Tata Steel
Research:Merrill lynch
RAting:buy
CMP:Rs 782
Merrill Lynch estimates that Tata Steel is trading at 7.8x FY09E. This is at a 38% discount to Steel Authority of India (SAIL), its closest Indian peer, and in line with Arcelor Mittal, its closest European peer. Tata Steel's stock price already discounts Corus' lack of raw material integration, but it ignores the potential upside from synergy benefits which will unfold over the next 12-18 months. Steel prices are likely to rise 6-7% in FY09 in India and Europe.
This will be just about adequate to pass on the higher iron ore and coking coal costs. Notwithstanding fears of a US slowdown, recent positives such as inventory restocking in the US, expectations of higher export taxes in China and continuing strong demand in China and India may boost steel price outlook. Merrill Lynch estimates that a 1% change in steel price may increase Tata Steel's EPS by 9%. Tata Steel's high risk profile (owing to lack of raw material integration) is cushioned by potential synergies to some extent. Merrill Lynch has built in synergy benefits of $150 million in FY09E.
This amounts to 3% of the group EBITDA. The management has indicated synergy benefits of over $450 million over the next three years. There is potential for upside on the synergy benefit. However, the key risk is that steel prices may increase less than Merrill Lynch's forecast of 6-7%. In addition, recent media reports indicate that iron ore prices may increase by 70%.
Petronet LNG
Research:Credit suisse
RAting:Underperform
CMP:Rs 102
Credit Suisse maintains 'underperform' rating on Petronet LNG. The company's third-quarter earnings were ahead of expectations due to income on sales to Ratnagiri Gas and Power (RGPPL, erstwhile Dabhol). While Petronet LNG imposes re-gasification tariff on the 5 million tones (mt) from RasGas, it has a fixed price contract for the supply of 1.5 mt of re-gasified LNG to RGPPL till December '08, with the ability to keep any upside due to lower procurement costs and efficiency. Of the 1.5 mt committed, 1.25 mt will be sourced from RasGas, while the rest will be sourced on spot — this 0.25 mt is where Petronet LNG sees benefits of lower sourcing costs. Total regasified volumes declined 3.5% quarter-on-quarter (q-o-q), but earnings per share (EPS) increased by 13%. The momentum in earnings is likely to continue. Increase in regasification capacity at Dahej and the new facility at Kochi are likely to contribute to growth in earnings. However, with significant new domestic gas discoveries, utilisation levels may fall, without which, current valuations seem stretched. Petronet LNG aims to diversify into power generation, but this has not been finalised as yet.
Tata Consultancy Services
Research: Citigroup
Rating: Buy CMP:Rs 904
Tata Consultancy Services' (TCS) third-quarter revenues of $1.5 billion were below the expectation of $1.53 billion, but net profit at Rs 1,330 crore was higher than the expectation of Rs 1,300 crore. The company's EBIT margins were up 33 basis points (basis) q-o-q. Its revenue growth comprises 5.3% volume growth and 0.5% pricing increase q-o-q. TCS' North American revenues increased 1% q-o-q. With a challenging macro-environment, this remains the key investor concern. Banking, financial services and insurance (BFSI) revenues increased 7% q-o-q — higher than the company average. BFSI revenues have grown better than the company average for both Infosys Technologies and TCS. TCS hired 8,000 employees in the quarter (lower than the indicated number of 9,000). However, the management maintained its earlier guidance for full-year hiring at 32,500 and indicated that budget discussions with clients do not indicate any weakness in demand. TCS is pursuing around 25 large deals. However, given the negative macro news, it continues to monitor its outlook and has a cautiously positive view on demand. The slowing US economy and its impact on demand for IT services continue to pose concerns for investors. Citigroup continues to believe that Tier-1s are better-placed. TCS stock trades at 15x FY09E.
DISCLAIMER: Investor's Guide does not accept responsibility for consequences of financial decisions taken by readers on the basis of information provided herein. The aim is to provide a reasonably accurate picture of financial and related opportunities based on information available with us.
