes nearly Rs 25 crore to the top line, with a gross margin of around 30%. Going forward, this brand has scope for almost doubling sales every year from both the vending popcorn as well as from the ready-to-eat segments, considering the huge untapped rural and urban markets with hardly any competition.

Agro Tech Foods is expected to register EPS of Rs 5.3 in FY 2007 and Rs 6.6 in FY 2008. At the current market price of Rs 75, the scrip trades at 14.2 times its FY 2007 earning and 11.4 times its estimated FY 2008 earning. This discounting is very low compared to Nestle and other MNC Dairy companies in India.

J P Morgan initiates coverage on Tech Mahindra with Overweight rating and a Dec-07 price target of Rs1,700, implying 13% upside.

JPM expects a 42% revenue CAGR and 38% EPS CAGR in FY07-09 led by: (1) strong growth of two largest clients—BT and AT&T; (2) diversifying customer base; (3) strong offshoring trend in TSP space; and (4) widening service offering. JPM expects a 37% revenue CAGR from British Telecom (TM’s largest customer with~60% of revenues) due to BT’s aggressive offshoring drive and recently signed US$1B deal with BT Global Services. JPM expects a 45% revenue CAGR from AT&T (second-largest client) due to offshore vendor consolidation, stake in TM, and low base.

JPM is expecting Tech Mahindra to report an EPS of Rs 72.0 for FY08 and Rs 102 for FY09. At these EPS’ JP Morgan target is slightly on the lower side because of strong management and better than expected growth story.

We at DalalStreet.Biz continue to be bullish on the prospects of Tech Mahindra and rate it as an aggressive BUY with a Price target of Rs 1,900. Tech Mahindra will enter the big league software companies in FY08 and will see a re-rating for its stock.

ICICI in its research report released jus ta while ago has said that Clutch Auto will be an outperformer with a price target of Rs 260 [ 99%] appreciation from current levels.

Clutch Auto Ltd reported a splendid performance for the year ended March 31, 2007 (FY07), exceeding our estimates. Net sales surged 56.8% to Rs 235.5 crore against Rs 150.2 crore in FY06. This was much above our estimate of Rs 214.2 crore. Though contribution from exports were below from our estimates of Rs 97.5 crore, the 81.3% surge in domestic revenues more than made up for the shortfall.

At the current price of Rs 130, the stock trades at 5.1x its FY08E EPS. The stock underperformed the BSE Sensex mainly due to the company’s poor performance on the export front. The margin pressure would continue and this is the major cause of concern. However, ICICI continues to remain bullish on the company. Read the entire report here.

Merill Lynch has put an outperform rating on Biocon Limited. Merrill raised price target on Biocon to Rs600/share (from Rs500/share) as it remains upbeat on

• Near doubling of insulin revenues by FY09E (current12-13% of revenues)
• Robust 40%+ growth outlook for contract research andlicensing fees

New Price Target is based on target multiple of 20x on FY09E earnings. EPS Growth is expected to be 26% and 18% FY08E and FY09E respectively. Biocon’s 4Q net profit of Rs600mn (27% growth YoY), about 18% ahead of MLe while revenues were 16% ahead of MLe. Higher than expected 260bp increase in EBITDA margin was driven by statin supplies to US and better product-mix.

Citigroup in its research report released just a while ago has downgraded Shoppers Stop to SELL with a price target of Rs 412, potential downside of 33%. This downgrade comes after we reported of the first Retail Downgrades in India coming from Merill Lynch on March-29th.

Shoppers Stop growth story is leveraged to rapidly growing high-end urban consumption. However, at 43x FY08E P/E valuations are steep and seem to be building unfeasible expectations from HyperCity. As such, the stock has underperformed the Sensex by 9% and Citi expects valuation roadblocks to continue. Shoppers Stops positioning has also been at the premium end, with a strategy focusing on product assortment and quality, rather than discounts, driving sales. It is also expanding in the specialty format, focusing on food, cosmetics, books and apparel.

Sum of Parts Valuation:
Sum of parts valuations returns a target price of Rs421 per share, valuing the parent company at Rs376 and the HyperCity stake at Rs45 per share. Citi values the parent Shoppers Stop based on 27x FY08E P/E, for a target price of Rs376. Shoppers Stop could trade at 10% premium to its regional peers given its superior earnings growth profile. We expect two-year EPS CAGR of 36% vs. a 30% CAGR for our Asian retail universe. A 10% valuation discount for Shopper’s Stop to our Pantaloon target valuation, due to limited growth opportunities. Shoppers Stop is expected to report an EPS of RS 13.9 for FY2008.