Category: Equity Research

Irrespective of what happens with the CRR, Kotak Securities has retained BUY rating on AIA Engineering with a price target of Rs 1520, 18% upside from current levels. AIA Engineering has reported good Q3FY07 results, which were in line with analyst estimates.

AIA Engg’s expansion plans are on track. The company plans to increase its capacities from 65,000 TPA to 115,000 TPA by end of March-2007 and increase rise further to 165,000 TPA by October-2007. To cater to the demand of mill internals, the company is setting up another 100,000 TPA plant for manufacturing high chrome mill internals.

The company has an order book of Rs 3.7 bn of which 55% is for exports.

AIA Engg is expected to earn EPS of Rs 52, 76 and 101 for FY07, FY08 and FY09 respectively. The price target for AIA Engineering is Rs 1520.

In a research report released minutes ago by Citigroup equity research, they have maintained a BUY recommendation on Satyam Computers Ltd and revised the price target upwards to Rs 582 from Rs 510, 20% appreciation available from current levels.

3Q07 reported numbers were in-line with consensus expectations – however, considering that restricted stock unit (RSU) charge was deferred until next quarter, the results were below expectations.

3Q margins were boosted by seasonal/one-off items like lower leave encashment charges (down from Rs350m to Rs100m QoQ) and lower gratuity (down from Rs110m to Rs30m QoQ). All these seasonal factors reverting to normal levels and introduction of RSU charges will restrict any margin improvement in 4Q.

Satyam’s top-line growth story remains intact with good client wins and strong hiring of ~47% LTM, we believe that revenue outlook for FY08 remains strong. Margin pressures are likely to
continue. Despite factoring in a 150bp improvement in pricing in FY08, the full impact of RSU and wage hikes will result in a margin decline of ~100bps in FY08.

M&A story buried: Satyam has clearly stated in the investor release that it is not looking to get acquired [Speculators bought rumors of CapGemini BUYING out Satyam due to low promoters stake in the company], the M&A story gets buried.

Satyam is expected to report an EPS of Rs 25.18 and Rs 30.23 for FY08 and FY09. After the below-expectation quarterly performance, Satyam is back to a 28% discount to Infosys (vs. 22% before Satyam’s 3Q results). Our target price builds in a 25% discount to Infosys.

Macquaire Equity research in its report is bullish on the prospects of Sterlite Industries and puts a 12 month price target of Rs 852 using sum of parts valuation methodology.

Strong 3Q results: Net sales at Rs68.1bn grew 94% driven by all-round volume growth and higher LME prices. EBITDA at Rs29.5bn grew 215%. Net profit at Rs12.9bn grew 225%.

Zinc – the prime contributor: The zinc business contributed around 67% of net profits and we expect this to continue with our forecast of higher zinc prices and 50% expected capacity expansion.

Aluminium – huge volume growth: With the faster-than-expected stabilisation of its 250kt new smelter, this subsidiary has seen growth of 309% in its operating profits to Rs5.4bn. We expect this business to continue its stellar performance with our forecast of lower alumina prices.

Copper – peaking out: The company realised TC/RCs of 34.8c/lbs for this quarter, driving operating profits to grow 58% to Rs4.5bn. We expect TC/RCs to drop to around 16c/lbs and estimate profits to fall sharply by 50% from next quarter onwards. However, we expect 30% volume growth to lower the impact somewhat.

JV Vedanta alumina refinery on track: The 1mt alumina refinery is expected to be commissioned by March 2007 and will add to profitability in FY08.

Sterlite is expected to to maintain its high profitability, even with our falling forecast for all metal prices. Macquaire expects a recovery in zinc prices, earnings upgrades, visibility on the ADS offering and its purchase of residual stakes in HZ IN from the government to drive the stock up.

Attractive valuations: Sterlite is one of the fastest growing diversified base metals company, while the stock is trading at just 7x PER, which is around 30% discount to its peers globally. We expect this anomaly to correct. Macquaire sets a 12 month target of Rs 852.00 based on a sum of parts methodology.

DSP Merill Lynch has upgraded Satyam Computer Services Ltd to a BUY rating with a price target of Rs 575. Though Satyam missed the 3Q Rupee revenue and profit guidance due to forex losses, margin improvement was ahead of expectation. DSPML raises FY08 and FY09 EPS estimates by 5 and 10% to Rs 25.52 and Rs 31.60 and price target by 15% on roll-forward of forecasts.

