TATA POWER COMPANY
Reco price: Rs 1,303
Current market price: Rs 1,415.30
Target price: Rs 1,500
Upside: 6%
Brokerage: Ambit Capital
Tata Power Company (TPC) has obtained open-access approvals to distribute electricity to suburban Mumbai thereby, enhancing its distribution strengths and enabling higher ROEs. Further, since Reliance Infra has not renewed its power purchase agreement (PPA), TPC has a 500 MW uncommitted generation capacity.
Having secured the fuel supply would help TPC operate all its plants optimally. Moreover, going ahead, its fuel mix would change from 31 per cent liquid fuel capacity to 46 per cent imported coal-based capacity, simultaneously morphing from a predominantly distribution entity to one with presence in all the key segments of the power sector value chain.
It is estimated that TPC will need Rs 18,700 crore in the next four years, with equity of Rs 4,956 crore and debt of Rs 13,745 crore. Only Rs 2,678 crore of that their requirement is yet to be tied-up. The brokerage believes that this scenario would ease the recent funding pressure of TPC. TPC’s existing investments are valued at Rs 5,399 crore. Out of this, investments in the Tata group telecom companies are worth Rs 3,700 crore (Rs 156/share). These investments would provide cushion for TPC’s incremental; funding requirements. The Brokerage initiates a hold on TPC with a price target of Rs 1,500. However, key risks include fuel price and shipping venture risks.
MAHINDRA HOLIDAYS & RESORTS
Reco price: Rs 346
Current market price: Rs 350
Target price: Rs 404
Upside: 15.4%
Brokerage: Edelweiss Securities
Mahindra Holidays & Resorts India (MHRIL)’s business model is self-sustainable with negligible debt and free cash flow of Rs 500 crore over FY10-12E. Expect the company’s membership to grow at 25 per cent CAGR over FY10-12E with its diverse product offering and regular addition of resorts.
The Indian timeshare industry posted a CAGR of 15 per cent since 1998 and expects growth to pick up in the future with more Indians taking holidays. As MHRIL charges membership fees upfront, it helps the company build resorts without resorting to borrowed capital. Securitisation of membership fee receivables gives the company access to lump-sum money. As company retains the title of the property, it provides holiday resorts services over a period of time to members.
At Rs 346, MHRIL trades at 18.8 times and 13.8 times its estimated consolidated EPS for 2010-11 and 2011-12, respectively. Discounted cash flow analysis gives a fair value of Rs 404 for the next 12 months. Expect memberships to touch approximately 175,000 by 2011-12 from 98,224 members as of Q1 2009-10. Expect revenues and PAT to post CAGR of 33 per cent and 38 per cent, respectively, over FY09-12E. The brokerage initiates a buy on the stock.
BAJAJ FINSERV
Reco price: Rs 346
Current market price: Rs 322.30
Target price: Rs 377
Upside: 16.9%
Brokerage: IIFL Research
Bajaj Allianz Life Insurance (BALIC) has been following a concerted cost-control strategy, focusing on profitability and improving capital efficiency. This has resulted in slower new business growth and decline in market share. BALIC’s APE market share among private players declined to 10.9 per cent for five months of 2009-10 as against 13.1 per cent during FY09. While new business premium declined 27 per cent y-o-y, it was up 50 per cent q-o-q.
As the pace of business expansion slowed, expense overrun on account of new business strain has reduced, while income from in-force business has increased, leading to profitability. BALIC reported a net profit of Rs 7 crore for Q2 FY10 as against a loss of Rs 60 crore in the year-ago period. The rise in net profit is largely due to Rs 3,670 crore of revenues from investment and other income during Q2 FY10, which includes MTM gain on unit-linked portfolio of Rs 2,670 crore. Life insurance business reported a profit for the second consecutive quarter, while profit from general insurance business grew 8 per cent y-o-y and from consumer finance grew 4.4 times. The brokerage fair value estimate of stock was Rs 377 based on company’s 26 per cent economic interest in life insurance.
INFOSYS TECHNOLOGIES
Reco price: Rs 2,256
Current market price: Rs 2,189.90
Target price: Rs 2,260
Upside: 3.2%
Brokerage: Motilal Oswal Securities
Infosys has increased its gross hiring guidance from 18,000 to 20,000 employees in 2009-10. The increase of 2,000 in gross hires could be to replenish resources lost on account of attrition. Infosys might still miss its net hiring guidance (8,000 people in FY10) despite raising its gross hiring guidance. The wage hike is pre-emptive move by the company to hold on to the performing employees as IT hiring is picking up and signals that performance would be rewarded.
Infosys has guided EBITDA margin reduction of 200 bps in H2 FY10 and 50-100bp in FY10, thus leaving a buffer of around 200bp in H2 FY10 margin. Expect the EBITDA margin to improve by 20 bps in FY10 to 33.4 per cent. If the rupee does not change materially, the company should be able to beat its EPS guidance in the future quarters, comfortably. Expect a basic EPS of Rs 105 in FY10 (guidance of Rs 100 at the higher end).
Europe and Telecom continue to de-grow at 7 per cent q-o-q and 4.6 per cent q-o-q respectively in constant currency terms. An improvement in telecom and Europe would be key to building in faster growth assumptions for the company. Infosys trades at 21.5 times its 2009-10 estimated earnings. Maintain neutral.
INDUSIND BANK
Reco price: Rs 124
Current market price: Rs 133.85
Target price: Rs 165
Upside: 23.3%
Brokerage: Anand Rathi Financial Services
The bank had robust growth in net profits, driven by higher net interest income growth (131.3 per cent y-o-y), healthy non-interest income growth of (48.8 per cent y-o-y) and reduced cost-income (by 1,102 bps to 54.4 per cent). The brokerage raises the IndusInd Bank’s (IIB) EPS estimates by 25.9 per cent in 2009-10 and 22.1 per cent, the year after the impressive Q2 results.
Advances and deposits grew 25.2 per cent and 17.1 per cent y-o-y, respectively. NIM improved 118 bps y-o-y to 2.9 per cent, largely led by cost of deposits falling 69 bps y-o-y. CASA continues to improve, by 332 bps y-o-y and 100 bps q-o-q. Due to better-than-expected margins, NII is increased by 13.9 per cent in 2009-10 and 15.3 per cent in 2010-11. Led by steady business growth, fee income has risen by 44 per cent y-o-y, and is now around 2 per cent of average earning assets (annualised), higher than the last eight quarters’ average of around 1.3 per cent. Expect the contribution from fees to help RoEs improve to 16.4 per cent in 2009-10 and 17.6 per cent in 2010-11. At Rs 165, the stock trades at 2.7 times 2010-11 estimated earnings and 2.5 times its estimated 2011-12 adjusted book value. Maintain buy.
Current market prices as of October 16