Category: Equity Research

Edelweiss has initiated coverage on DLF with a BUY rating and a price target per share of Rs 755 based on NAV model of analysis.

DLF is the leader in the Indian real estate industry in terms of developable area. Its land bank of 13,055 acres translates into 615 mn sq. ft. of saleable area spread across the country.

DLF has entered into tie-ups in related businesses with some of the best names in their respective industries. For its SEZ initiative, DLF has tied up with Nakheel, one of the leading property developers in the UAE; for hotels, it has a partnership with the Hilton Group; and for construction, it has tied up with the UK-based Laing O’Rourke Plc. DLF’s SEZ and hotel businesses will start adding to its topline in the next 3-4 years; the value of these initiatives
is, however, not captured in current valuations.

Retail and commercial properties in India are currently capitalised at 9-10%. Recently, Ascendas India Trust listed its REIT-like structure on SGX-ST at a cap rate of 6.1% on FY08 net operating income. This will drive valuations of Indian Realty players going forward.

The NPV per share of the existing businesses at INR 649. Additionally, the SEZ initiative is expected to contribute an NPV of INR 104 and the construction and hotel businesses, INR 10 and INR 30, respectively. After adjusting the debt, the NAV per share is INR 755.

Earlier this month, Citi initiated coverage on DLF with a BUY rating and a target of Rs 725.

We had broken the store about Jubilant Organosys deal with Syngenta earlier this week. Citi in a report releases just a while ago continues to be bullish on Jubilant after the Syngenta deal.

Jubilant’s CRAMS business has got a shot in the arm in the form of a “multi-million” dollar 5-year contract with Syngenta to supply pyridines. Jubilant’s CRAMS business has grown at 45% CAGR (excluding acquisitions) over FY05-07, and this contract further improves the likelihood that this growth trend would sustain.

Jubilant is a leading player in pyridines & recently raised its capacity by c24% to 42000 TPA. These are key intermediates used in multiple pharma & agrochem APIs. Jubilant has over 150 derivatives in its product basket that are used in c229 APIs & 17 agrochem products. With the expanded capacity, Jubilant becomes the global leader in pyridines.

Jubilant as one of the superior Indian outsourcing plays, given its integrated presence across the pharma & chemicals value chain. The company is expected to report an EPs of Rs 17.57 and Rs 22.52 for FY08 and FY09 respectively. Citi reiterates a BUY with a price target of Rs 387.

In a research report released just a while ago, Morgan Stanley[MS] is bullish on the prospects of Rajesh Exports Ltd. MS has initiated coverage with a overweight on Rajesh Exports with a price target of Rs 1,051.

Bangalore based Rajesh Exports is the largest exporter of jewellery from India and now wants to shift its business mix towards the three higher-margin businesses of diamond jewellery, private label jewellery, and Retail Jewellery market in India.

The company is at an inflection point from where its three pronged growth strategy will lead to higher margins and earnings. We believe this growth is not fully captured in the stock price given that at current price the stock trades at 12.9 times F2009e earnings and at an attractive implied PEG of 0.60x.

12-month price target of Rs1051 implies 24.9x F2008e earnings and 15.9x F2009e earnings. The company is well poised to achieve good earnings growth for the next few years based on favourable industry macro factors and its three-pronged growth strategy. The company has changed its focus from revenue growth to margin expansion.

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ICICI has revised the ratings for Clutch Auto Ltd and Bharat Forge Ltd to outperform.

Clutch Auto Ltd: [CAL]
CAL had decided on exports as a major thrust area, had to focus on domestic market due to the delay in exports orders and integration of clutch business acquired from Pioneer Inc into its business model. However, by focusing on the domestic market where volumes were rising at robust pace, the company managed to meet revenue and profit estimates for FY07.

Domestic volume was subdued in the first quarter, which is expected to pick up in coming quarters supporting volume and value growth. The company is trying to enter into A and B segment vehicles.During the quarter, the company acquired the assets of Gurukripa Founders & Engineers (GKF). GKF is engaged in the production of castings used in clutch manufacturing. It is now in the process of augmenting its capacity to 1,200 tonne per month from 750 tonne.

