Category: Equity Research

Usha Martin is the world’s second largest wire rope manufacturer. The company is enhancing its backward integration by increasing the proportion of captive metallics (DRI+hot metal), captive coal mining (iron ore is already at 100% captive level) for its sponge iron unit, and maintaining its captive power usage in line with the enhanced capacity. The company is expanding its steel capacity by 2.25x to reach close to 1 mtpa in stages by end of FY09. To support its enhanced steel capacity and keep the operating costs under control, Usha Martin is adding DRI and hot metal/pig iron capacities of 200,000 tpa and 400,000 tpa, respectively, and setting up captive power plants of total 60 MW.

Coal from the company’s coal mine is expected to be available from Q4FY08. Combined wire, strand, and wire rope capacity will increase from the current level of 225,400 tpa to 303,200 in stages in FY09. The proportion of value-added products such as oil tempered wires, bright bars, and TMT bars is also being enhanced, thereby, significantly enriching the company’s already diverse product mix. Considering the usage of its products across engineering, oil and gas, automotive, and construction sectors, Usha Martin is also a proxy play on the oil and gas and infrastructure sectors.

Led by the above capacity expansion cum backward integration project, the company’s topline and bottomline are expected to increase at a CAGR of 20.9% and 43.8% respectively over FY07-10E. At CMP of INR 59, Usha Martin trades at P/E of 6.5x FY09E earnings, which is at a discount of about 30% to the sector average. Edelweiss recommends a BUY on the stock.

Globally LNG projects continue to be delayed, and prices continue to rise. Domestically produced gas in India are US$4.0-5.5/mmbtu, making LNG economics unfavorable esp. in light of ever increasing indigenous supply prospects.

In the current high price environment for LNG, the likelihood of Petronet entering into a long-term agreement anytime soon to secure supplies for its Dahej expansion and greenfield Kochi terminal appear unlikely. Spot volumes will continue to drive earnings in the near term (FY09-10E earnings increased by 11-12%); despite increasing domestic supplies, we build in high long-term utilizations driven by sustained growth in gas demand. Power plans, though interesting, are at a preliminary stage and completely contingent on competitive pricing for long-term LNG.

Petronet LNG stock is up 47% in 1 month, Citi analyst believes that the stock more than adequately reflects the high capacity utilizations (95%) that is assume in numbers in the longer term. Inherent structural challenges (increasing domestic supplies + globally high LNG prices) lend to believe that the risk is now more on the downside and warrants us to change recommendation. The DCF values are quite sensitive to capacity utilization – every 5% dip in utilization affects fair value by Rs6. As a consequence Citi downgrades the stock to Sell (3M) from Buy (1M) with TP of Rs78 on roll-forward.

Nagarjuna Constructions Corp Ltd [NCCL] has six verticals comprising of Buildings and Housing, Transportation, Water and Environment, Electricals, Irrigation and Real Estate. Three verticals, Buildings and Housing, Transportation and Water and Environment together constitute 75% of the order backlog as well as turnover of NCCL.

NCCL has a well-diversified order book position, which is currently Rs 75.2 bn. The average execution period is 2.5 years, spread over more than 90 projects. Out of total order book, about 10% are overseas orders. Read Dalal Street News on Orders Secured by NCCL.

NCCL consolidated its real estate initiatives under NCC Urban Infrastructure (80% subsidiary, with promoters of NCC having 20%).NCCL in joint venture with Tishman Speyer & ICICI Ventures is planning to develop township on 400 acres site in Tellapur, Hyderabad and NCCL has a 26% stake in this project.

NCC has set up a separate company, Nagarjuna Infrastructure Holdings (NIH), to primarily focus on BOT related infrastructure projects. NCCL has an excellent track record of delivery among its peers portraying a reflection of its superior execution ability. US based Equity Fund, Blackstone ventures has bought 12.5% stake in the company.

NCCL’s foray into higher margin segments and the traction that its subsidiaries are expected to grow in the near future mean better visibility for revenues and profits going forward. On its fully diluted equity, it quotes about 18.5 – 19.5 times its FY09 earnings. HDFC recommends to accumulate NCCL in the Rs. 202 -224 band with an expected return of about 20% returns over the next 8-12 months.

Breaking News:Citigroup in a research report has initiated coverage on Educomp Solutions with a AGGRESSIVE SELL rating and has categorized the stock in “HIGH RISK” vertical.

The crazy Indian market is ignoring expensive valuations and high risks in Educomp’s business model and aggressive accounting policy, in our view. We see 20% downside for the stock. Citi forecasts 102% revenue CAGR and 95% EPS CAGR over FY07-10 as Educomp penetrates beyond tier 1 & 2 cities. Stable margins as pressure in school ventures and the ICT business is countered by leverage in Smart_Class and MathGuru. There is high execution and regulatory risks in Edu-Infra and Edu-Manage.

Investors should note High valuations paid to acquire start-ups Edu-Infra and Edu-Manage; b) Reasons for exit taken by private equity firm just before IPO; and c) High regulatory risk in the K-12 business.

SELL with a target price of Rs 2,380, which is based on 35x FY09E fully diluted EPS, derived using the stock’s historical trading band. Target multiple of 35x is at 20% premium to the stock’s average historical valuation to factor in the company’s stronger growth prospects. It is supported by valuation multiples of other educational services companies in the Asia Pacific region. Target multiple of 35x is at a premium to the average valuation for Indian IT companies.

Citigroup in a research report released just a while ago has initiated coverage on Yes Bank with a BUY recommendation and a price target of Rs 230.

Yes Bank is India’s youngest private bank, has grown rapidly and profitably, and delivered strong stock returns. This is a Structural play given growing Indian banking opportunity, strong management and execution capability, scarcity value of new private banks; and 2) Cyclical play on easy liquidity, stable asset quality, continued economic growth. If the environment holds, Yes Bank should be a large beneficiary; else, it could be vulnerable.

Based on growth, track record, and positioning, Yes is a wholesale bank. It has excelled in corporate and advisory businesses, expanded focused asset book, and kept risks low. Its retail business, though still in the making, should add another leg to growth and returns.

Citi believes franchise and value enhancement will be driven by more balance in a) deposits – low cost retail from wholesale, b) fees – transaction banking and retail from advisory, and c) assets – more diversified mix from current mid market.

Yes Bank is expected to grow earnings by 56% and loans by 70% over FY07-10E, driving ROEs to a strong 17% in FY09E. Diluted EPS for FY08 is expected to be Rs 5.65 and for FY09 it is expected to be Rs 8.18.

BOC India is the second largest industrial gas company in India. IDBI is recommending this stock based on the medium and long term technicals. CMP Rs 153.

After consolidating near 129 region, price with the current month rise has shown strong signs of bottoming out from its ongoing reaction phase. Adding more flavor to this recently launched rise was the news that BOC is likely to set up a Rs 2,400 million gas plant in Himachal Pradesh’s Baddi industrial area. Further rise from here will bring back the prices at the site of the crucial
hurdle of 198, where it will complete small set of accumulation pattern. There are additional signals on the short-term charts that the corrective move in progress for the past few months appears to be completing. The stock has a formidable resistance at 198 levels but with momentum still in good shape another assault on the resistance is certain and the probability of it being overcome will be great if volume build up is also seen on the rise. One can consider this stock from a long-term perspective for rise to 280/379 and accumulate now and on dip down to 129.