India Cements
Reco price: Rs 137
Current market price: Rs 117.50
Target Price: Rs 188
Upside: 60%
Brokerage: Religare Hichens, Harrison
India Cements (ICL) commissioned its 1.1 million metric tonne (mmt) grinding unit at Vallur, Tamil Nadu in August 2008, which will result in higher volume growth in H2 FY09. Brownfield expansion at Vishnupuram and Malkapur (both in Andhra Pradesh) along with a grinding unit at Parli (Maharashtra), expected to be commissioned by Q4 FY09, will enhance its clinker and cement capacities to 9.8 mmt and 13.2 mmt, respectively by the end of FY09.
With timely expansion of its capacities, ICL will have higher volume growth as compared to its peer group. The company's cement volume is expected to grow at 20 per cent in FY09 and 14 per cent in FY10.
As the company imports about 65 per cent of its total coal requirement from Indonesia, the recent fall in international coal prices augurs well for future booking of coal requirements. But, rupee’s depreciation against the US dollar offsets part of the gains arising from lower coal prices.
Cement prices on the other hand are firm, mainly due to strong demand growth in the southern region (11.7 per cent during April-August 2008). At Rs 137, ICL trades at a P/E of 5.3x and EV/EBITDA of 4.3x FY09E earnings, respectively. On the EV/tonne basis, it trades at $86/tonne on FY09E installed capacity, as against the replacement cost of $120/tonne. Maintain Buy.
JSW Steel
Reco price: Rs 505
Current market price: Rs 410.65 Target Price: Rs 595
Upside: 44.9%
Brokerage: India Infoline
JSW Steel (JSW) is expanding its capacity from 4.8 million tonne per annum (mtpa) to 11 mtpa by CY10 and working on backward integration through allocation of coking-coal mines and iron-ore mines from the Indian government and acquisitions abroad (Mozambique and Chile).
Backward integration will increase JSW’s self-sufficiency in coking coal from nil to 50 per cent and in iron-ore from the current 20 per cent to 75 per cent. These initiatives should enable the company to deliver 25 per cent volume CAGR over FY08-13E and reduce cost of production.
However, in the near-term, volume growth might fall short of expectation, as expansion to 6.8 mtpa (scheduled to be commissioned by September 2008), is likely to be delayed by a couple of months. Additionally, benefits from overseas mine acquisitions will accrue from H2 FY10.
Accordingly, the brokerage has cut JSW’s EPS estimates for FY09 by 14 per cent to Rs 92 and for FY10 by 17 per cent to Rs 107, to factor in lower volume assumptions. However, the brokerage maintains that the current valuations do not factor in the structural improvement in the company’s business model due to increasing raw-material self-sufficiency and strong volume growth post-expansion. Maintain ADD.
BGR Energy Systems
Reco price: Rs 255
Current market price: Rs 239.25
Target Price: Rs 349
Upside: 45.9%
Brokerage: Kotak Securities
BGR Energy Systems (BGR) has emerged as a leading player in the Balance of Plant (BoP) space after successfully executing several power projects ranging from 25 mega watt (MW) to 500 MW using different types of fuels. Apart from having expertise in executing power projects, it has also diversified its presence across captive power projects, oil and gas equipment, environmental engineering, electrical and infrastructure projects.
BGR has expanded its presence to the engineering, procurement and construction (EPC) space too, wherein it would provide the power island for the plant including boilers, turbines and generators, along with the mechanical, electrical, control instrumentation and civil features for the project.
BGR has recently bagged significantly large sized EPC orders totalling Rs 8,000 crore for setting up thermal power plants. The company is likely to be a key beneficiary of the huge investments planned by state and central governments in power and infrastructure sector during the eleventh five-year plan.
With a robust order book of Rs 11,000 crore diversified across various sectors, BGR’s revenues and earnings are expected to grow at a CAGR of 49 per cent and 37 per cent, respectively between FY08-FY10. At Rs 255, the stock is trading at attractive valuations of 15.2x and 11x on P/E multiples, and 7.9x and 6.5x on EV/EBITDA estimates for FY09 and FY10, respectively. Maintain Buy.
Cadila Healthcare
Reco price: Rs 310
Current market price: Rs 310.5
Target Price: Rs 422
Upside: 35.9%
Brokerage: Emkay Global Financial Services
Cadila Healthcare (Cadila) is a global healthcare provider and one of the top five pharmaceutical companies in India. Earlier than expected at risk launch of the generic version of Pantoprazole by Teva and Sun Pharmaceutical in the US, have raised serious concerns over Cadila losing significant revenues.
Cadila’s Nycomed joint venture (JV), which supplies the key intermediates for the manufacturing of Pantoprazole, is expected to take a hit on earnings as a result of this. However, the earnings from the Hospira JV are sufficient to offset the losses faced due to the generic launch of Pantoprazole by peers.
On the other hand, Cadila’s foray into newer markets is expected to yield rich dividends and also diversify its business. With the US business on high growth path (CAGR growth of 30 per cent) and the French (CAGR of 22.5 per cent) and Brazilian (CAGR of 21 per cent) operations turning earnings accretive, Cadila’s international business is likely to be the key growth driver going forward.
Cadila’s revenues and earnings are expected to grow at a CAGR of 18.8 per cent and 21.2 per cent, respectively over FY08-10E. At Rs 310, the stock trades at 13.5x FY09E and 10.9x FY10E earnings and is available at a significant discount (about 30 per cent) to its peers like Lupin, Biocon and Piramal Healthcare. Buy.
State Bank of India
Reco price: Rs 1,466
Current market price: Rs 1,481.4
Target Price: N.A.
Brokerage: Motilal Oswal Securities
State Bank of India (SBI) has been working on creating a scalable structure and control systems for its Agri and Rural Business (ARB) over last two years, which would adapt to the specific requirements of this business and minimise the credit and operational risks.
Current and savings account (CASA) ratio in ARB unit is over 55 per cent (v/s SBI’s overall CASA ratio of 42 per cent), average yield on loans is around 10 per cent and spreads are more than 5 per cent. SBI has 7,100 branches in rural and semi urban areas, which are about 70 per cent of its total branch network strength. It aims to ramp this up to 10,000 branches by FY10.
Agri gross NPAs were close to Rs 3,000 crore as of March 2008, which have been reduced to about Rs 1,900 crore currently, due to farm loan waiver and recoveries. The possibilities of (a) interest being paid on the amounts involved in the agri farm loan waiver scheme and (b) increase in subvention of farm loans from 2 per cent to 3 per cent can further improve profitability of the segment going forward.
SBI is expected to report consolidated EPS of Rs 155 in FY09 and Rs 187 in FY10. Adjusted for value of SBI Life Insurance (at Rs 205 per share), the stock trades at 1x FY10E consolidated book value. Maintain Buy.
Current market price as on October 6, 2008.
