Lanco Infratech
Reco price: Rs 171
Current market price: Rs 145.3
Target Price: NA.
Brokerage: ICICI securities
Lanco Amarkantak, the Hyderabad-based Lanco Infratech’s power project, is finally ready for takeoff. Being developed in four phases, Lanco Amarkantak will have a total capacity of 1,920 MW. Amarkantak-I (300 MW) is expected to be commissioned by the end of November 2008. It would be the first Chinese equipment-based operational power plant in India and would reduce the execution risk/discount associated with Lanco’s power portfolio.
Further, Lanco’s ongoing litigation with Madhya Pradesh State Electricity Board to convert Amarkantak-I from power purchase agreement to merchant is expected to be resolved soon; even 50 per cent conversion will provide upside of Rs 35 per share.
Lanco has emerged as the sole bidder for the 1,320 MW coal-based power plant at Rajpura, Punjab. The tariff of the project is expected to be lucrative, providing healthy upside along with Rs 7,000 crore engineering procurement and construction (EPC) potential.
However, given that Lanco is the sole bidder, possibility of re-tendering and litigations by other bidders and between Punjab State Electricity Board and Punjab State Electricity Regulatory Commission cannot be ruled out. The NAV estimates for Lanco stand at Rs 6,500 crore or Rs 296 per share. At Rs 171, the stock is trading at 10.7xFY09E and 8.8xFY10E earnings. Maintain buy.
Rallis India
Reco price: Rs 348
Current market price: Rs 332.5
Target Price: Rs 518
Upside: 55.8%
Brokerage: Emkay Global Financial Services
The brokerage has revised Rallis’ sales numbers upward by 8.3 per cent to Rs 835.42 crore for FY09E and by 8.3 per cent to Rs 960.73 crore for FY10E. The higher sales is on account of overall increase in farm income, normal monsoon, higher revenues from new products in the domestic market and better than expected exports.
As part of the restructuring exercise, Rallis had taken systematic initiatives like DISHA and APOLLO.
DISHA is an initiative for improving operational efficiency to tackle various issues at operational level; the improvement in EBITDA margin to 23.8 per cent y-o-y in Q2 FY09 from 17.4 per cent is attributed to this program. APOLLO will drive a rational approach towards entering into international markets. With APOLLO, the company expects to reach a target of 40 per cent of sales in exports in the next four years from the present levels of 22 per cent.
The increase in the international income will eventually reduce its dependence on the Indian market, which is more dependent on monsoon, and will also reduce the lumpiness in the business model. The company is expected to spend Rs 180 crore on capex till FY10E. At Rs518, the stock is trading at 8x FY10E earnings. Maintain Buy.
Reliance Petroleum
Reco price: Rs 82
Current market price: Rs 80.2
Target Price: Rs 97
Upside: 21%
Brokerage: Religare Hichens, Harrison
Reliance Petroleum's (RPL) state-of-the-art refinery is slated for commencement by end-2008 with a capacity of around 5,80,000 barrels per day (bpd). RPL will be able to refine crude of higher complexity and is expected to earn a gross refining margin (GRM) of $12 per barrel in FY10.
RPL's product slate is expected to consist primarily of petrol and diesel, which would comprise an estimated 75 per cent of its total production capacity. The company does not intend to manufacture lower value-added products such as fuel oil. In addition, it is expected to focus on premium offerings such as 10ppm sulphur gasoline and diesel, which enjoy high demand in Europe.
Globally, additional refining capacities of about 8.8 million bpd are coming on stream between CY08-CY13 and would exert margin pressure. Over the last few months, the light-heavy crude oil price differential has been narrowing due to lower demand. Consequently, the gasoline and gasoil crack spread has eroded, thus declining the pricing premium enjoyed by complex refineries.
Concerns of deepening economic slowdown would further shrink the premium for complex refineries. The expected GRM's is expected to decline to $11.5 per barrel in FY11 and stabilise at $ 10.5 per barrel from FY12 onwards. RPL is trading at 5.8x and 6x EV/EBITDA its FY10E earnings. Accumulate.
Bharat Bijlee
Reco price: Rs 750
Current market price: Rs 703
Target Price: Rs 950
Upside: 35.1%
Brokerage: Sharekhan
In Q2FY09, the net sales of Bharat Bijlee (BBL) grew by 11 per cent to Rs 150.9 crore. The operating profit margin (OPM) declined by 500 basis points to 14.1 per cent on account of a high staff cost and lower absorption of fixed costs due to lower sales volume.
The interest cost increased by 85 per cent to Rs 1 crore due to higher cost of funds and an elongated operating cycle. Consequently, the net profit declined by 23.7 per cent to Rs 12.5 crore. The new capacity of 3,000 MVA has been set on stream. BBL’s total manufacturing capacity for transformers now stands at 11,000 MVA.
The company’s major industrial clients (cement, steel, etc) are either pruning production or cutting capex, which has slowed down the demand for motors and transformers. And, while the orders from state electricity boards (SEBs) continue to flow, the slowdown has led to fierce competition for the business from the SEBs. Hence, the brokerage has revised downwards the earnings estimates for BBL.
The company’s revenues are now expected to grow at a CAGR of 12.2 per cent over FY08-FY10E. At Rs 750, the stock is trading at a P/E multiple of 4.5x and EV/EBIDTA multiple of 1.6x its FY10E. The brokerage has maintained ‘hold’ on the stock, with a revised price target of Rs 950 (valuing the core business at Rs 822 per share and the marketable investments at Rs 128 per share).
Indraprastha Gas
Reco price: Rs 105.6
Current market price: Rs 103.9
Target Price: Rs 130
Upside: 25.1%
Brokerage: KR Choksey Shares & Securities
Indraprastha Gas (IGL) reported net sales of Rs 215.2 crore in Q2FY09, up 23.6 per cent y-o-y, on the back of increase in volume of CNG by 22.7 per cent and PNG by 26.7 per cent. While the increase in demand for CNG was partly due to the rising prices of petrol and diesel, growth of PNG can be attributed to its expanding network.
The company’s OPM dipped by 354 basis points to 39.5 per cent due to higher staff cost (6th pay commission) and increase in raw material cost. However, increase in other income by 68.7 per cent and lower tax rate of 33.2 per cent helped the bottomline to rise by 19 per cent to Rs 50.2 crore.
During the quarter, IGL set up a joint venture with Siti Energy to carry out city gas distribution (CGD) in Haryana. Once authorised by the Petroleum and Natural Gas Regulatory Board (PNGRB), this would enable IGL to expand its presence beyond Delhi.
With forthcoming Commonwealth Games in 2010 and greater focus by Delhi government on reducing pollution, additional capex through internal accruals and further business opportunity from CGD operations will drive the growth momentum for next 2-3 years. At Rs 105.6, IGL is trading at a P/E multiple of 7.3x FY09E earnings.
Current market price as on November 14, 2008
