Category: Equity Research

Esab India is the latest recommendation from Capital Market Telefolio. Esab is a MNC with 56% stake held by UK parent. The parent company had come out with an Open Offer to more than double its holding by acquiring 37.69% stake in the company at Rs 505 per share. However, the Parent company failed to gather the entire 37.69% shares, through the Open Offer and managed to get only 18.25% shares. However, this took the Parent’s stake in the company to 55.56% from 37.3%.

The company is focused on equipments for infrastructure projects. Electrodes and welding/cutting equipment are integral requirement for any kind of fabrication required in engineering and construction. With major investments expected in steel, oil & gas pipelines and ship building industries (which are the key driving force for the welding industry) along with strong capex in power and construction sectors, welding industry has strong growth prospects ahead.

For the Half year ended Jun’07, sales of consumables division increased 27% to Rs 121.29 crore and PBIT rose by 30% to Rs 33.80 crore. This division accounted for almost 72% of the total sales and 80% of total PBIT.

For the Half year ended Jun’07, the PBIT of the equipment division recorded 98% growth to Rs 8.70 crore (contributing to 20% of the total PBIT) on segment sales of Rs 47.19 crore (up by 48%) and contributing to 28% of total sales.

For the FY2007[Dec-07], the company reported an EPS of Rs 37. The share price trades at Rs 468, P/E works out to just 12.6 [trailing EPS]. Investors can take exposure to the stock for handsome returns.

TCS reported good 2QFY08 results – revenues grew 10.8% qoq to $1.42b (our exp: $1.38b) and EBITDA margins at 26.3% (exp: +26.1%) were up 80bp qoq. Net profit for Q2 was Rs12.15b (exp: Rs12b). Volumes in the international business were up 9% qoq.

TCS reported another quarter of pricing increase – realizations improved by ~85 bp qoq. Offshore proportion of revenues increased by ~190bp qoq. Pricing increase and higher offshore proportion resulted in margin expansion despite INR appreciation.

Management remains confident of strong deal flows and improved client mining over the next few quarters. Pricing trend continues to remain positive with 5-8% hikes in new deals and 3-5% hikes in renewals.

Kotak Research expects EPS growth of 22% YoY for FY08 at Rs.51.5. FY09 EPS has been
estimated at Rs.60. The rupee is assumed to be at Rs.38.50 per US dollar by FY09 end. BUY TCS with a price target of Rs.1297, implying a P/E of about 22x on FY09 estimates.

Citigroup Researach estimates a fully diluted EPS of Rs 51.55, 62.65 for FY08 and FY09 respectively. Target price of Rs1,460 is based on a P/E of 24x FY09E EPS, derived from a 4% discount to our target 25x FY09E EPS for Infosys.

Motilal Oswal revised EPS estimate of Rs51 and Rs61.8, the stock trades at a P/E of 21x FY08E and 17.4x FY09E respectively. Valuations at 17.4x FY09E earnings offers room for upside. Maintain Buy with a target price of Rs1,360.

CLSA expect underperformance to continue for some more time. Current 16-18% EPS Cagr for FY07-10 remains the key drag on the stock. CLSA has set a price target of Rs 1,135 for the stock.

DSP Merill Lynch says the stock is attractively valued and has a Price Objective of Rs1360 to Rs 1480 is at a rolling forward multiple of 20x 12 months earnings ended Sep 09 at a 10% discount to Infy’s median PE or an implied FY09e target multiple of 21x.

Monnet Ispat and Energy’s (MIEL) Q2FY08 results were better than expectations due to greater-than-anticipated increase in ferro alloy sales volume and realisation. Sales volume of ferro alloys increased 70% Y-o-Y and 10% Q-o-Q. Net revenue, EBITDA, and net profit grew 92%, 45%, and 36% Y-o-Y, respectively, led by higher sales volume in sponge iron and ferro alloys and improved sales realizations across all products (sponge iron, steel, and ferro alloys).

Key disappointments were in terms of: (i) lower-than-expected sponge iron production, which at 118,081 MT was 14% below our expectation; and (ii) the second captive power plant not commencing in September 2007.

At CMP of INR 390, the stock is trading at an EV/EBITDA of 8.0x FY08E and 5.6x FY09E, and P/E of 9.5x FY08E [Rs 41 EPS] and 6.8x FY09E [Rs 57 EPS] on a fully diluted basis.

