BHARTI AIRTEL
Reco price: Rs 418
Current market price: Rs 435.35
Target price: Rs 450
Upside: 3.4%
Brokerage: Ambit Capital
After months of negotiations, the potential merger between Bharti Airtel and MTN has been called off. This comes on the back of South African government's denial in accepting the deal structure proposed by Bharti and MTN.
The cancellation of the deal would lead to a relief rally in Bharti's stock. Since the announcement of the deal, Bharti's stock has underperformed compared to the Sensex by 20 per cent. The cancellation of the deal will remove the uncertainty and overhang investors had regarding the MTN deal. The concerns were on account of rumours about Bharti sweetening the deal resulting in higher cash outflow and earnings dilution compared to standalone entity. In the event of the deal, debt on Bharti's books would have gone up significantly resulting in higher interest burden.
The brokerage maintains a buy on the stock with price target of Rs 450. Their model captures Rs 4,800 crore 3G auction amount in 2009-10, capex of Rs 4,000 crore spread over five years (starting 2010-11) and higher decline in ARPU on account of MNP. The downside risks are higher-than-expected outflow on account of 3G spectrum auction and higher-than-anticipated decline in ARPU.
GODREJ CONSUMER PRODUCTS
Reco price: Rs 245
Current market price: Rs 248.20
Target price: Rs 263
Upside: 6%
Brokerage: Sharekhan
Godrej Consumer Products (GCPL) recently acquired a 49 per cent stake in Godrej Sara Lee (GSL) from group companies in a share swap deal. Sara Lee Corporations’ plan to sell part of its global non-food business to Unilever and divest the remaining of it could have major long-term implications for GCPL. Sara Lee’s strategy increases manifold the probability of GCPL acquiring the former’s 51 per cent stake in GSL in the near to medium term as GCPL has the first right of refusal for the Indian business at a pre-determined price. GCPL’s acquisition of 49 per cent stake in GSL adds immense value as it broadens the previously limited product portfolio (by adding brands like Good Knight, JET, HIT, Ambipur, Brylcreme and KIWI) and vastly improves the growth profile of GCPL.
With strong growth in the domestic business, an enhanced product portfolio after the acquisition of the stake in GSL and the possibility of more acquisitions in the future, augur well for GCPL stock. The brokerage has upgraded GCPL’s price target to Rs 263, valuing the stock at 23 times 2010-11 estimated earnings of Rs 11.4 (including earnings for its 49 per cent stake in GSL). However, in view of limited upside from the current levels, it maintains hold on the stock.
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LUPIN
Reco price: Rs 1,140
Current market price: Rs 1,137
Target price: Rs 1,290
Upside: 13.5%
Brokerage: Angel broking
Lupin has completed the acquisition of Antara rights in the US, from Oscient Pharmaceutical, for $38.6 million at 0.6 times its CY2008 sales, which would be funded through internal accruals. This is the second branded product acquisition by Lupin in the US in 2009-10, following the Allernaze acquisition in June 2009. The deal should be EPS-accretive in the first year of acquisition, and estimates that the product would partially compensate for the fall in revenue from Suprax in 2010-11, when the generic competition kicks-in. After the acquisition, sales estimates for 2009-10 and 2010-11 were revised by 5-6 per cent and earnings estimates by 7-8 per cent.
With the Antara acquisition, Lupin has been able to strengthen its branded generic basket in the US. Branded generic sales contributed $74 million in 2008-09; with this acquisition, expect the branded sales to double to $149 million in 2009-10. The stock qualifies to be a re-rating candidate, once the Mandideep issue gets resolved. The stock is trading at 14.9 times and 13.3 times its estimated 2009-10 and 2010-11 earnings, respectively. Maintain accumulate.
PATNI COMPUTER SYSTEMS
Reco price: Rs 447
Current market price: Rs 452.30
Target price: Rs 493
Upside: 9%
Brokerage: Motilal Oswal Securities
Sharpening of focus on micro-verticalisation, strengthening of management team and expansion of geographical footprint is showing early signs of success in its order pipeline and improved operational efficiencies. Patni has also made investments in sales and marketing to target new geographies like EMEA, SAARC and APAC. The company posted dollar revenue growth of 3.5 per cent quarter-on-quarter (q-o-q) in Q2 CY2009 (June quarter) and appears confident of achieving 2-3 per cent compounded quarterly growth rate from now on. Further, Patni is aiming at delivering above industry average growth in CY2010. It is confident of maintaining EBIT margins in the range of 15-17 per cent. The brokerage has modelled EBIT margin of 16.7 per cent in CY2009 and 15.9 per cent in CY2010.
Patni is keen on filling up gaps in its services portfolio through acquisitions. The company also hopes to use its cash chest for geographical diversification. The company’s initiatives on the cost front have already shown impressive results in Q2 CY2009. The brokerage upgraded its earnings estimates for CY2010 by 25 per cent, building in higher dollar revenue growth at 12.7 per cent (9.4 per cent earlier), greater resilience in margins and higher other income on lower capex expectations. The stock trades at 10.8 times its revised CY2010 estimated EPS of Rs 41.1. Maintain buy.
TULIP TELECOM
Reco price: Rs 920
Current market price: Rs 950.60
Target price: Rs 1,275
Upside: 34.1%
Brokerage: Emkay Global
Tulip, after establishing itself as the largest provider of IP/VPN services in India, is now targeting the higher bandwidth requirements of corporates by laying optic fibre cable for last mile wireline connectivity in 10 major central business districts. This would enable Tulip to provide a wider range of services including DLC, IPLC, Internet, etc. Its end-to-end services, cross selling opportunities and higher uptime equipments would help it to compete with big players like Bharti Airtel and Reliance Communications. Expect Tulip's growth in the niche IP/VPN segment to continue unabated with revenue CAGR of 24 per cent between 2008-09 and 2011-12.
Tulip would further improve its business mix with 86 per cent contribution from the high margin data connectivity business in 2011-12 (74 per cent in 2008-09). Aided by increased annuity revenues, improved profitability and lower capex, Tulip's consolidated revenue, EBIDTA and PAT should grow at a CAGR of 20 per cent, 29 per cent and 20 per cent, respectively between 2008-09 and 2011-12. Competition from big telecom players and upcoming 3G and Wimax spectrum auction remain key risks to the brokerage’ ‘buy’ call.
Current market prices as on October 1