LARSEN & TOUBRO
Reco price: Rs 854
Current market price: Rs 720.1
Target price: Rs 884
Upside: 22.8%
Brokerage: Motilal Oswal Securities
While Larsen & Toubro (L&T) has not experienced any major execution challenges till date, the research firm believes that there is a possibility of delays for segments like metals/minerals (8-9 per cent of order book), airports (11 per cent) and real estate (6 per cent).
In metals, the company is handling projects worth Rs 4,400 crore and delays are expected here due to poor demand conditions and funding constraints. Airport projects, comprising Mumbai and Delhi airports are also facing issues like delays in achieving financial closure, monetisation of real estate and decline in passenger traffic growth.
Standalone capex guidance for FY09 has been reduced to Rs 1,500 crore now from Rs 2,000 crore. L&T is now focusing on increased optimisation of existing asset base. L&T is expected to report a consolidated EPS of Rs 52.6 for FY09, Rs 57.4 in FY10 and Rs 60.8 in FY11.
Based on sum-of-parts methodology, the price target is put at Rs 884.The stock trades at P/E of 14.9x FY10E, 13.7x FY11E and 14x FY11E. Adjusted for value of Ultratech Cemco and L&T IDPL, the stock trades at adjusted P/E of 13.8x FY10E and 13x FY11E.
BANK OF INDIA
Reco price: Rs 294
Current market price: Rs 280.15
Target price: Rs 417
Upside: 48.8%
Brokerage: ULJK Securities
Advances of Bank of India (BOI) have grown by around 35 per cent y-o-y during H1FY09. The bank is increasingly focusing on the SME sector which accounts for around 18 per cent of the total advances. Apart from SMEs, corporate advances and retail advances account for 44 per cent and 17 per cent of the total advances, respectively.
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The economic slowdown and low business activity is likely to result in reduction in asset growth. Non-interest income contributes around 31 per cent of the total income and the brokerage expects it to grow at a CAGR of 10.2 per cent during FY08–FY10E. This is much lower than the 30 per cent growth achieved in FY08.
The bank is targeting an increase in CASA level to 35 per cent, but this is expected to remain at 30 per cent mark for the next two years. The yield on advances is expected to be at 9.3 per cent-9.1 per cent during FY09E–FY10E while cost of deposits would be at 6.3 per cent–5.7 per cent during the period.
The gross NPA ratio is expected to see a slight increase, although net NPA is expected to remain at 0.50 per cent during the period FY09E–FY10E due to aggressive provisioning. At Rs 417, the stock trades at P/BV of 1.73x on FY09E book value and 1.44x on the FY10E book value.
INDOCO REMEDIES
Reco price: Rs 121
Current market price: Rs 121.65
Target price: Rs 204
Upside: 67.7%
Brokerage: Angel Broking
Indoco Remedies (Indoco) domestic formulation business has grown at a CAGR of 15.9 per cent over the last four fiscals. While the company’s FY09 performance is expected to be flat, it is expected to grow by 10.3 per cent in FY10.
Its international business has grown from 8.5 per cent of net sales in FY04 to 22.9 per cent in FY 08. Exports are expected to post a CAGR of 24.3 per cent over FY2008-10E driven by higher formulation exports. Indoco has embarked on a brownfield expansion with an investment of Rs 20 crore at its Patalganga API plant and Rs 5 crore at the Goa plant II to meet the requirements of the Amneal JV.
The company expects to fund these expansions through debt and internal accruals. It plans to raise ECBs in the range of $2-2.5 million by the end of FY09. For FY08-10E, the company’s net sales are expected to grow at a CAGR of 9.6 per cent.
On the earnings front, the company is expected to post CAGR of 4.6 per cent over FY2007-10E and clock 22.7 per cent in FY10. As a result, Indoco’s RoCE is to improve from 14.8 per cent in FY09 to 16.1 per cent in FY10. At Rs 121, the stock is trading at 3.0x FY2010E EPS, which is at the lower end of its historical trading band.
SUN PHARMA
Reco price: Rs 1,041
Current market price: Rs 1,100.8
Target price: Rs 1,469
Upside: 33.4%
Brokerage: Sharekhan
With Taro’s rejection of Sun Pharma’s (Sun) amended proposal, the stalemate between the two companies on the merger continues. The brokerage expects the following events like intervention of Israeli Supreme Court on the enforceability of the original merger agreement and the tender offer or a counter-offer by Sun, raising its offer price closer to Taro’s expectation of $10.25 per share or Sun walking away from the merger and remains a strategic investor in Taro are various probabilities that could shape the fate of the merger.
Sun is expected to deliver 30.5 per cent growth in its revenues in Q3 FY09 on the back of a 19 per cent improvement in the domestic business and a 38 per cent surge in the exports.
Sun is expected to benefit from the weaker rupee, since it has not hedged actively at higher levels of the rupee, relying more on the natural hedges. Margins are expected to shrink by 240 basis points y-o-y to 41.7 per cent due to rising pricing pressure in Oxcarbazepine and a decline in the high-margin exclusivity income. At Rs1,041, Sun is trading at 11.5x FY09E and at 11.3x FY10E earnings.
PSL
Reco price: Rs 92
Current market price: Rs 77.5
Target price: NA
Upside: 33.4%
Brokerage: Edelweiss Securities
PSL has a domestic pipeline capacity of 1.1 MMT. Their large capacity in HSAW will make them eligible bid for higher capacity tenders. Additionally, their domestic capacity is spread regionally (near pipeline construction points), imparting a freight advantage.
Transport costs are typically 20-25 per cent of the cost of the pipe. In the US, PSL’s US mill also has location advantage along with firm orders for 12-15 months of production (till Mar-10) would ensure decent order book. The company is setting up an incremental 150,000 MT capacity in US.
The HSAW plant in the US has been completed and is awaiting API approval (likely by Feb-09). Sharjah capacity expansion plans have been put on hold, until the company gets firm orders. Existing capacity is 75,000 MT.
PSL’s total order book aggregates Rs 6,000 crore, out of which Rs 4,000 crore is for Indian operations (executable by Mar-10). Approximately, Rs 2,000 crore order book is from GAIL. Three major tenders are expected to create incremental requirement for 700,000- 800,000 MT of pipes through Mar-09.
At Rs 92, the stock trades at 3.0x and 1.8x of FY09E and FY10E earnings.