BHARAT HEAVY ELECTRICALS
RESEARCH: HSBC
RATING: OVERWEIGHT
CMP: RS 1,654.90
HSBC maintains ‘overweight’ rating on Bharat Heavy Electricals (Bhel) with a target price of Rs 2,300. The recent correction in the stock price provides a buying opportunity as fundamentals remain intact. The share price does not reflect the growth momentum of the domestic power equipment market. India aims to add 78 GW of capacity in the 11th Five-Year Plan, and Bhel, with a 65% market share, is its main beneficiary. Strong new order inflow of Rs 14,500 crore resulted in a Rs 95,000-crore order backlog.
The gas turbine and railway locomotive businesses are additional growth drivers. Bhel has formed three JVs with state utilities to set up supercritical projects. HSBC maintains its revenue growth estimate of 27% for FY09E, given that Bhel has expanded its capacity and has been able to address its execution-related issues. But higher commodity prices and staff cost provisioning may impact the company’s profitability, thus affecting EBITDA margins by 200 bps in FY09E and FY10E, lowering profit growth by 8-10%. HSBC expects Bhel to report EPS of Rs 79.3 and Rs 103.1 in FY09E and FY10E, respectively.
LARSEN & TOUBRO
RESEARCH: DEUTSCHE BANK
RATING: SELL
CMP: RS 2,625.60
DEUTSCHE Bank has downgraded Larsen & Toubro (L&T) to ‘sell’ with a revised target price of Rs 2,000 (-18%). Despite underperforming the Sensex by 6% YTD, L&T trades at 21x FY09E and 16x FY10E P/E, which seems high in the current market downturn. Deutsche Bank has cut its earnings estimates by 8% for FY09E and 12% for FY10E. Its concerns are:
(1) risks to 44% of the order book in steel, oil & gas and real estate;
(2) turnaround of international subsidiaries keeps getting pushed back; and
(3) the quality of earnings may deteriorate as the working capital cycle stretches.
Also Read: Best Indian stock pick: Larsen and Toubro
L&T has seen significant order inflows in the power, construction, real estate and steel sectors. Earnings growth momentum picked up in FY08, albeit from a low base in FY07. However, the risk profile for steel, power and real estate sectors has increased significantly, and can impact the company’s medium-term growth prospects. While the revised estimates are largely in line with consensus, operating free cash flows may be hit as order inflow momentum slows down.
SASKEN COMMUNICATION TECH
RESEARCH: MERRILL LYNCH
RATING: UNDERPERFORM
CMP: RS 154.40
Merrill Lynch has cut the target price of Sasken Communication Technologies by 7% to Rs 140 and has retained ‘underperform’ rating on the stock. Merrill Lynch has cut its FY09 and FY10 earnings estimates by 6% and 10%, respectively, to factor in sluggish Q1 revenue growth and muted Q2 revenue guidance in Sasken’s IT services business. High attrition levels at 29% and potentially weak Q2 results remain cause for concern. The management has indicated that revenue growth in IT services can reduce to 17-20% y-o-y from 25-29% earlier. IT services revenues grew by 7.5% q-o-q — 1% lower than estimates — with EBITDA margins rising by 305 bps, driven by the rupee’s depreciation. Employee numbers fell and the management scaled down net hiring numbers from 700 to 500 for the year. Sasken’s products business grew 112% y-o-y, though 60% came from customisation revenues and can be volatile. With a weak Q2 ahead and growth likely to be back-ended, the stock can languish at current levels.
SESA GOA
RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: RS 3,101.45
MORGAN Stanley maintains ‘overweight’ rating on the stock due to constructive stance on iron ore pricing and confidence in Sesa Goa’s ability to deliver robust volume growth over the next two years. Sesa Goa announced Q1 PAT of Rs 636 crore, up 436% y-o-y. EBITDA was Rs 800 crore, 39% ahead of estimates, due to higher volumes and better realisations. Iron ore sales volumes were strong, at 3.2 mt, up 48% y-o-y, against the expectation of 18% increase. This should put Sesa Goa on track to achieve its annual target of 25-30% annual growth. Iron ore realisation was also ahead of estimates at Rs 3,400/tonne — a rise of 11% q-o-q and 92% y-o-y. This was mainly due to continued strength in spot prices, favourable rupee movement and 65% y-o-y increase in the contract settlement price. For the rest of FY09, Sesa Goa should realise the benefit of 81-97% increase in contract settlement price of iron ore. Sesa Goa’s coke realisations were strong at Rs 21,000/tonne, up 42% q-o-q, driving the 8% q-o-q growth in coke EBIT. The company’s EBITDA margin was a healthy 62% in Q1. Though this was 2,550 bps higher y-o-y, it was 850 bps down sequentially, because of higher transportation costs. This was due to higher proportion of sales from Orissa and Karnataka, and increased trucking and rail charges.
ABAN OFFSHORE
RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: RS 2,695.15
GOLDMAN Sachs reiterates ‘buy’ rating on Aban Offshore with a P/E-based 12-month target price of Rs 4,375, implying potential upside of 64%. Discounted cash flow value is Rs 4,500/share. Aban’s FY08 pre-exceptional consolidated net profit stood at Rs 310 crore, beating the estimate of Rs 250 crore by 22%. Aban’s reported FY08 profit of Rs 120 crore had a one-time translation loss of Rs 180 crore due to adverse movement of NOK-USD exchange rates since March ’07. Strong operating results were offset by higherthan-expected interest cost. Better-than-expected operating results and persistent market fears of large derivatives loss proving to be untrue will lead to re-rating of the stock. Goldman expects Aban to announce contracts for five assets — jack-up rigs Deep Driller III, VI, VII and VIII and semi-submersible rig Aban Pearl — over the next 1-6 months. Goldman estimates the jack-up day rates to be $180-185K for short-term contracts and at a 10% discount for long-term contracts. For Aban Pearl, Goldman has assumed a day rate of $275K. So far, Aban’s last nine contracts have been at rates higher than estimates. Aban’s stock is trading at 5.8x FY10E EPS, which implies a discount of 23% to the global average for offshore drilling companies. Aban still has the best earnings growth profile in the medium term in its peer group, with EPS CAGR of 162% between FY08 and FY10E, even after cutting FY09E EPS by 3.5% to reflect delay in deployment of Frontier Ice at higher day rates.
ULTRATECH CEMENT
RESEARCH: INDIABULLS SECURITIES
RATING: HOLD
CMP: RS 550.50
INDIABULLS Securities reiterates ‘hold’ rating on UltraTech Cement. A slowdown in construction activity in the real estate sector is expected to adversely affect cement sales. However, ongoing infrastructure-related construction activities should protect volume growth from declining sharply. Going forward, Indiabulls expects that the company’s new capacity addition in South India, along with strong demand in the region, will help cement sales volume to witness a CAGR of 13% in the next two years to reach 19.2 mt in FY10E. During the quarter, EBITDA margin fell 239 bps y-o-y due to rise in raw material and fuel costs. Realisation rate has also started moderating — it increased a mere 1% q-o-q in Q1 FY09, lower than the 3% q-o-q increase in Q4 FY08. Excess cement supply projected in FY09E and the government’s price control policies may further reduce realisation rate. Indiabulls believes that escalating costs and moderating realisations will continue to keep UltraTech’s margins under pressure in coming quarters.
