Category: Equity Research

Indian IT major, Infosys Technologies which mainly banked on large maintenance and lower end IT work is now going through mid life crisis. Founding member, Naryana Murthy who takes much credit is responsible for the current mess Infosys is in today. Had he been a visionary, he should have stepped down long before to pave wway for other Infoscions who have different vision apart from being mere consulting company. Unfortunately all those guys parted ways with Infosys to successfully build tech companies – OnMobile is one of them.

Scenario 1: Indian Rupee at 39 for FY09 and 3-4% appreciation from current levels.

In this scenario, our EPS estimate for FY2010 is INR 110 (considering the higher tax rate in 2010) and EPS is expected to grow at a CAGR of 25% between FY10-12.

1a. Assuming a historically traded PEG of 1, the stock price in 18 months should be INR 2,750 (25x FY10 EPS, upside of 44%).
1b. Assuming a lower PEG of 0.8 to factor in lower ROEs (31% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,197 (upside of 15%, 20x FY10 EPS).

Scenario 2: Indian Rupee at 38 for FY09 and 3-4% appreciation p.a. from there

In this scenario, we think FY10 EPS will be INR 104 (considering the higher tax rate) and EPS will grow at a CAGR of 25% between FY10-12.

2a. Assuming historically traded PEG of 1, the stock price in 18 months should be INR 2,599 (upside of 36%).
2b. Assuming a lower PEG of 0.8 to factor in lower ROEs (29% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,079 (upside of 9%, 20x FY10 EPS).

Assigning a 33% probability to scenario 1b and 2b and 17% to 1a and 2a (of course there can be more optimistic and pessimistic scenarios). 18 month target price comes to INR 2,314 (annualized return would be 14.5%). Therefore, it should be rated accumulate from the current levels. It becomes a buy only below INR 1,800

Sun Pharma Advanced Research Company (SPARC) was formed after the demerger of Sun Pharma Industries’ (SPIL) innovative R&D business. SPARC, which got listed on July 18, ’07, is an international research-based pharmaceutical company that discovers and develops new drugs / delivery systems. SPARC’s innovation philosophy is based on finding drugs for unmet medical needs by focusing on validated targets, implying reduced risk, while not compromising much on the huge potential upside. ICICI is confident of NPV for the pipeline at ~US$700mn or Rs149 / share and expect significant value creation in the next 3-5 years.

SPARC is the only listed Indian company that focuses purely on pharma drug discovery research. SPARC’s innovation philosophy of finding a drug and develop analogue NCEs is an appropriate and ‘relatively lower risk yet higher returns’ strategy. The current pipeline is an impressive mix of two NCEs, two pro-drug NCEs, and eight products under development using four distinct novel drug discovery system (NDDS) platform technologies.

ICICI recommends investment in Shiv-Vani Oil & Gas Exp for medium term [3-6] months with a price target of Rs 403.

Shiv-Vani provides services to ONGC, OIL, RIL, and Cairns India for on-shore exploration services. The company provides the entire value added services from seismic data acquisition through drilling. The growth of the company is a function of increase in the number of onshore block on offer for exploration and production. Under the New Exploration Licensing Policy – VI (NELP), the central government has invited bids for 55 exploration blocks comprising 25 onshore, 6 shallow water blocks and 24 deepwater blocks (beyond 400 metres). Only 18% of the total sedimentary basinals area has been explored so far. Huge potential is yet to be explored. Shiv-Vani has a 50% market share and is set to be one of the primary beneficiaries of the increase in the number onshore blocks on offer.

Shiv-Vani is sitting on an order book position of Rs 3,200 crore. Of this, Rs 1,000 crore pertains to a company in Oman and is spread over 15 years. The remaining Rs 2,200 crore, to be executed over the next 2 to 2.5 years is around 8x CY06 consolidated revenue of Rs 276.78 crore.

