GAIL India
Reco price: Rs 399
Current market price: Rs 416.25
Target price: Rs 529
Upside: 25.8%
Brokerage: ICICI Securities
GAIL India (GAIL) will benefit from gas grid expansion and improved visibility on gas supply from Reliance Industries’ (RIL) KG basin. The company plans to double its gas transmission capacity at a capex of Rs 28,000 crore in two phases, to be completed by FY12E.
This will increase its pipeline network to over 12,000 kms and its transmission capacity by 176 mmsmcd. This in turn will quadruple GAIL’s gas transmission EBITDA in the next seven years, and improve its risk profile based on enhanced annuity earnings from transmission and reduced share of cyclical earnings from LPG and petchem.
GAIL will fund the pipeline network expansion through 70 per cent debt and the remaining via equity. The company’s existing free cash-flows and retained earnings are adequate to fund the equity portion at Rs 8,400 crore.
Higher crude oil prices will lead to increased profitability of LPG and petchem on surging realisations (linked to crude price) and stable raw material prices (as gas price is regulated in India). This will offset the affect of higher subsidy burden on GAIL.
GAIL’s revenue is expected to grow at a CAGR of 11.3 per cent through FY09E-11E on the back of 20.2 per cent transmission volume CAGR and declining subsidy burden. The stock is currently trading at FY10E P/E of 11.1x, EV/EBITDA of 7.5x and P/BV of 2x. Maintain Buy.
Satyam Computer Services
Reco price: Rs 433
Current market price: Rs 415.80
Target price: Rs 521
Upside: 20.5%
Brokerage: Sharekhan
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Satyam Computer Services’ (Satyam) hedge position at the end of Q1 FY09 has reduced from $1,133 million in FY08 to $675 million, which is lowest among its peers. As the rupee depreciated around 7 per cent in Q1 FY09, Satyam reported lower forex losses in Q1 FY09 compared to its peers.
Satyam’s subsidiaries contributed 4.7 per cent to the topline in FY08, while their contribution to the bottomline was negative. The management had earlier said that it expects Satyam BPO (Nipuna) to break even in FY09 as against a loss of Rs 20 crore in FY08.
In FY09, the company intends to increase its capex to Rs 538 crore for developing four special economic zones (SEZs); two in Hyderabad and one each in Chennai and Nagpur. This should benefit the company to reduce its effective tax rate post FY10, when the tax sops to Software Technology Parks of India are withdrawn. Satyam has a strong balance sheet with cash and cash equivalent of about Rs 4,500 crore.
According to a press release, Satyam is currently pursing four acquisitions in Europe to strengthen its presence in the region. Satyam’s topline and bottomline are expected to grow at a CAGR of 25.4 per cent and 23.4 per cent, respectively during FY08-FY10. At Rs 433, the stock trades at 13.5x FY09E and 11.6x FY10E earnings.
ITC
Reco Price: Rs 191
Current market price: Rs 189.60
Target Price: Rs 218
Upside: 15.2%
Brokerage: India Infoline
ITC’s cigarette volumes will decline by 1 per cent in FY09 although Q1 FY09 volume decline was not as bad as expected. Margins on cigarettes will expand once the consumer upgrading exercise targeted at converting non-filter smokers is over by Q2 FY09. Cigarette volumes are expected to register a CAGR of 6.5 per cent over FY10-11.
Losses of non-cigarette FMCG businesses are unlikely to increase meaningfully as, the food business will turn earnings-positive by FY10 as commodity prices stabilise with major contribution from Aashirvaad and Sunfeast. Also, investments in soaps and shampoos businesses will be scaled back after aggressive expenses in the launch phase to accommodate new market entries such as skincare.
In agriculture business, easing in commodity prices is likely to improve the macro environment for ITC, with exports of commodities such as wheat being freed up. Growth in paper business would be driven by expansion plans of Rs 200 crore over the next 2-3 years and feasibility study is on to put up a 9,00,000 tpa paperboard machine.
Hotels revenues would be stable, driven by capacity additions during FY10-11 as well as restricted supply in key markets. To protect itself against rupee appreciation, ITC has started rupee billing. Agri, paper & paperboard and hotels are expected to register sales CAGR of 16 per cent, 28 per cent and 10 per cent, respectively over FY08-11.
HTMT Global Solutions
Reco price: Rs 246
Current market price: Rs 242
Target price: N.A.
Brokerage: Edelweiss Securities
HTMT Global Solutions (HTMT), a part of the Hinduja group, is the twelfth-largest BPO player in India, based on NASSCOM’s ranking for FY08. In customer contact services, HTMT focuses on after-sales service across verticals such as telecom, consumer electronics, and BFSI among others. On the back-office processing side, it provides claims processing services for insurance customers.
HTMT has, with its organic and inorganic initiatives, acquired an onshore presence in the US, near-shore presence in Canada, and offshore presence in Mauritius, the Philippines, and India that provides it with a fairly diversified delivery base.
With cash on hand of close to Rs 500 crore, the company is actively looking for inorganic growth opportunities to strengthen its delivery and domain capabilities.
HTMT has grown its revenue and net profits at a CAGR of 68 per cent and 101 per cent, respectively over FY06-08, while EBITDA margins also have steadily improved from 12.7 per cent to 15.8 per cent.
The stock is currently trading at a P/E of 5.2x and 4.2x its FY09E and FY10E earnings, respectively. HTMT has huge net cash balance equivalent to Rs 229 per share; almost the price at which the stock is currently trading. The brokerage has not rated the stock.
Sadbhav Engineering
Reco Price: Rs 827
Current market price: Rs 800
Target Price: Rs 1,036
Upside: 30.3%
Brokerage: Angel Broking
Sadbhav Engineering (SEL) is embarking to de-risk business from road segment (86 per cent of topline) by giving importance to segments like irrigation and mining in the future.
SEL is accepting projects outside Gujarat, besides going international with its entry in Mozambique. SEL has a strong order book of Rs 2,643 crore. It enjoys L1 status for projects worth Rs 1,800 crore. SEL has fixed price BOT orders worth Rs 596 crore and is moving up the value chain by owning BOT projects through its subsidiary, Sadbhav Infrastructure Projects (SIL).
Around 77 per cent of SEL's order book has a pass through clause, which insulates it from any increase in raw material prices.
SEL plans to raise Rs 80-100 crore by diluting 10-15 per cent stake in SIL, which will be a possible trigger.
Sadbhav Natural Resources (SNRL), another subsidiary, has entered the mining exploration segment by acquiring 74 per cent stake in Ocean Bright Corporation, which holds over three mining areas for which SNRL has acquired prospecting licenses. SEL is expected to grow at a CAGR of 34 per cent over FY08-10E. The stock is trading at 10x FY10E earnings.