BHUSHAN STEEL
Reco price: Rs 1,680
Current market price: Rs 1,744.60
Target price: Rs 2,245
Upside: 28.7%
Brokerage: Edelweiss Securities
Driven by the 2.3 MTPA greenfield capacity expansion involving captive metallics and HR coils and the expected 10-12 per cent growth in the auto and consumer durables sectors, expect Bhushan Steel’s EBITDA/tonne to increase significantly to $320 in 2011-12 from $210 now.
Phases I and II of the 2.3 MTPA steel capacity are nearly complete and Phase III will be commissioned by October 2012, which will feed HRC for the planned ERW pipe facility. The management also expects the mining lease for thermal coal mines by September 2010, while iron ore and coking coal mines are expected to be operational in the next two and four years, respectively.
The expected ramp up of the 2.3 MTPA steel capacity would drive volumes over the next two years and enable Bhushan Steel to further strengthen its position in the auto and white goods sectors. The backward integration facility right up to the metallic stage will give a fillip to EBITDA margins as dependence on external HR coils will be eliminated. Expect the company’s EBITDA and EPS to post a CAGR of 59 per cent and 68 per cent, from 2008-09 to 2011-12, respectively. The stock is valued at 5.5 times its EV/EBITDA based on 2011-12 estimates. Maintain buy.
KSK ENERGY VENTURES
Reco price: Rs 178
Current market price: Rs 188.50
Target price: Rs 243
Upside: 28.9%
Brokerage: IIFL
KSK started commercial generation at its 135 mw VS Lignite unit (74 per cent of the stake is owned by KSK) which would almost double KSK’s generation capacity of 144 mw. KSK contracted its entire power generation to captive users. However, according to the management, deferment of off-take by a large industrial player would enable KSK to sell 25-30 mw through short-term power purchase agreements. With fuel firmly tied up (through captive lignite mines), such opportunistic external sales should allow the unit to register healthy profits. The rest of the power generated is contracted to captive users, at an average price of around Rs 2.90 per unit.
KSK is currently constructing two projects aggregating 583 mw, one at Wardha Warora (540 mw) and the other at Arasmeta expansion (43 mw). Commissioning of VS Lignite improves visibility on these under-construction projects. The brokerage retains 2010-11 and 2011-12 estimates, which build on a 91 per cent CAGR over FY09-12. At Rs 178, the stock is trading at 11 times its estimated 2011-12 EPS. Maintain buy.
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PFIZER
Reco price: Rs 956
Current market price: Rs 1,006.25
Target price: Rs 1,040
Upside: 3.4%
Brokerage: Emkay Research
Pfizer’s results for first quarter ended February 2010 are in-line with expectations with a 9 per cent year-on-year revenue growth to Rs 207 crore, 200 basis points expansion in operating profit margins to 24.9 per cent and 9 per cent growth in net profit to Rs 42.5 crore. Revenue growth was largely driven by 15 per cent growth in service business and 9 per cent growth in pharma segment.
Despite higher raw material cost (up 12 per cent year-on-year), operating margins for the quarter expanded because of a 200 basis points reduction in employee cost and 100 basis points reduction in other expenditures. Higher depreciation cost (up by 14 per cent) and lower interest income (declined by 16 per cent to Rs 15.5 crore) restricted the net profit growth at 9 per cent.
Going ahead, Emkay expects Pfizer to grow in-line with the industry growth on the back of new launches, both from parent’s pipeline as well as branded generic portfolio, focus on key brands and market expansion in rural areas. It is of the view that Pfizer-Wyeth merger in India will lead to the rerating of the stock. Emkay maintains its earnings estimate of Rs 56.7 and Rs 65.6 for Pfizer for CY10 and CY11, respectively and re-iterates its buy rating with a target of Rs 1,040.
GAMMON INDIA
Reco price: Rs 229
Current market price: Rs 230.45
Target price: Rs 290
Upside: 25.8%
Brokerage: Ambit Capital
Ambit has initiated coverage on Gammon India with a buy and an sum-of-the-part target of Rs 290. It values the company at Rs 179 per share based on 12 times its 2010-11 estimated earnings, stake in Gammon Infrastructure Projects (GIPL) at Rs 88 per share, international acquisitions (Rs 9 per share), treasury stock at Rs 10 per share and stake in Sadbhav Engineering (Rs 4 per share).
Ambit’s total valuation for Gammon’s power business ranges from Rs 1-22 per share over CY10 and CY11. As per its stress case valuation of Rs 221 per share assuming entire write-off acquisition debt of Euro 97.5 million and excluding GIPL, power subsidiaries and others, the stock is trading at 8 times (Rs 118) 2010-11 estimated earnings.
While it says that order inflow in Gammon’s India boiler business to be a key re-rating trigger, GIPL’s current valuation does not reflect the inherent business value. With road project’s nearing commercial operations date and expected financial closure of other key infra-projects, valuations would improve, leading to further upside.
Gammon India’s current order book of Rs 14,400 crore is biased in favour of high-growth sectors with 46 per cent in transportation, 22 per cent in power, 15 per cent in transmission lines and the remainder in buildings, cooling towers and chimneys. This will result in continued traction as infrastructure spending picks up.
PUNJ LLOYD
Reco price: Rs 178
Current market price: Rs 177.80
Target price: Rs 171
Downside: 3.8%
Brokerage: Anand Rathi Research
Punj Lloyd has sold its 19.43 per cent stake in Pipavav Shipyard for Rs 656 crore (Rs50.75 a share, a 20 per cent discount to the market price). This stake sale is aimed at boosting its liquidity position, which was badly affected by execution delays. Punj, as co-promoter of Pipavav Shipyard, had invested in it to gain a valuable fabrication facility. This would have helped it construct offshore platforms, etc. According to the company, Punj would continue bidding for projects jointly with Pipavav where their interests converge.
With the company still facing problems in some of the projects, the execution risks are still high and could lead to negative surprises in the future. The brokerage lowered its 2009-10 earnings estimates owing to liquidated damages faced by the company in the Ensus project. It also excluded earnings attributed to Pipavav Shipyard as part of profits from associates over FY11-12. The stake sale in Pipavav Shipyard is value-dilutive, where the reduced earnings are far more than the benefits from the immediate cash infusion. The brokerage has reduced its one-year target price to Rs 171 (from Rs 191 earlier) based on 12 times one-year-forward earnings (2011-12).
Current market prices as on April 1