Analysts' corner

Gujarat State Petronet
Reco price: Rs 28.05
Current market price: Rs 30.05
Target price: Rs 34
Upside: 13.14%
Brokerage: BNP Paribas Securities

The country’s only pure natural gas transmission company, operates the second largest natural gas transmission network after GAIL. It has a market share of 16 per cent compared to GAIL's 78 per cent. GSPL is a long-term play on rising natural gas supplies with FY11 being the inflexion year when GSPL's delayed agreement with Reliance Industries (RIL) to transport 11mmscmd of gas kicks in. Also, GSPL's gas volumes are expected to increase at 26.8 per cent annually between FY08 and FY11 driven by its contracts with RIL and Torrent Power. RIL will commence gas supplies starting in April 2009 with the production rate touching 40 mmscmd for FY10. This is further expected to go up to 60 mmscmd starting FY11 and 80 mmscmd starting FY12 thus helping GSPL to start transmitting 11mmscmd of gas for RIL. Besides, the new regulations, which prescribe a pre-tax ROCE of 18.2 per cent for gas transmission utilities would boost GSPL's RoCE. Factoring in the impact of new regulations the adjusted pre-tax ROCE will improve to 21.6 per cent in FY11. With the increase in the RoCE, the target prices mentioned in the report factored in a premium multiple at 7.6x over FY10 EBITDA relative to GAIL's transmission business.

Opto Circuits
Reco price: Rs 85
Current market price: Rs 87.60
Target price: Rs 140
Upside: 59.8%
Brokerage: Ambit Capital

Opto Circuits Q3FY09 results are in line with expectations. During Q3FY09, OCL registered an operating income of Rs 211 crore, a growth of 65.7 per cent y-o-y. However, its net profit grew by 47.4 per cent to Rs 52.7 crore, which was partly restricted due to higher interest costs that increased by a staggering 426.7 per cent to Rs 14.66 crore. The broking house remains upbeat on the company's growth prospects and increases its PAT estimates for FY09E, from Rs 176.4 crore to Rs 196.76 crore, on account of lower administrative costs and higher other income. Also, the company is planning a capex of Rs 100 crore as against Rs 25 crore planned earlier for FY10E. Interest burden is likely to come off marginally as the company would see an infusion of Rs 18 crore by way of the promoter's warrant conversion. At the recommended price of Rs 85, the stock is available at 5.3x its consolidated FY10E EPS. The broking firm expects the stock to perform well as company delivers growth numbers over the next few quarters. OCL's strong margins and high return ratios warrants a re-rating on the stock. Also, the concerns on high interest cost and extended working capital cycle are already priced in current valuations. The broking house maintains a buy on the stock with a reduced DCF target price of Rs 140.

CESC
Reco price: Rs 228
Current market price: Rs 230.85
Target price: Rs 449
Upside: 94.4%
Brokerage: Angel Broking

Angel Broking in its Q3 result update on CESC has maintained its buy rating on the company. In Q3FY09, CESC's net revenue grew by 12.9 per cent to Rs 763 crore whereas net profit grew by 5.4 per cent to Rs 98 crore on y-o-y basis. During the quarter, CESC got the WBERC order allowing it to charge Rs 3.91 per unit compared to Rs 3.86 per unit charged earlier. Also, the company's plans to expand its power generation capacity by 4,150 mw from the current 975 mw by FY2013, is on track. Besides, the company has chalked out huge expansion plans for Spencer's Retail. It plans to increase the number of stores from 400 (in FY08) to 1,000 by FY2010 and turn profitable in the next 12 months. Its subsidiary, CESC Properties, has been valued at Rs 17 per share. This includes valuations of mall at Kolkata and the land at Mulajore (35 acres) on NPV basis. Overall, CESC is expected to record a CAGR of 10.6 per cent and 10.5 per cent in revenue and net profits respectively over FY2008-10E. At the recommended price, the stock is trading at 6.9x FY2010E EPS and 0.8x FY2010E P/BV.

Container Corporation
Reco price: Rs 663
Current market price: Rs 701.1
Target price: Rs 800
Upside: 14.1%
Brokerage: Emkay Global

Container Corporation, India’s largest logistics company, reported higher EBIDTA margins at 28.9 per cent (up 160 bps) y-o-y for the December quarter. The improvement was due to an increase in freight rates on the Exim route and cost reduction measures in the container handling segment. Exim segment reported a decline in volume growth of 11.4 per cent during the quarter. The company attributed this to significant slowdown across industries, drop in global demand and decline in port volumes across the country. However, realisations increased by 15.2 per cent to Rs 15,350 per TEU as the company increased its freight rates from August 2008 onwards. Domestic segment reported 5.6 per cent decline in volume to 108,338 TEUs. The decline was driven by a general slowdown in the economy and private players gaining market share. Due to the drop in volumes in both the exim and domestic segment, the research firm has downgraded revenue and net profit estimates for FY10. The company is likely to report revenue and net profit of Rs 3,920 crore and of Rs 820 crore in FY09, respectively. For FY10, Concor is likely to report revenue of Rs 4,080 crore (earlier Rs 4,350 crore) and net profit of Rs 860 crore (earlier Rs 930 crore). The stock trades at 10xFY10 earnings, which we believe is attractive given Concor’s dominant position in the railway haulage business. The firm maintains a buy rating with a revised target price of Rs 800 (earlier Rs 1,065). At the target price the stock would trade at 12x FY10 earnings.

JSW Steel
Reco price: Rs 205
Current market price: Rs 211
Target price: Rs 197
Downside: -6.6%
Brokerage: IIFL

In the December quarter, JSW Steel reported loss of Rs 128 crore as compared to an estimated profit of Rs 6.5 crore. The negative surprise is primarily due to higher than expected forex loss at Rs 177 crore. EBIDTA for the quarter stood at Rs 390 crore below estimate of Rs 460 crore largely due to sharper than estimated drop (23 per cent) in realisations. JSW Steel is commissioning its 3mntpa expansion in 4QFY09. This will increase its standalone interest and depreciation cost for FY10 by 41 per cent to Rs 2,300 crore. To utilise enhanced capacity, quarterly sales volume should increase to 1.5-1.7 million tonnes (70 per cent growth). This looks difficult given expected growth of 5-6 per cent in domestic steel consumption in FY10 and a weak export market. Import substitution is not easy given a large part of imports are for specific usage (such as auto grade and steam boilers). Another chunk of imports is by re-rollers, which is low margin business. The company will benefit in quarters ahead from cost cutting initiatives and lower bulk prices. High consolidated gearing ratio at 1.75x leaves no room for disappointment. The stock is downgraded to reduce.