Analysts' corner

RESEARCH CALLS

Brokerage: Macquarie Research

Macquarie compares Gujarat NRE Coke with Chinese coal company Hidili, which has proposed an initial public offering, as there is hardly any comparable peer for the former in India. The brokerage infers that Gujarat NRE Coke is valued at a significant discount and has an upside potential of over 50 per cent, and rates it an outperformer.

Gujarat NRE Coke's total coal resources are measured to be nearly 589 million tonne, valued at $1 per tonne. In comparison, Hidili's resources of 217 million tonne are valued at $8.4 per tonne, Macquarie expects Gujarat NRE Coke's production of coal to overtake Hidili's production by FY11, as Gujarat NRE Coke's newly acquired mines go on-stream.

Further, Gujarat NRE Coke clocks higher revenues ($127 million in FY07) compared to Hidili ($109 million in FY07). However, Gujarat NRE Coke commands an enterprise value (EV) of just $587 million as compared to Hidili's EV of around $1.4-1.8 billion.

Based on EV/tonne, Gujarat NRE Coke trades at $2.2 a tonne, which is 20 per cent of Hidili's $10 per tonne, considering that the fully subscribed offering of Hidili trades at the higher end of its price band. Going by price-earnings (P/E) multiples, Gujarat NRE Coke trades at a P/E ratio of 12.5 times estimated FY08 earnings, much lower compared to around 28.5 times for Hidili.

Alembic
Reco price: Rs 76
Current price: Rs 79
Target price: Rs 110
Brokerage: IL&FS InvestSmart

Alembic, a leading player in the Indian formulations space with a 39.7 per cent market share in the macrolides segment, is expected to record a compounded annual growth rate of 23.2 per cent in revenues and 33.5 per cent in net profits through FY07-09.

IL& FS InvestSmart expects the revenues and net profits to be Rs 910 crore and Rs100 crore in FY08, and Rs1,060 crore and Rs130 crore in FY09, respectively, much above the expected market growth rates.

Alembic has restructured its product mix from anti-infective products which are at a maturity stage in their life-cycle to a high-growth life style product basket, thereby focussing more on higher profitability.

In order to accomplish this, in January 2007, Alembic acquired the non-oncology division of Dabur for Rs159 crore, with full rights to market 24 brands in the high-growth, life-style therapeutic segments. At Rs 76, the stock traded at a price-earnings ratio of 10.5 times and 8.5 times estimated FY08 and FY09 earnings respectively. The brokerage recommends a "buy".

Kirloskar Ferrous
Reco price: Rs 44
Current price: Rs 43.75
Target price: Rs 65
Brokerage: Anand Rathi

Banking on the favourable industrial environment and buoyant auto sector, Anand Rathi expects demand for steel and castings to remain robust. As a result, the brokerage expects Kirloskar Ferrous to be able to register a strong growth in its revenues and expand its margins.

Kirloskar Ferrous has lined up Rs 330 crore as capital expenditure for the next two years, expanding both the molten metal and castings capacity from the present 240,000 and 84,000 tonne, respectively, to 425,000 and 130,000 tonne. It has initiated cost savings in coke by setting up a hot stove and a turbo blower.

This is expected to save nearly 10-15 per cent in coke cost, a major raw material in producing pig iron. It is also putting up a sinter plant, which would aid in cost reduction in iron ore production.

The rise in castings capacity and cost reduction measures are likely to be key drivers for better margins. For FY08 and FY09, the brokerage expects a top line growth of 20 per cent and 11.6 per cent, respectively from Rs 525.1 crore in FY07 to Rs 632.3 crore in FY08 and Rs 705.7 crore in FY09.

An operating margin expansion of 220 basis points in FY08 and 100 basis points in FY09 is likely. At Rs 44, the stock is valued at 13.5 times estimated FY08 earnings and 10.6 times estimated FY09 earnings.

Larsen & Toubro
Reco price: Rs 2621
Current price: Rs 2783
Target price: 2921
Brokerage: Edelweiss

Edelweiss estimates Rs 14 trillion to be spent on infrastructure in India, across segments over FY07-12. As a result, with its broad-based and deep presence, Larsen & Toubro (L&T) is expected to witness a noteworthy momentum in order intake.

Over FY08-09, Edelweiss expects L&T's order intake to be Rs 61,400 crore in the infrastructure space, in addition to Rs 13,100 crore order intake from the process vertical.

In the core engineering and construction segment, the order accretion is expected to be around Rs 74,600 crore over FY08-09, and there could be positive surprises with large orders accruing from verticals like ship building, dredging, defence, power and railways.

Also, given that both defence and ship building/dredging have better profits compared to L&T's current portfolio, the company's overall consolidated margins are expected to expand over the next three-four years.

Led by stellar performance of L&T's key subsidiaries like L&T Infotech, L&T Finance, L&T Oman, and its transportation arm, the subsidiary portfolio contributed 21 per cent to overall profits of the company, last fiscal.

Edelweiss expects the growth trajectory for its subsidiary portfolio to further improve and contribute 20% to consolidated revenues and 30% to consolidated profits by FY09. At Rs 2621, the stock traded at a price-earnings multiple of 28.6 times estimated FY08 earnings and 21.5 times estimated FY09 earnings.