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| Analysts' corner |
| S I Team / Mumbai Nov 30, 2009, 00:36 IST |
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Hindalco Industries
Reco price: Rs 134
Current market price: Rs 132.65
Target price: Rs 152
Upside: 14.6%
Brokerage: Anand Rathi Research
Hindalco $600 million QIP issue will result in a 12 per cent equity dilution. However, the 2010-11 EPS dilution is expected to be lower at around 7.5 per cent due to higher other income. Hindalco plans to spend around Rs 15,000 crore in the next three years for its greenfield expansion plans. The QIP proceeds would be used to partially finance an equity contribution of Rs 7,000 crore.
The current fund-raising further improves visibility on Hindalco’s priority projects like 1.5m tpa Utkal alumina refinery, 0.359m tpa Aditya aluminium smelter and 0.359m tpa Bargawan aluminium smelter, which face lower risk of delay. The equity infusion would also result in lowering Hindalco’s leverage, which is quite high. The brokerage believes that successful completion of the QIP issue would lower Hindalco’s 2010-11 net debt-equity to 1.2 versus its earlier estimate of 1.8. The stock trades at a steep discount to peers, mainly due to a stressed balance sheet, Novelis’ weak earnings and uncertainty regarding domestic expansion plans. With the improving outlook at Novelis and visibility on domestic plans, the brokerage believes a discount is unwarranted.
Mphasis
Reco price: Rs 670
Current market price: Rs 676.90
Target price: Rs 725
Upside: 7.1%
Brokerage: Motilal Oswal Securities
For the October 2009 quarter, revenues at Rs 1,130 crore were up 2.4 per cent sequentially (q-o-q), EBITDA margin was 26 per cent and net profit stood at Rs 244 crore. Mphasis' revenue growth for the quarter was muted due to lower billing days (four extra holidays), pricing pressure in BPO and moderation of growth in the ITO business. This was countered by improved utilisation in service lines, SGA leverage, product license sales and forex gains in revenue.
Among other highlights, there is an improvement in blended utilisation (including trainees) in application services, infrastructure technology outsourcing (ITO) and BPO. Reported pricing was stable in applications and ITO, but declined from $9 to $8 per man-hour in BPO.
Going ahead, US-dollar revenue CAGR is expected to be 22 per cent over FY09-11 (year-end October). Expect moderation in earnings growth due to assumed rupee appreciation of 5.1 per cent in 2009-10 and of 2.2 per cent in 2010-11. The company’s profit before tax is said to grow at CAGR of 14.6 per cent and EPS at a CAGR of 8 per cent over FY09-11. The stock trades at a PE of 14.1 times and 13.4 times its estimated 2009-10 and 2010-11 earnings, respectively.
Oil India
Reco price: Rs 1,244
Current market price: Rs 1,241.70
Target price: Rs 1,442
Upside: 16.1%
Brokerage: Prabhudas Lilladher
Crude production witnessed a sizable jump of 11.5 per cent year-on-year (y-o-y) to 3.5 mmt during 2008-09, however, natural gas volumes declined marginally. With aggressive capex and higher recovery rates, the crude volumes are anticipated to jump by about 5-7 per cent y-o-y. However, natural gas volumes are expected to take a giant leap from current levels of about 6.5 mmscmd to 11.0-12.0 mmscmd by 2012.
The aggressive capex of over Rs 11,000 crore planned for the next three years will keep up the momentum for the company. Conversely, the petroleum ministry announcement to align APM gas price with the market prices will boost the earnings for Oil India. Upstream subsidy burden for 2009-10 is expected to be restricted only towards petrol and diesel. This move by the government will benefit upstream companies by reducing their subsidy discounts.
Oil India’s payout ratio is about 30 per cent which translates into a dividend yield of about 3-4 per cent. With its volume growth, the company is expected to benefit from the favourable sector dynamics. The stock is currently available at a PE of 10.3 and price-to-book value of 2.1 based on estimated 2010-11E numbers.
Tata Power
Reco price: Rs 1,327
Current market price: Rs 1,322.95
Target price: Rs 1,307
Downside: 1.2%
Brokerage: India Infoline
Tata Power’s September 2009 quarter standalone revenues fell by 12 per cent on account of lower fuel cost translating into lower realisation for the Mumbai Licence Area. As a result, the consolidated revenues of the power division fell by 0.6 per cent. However, this was offset by strong performance by two of its subsidiaries: NDPL and Powerlinks. During the quarter, the company’s EBIT margins expanded 187 bps y-o-y to 17.3 per cent. EBIT margin for the power division expanded by 416 bps, while that of coal division contracted by 394 bps y-o-y. It also experienced higher tax outgo, which may be due to higher tax paid by the coal subsidiary and higher MAT rate. As a result, the company’s adjusted PAT fell by 25 per cent y-o-y to Rs 340 crore.
Tata Power’s two key projects - Maithon and Mundra – coupled with a JV project - Jojobera – are expected to commission on schedule. Contribution from these projects coupled with robust earnings from its merchant plants should allow the company to witness around 20 per cent earnings CAGR over FY09-12. The recent GDR and FCCB issues will ease funding requirements. In light of continued robustness in business operations and its Maharashtra-based power capacity becoming available for merchant sales from 2010-11 onwards, there is room for upside.
Welspun-Gujarat Stahl Rohren
Reco price: Rs 271
Current market price: Rs 268.60
Target price: Rs 350
Upside: 30.3%
Brokerage: Edelweiss Securities
Welspun-Gujarat Stahl Rohren (WGSR) recently raised $250 million—$100 million through QIP and $150 million through FCCBs. This has collectively resulted in a 23 per cent equity dilution. The brokerage believes that the proceeds could possibly be used for repayment of Rs 700 crore debt and capital spending (Rs 100 crore for new LSAW and HSAW capacity) in 2009-10. Also, Rs 220 crore capex is planned for 2010-11.
Overall, the company seems to have reasonable funds (2008-09 cash of Rs 947 crore, subsequent gross cash flows of Rs 600-900 crore a year and recent capital raising of Rs 1,200 crore). Hence, it is likely that the proceeds may be used for inorganic growth opportunities and expanding in other geographies. Post-dilution and lower interest expenses, the brokerage’s estimated EPS now stands at Rs 22.1 (earlier Rs 25) and Rs 26.2 (Rs 28.6) for 2009-10 and 2010-11, respectively.
WGSR is well positioned to leverage improvement in the global and domestic pipes industry, which should result in higher volumes, but tepid EBITDA margins. The brokerage has valued WGSR on PE, EV/EBITDA and DCF. Its valuation yields an target of Rs 350 by March 2011. At Rs 271, the stock is trading at a PE of 10.3 times its estimated 2010- 11 EPS and 5.5 times its EV/EBITDA.
Current market prices as on November 27
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