Analysts' corner

RESEARCH CALLS

Macquarie Research

Reliance Communications' wireless revenue in Q2 FY08 grew by 8.8 per cent q-o-q and by 42.6 per cent y-o-y to Rs 3,670 crore.

The EBITDA (earnings before interest, tax and depreciation) margins in the wireless business were down 60 basis points q-o-q at 39.1 per cent, as the company clocked in an EBITDA of Rs 1,440 crore in the second quarter.

The average revenue per user (ARPU) for the quarter too, witnessed a 5.6 per cent q-o-q fall to Rs 356, while the minutes of usage (MoU) also fell by 3.9 per cent q-o-q to 490 minutes, leading to an average revenue per minute (ARPM) of Rs 0.73, down 1.2 per cent q-o-q.

According to Macquarie Research, even though the ARPU and overall EBITDA margins slumped, Reliance Communications' EBITDA per minute fell by only 2 per cent q-o-q, primarily due to lower MoU.

Going by per minute metrics, the company has been delivering steady performance for the past six quarters.

While the brokerage reduced its earnings estimate for the company by 4.3 per cent for FY08, by 5.9 per cent for FY09 and by 0.9 per cent for FY10, it's sum-of-the-parts valuation of Rs 865 per share is still higher than the current market price, leaving some headroom for an upside.

The brokerage classifies Reliance Communications as "outperform". At the current market price, the stock trades at a price-earnings multiple of 31.2 times, 22.3 times and 16.9 times estimated FY08, FY09 and FY10 earnings, respectively.

Jindal Drilling & Industries
Reco price: Rs 1050
Target price: Rs 1305
Current market price: Rs 1089
Upside: 24.3 %
Brokerage: Religare

Jindal Drilling and Industries' Q2 FY08 net sales are in line with Religare's estimates, posting a growth of 19.8 per cent y-o-y to Rs 100 crore.

The growth was driven by higher day rates for its rigs which can be attributed to a severe shortage of drilling rigs worldwide. However, only two of its three rigs were in operation during the quarter.

Add to this, higher operating expenses caused a drop of 300 basis points y-o-y in the company's operating margins. Lower interest and depreciation costs improved the net profit margins significantly to Rs 5.92 crore, a growth of 7.4 per cent y-o-y.

During the quarter, the company bagged a Rs 660 crore contract from ONGC for its new jack-up rig Discovery I, which translates to a day rate of $ 160,000 a day. In addition to Discovery I, the company is acquiring another new rig, Virtue I from the Singapore-based Keppel.

Both these rigs are expected to join Jindal Drilling's fleet by October 2008, three months ahead of schedule. This leads to an upward revision of revenue and earnings estimates for the company by Religare, for FY08 and FY09.

As a result, the sum-of-the-parts price per share rises from Rs 1037 to Rs 1305, giving an upside of over 24 per cent. Religare recommends a "buy" on the stock. The stock trades at 47.7 times and 22.7 times the company's estimated FY08 and FY09 earnings, respectively.

Steel Authority of India (SAIL)
Reco price: Rs 254
Target price: NA
Current market price: Rs 243.45
Upside: NA
Brokerage: IL&FS InvestSmart

Higher average realisations and marginal increase in volumes enabled SAIL to report a 7.3 per cent y-o-y growth in net sales during Q2 FY08.

In line with this growth, the company's operating margins and adjusted net profits increased by 140 basis points y-o-y and 13.8 per cent y-o-y, respectively, during the quarter.

SAIL's operating margins, however, declined 90 basis points q-o-q due to higher wage costs, rising ferro-manganese prices and lower average net sales realisations caused by both softening of steel prices in July-August 2007 and rupee appreciation.

During CY08, iron ore contract prices are expected to rise by 35-45 per cent, whereas coking coal prices are expected to increase by 20-30 per cent.

With this cost push, global demand for steel being expected to be robust and China's net exports likely to decline, steel prices are set to rise in CY08. Since SAIL sources its entire iron ore requirements internally, it would be insulated from the expected increase in iron ore prices; however, the company is likely to be impacted by the rising coking coal prices.

IL&FS InvestSmart revised its FY08 earnings estimates for SAIL upwards from Rs 16.8 to Rs17.9 and introduced our earnings estimates for FY09 at an earning per share of Rs 21.

Presently, SAIL is trading at a price-earnings multiple (P/E) and EV/EBIDTA (enterprise value/EBITDA) of 12.1 times and 7.3 times estimated FY09 earnings, respectively.

The company has been re-rated due to its huge iron ore mining assets; SAIL has iron ore reserves of nearly 3 billion tonne, including the Chiria mines that have reserves of approximately 2 billion tonne.

At its future expanded steel capacity of 23 million tonne after 2011, it will require almost 1 billion tonne of iron ore over the next 25 years. This leaves it with a surplus of about 2 billion tonne of iron ore. The brokerage maintains an "accumulate" rating on the stock.

Tata Chemicals
Reco price: Rs 315
Target price: Rs 387
Current market price: Rs 320
Upside: 22.9 %
Brokerage: Angel Broking

Due to the robust demand and tight supply position in the global market, soda ash prices continued to remain firm. This helped Tata Chemicals report a 8.7 per cent y-o-y growth in revenues to Rs1,733 crore.

Apart from the chemicals segment, the company's fertilisers segment also posted robust growth of 8 per cent y-o-y aiding top line growth. The benefits derived from strong product prices and rupee appreciation (in case of imports) were negated by an increase in key raw material prices during the quarter denting the company's operating margins.

Increasing fuel costs, trade and port congestion increased the ocean freight rates, and rise in coke and coal prices also impacted the operating margins. The company's operating margins declined by 40 basis points y-o-y to 16.9 per cent from 17.3 per cent.

However, in absolute terms, the operating profit grew 6.5 per cent y-o-y to Rs 293 crore from Rs 275 crore. The company registered an other income of a whopping Rs 45.1 crore in foreign exchange gains due to rupee appreciation, which helped its net profit increase by 12.2 per cent y-o-y to Rs 208 crore from Rs 185 crore for the same period last year.

Going by the belief that globally, prices of chemicals will remain strong and will be positive for the company, Angel Broking estimates the company's earnings per share at Rs 29.6 in FY08 and at Rs 33.6 in FY09. The stock trades at 10.6 times and 9.4 times estimated FY08 and FY09 earnings, respectively. The brokerage recommends a "buy" with a 12-month target price of Rs 387.