Category: Equity Research

Morgan Stanley has downgraded the Indian cement sector. Jeez! the downgrade has been very severe and the sector is likely to underperform in short-medium term.

ACC:
The report said government intervention has rendered the pricing power meaningless. They further downgraded the stock from Overweight to Underweight and set a new price target of Rs 598, implies a downside of 23%.

Gujarat Ambuja Cement:
Same reason as above and stock downgraded to Underweight with a price target of Rs 84.

Grasim Industries:
Same reason and stock downgraded to Underweight with a price target of Rs 1,783.

Ultratech Cement:
This is the worst hit company and the stock has been downgraded to Underweight with a target price of Rs 554.

Many companies in India are declaring dividends to escape the higher dividend distribution tax that comes into effect from April-1st.

As man as 15 companies declared dividends today which include but not restricted to,

• Reliance Industries Ltd
• Hindalco
• Kansai Nerola Paints
• Himatsingka Seide
• Bajaj Electricals

It will be interesting to see the dividend distribution patterns in PSU enterprises such as ONGC, NTPC and Banks which pay hefty dividends back to the Government. So far none of the PSUs have opted to play this game to escape from tax.

Citigroup research is bullish on the prospects of Vardhaman Textiles [VART.BO] and ICICI Bank.

Vardhaman Textiles announced plans to de-merge the sewing thread business (14% of FY07E revenues) to its 100% subsidiary Vardhaman Yarns and Threads (VYTL). Additionally, the threads business of another 100% subsidiary, Vardhman Threads, will also be transferred to VYTL. Vardhaman Textiles’ sewing thread division will be transferred as a going concern on a slump-sale basis for Rs.2.6bn; For every 2 shares held in Vardhman Threads, equity holders would get one equity share of VYTL and one share of Vardhaman Threads.

Vardhaman textiles is expected to report a fully diluted EPS of Rs 38.64 for FY08 and Rs 51.54 for FY09. Citi recommends BUY on the stock with a target of Rs 350.

ICICI Bank is in the news after it proposed to demerge and unlock the value of its subsidiaries – mainly Insurance. Citi has recommended a BUY on ICICI Bank with a target price of Rs 1,125.

ICICI Bank will be spinning off its holdings in Life Insurance, General Insurance and Asset Management businesses into a 100%-owned holding company. The transfer – Rs19.5b (9% of capital) of its investment will be at book value. Management suggests a listing time frame of 6-9 months. ICICI is expected to report an EPS of Rs 39 for FY07 and Rs 45 for FY08. However, the re-rating in stock is only due to the listing of its insurance business. BUY on decline.

The impact of budget on the bottomline of many companies is getting more clear now.

Merill Lynch is bullish on ITC and TCS and is bearish on the prospects of ACC. Merill added ITC to its top buys list in India and increasing its weight in their model portfolio. Fears of VAT had driven a de-rating of the stock. Post the budget these fears are behind us and look for the
stock to deliver a strong return over the next year.

Merill expects profit growth of 20% over next 2 years: ITC earnings remain insulated from rising interest rates, slowing global economy and worries on inflation. Key assumptions are cigarette volume growth of 7-8% and EBIT margin expansion of 150bp. Merill has set a price target of Rs200 which is based FY08 P/E of 22.5x. A one-year forward multiple of 22.5x would also put ITC in line with Indian consumer sector average.

MAT will impact the bottomlines of Infosys and HCL Technologies more than TCS and Wipro. However, FBT on ESOP is likely to have a deeper impact on Infosys, Medium impact on Wipro and no impact on TCS. Merill is bullish on TCS with a price target of Rs1,600 – at 23x 1-yr rolling forward EPS. This is at a 5% discount to our target multiple for Infosys at 24x and lower than TCS’ current 1yr forward PE of 26x.

Citigroup published a report on the impact of withdrawal of Tax benefits for construction companies. Recall my last night posting on the cost of doing business in India because you never know when tax laws will nail your company. Citi says that the tax impact may also lead to liquidity crunch. Gammon India will have an one time impact of Rs 35 crore, Nagarjuna Constructions of Rs 26 crore and IVRCL of Rs 58 crore. I had already told you yesterday that this will have no impact on Punj Lloyd and L&T and Citi report confirms the same 🙂

Citi maintains a BUY with Low Risk rating on Gammon India with a Price Target of Rs 461. Nagarjuna Constructions BUY with Medium Risk for a price target of Rs 272 based on sum of parts evaluation. Citi downgraded Hindustan Construction to SELL Low Risk with a price target of Rs 105.

Delhi based construction company Punj Lloyd is doing extremely well after the takeover of SembCorp – SEC.

Punj Lloyd’s [PLL] order book has grown from Rs 1,200 crore to Rs 10,300 crore. On a consolidated basis the current order backlog is Rs 14,300 crore. PLL’s average order size has increased from $30 Million to $200 million and the company management is hopeful to achieve $ 300 million. PL is the second largest EPC contractor after L&T.

I went through the transcripts of their conference call [PDF] and find that they are trying to improve the margins of SEC by outsourcing engineering design work to India. For this they are hiring close to 700 engineers in FY08 and 1,300 in FY09. This will directly add to the bottomline of SEC.

Valuations and Investment Rationale:
PLL (including SEC) is expected to post a CAGR of 77% in revenues between FY06-09E and
99% in earnings for the same period. At the CMP of Rs 835, the stock trades at a P/E Ratio of 15.4x and 9.9x our FY08E and FY09E EPS estimates of Rs 54 and Rs 84. We have a 12-month price target of Rs 1,400, an upside of 65% using a 3-stage DCF model.

Budget time is a good opportunity to BUY if you are a long term investor as some stocks like PLL and TCS are available at attractive prices. However, just by 50% of your intended investment now as J P Morgan and other analysts are underweight on India.

Citigroup Research in its report on ABB has reiterated a BUY with Low Risk and has set a price target of Rs 4,400, 16% upside from current levels.

ANN (India) reported a 4QCY06 PAT at Rs1.35bn (up 43% YoY) was 7% ahead of estimate of Rs1.26bn on faster execution of orders leading to net sales of Rs14.3bn, which was 5% ahead of estimates.

ABB (India) booked Rs14.1bn (up 40% YoY) of fresh orders in 4QCY06, ending the year with an order backlog of Rs33.7bn (up 60% YoY). In CY06, the company booked orders worth Rs56.2bn (up 50% YoY). Strong industrial growth and power capex imply future order inflows.

The power capex cycle will be stronger for longer as the first concrete numbers of the Ministry of Power’s (MoP) generation targets for the XIIth Plan (FY12-17E) at 86.5GW has started trickling in, implying that capacity addition targets in the 10 years from FY07E-FY17E is likely to be 153.5GW.

Target price of Rs4,400 is based on a P/E of 34x FY08E which is a ~50% premium to BHEL, in line with the premium over the last 3 years.