Union Bank of India
Reco price: Rs 150
Current market price: Rs 166.95
Target price: Rs190
Brokerage: Centrum Broking
Union Bank of India (UBI) plans to add another 400-500 branches, which would help it to scale up its low-cost CASA deposit base to about 35.4 per cent in FY10E. Considering the prevailing economic slowdown and qualitative growth taking centre-stage, the brokerage expects the credit growth to taper to 21 per cent in FY09E and 16.5 per cent in FY10E (credit growth of 26.2 per cent in H1 FY09). Higher provision coverage ratios in excess of 90 per cent and lower net NPA ratio at 0.14 per cent would keep it on strong footing in terms of asset quality. The provision coverage ratio is expected to be in the range of 85-90 per cent during FY08-10E, which would help contain net NPAs at lower levels of 0.3 per cent in FY10E.
The bank’s return on equity would be in excess of 20 per cent over FY08-10E, although return on asset is expected to slip to 1 per cent in FY09E (v/s 1.2 per cent during FY08). PAT has grown 43 per cent CAGR over FY06-08, but would register 9.4 per cent CAGR over FY08-10E. The stock price has corrected by about 40 per cent from its peak and is currently available at 0.9x FY10E adjusted BV and a P/E of 4.6x FY10E EPS. Maintain Buy.
Lupin
Reco price: Rs 554
Current market price: Rs 577.35
Target price: Rs 950
Upside: 64.5%
Brokerage: Kotak Securities
Lupin announced that it has settled the patent challenge litigation relating to Desloratadine tablets, the generic version of Schering-Plough’s “Clarinex” tablets used in treatment of allergy. Lupin will be licensed under the relevant patents, and free to commercially launch its generic Desloratadine product, on July 1, 2012, or earlier. Clarinex tablets had sales of $329 million in US for the year 2007-MAT June 2008, according to IMS Health.
Patents for this product were being challenged by several companies like Zydus, Sandoz, Mylan, etc. It is likely that Schering will announce settlement with more companies in future as it did with Perrigo in December 2008. More settlements would reduce the size of benefit for Lupin. Given that revenues would start in July 2012, the brokerage has not made any changes to its earlier estimates. Lupin was also under pressure in the past month due to US FDA inspection at its Mandideep plant. This announcement could help it regain the positive momentum. Maintain BUY.
Sesa Goa
Reco price: Rs 78
Current market price: Rs 84.5
Target price: Rs105
Upside: 24.3%
Brokerage: ICICI Securities
Declining global and Chinese steel demand has led to a slowdown in iron ore demand. In fact, there is around 60-70 per cent dip in Chinese spot iron ore prices along with decreased off-take has meant that there is a 70 million tonne iron ore inventory build-up (equivalent to 50 days). Consequentially, global majors have cut production by 10-25 per cent, thereby pressurising Indian iron ore exports. This scenario, would affect Sesa Goa (Sesa) whose domestic sales comprise six per cent only. Increased inventories, low off-take and reduced spot activities put to risk aggressive management expectations of sales ramp-up to 15 million tonne by FY09E.
Sesa’s total estimated reserves are at around 180 million tonnes from mines in Goa, Orissa, Karnataka and Jharkhand. The company had obtained prospecting licences for mining in Jharkhand with total reserves of more than the earlier estimated 50 million tonne of high-grade reserve content. While most small-scale miners are unprofitable owing to declining prices and high transportation costs, this would help the company increase its market share. At Rs78, stock is trading at FY09E and FY10E P/E of 1.5x and 1.8x, and EV/EBITDA of 1x and 1.1x, respectively. Besides, Sesa Goa enjoys huge cash (around Rs 45/share) and is significantly deleveraged, implying low downside.
NALCO
Reco price: Rs 179
Current market price: Rs 201.6
Target price: Rs158
Downside: (21.6%)
Brokerage: India Infoline
National Aluminium Company (NALCO) benefited from rising prices of aluminium in the last five years, particularly because a backward-integrated business model kept production cost increases modest in comparison to peers. This cost advantage is now diminishing, owing to softening in prices of aluminium along with key inputs like alumina and energy. The decline in NALCO’s production cost, however, will be modest, as it is already fully-integrated for alumina and energy requirements. Aluminium prices are also unlikely to recover in the medium term with LME inventory at 1.9 million tonnes (at a 14-year high).
Profitability and utilisation of NALCO’s brown field aluminium capacity expansion (from 345,000 tpa to 460,000 tpa) critically depends on allocation of additional coal linkages from the Bhartapur coal block. Status of additional linkages remains unclear, as the state-run supplier is struggling to meet needs of even existing plants. On the positive side, NALCO is better placed to weather the slide in aluminium price, thanks to its low production cost and unleveraged balance sheet. The brokerage has reduced the earnings estimates by 18 per cent and 26 per cent in FY09 and FY10, respectively, after factoring lower aluminium prices and inability to obtain additional coal linkages for enhanced capacity. NALCO is trading at a PE of 12.4x and EV/EBIDTA of 6.0x on FY10E. Maintain Reduce.
HDIL
Reco price: Rs 145
Current market price: Rs 154.3
Target price: Rs 170
Upside: 10.2%
Brokerage: Emkay Global Financial Services
Housing Development & Infrastructure (HDIL) has admitted that the real estate market is going through tough times and would consider price cuts in order to boost demand. The company is willing to sell Transferable Development Rights (TDR) at Rs 1,500 per sq ft vis-à-vis Rs 2,500 per sq ft it had sold few quarters back. The airport slum rehabilitation project has been on track and the company has sold 2.3 million sq ft of TDR generated from the project. HDIL intends to generate another 2 million sq ft of TDR by March 2009. On its slum rehabilitation scheme (SRA), work is progressing in all seven projects at Bandra, Andheri, Versova and Malad.
In the current environment where it has been difficult to sell real estate to end consumers HDIL is expected to generate Floor Space Index from its SRA projects and will yield 5-6 million sq ft of FSI over the next two years. Due to tight liquidity conditions and lack of buyers, the company has delayed its launch plans in projects at Ghatkopar and Navi Mumbai. With recent guidelines from RBI regarding restructuring of commercial real estate loans, HDIL’s liquidity position would improve. However, the brokerage expects the loans repayable to increase from Rs 65 crore (by March 2009) to Rs 1,200 crore in FY10. The stock is trading at 0.8x FY09 book value (industry peers trading at 1.1-1.4x). Maintain buy.
Current market price as on December 18, 2008
