Patel Engineering
Reco price: Rs 11
Current market price: Rs 116.10
Target price: Rs 227
Upside: 49.3%
Brokerage: Kotak Securities
Patel Engineering's order inflow in the hydro power segment has witnessed a slowdown in past 3-4 quarters. The company has received order inflow to the tune of Rs 700 crore in the last quarter from the Andhra Pradesh government for the modernisation of the Krishna-Delta system in the irrigation segment and is the lowest bidder in another Rs 1,500 crore worth of orders. Due to the slowdown witnessed in the real estate sector, its real estate division has also been impacted. Credit crunch witnessed in the month of October has resulted in a steep increase in interest rates, impact of which is expected in the third quarter, thereby impacting the company's profitability.
As Patel Engineering's order book is inclined towards higher margin hydro power projects, operating margins are better than that of the industry. And while the impact of lower commodity prices is expected to be reflected by Q4FY09, company should be able to maintain margins at the current levels going forward due to its diversification. The stock trades at 7.8x and 6.9x its FY09E and FY10 P/E multiples, respectively. The brokerage has arrived at a price target of Rs 227, based on sum-of-parts methodology (Rs 306 earlier). Maintain 'accumulate'.
Tata Steel
Reco price: Rs 165
Current market price: Rs 182.80
Target price: Rs N.A
Brokerage: Angel Broking
Tata Steel's consolidated revenue grew by 36.2 per cent year-on-year (y-o-y) to Rs 44,199 crore during Q2FY09, aided by price hikes by Corus and an improved product mix. Tata Steel's earnings more than doubled to Rs 4,772 crore, partly due to lower interest costs and tax rate.
Prices in Europe have declined to $900 per tonne currently from the peak of $1,275 per tonne during July 2008, with uncertainty over demand on account of adverse global macro-economic factors. Falling steel prices is a concern for Corus as it is a non-integrated steel company, unlike its parent - Tata Steel. Also, productions cuts of 30 per announced by Corus to adjust with the low demand will affect its volumes going ahead. Tata Steel's consolidated EPS estimates have been upgraded by 2.3 per cent for FY09 to factor in the better-than-expected H1FY09 results. However, the FY10 EPS estimates have been downgraded by 20.3 per cent to factor in the recently announced production cuts by the company and its subsidiaries. At Rs 165, the stock is trading at a P/E of 2.6x and EV/EBIDTA of 3.3x FY10E consolidated earnings. Maintain 'neutral'.
Balaji Telefilms
Reco price: Rs 62
Current market price: Rs 67.25
Target price: Rs 80
Upside: 19%
Brokerage: Religare Hichens, Harrison & C
The feud raging between the Federation of Western India Cine Employees (FWICE) and television producers over wages has finally been resolved. But, in the process, Balaji Telefilms (BTL) has incurred a loss of about Rs 3.5 crore, due to the boycott on shooting and non-supply of fresh programmes to broadcasters. The revised pay scales are expected to sustain at these levels over the next few years.
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The pay hike and temporary break in content production will have a negative impact on BTL's earnings in both FY09 and FY10. The higher staff cost is expected to raise overall operating costs by 2 per cent, thus putting pressure on EBITDA margins. The brokerage has accordingly revised its earnings estimates for the company downwards. BTL is currently trading at 6.3x and 5.5x its FY09E and FY10E earnings, respectively. After adjusting for cash and cash equivalents of Rs 21 per share, the stock is trading at a P/E multiple of 4.2xFY09E and 3.6xFY10E earnings. Maintain 'buy'.
Television Eighteen India
Reco price: Rs 59
Current market price: Rs 65.20
Target price: N.A
Brokerage: Edelweiss Securities
Television Eighteen (TV18) has subscribed to 15 million warrants of IBN18 Broadcast at Rs 102 per share, for a total outlay of Rs 153 crore. This will increase TV18's stake in IBN18 to 20.8 per cent (17.5 per cent earlier). TV18, in a presentation given to analysts in July 2008, reported that it has an option amount worth Rs 250 crore receivable from IBN18, for facilitating a joint venture between IBN18 and Viacom, which holds the leading Hindi GEC Colors. Adjusting this amount for TV18's warrants investment, it still stands to receive about Rs 100 crore from IBN18.
IBN18 had a loss of Rs 23.4 crore for FY08 at consolidated level. Given the investment made by the company in launching Colors, IBN18 is not expected to breakeven before FY10. Hence, acquiring additional stake in IBN18 would prove to be EPS dilutive for TV18 at a consolidated level. However, as the DTH market expands and advertising spends pick up, TV18 could benefit from the investment made in IBN18. IBN18 would benefit from a strong bouquet of channels with Colors in the forefront and a backing of a host of other strong channels such as CNN-IBN, IBN7, IBN Lokmat, MTV, VH1 and Nickelodeon. TV18 trades at a multiple of 19.4xFY09E and 17.9xFY10E earnings. Maintain 'accumulate'.
Dr Reddy’s Laboratories
Reco price: Rs 469
Current market price: Rs 475.45
Target price: 566
Upside: 19%
Brokerage: India Infoline
Initial indications from Dr Reddy's suggest that it has managed to corner a larger-than-expected pie of the ?2.3 billion AOK contract in Germany. When the contracts for 44 of the 64 products were decided, Dr Reddy's stood second (behind Sandoz), winning more than one eighth of the 220 contracts awarded. The company has neither divulged the value of the contracts, nor the products involved; hence, it is difficult to assess the value share of total AOK business awarded so far. Of the remaining 20 product contracts to be announced, the company has bid for 15 and the results should be out very soon.
A first cut analysis suggests that the gross profit of Betapharm could benefit about 20 per cent in absolute terms, though the margin may significantly fall. Two key assumptions made by the brokerage are a) 12 per cent value share in AOK business and b) 25 per cent lower price for the AOK contract business. The contract business gives Dr Reddy's further leeway in cutting selling and marketing expenses. Also, the gross profit upside could mean better leverage of fixed costs. The outcome of the AOK contract removes an important overhang on the stock and there could be significant appreciation in valuation of the company. Maintain 'buy'.
Current market prices as on December 5, 2008