The strong infrastructure spending will boost demand for steel, which will lead to higher sponge iron demand in the near future. The surge in demand for sponge iron led to a rise in prices by 50% over the last two years. Expect demand in India to witness 12-14% CAGR over the next five years and prices are likely to rule firm.

TSIL in FY07, increased its sponge iron capacity to 0.39mn tons with the addition of a third kiln of 0.15mn tons. Improving capacity utilization should lead to higher production by 18% and 10% in FY08 and FY09 respectively. Expect it to expand its operating margin to 23.4% and further to 26.1% in FY08 and FY09 respectively. TSIL’s strategic tie up with Tata Steel secures its future iron ore requirement. 100% of TSIL’s iron ore demand is met by ore mined from Tata Steel’s Khondbond Mine, Orissa.

TSIL should post revenue and profit CAGR of 36.4% and 78.6% over FY07-09E respectively. At the current price it trades at 7.3x and 5.6x FY08E and FY09E EPS of Rs33.8 and Rs44 respectively. Indiainfoline Research recommends a BUY with a price target of Rs286.

Credit Suisse is in love with 5 stocks which are being ignored by the market and which have also underperformed the market.

1. MICO:
The stock is attractively valued (20.2x CY08E). Three catalysts for MICO’s business and share performance: 1) increasing popularity of CRS powered diesel cars; 2) an increase in exports of engines and cars from India and 3) production of Tata Motors’ proposed mini-car. MICO being a key supplier of injection systems to engine and car manufacturers is likely to be a beneficiary of all these.

2. HPCL:
In the medium to long term though, the company is expanding capacity and working hard on improving service quality at its outlets, putting it in a good position for the day when price distortions are removed. Meanwhile, decreasing international crude prices can imply better earnings for the company.

3. Satyam Computers:
While the exchange rate is a real concern, demand slowdown may not become evident till the end of 2007, in our view. Sound September 2007 results and an increase in guidance would be strong triggers for the stock in the near term. For long-term investors, however, its attractiveness is both in valuations and long-term growth.

4. Dr Reddy’s Laboratories:
Dr Reddy’s performance has suffered primarily due to four reasons: 1) uncertainty over the changes in Germany and the possible impact 2) currency – 80% of revenues are exports, and it has a low natural hedge. 3) a lack of immediate catalysts in the US pipeline – Dr. Reddy’s is known to be a stock driven by one-offs in the US market. 4) removal from the Sensex will be a dampener until 19 Nov. Stock is trading at its lowest forward multiple since 2004; For the long-term investor, this provides an excellent entry point.

5. Canara Bank:
With uncertainty looming large over whether the RBI will hike CRR, many banking stocks have underperformed the Sensex. A stable earnings growth over the next two or three quarters after a relatively weak 1Q and cheaper valuations could be the catalysts for the stock to outperform.

JSW Steel: Global commodities team has revised steel price forecasts upward by 6% and 2% for FY3/09 and FY3/10, respectively, while also increasing iron ore forecasts by 20% each year, and for coking coal by 8% and 5% for FY3/09 and FY3/10, respectively. JSW has recently been allocated 69% in a coking coal mine with mineable reserves of 250mt while it explores for more reserves in Mozambique. It expects to reach 50% self sufficiency in the next 3–4years.

Revising EPS estimates for FY3/08–FY3/10 by 7.5%, 29.2% and 0.3% to Rs100.6, Rs120.3 and Rs160.2 respectively. Increasing the target price to Rs1,203, based on a PER of 10x FY3/09E EPS.

Gujarat NRE Coke:
Global commodities team has upgraded coking coal price forecasts for FY09-11 by 13%, 10% and 6% to US$135/t, US$110/t and US$95/t, respectively.GNC is looking to double its coking coal production to 1mt in FY09, with the completion of purchase of Elouera mine by December 2007. GNC is merging its two mining subsidiaries listed in Australia. This, we believe, will lead to reduction of discount, as the merged entity will be a multi-mine, multi-location company with lower risks.

Revising EPS estimates for FY3/09–FY3/10 by 7.5% and 12.2% to Rs8.1 and Rs8.8 respectively. 12-month price target: Rs140.00 based on a DCF methodology.