At the current price of Rs 105, the stock trades at 4.1x its FY08E EPS. ICICI remains bullish on the company and maintain earnings estimates for FY08 [Rs 25 EPS]. Reiterate outperformer rating on the stock with a price target to Rs 205.

Bharat Forge Ltd: [BFL]
BFL reported a 18.1% growth in revenue during Q1FY08, strongly backed by a 31.5% growth in exports. It reported net sales of Rs 496.9 crore against Rs 420.6 crore in the corresponding quarter the previous year. Exports to Europe was key growth driver and sales doubled to Rs 93.3 crore. However, a slowdown in demand from the commercial vehicle segment in the US and an appreciation of the rupee against dollar, restricted revenue growth from the US to only 4.3%.

The company has been successful in implementing a hedge policy and had dollarized its loan profile to gain benefit from dollar depreciation. This strategy helped it to record a one-time foreign exchange gain of Rs 33.3 crore on its loan portfolio. The company managed to mitigate the impact of higher interest and depreciation provision by reporting a 129.4% growth in other income, supporting bottom line growth of 15.8% to Rs 64.8 crore against a decline of 5% in EBITDA.

Going forward, higher capacity utilization and increasing focus on European and Asia-Pacific countries, where demand is rising, would mitigate the impact of de-growth in the USA. At the current price of Rs 282, the stock is trading at 18.1x and 13.1x its consolidated FY08E and FY09E EPS of Rs 15 and Rs 20.7 respectively. ICICI reiterates an outperformer rating with a price target of Rs 416.

Indian Hotels [Taj Group] acquired 10% stake in Orient Hotels in the US. Citigroup’s US lodging analyst forecasts revenue growth of 18% to US$603m and healthy EPS growth of 30% to US$1.40 for CY2007E, on REVPAR growth of 8.5% and occupancy of 62%.

The acquisition ties-in with the company’s strategy to grow overseas. While it looks to form an alliance and leverage on OEH’s luxury brand and global network, OEH’s management board has denied interest in entering into strategic discussions with Indian Hotels. If this alliance goes through, it would help the company diversify and manage downturn in India (86% of revenues) better. However, this large investment could dampen return ratios and stock sentiment in the near term. Citi maintains a BUY on Indian Hotels with a price target of Rs 187.

Meeting with the management of Glenmark Pharmaceuticals indicates that the next few months would be critical on the R&D front. It is awaiting the US FDA’s response on Oglemilast, even as it continues outlicensing discussions on GRC-6211. Besides, 2 more NCEs are set to enter the clinic over the next 2 months. Citi reiterates Glenmark as the best innovative R&D play in Indian pharma. Glenmark reiterated that it will conclude 2 R&D deals by end FY08. Glenmark is expected to report an EPS of Rs 20.27 and Rs 25.42 for FY2008 and FY2009 respectively. Citi has a BUY rating on Glenmark with a price objective of Rs 427.

ICICI Equity Research has a BUY with an outperform rating on Escorts Limited with a price target of Rs 180.

The poor performance of the tractor segment dampened revenue and profit growth. Going forward, tractors’ sales is expected to pick up, expanding the company’s top line. The company also has auto ancillary component unit, which contributes around 4-5% to total revenues, but is running at losses. Escorts also manufacture railway equipment, which contribute 6-7% to revenues and reported PBIT of Rs 4.2 crore during the quarter under review.

Construction Equipment Business – Hidden Gem
Escorts operates this business segment under a separate 100% subsidiary company called ECEL and is planning to unlock the value of investments in the next 8-10 months. The construction business is valued at Rs 735 crore and core tractor and equipment business at Rs 636 crore, while the market capitalization of Escorts Ltd is around Rs 785 plus crore. This means at current price, the construction business is available almost free of cost.

A sum-of-the parts (SOTP) valuation gives is a target price of Rs 181.At the current price, the stock is available at attractive valuations of 9.4x consolidated FY08E EPS of Rs 10.9 and 14.7x standalone FY08E EPS of Rs 7.

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