DABUR INDIA
RESEARCH: MERRILL LYNCH RATING: BUY CMP: Rs 94.65
MERRILL Lynch has cut its FY09 and FY10 EPS forecasts for Dabur by 6-12%, primarily due to high gestation costs for the company’s new retail business. Dabur’s retail format will focus on health, beauty and wellness products. The first store was opened recently in Delhi. The offering looks high quality and Dabur has the first-mover advantage in a format that has huge potential. But near-term costs may be higher than earlier expectations. The growth in Dabur’s topline in FY08 slowed down to 15%. Positive surprises were hair oils (16% of sales), digestives (6%) and exports (16%), which grew above the trend. Key disappointments were Chyawanprash (7%), healthcare (6%) and home-care (5%). Going forward, topline growth rate will remain steady at 15-16%. Merrill Lynch expects significant acceleration in foods and Chyawanprash (led by new products), and in healthcare (led by easing of supply chain issues). It has forecast that Dabur’s EPS will grow 16% in FY09 to Rs 4.4 and 19% in FY10 to Rs 5.2. Excluding retail, EBITDA margins are expected to expand marginally by 10-20 bps every year, led primarily by scale benefits. This should be primarily the case in exports, where margins are much lower than in India. Key risks to margins are higher input costs and higher advertising costs to support new product launches.
FINOLEX CABLES
RESEARCH: HSBC RATING: NEUTRAL CMP: Rs 69.90
HSBC has downgraded Finolex Cables from ‘overweight’ to ‘neutral’ with a new price target of Rs 80. HSBC has cut its FY09/FY10 estimates based on lower EBITDA margin and reduced other income. There are three reasons to believe that core earnings at Finolex will remain volatile: (1) EBITDA margin is expected to be hit by volatile copper prices. In the past five quarters, EBITDA margins have been highly volatile due to sharp movements in copper prices. Finolex reported its historical low EBITDA margin of 4.9% in Q4 FY08 (March ’08). The company is unable to pass on the incremental costs to customers because it lacks pricing power. (2) The company’s earnings are driven by dividend income. In the past few years, including FY08, earnings have been driven by other income (dividends on investments). Since FY05, other income has contributed 20-45% to profit before tax. (3) Its capacity expansion plans have suffered significant delays. HSBC now expects investors to look for stabilisation in the core business before assigning value to the company’s investments. Based on historical price-to-earnings (P/E) multiple during times of falling EBITDA margins and stripping out Rs 19 per share for Finolex Industries, HSBC has reduced its target P/E from 15x to 13x.
PHOENIX MILLS
RESEARCH: KOTAK SECURITIES RATING: ADD CMP: Rs 354.40
KOTAK Securities has initiated coverage on Phoenix Mills with an ‘add’ rating and a target price of Rs 450, based on March ’09 net asset value. Kotak believes that Phoenix Mills is among the best-positioned to ride India’s retail boom. Phoenix Mills, along with its associates, has a total developable land bank of 34 million sq ft comprising retail (25 million sq ft), residential (7 million sq ft) and hotels (2,200 keys) spread across 23 cities. Phoenix group will have operational retail space of 25 million sq ft by FY12E with 11.9 million sq ft attributable to Phoenix Mills. Financial structuring/alliances will aid in faster growth and diversify project-specific risks Phoenix intends to undertake projects in metro cities in association with financial investors. The company plans to dilute its stake in various projects at a premium, thus unlocking capital to enable faster growth. Phoenix has expanded its retail footprint through acquisitions: (1) Buyout of Atlas Hospitality; (2) Purchase of a 42% stake in EWDPL (a tier-II city); and (3) Purchase of 70% stake in United Malls (a mall developer in tier-III cities). Revenues will grow strongly over FY09-11E. Kotak expects other projects to start contributing to revenues in FY11E.
HCL TECHNOLOGIES
RESEARCH: CLSA RATING: UNDERPERFORM CMP: Rs 292.10
WHILE the sector-wide sentiment has strengthened, driven by currency depreciation and tax extension, it is difficult to envisage further stock outperformance, given that HCL Technologies’ phase of ‘superior than peers’ financial performance is weakening. IT spending may remain sombre for some more time While HCL believes IT spending environment is favourable for offshore delivery in the long term, near-term growth will be hindered by the freeze on client budgets and delays in deploying budgeted IT spend. While HCL has benefited from proactive forex hedging (hedging gains contributed 5.2% to PBT during nine months of FY08), gains from a reversal in currency moves will be muted. HCL’s significant improvement in financial performance, deal wins and operational control over the past 18 months helped it to resist sector-wide valuation contraction in CY07. Immediate objectives of restructuring the voice-heavy BPO business by containing growth from BT and growing the ERP business by leveraging global partnership with SAP may take some time. The FM’s dole has given an extra year for HCL to make its SEZ move. But HCL needs to consistently outperform its peers to sustain investor interest and this may not be forthcoming in the near term.
BHARAT FORGE
RESEARCH: CITIGROUP RATING: HOLD CMP: Rs 276.75
CITIGROUP has cut the target price of Bharat Forge to Rs 312 as it has revised the company’s earnings estimates downwards by 9-20% over FY09/FY10E. The target price is based on 18x September ’09 EPS — the mid-point of the current trading band — and is well supported by an earnings CAGR of 25% over the next two years. It is also based on expectations of slower growth in domestic demand, margin pressures due to a rise in input costs, a volatile currency, a slower-than-expected turnaround in operations of subsidiaries and joint venture operations. The sharp rebound in profitability in FY10E will depend on the management successfully executing the high-margin non-auto business. Citigroup has forecast strong earnings CAGR of 26% in standalone PAT over the next two years, driven by steady improvement in export sales (notably in the non-auto segment). Recurring parent PAT at Rs 68.3 crore (+6% y-o-y), was in line with estimates. EBITDA margin rose 70 bps y-o-y (50 bps above estimates), led by stronger growth in exports and the attendant beneficial impact of duty entitlement passbook (DEPB).
STEEL AUTHORITY OF INDIA
RESEARCH: MORGAN STANLEY RATING: OVERWEIGHT CMP: Rs 172.95
MORGAN Stanley’s conviction on out-of-consensus ‘overweight’ call on SAIL has increased after its robust Q4 FY08 results. The stock is trading at a P/E of 6.9x and EV/EBITDA of 3.7x on FY09 earnings, which looks unfair, given comparable global averages of 11.2x and 6x, and SAIL’s likely EPS CAGR of 37% between FY08-F10. After adjusting for exceptional items and provisioning, SAIL’s Q4 FY08 EBITDA stood at Rs 4,350 crore, in line with estimates. The strong performance should provide the first trigger for trend reversal for the 24% year-to-date underperformance versus the Sensex, offering a good opportunity to build positions in SAIL. Fears about SAIL’s earnings trends should be mollified in the coming two quarterly results. Morgan Stanley believes fears of a steel price hike and coking coal costs are overblown. Additionally, SAIL should be able to reduce its wage cost by $19/tonne in FY09 after the one-time provisioning of Rs 1,600 crore in FY08.
Source: economictimes
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