Hindustan Unilever
Reco price: Rs 227
Current market price: Rs 232.95
Target price: Rs 305
Upside: 30.9%
Brokerage: Emkay Global Financial
Hindustan Unilever (HUL) implemented price cut of 4-20 per cent on select brands and product categories, either directly (20 per cent price cut on Wheel Active Blue) or indirectly through weight increases (4.2 per cent in Lifebuoy and 6.7-8.3 per cent in Wheel Green). While these are along expectations, total blended price reduction is approximately 1.2 per cent. This translates into net cost saving of Rs 530.1 crore compared to Rs 763.7 crore earlier and additional EBITDA margins of 2.9 per cent versus 4.1 per cent earlier. The move confirms that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilise the balance for price reductions to benefit consumers.
Despite adjusting the above price actions, HUL has enough safety cushions to introduce further pricing actions (up to 3.1 per cent blended price reduction) and make aggressive spends on advertisement. Should it do so, it will not impact the brokerage’s estimate for FY10 earnings. Earnings forecasts for CY09E remain unchanged at Rs 11.7 per share. The stock trades at 19.6x of its FY09E earnings. Maintain buy.
Godrej Industries
Reco price: Rs 65
Current market price: Rs 67.2
Target price: Rs 120
Upside: 78.6%
Brokerage: Centrum Broking
Godrej Industries (GIL) has built partnerships with corporations like Sara Lee (Household insecticides), Tyson (Packaged meat), Goldcoin (Shrimp feed marketing business) and Hershey (Confectionary, snacks, beverages) to leverage the Godrej brand to further scale up the businesses. Godrej Properties, the realty arm of GIL has 55 million sq ft of saleable area, of which, around 50 per cent is in Ahmedabad.
Due to the emphasis on brand building to an extent uncommon in India, where intangible assets have historically been undervalued, GIL has built a suite of well-known FMCG brands, some of which have attained industry leadership (Good Knight, BrylCream and MahaLacto). Godrej Agrovet was set up as a separate company with focus on the agriculture opportunity. Here, there is tremendous potential in oil palm plantations, poultry and marketing of shrimp feed. Meaningful alliances and strategic acquisitions have also been providing impetus to the company’s growth.
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GIL’s consolidated revenues and profits are expected to grow by 12.3 per cent and 24.3 per cent CAGR, respectively between FY08-FY11E. The value of GIL’s core business, subsidiaries and JVs works out to Rs 59 per share, while Godrej Properties provides Rs 91 per share.
Sesa Goa
Reco price: Rs 107
Current market price: Rs 112.2
Target price: NA
Brokerage: Edelweiss Securities
Macro indicators such as purchasing managers’ index, fixed asset investment and loan growth are pointing to a turnaround in the Chinese economy. Financing of the RMB 4 trillion stimulus programmes is underway and expect actual demand for steel to commence within the next six months.
China’s incremental steel demand is estimated to be 110 million tonne (MT) over two years and in near term, it could rise 15 per cent in H2 CY09 over H1 CY09. There are concerns regarding looming oversupply and high inventories. Top global players alone have added or will add 210 MTPA of capacity over the next two years (around 26 per cent of CY08 demand). However, most of the pain is over for spot prices with no major downside from current levels.
Sesa Goa, which produces iron ore, has seen its market share in Indian exports increase from 10.8 per cent in FY07 to 14.5 per cent in 9M FY09, underscoring its leadership position. The management is looking to add 500 MT in iron resources over the next two-three years; exploration in existing mines has already indicated higher resources. Withdrawal of export tax on iron ore fines has improved the company’s margins significantly. The estimates for FY10 are being revised upwards on the basis of strong volume growth and rupee depreciation. The DCF valuation additionally factors in potential increase in royalty to 7.5 per cent from FY11E and works out to Rs 129 per share. The brokerage has upgraded its recommendation on the stock to ‘buy’, from ‘reduce’ earlier.
GAIL India
Reco price: Rs 260
Current market price: Rs 268
Target price: Rs 255
Upside: NA
Brokerage: Religare Hichens, Harrison
GAIL India’s management indicated that at least two-thirds of the KG-basin gas would flow through its network--the brokerage anticipates gas flow of over 80 per cent. However, GAIL is seeking clarity on marketing margins for KG gas. GAIL currently has 7,000 km (150 mmscm) of pipeline capacity and is adding another 5,500 km (150 mmscm) in two phases by FY12.
The company has charted out a capex of around Rs 20,000 crore during the 11th five-year plan, of which, close to 80 per cent is expected to be incurred towards the pipeline business. GAIL does not expect its transmission tariff to reduce, even if PNGRB (the regulator) imposes a ROCE-based rate. It expects gas transmission volumes to be revised downwards for FY10 and also raised petrochemical price assumption from Rs 42 to Rs 55 per kg and a shift in rupee depreciation assumption from Rs 46 to a dollar to Rs 48.5. Driven by change in estimates and altered WACC assumptions, the target price is revised upwards from Rs 216. Maintain ‘hold’.
NTPC
Reco price: Rs 196
Current market price: Rs 194.2
Target price: Rs 200
Upside: 3%
Brokerage: ICICIdirect
As per provisional numbers, NTPC achieved the highest ever volume of 56.9 billion units (BU) in Q4 FY09, which is the primary contributor to the growth in revenues. Generation at coal-based station witnessed a y-o-y growth of 7.1 per cent in Q4FY09. However, average realisation per unit declined 3 per cent to Rs 2.24 compared to Rs 2.31 Q4FY08. PLF of the coal-based stations has improved q-o-q to 96.6 per cent in Q4 (from 94.1 per cent). NTPC, in order to resolve the coal crunch situation in Q3, has started increasing the proportion of imported coal in the overall coal usage.
NTPC’s capacity addition plans are running behind schedule, thus, we have reduced the earnings CAGR (FY08-FY11E) from 8.9 per cent to 7.8 per cent. Projection of capacity addition looks an uphill task as NTPC is expected to add 19,700 MW over the next three years and has been able to achieve only 2,700 MW in the past two years. At Rs 196, the stock is trading at 20.7x and 19.1x its FY09E and FY10E earnings, respectively.
Current market price as on April 9, 2009