ORBIT CORPORATION
Reco price: Rs 270
Current market price: Rs 290.25
Target price: Rs 340
Upside: 17.1%
Brokerage: Sharekhan
In the last conference call after the announcement of the company’s December 2009 quarter results, the management indicated the launch of five new projects and the first phase of the Mandwa project over the next 3-6 months. However, in the current quarter, Orbit Corporation has not launched any project so far and will not do so until the next quarter. One of the primary reasons for this was that people were waiting for the Budget 2010-11, and hence, any new launch prior to its announcement might not have evoked a very positive response. Besides, projects like Orbit Residency (Andheri) and Orbit Grand (Lower Parel) are expected to get delayed.
The brokerage is lowering its earnings estimates for 2009-10, 2010-11 and 2011-12 due to a delay in the new launches as well as the delay in revenue recognition from two of the projects. However, some positives are that Orbit operates in the key property market – Mumbai – and a project pipeline which provides strong revenue visibility. The stock is trading at 12.9 times 2010-11 earnings estimates. Sharekhan maintains a buy on the stock with a price target at Rs 340 (earlier Rs 393).
GUJARAT GAS
Reco price: Rs 260
Current market price: Rs 270.80
Target price: Rs 266
Upside: NA
Brokerage: Angel Securities
Gujarat Gas’ fourth quarter ended December 2009 numbers came in line with expectation, net profit increased 43 per cent year-on-year to Rs 46 crore while top-line grew by 16.7 per cent to Rs 386 crore. Top-line was driven by both an improvement in average realisations and regassified-LNG (RLNG) volumes. Average realisations increased from Rs 12.8 per scm to Rs 13.8 per scm. The company’s gross gas spread touched an all-time high of Rs 4 per cent scm and led to a 569 basis points expansion in OPMs to 19.9 per cent.
The company’s volumes continued to be supported by RLNG in the quarter as well, with 20 per cent of the total gas sourced being RLNG. This was on account of subdued RLNG prices. In the ensuing quarters also, expect RLNG volume to be robust as prices are expected to be subdued. Going ahead, RLNG and expected gas flow from KG-D6 will be the growth drivers. With incremental volumes likely to flow to the high-margin industrial retail segment, margins would expand going ahead. The potential appreciation of the rupee would be the icing on the cake. At Rs 266, the stock trades at 13 times its CY2011 estimated EPS of Rs 20.4. Maintain neutral.
RELIANCE COMMUNICATIONS
Reco price: Rs 163
Current market price: Rs 160.75
Target price: Rs 165
Downside: NA
Brokerage: Ambit Capital
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The mobile industry has been adding more than 15-16 million subscribers per month. However, the proportion of multiple SIM-users is on a rising trend, leading to more than 100 per cent penetration in some metro areas. Consequently, the company believes subscriber based criteria is increasingly becoming irrelevant. According to RCom, MNP, which is set to be implemented over the next few months, is expected to be beneficial. The company expects competitive intensity to increase in the high-value post-paid and corporate subscribers and expects to be a net beneficiary of this move.
The number of players is expected to go up further after launch of services by new players. This will put further pressure on revenue and profitability of all operators. RCom believes that it will not be possible for all the players to survive and remain profitable in the long term, and hence, consolidation is inevitable. Due to rising competition, margin dilution due to MNP implementation, cash outflow (3G spectrum auction) and regulatory uncertainty about spectrum allocation, Ambit maintains a sell on Rcom.
INDIA CEMENTS
Reco price: Rs 126
Current market price: Rs 121.35
Target price: Rs 91
Downside: 25.0%
Brokerage: Religare Hichens, Harrison
With elections in Tamil Nadu next year, India Cements believes the government would expedite infrastructure projects, resulting in a degree of demand revival in the southern market. However, the capacity overhang in the south will continue as additions of over 30 million tonnes (MT) become operational over FY10-FY11.
India Cements’ 1.5 MT cement expansion project in Rajasthan is progressing as per schedule and should be commissioned in June this year. Based on expanded production, volume growth estimates are 20 per cent and 12 per cent for 2009-10 and 2010-11, respectively. The company is likely to incur a total capex of Rs 1,500 crore over the next two years, for which it has raised debt to the tune of Rs 550 crore. It is also incurring $20 million for the acquisition of a 30 MT coal mine in Indonesia. The company is confident of mining captive coal in 2010-11, thereby lowering its coal cost going forward.
Pricing pressure is likely to continue in the south with oversupply setting in. Being a fragmented market, cement players are likely to battle for market share, undercutting prices. India Cements’ stock is trading at 20 times its 2010-11 estimated earnings. It is trading at 8.5 times its two-year forward earnings for the base business and Rs 25 for the company’s India Premier League (IPL) cricket team. Maintain sell.
AUROBINDO PHARMA
Reco price: Rs 979
Current market price: Rs 960.15
Target price: Rs 1,250
Upside: 30.2%
Brokerage: Edelweiss Securities
Aurobindo Pharma’s (ARBP) recent entry into CRAMs with a new division, Aurosource, is a positive, enabling the company to participate in the growing outsourcing opportunity. Besides, ARBP is favourably placed to garner contracts, given its relatively low-risk strategy for US, low cost of manufacturing and current relationships with innovators. Initial focus will be on pre-clinical and late phase IV candidates, with revenues expected to commence from late 2010-11.
Current stock price performance partially alleviates market concerns on FCCBs, which is the key overhang to higher valuations. ARBP has $37 million of FCCBs scheduled for redemption/conversion in August 2010 at a conversion price of Rs 522. Total FCCB conversion could lead to an 8.3 per cent dilution in equity.
ARBP’s valuations are at a 40-60 per cent discount to peers, likely affected by key concerns on $200 million of FCCBs to be redeemed in May 2011, and which offset potential upsides due to the Pfizer contract ramp up and likely upsides from recent CRAMs initiatives. Edelweiss has maintained its outperformer rating on the stock.
Current market prices as on March 11