| AEL has modified the catalyst to suit the conversion of oil sludge into usable fuel. Trial runs carried out by the company have resulted in much higher conversion of 50 per cent as compared to the lower proportion currently obtained (10 per cent). |
| Considering the high price of crude and lucrative profit margins, Prabhudas Lilladher believes this could lead to significant growth for the company. AEL is expected to report a compound annual revenue growth of 59.3 per cent over FY07-10 and compound annual net profit growth of 83.4 per cent over the same period. |
| At the Rs 460, the stock traded at 10.8 times estimated FY09 and 6.9 times FY10 earnings of Rs 42.6 and Rs 66.2, respectively. The brokerage has factored in revenue from 'plastic to fuel' business, but not from its refinery sludge conversion. |
| If commercially successful, it could be a huge potential for the company and there could be significant upside to current estimates. Prabhudas Lilladher recommends a "buy" with a target price of Rs 638, an upside potential of 34 per cent from the current market price of Rs 474.70. |
| DECCAN CHRONICLE HOLDINGS Reco price: Rs 193 Current market price: Rs 216.40 Target price: Rs 260 Brokerage: Angel Broking |
| Deccan Chronicle (DCHL) is the highest circulated English daily in Andhra Pradesh. It also has a Chennai edition and plans to launch a new edition in Bangalore. DCHL's subsidiaries, Asian Age, Odyssey and Sieger, are in the business of publishing newspapers, leisure stores and marketing, respectively. |
| Angel estimates the newspaper industry to grow 11 per cent annually over the next five years on the back of increasing spending power and higher literacy levels. The industry advertising and circulation revenues are expected to grow at a compound annual growth rate (CAGR) of 13.3 per cent and 7.8 per cent respectively, in the mentioned period. |
| DCHL had announced a 30 per cent hike in its advertisement rates in May 2007, which has been accepted by advertisers due to the increase in circulation. In FY07, DCHL's advertisement revenues increased 72 per cent y-o-y to Rs 511 crore, while average realisations per sq cm of advertisement space improved 15 per cent y-o-y to Rs 389. |
| The total advertisement space sold by the company also witnessed a rise of 50 per cent y-o-y to 131.3 lakh sq cm. The brokerage believes that higher circulation would help improve average realisations per sq cm, going forward, and the sale of advertisement space in turn boosting top line growth. |
| Angel expects DCHL's Net Profit to grow at a CAGR of 38 per cent on the back of 32 per cent CAGR in Net Revenues over FY2007-09E. At Rs 193, the stock traded at 19 times and 15.3 times estimated FY08 and FY09 earnings, respectively. The brokerage recommends a "buy" with a 12-month target of Rs 260, an upside of 20 per cent. |
| HIMADRI CHEMICALS & INDUSTRIES Reco price: Rs 636 Current market price: Rs 638.40 Target price: Rs 769 Brokerage: Pioneer Investcorp (PINC) |
| Himadri is in the business of distillation of coal tar to extract coal tar pitch, creosote oils and chemical oils. It has a distillation capacity of about 1.7 lakh tonne, in Hooghly, Howrah and Vishakhapatnam. Its main product, coal tar pitch (CTP) caters to around 70 per cent and 89 per cent requirement of the domestic aluminium and graphite electrode manufacturers. |
| Its clients include Steel Authority, Tata Steel, Nalco, Balco, Hindalco, Indal, Malco and the like. The company is in the midst of an aggressive capex plan of Rs 1,600 crore, to be executed over FY07-10. |
| Post successful completion of the same, its capacity would be as follows: CTP 0.7 million tonne (0.4 million tonne in India and 0.3 million tonne in China), carbon black: 50,000 tonne, advanced carbon: 400 tonne. Plans are afoot to undertake an acquisition in China which would further enhance its CTP capacity. |
| At Rs 636, the stock traded at an enterprise value - earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 9.7 times and price-earnings (P/E) multiple of 13.9 times estimated FY09 earnings. Considering the sharp scale up, adequate financial strength to implement its expansion, successful transition to being a value added player, there is a high potential of revenues and net profits posting a CAGR of 53 per cent and 63 per cent, respectively during FY09-11. |
| Assuming a weighted average cost of capital (WACC) of 13 per cent and a terminal growth rate of 3 per cent (in alignment with user industry i.e. aluminium and graphite electrodes), PINC arrives at a discounted cash flow (DCF) value of Rs 769 a share. Hence, it recommends a "buy" with a 12-month investment perspective. |
| TECH MAHINDRA Reco price: Rs 1,114 Current market price: Rs 1224.50 Target price: Rs 1,062 Brokerage: IndiaInfoline |
| Tech Mahindra's outlook on the top line, which has been a major cause of concern of late, remains hazy in the near term with the top two clients (British Telecom and AT&T contributing about 76 per cent of revenues) undergoing major restructuring. |
| IndiaInfoline believes that the relative positives about Tech Mahindra like low US exposure, low dollar exposure, no subprime exposure and niche positioning have been outweighed by the increasing concerns about the high vertical and client concentration in the light of recent happenings in its key client accounts. |
| As an acknowledgement of that fact, the stock has corrected sharply than peers. It is down 23 per cent since start of FY08 and 45 per cent since its 52-week high in January 2007. Valuations have declined drastically from 23-27 times 1-year forward P/E to 13-16 times with moderation in growth expectations from 40-50 per cent to 20-25 per cent over the medium-term (1-2 years). |
| Based on IndiaInfoline's FY09 earning per share (EPS) estimate of Rs 75.9 and FY07-10 earnings CAGR forecast of 19 per cent, the brokerage arrives at a March 2008 target price of Rs 1,062 for Tech Mahindra by assigning a P/E multiple of 14 times. The assigned valuation is at 15 per cent discount to Infosys and TCS and at par with Satyam. With a likely 4-5 per cent downside in the near term, the brokerage believes that the stock is a short-term "sell". |
| Current market price on BSE as on December 7. |
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