The stock trades at 11.37x its diluted CY08E EPS of Rs 29.56.Its foray into the offshore business could lead to a re-rating on the counter. The stock will be an outperformer with price target of Rs 403 over a 6-month time frame.

B L Kashyap[BLK] has proven execution skills, reasonably large-scale of operations and an established customer base, BLK is well poised to ride the construction boom in the fast-growing industrial, residential, commercial and retail segments.

BLK’s is our type of company because it focuses on providing contractual construction services to private sector clients and it has consciously avoided exposure to long duration infrastructure projects that are prone to delays and are much more capital intensive. Thus, it does not require regular infusion of funds through debt or equity dilution.

BLK has shown a healthy CAGR of 72.6% in its stand-alone revenues to Rs808 crore over the past three years. What’s more, the strong order backlog of Rs2,100 crore (2.6x FY2007 revenues) provides a robust revenue growth outlook for the coming years. Expect BLK to report CAGR of 48.8% over FY2007-10.

Real Estate Arm: BLK has forayed into real estate development through its subsidiary SSP, which undertakes joint development projects with the existing owners of land. Currently, it is executing six projects with saleable area of 13.2lsf (SSP’s share of around 8.5lsf) and also has rights for around 150-acre land in Bikaner, Rajasthan. Sharekhan value SSP at Rs580 crore.

At the current market price the stock trades at attractive valuations of 12.8x FY2009E and 9.3x FY2010E earnings (after adjusting for the value of its subsidiary: Rs554 per share). SSKI analysts recommends a Buy call on BLK with a price target of Rs2,850.

ITC’s cigarette performance in Sept Quarter will not live up to market’s expectations. ITC’s volumes in Sept Quarter are expected to be down 3-4% y-o-y and volumes are lower than June Quarter as the later had the hit of higher prices for only 2 months. Secondly, it bears the full brunt of Uttar Pradesh tax of 32%. UP accounts for 6% of ITC’s volumes and has not implemented VAT of 12.5%.

ITC’s recent shampoo launch marks its entry in the household and personal care (HPC) category. The brand, Fiamma Di Wills has been launched in six SKUs and is priced in between HUL’s Sunsilk and Clinic All Clear. We believe next in the pipeline are shampoo sachets and soaps. These events imply that ITC’s FMCG losses (5% of EBIT) are unlikely to decline in the near future.

ITC is expected to report a fully diluted EPS of Rs 8.27 for FY08 and Rs 9.36 for FY09.

DalalStreet.Biz Recommendation:
We recommend our reader / investors to switch out of ITC into other growth stock.

Kotak Equity research has reiterated a BUY on Pfizer India with a price target of Rs 965.

Pfizer has announced its quarterly results for Q3CY07, which is disappointing at the revenue level. Net sales fell 1.6% to Rs.1.76 bn from Rs.1.78 bn. Reported net profit was up 9.8% to Rs.308 mn as compared to Rs.281 mn. The pharma and consumer healthcare business fell 3.5% to Rs.1.58 bn. The animal healthcare business rose 18% to Rs.179 mn and income from clinical development services declined 38.1% to Rs.43 mn.

The company is targeting 14% compounded revenue growth (for continuing business) and a 500 bps expansion in EBITDA margin by CY10. New launches through the parent’s portfolio as well as launch of patented products from CY08 onwards will be key revenue drivers. EBITDA margins are likely to improve from the existing 25% to about 30% by CY10 led by higher revenue growth, outsourcing of manufacturing and cost reductions in the distribution/supply chain areas.

Pfizer currently has 3.1 bn cash. It will receive 2.27 bn cash from sale of its Chandigarh property. Further 3.5 bn is expected from sale of its consumer health care business. In all it is likely to have Rs 10 bn in cash which translates to Rs 335 / share. At the current market price of Rs.720, the stock is trading at 14.5x CY07 and 12.1x CY08 earnings estimate. Kotak maintains BUY with a target price Rs.965.