While Satyam met its USD revenue guidance, a steep Rupee appreciation and relatively lower hedging than peers resulted in a 3Q revenue and EPS guidance (before Restricted Stock Unit charge) by ~0.5% and ~3.7%.

20 to 25% PE discount to Infy may continue
Satyam’s 20 to 25% PE discount to Infosys may sustain given lower visibility to earnings, as reflected in the revenue and profit miss this quarter and lower forecast earnings growth of ~23% CAGR vs 30% for Infosys and TCS.

Infotech Enterprises Ltd:
Based on a robust operating performance in Q3FY07 and sustainable EBITDA margin expansion, DSPML has revised Infotech’s FY08 and FY09 earnings estimates upwards by 10 and 9% respectively to Rs 24.9 and Rs 30.95 . Based on this they have set a target price of Rs400 (17% potential upside from current levels) at a target PE of 16x FY08E and at a target PEG of 0.5 for FY08E to FY07-09E growth.

EBITDA margin expanded by 100bps driven by utilization (150bps impact). Given room for further improvement in utilization, increasing proportion of EMI revenue and scale benefits we believe these improvements are sustainable. GSD growth picked up (grew 9% qoq) ahead of our expectations, post two flat quarters driven by strong order intake of GBP6mn in Europe, ramp-up in clients like Swisscom, and growth in US operations. EMI grew by a robust 9% qoq driven by a ramp up in existing clients like Bombardier and Alstom.

Citigroup Research has upgraded Gammon India Ltd to BUY with a price target of Rs 461, 20% upside from current levels.

Citi’s target price is based on a P/E of 19x FY08E (from 17x CY07E), a premium to Nagarjuna’s 16x and a discount to L&T’s 23x. Gammon’s portfolio of projects has been significantly enhanced to 13 from 7.

Gammon ended 2Q FY07 with a strong order backlog of Rs80bn (4.0x FY07E sales), comprising 30-35% low-margin transportation orders, 30-35% high-margin power orders, and medium-margin orders making up the balance. Citi expects order inflow momentum to remain strong with an order booking CAGR of 14% over FY06-09E.

Citi expects an EPS CAGR of 42% over FY06 -09 (FY06A annualized for 12 months), supported by a sales CAGR of 45% and stable EBITDA margins of 9.0 – 9.5% over FY06-09E. Citi’s research expects an EPS of Rs 18.06 and Rs 27.49 for FY08 and FY09.

ABN Amro’s investment views on the following stocks after quarterly results.

India Cements: IC
IC’s results were exactly in line with our expectations. The macro environment for the cement business in India (and South India) remains positive on volumes and pricing, and the real threat (if any) to pricing seems clearly from 2HFY09. IC is contemplating a greenfield capacity in North India to address growth beyond FY09. It remains the cheapest stock on all key parameters in the top-five cement companies. We continue to like the stock and re-iterate Buy. Sales growth of 36% driven by 28% realisation growth and 7% volume growth.

Bank of India: BOI
Net profit increased 78% yoy, led by a 47.6% increase in pre-provision operating income. However, there has been a slippage in three large accounts, leading to an increase in provisioning; hence, the improvement in asset quality is not significant compared to the recent past. Tax rate was lower at 21.5% in 3QFY07, vs 26.4% a year ago. Maintain Buy rating. BOI trades at 9.5x FY08F earnings and 1.5x FY08F adjusted book, after writing off 100% pre-tax net NPAs. Our estimates include equity dilution of 100m shares in FY08.

Castrol India:
Castrol has maintained its bottom line despite large spikes in base oil prices. This proves the strength of brand and raises earning growth potential as base oil prices weaken and volumes grow. Reommended to Buy and with a target price of Rs300.

Castrol’s 2007 EPS is expected to grow 40% to Rs16.20, giving a return on equity of 46%. Earnings are likely to grow 64% over 2007-09 on the back of lower base oil prices and volume growth. We believe a potential share price trigger is a decline in LOBS prices, which we expect to come through by 2Q07. Meanwhile, the 2007F dividend yield of 4.7% should provide downside support.

Tags: Dalal Street, Bank of India, India Cements, Indian Stocks