Analysts' corner

RESEARCH CALLS

ABG SHIPYARD
Reco price: Rs 979
Current market price: Rs 936.65
Target price: Rs 1,096
Upside: 17%
Brokerage: Prabhudas Lilladher

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ABG Shipyard has announced Rs 400 crore expansion of its Surat facility, which will increase its fabrication capacity by up to four times. This expansion is likely be completed by July 2008. Further, it has also proposed to set up a new deep water shipyard, which is likely to be completed by 2011. The company is likely to invest Rs 800 crore on this shipyard.

In order to fund the expansion, the company has issued four million warrants to its promoter at a price of Rs 796. Further, the company plans to raise Rs 800 crore through a qualified institutional bidders (QIB) issue. The estimated equity dilution post issue is likely to be 22 per cent.

On account of higher than operating margin, Prabhudas Lilladher expects ABG Shipyard to expand its margin from 19 per cent to 24 per cent in FY08.

The brokerage revised its FY09 revenue estimate for ABG Shipyard upward by 20 per cent to Rs 1,890 crore on account of the expansion at Surat. At Rs 979, the stock traded at 16 times estimated FY09 earnings. The brokerage rates the stock an "outperformer" with a price target of Rs 1,096.

AXIS BANK
Reco price: Rs 1,096
Current market price: Rs 1,167.45
Target price: NA
Upside: NA
Brokerage: IL&FS Investsmart

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During Q3 FY08, Axis Bank reported a net interest income (NII) growth of 80 per cent y-o-y, driven by re-pricing of loans and an increase of 50 per cent in advances.

The bank's operating profit increased by a sharp 87 per cent y-o-y, despite a 6 per cent q-o-q increase in employee costs due to addition of branches during the last year -- the bank added 127 branches and extension counters, and 469 ATMs.

Axis Bank reported a 35 per cent growth in fee income, from Rs 200 crore in Q3 FY07 to Rs 348 crore in Q3 FY08. Overall, the other income increased by 27 per cent q-o-q, from Rs 383 crore in Q2 FY08 to Rs 487 crore in Q3 FY08.

At Rs 1,096, the stock traded at 4.5 times estimated FY08 and 3.9 times estimated FY09 book value, which is at a discount to its immediate peer, HDFC Bank valued at 8.1 times estimated FY08 and 7 times estimated FY09 book value (excluding dilution).

The discount is warranted due to Axis Bank's lower branch network, and the composition of its lending portfolio being tilted toward large and mid-corporate loans compared to higher retail loans by HDFC Bank. The brokerage recommends a "hold".

BAJAJ AUTO
Reco price: Rs 2,538
Current market price: Rs 2,517.25
Target price: Rs 2,928
Upside: 16.3%
Brokerage: Indiabulls

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The shift in Bajaj Auto's focus from the low margin entry level bikes to high margin premium segment bikes along with the shutdown of the assembly operations at Akurdi plant, resulted in the expansion of margins for Q2 FY08.

While expected earnings before interest, tax, depreciation and amortisation (EBITDA) margin expanded by a sharp 100 basis points (bps) y-o-y to 16 per cent, net profit margin showed a substantial improvement of 110 bps y-o-y to 14.6 per cent.

In the insurance business, Bajaj reported a robust growth with gross written premium increasing 40 per cent y-o-y in general insurance and 127.8 per cent y-o-y in life insurance business.

Bajaj Auto's recent launch XCD in the 125cc segment, is performing well. To meet the strong demand for XCD, the company is planning to increase production to 75,000 units per month from January 2008.

Bajaj Auto also launched Avenger 200cc recently, in the premium segment to increase the market share and enlarge its product base. Considering the better than expected growth in the bottom line, Indiabulls has revised its earnings estimates by 3.5 per cent and 4.1 per cent for FY08 and FY09, respectively. Based on a sum-of-the-parts valuation, Indiabulls rates Bajaj Auto as "buy" with an FY09 target price of Rs 2,928.

MERCATOR LINES
Reco price: Rs 155
Current market price: Rs 135.95
Target price: Rs 255
Upside: 87.6%
Brokerage: Pioneer Investcorp

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Mercator Lines is the fastest growing and the second largest private shipping company in India. It has built scale rapidly with its tonnage growing from less than 0.1 million dead weight tonne (dwt) in FY00 to 2.4 million dwt in FY08. With aggressive expansion plans lined up, the company should see further increase in capacity by FY10.

Mercator Lines has been one of the aggressive players, though constrained by a relatively small balance sheet so far. With the recent rounds of fund raising ($300 million) and robust internal accruals ($100 million a year), Mercator Lines' balance sheet is now large (approximately $1.5 billion or around Rs 6,000 crore) and strong with a net leverage about1.2 times.

Thus, the company appears to be ready for the next phase of expansion (up to $1.5 billion) to move up the league as a large regional player.

Mercator Lines has also been able to de-risk its business model by maintaining a judicious mix (50-70 per cent) of long term charters (3-5 years). In order to further de-risk its business model, Mercator Lines has adopted a three pronged strategy to reduce its dependence on shipping.

This includes diversification into related and high growth areas of dredging, offshore services and mining. The brokerage recommends a "buy" on Mercator Lines, with a 12-month price target of Rs 255.

ORIENT PAPER AND INDUSTRIES
Reco price: Rs 727
Current market price: Rs 725
Target price: Rs 952
Upside: 31.3%
Brokerage: India Infoline

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Orient Paper's cement division is among the most profitable ones, aided by location advantage of plants and high quality limestone reserves.

It generates 95 per cent of its cement revenues from supply deficient Southern and Western regions and is expanding capacity at Devapur and Jalgaon plants to 5 million tonne from 2.7 million tonne per annum, and clinker capacity to 3.2 million tonne from 2 million tonne per annum by March 2009 at an investment of Rs 600 crore.

In its core business, Orient Paper has a strong presence in the photocopying, office paper and tissue paper segment. To meet the increasing demand for paper, the company plans to increase its Amlai plant capacity by 20,000 tonne from existing 85,000 tonne per annum with an investment of Rs 100 crore.

Orient dominates the fast growing Rs 700 crore tissue paper segment with a 40 per cent market share and plans to expand its tissue paper capacity to 30,000 tonne from present 10,000 tonne per annum by Q4 FY09.

India Infoline expects Orient's net profit to witness a 30.8 per cent compounded average growth over FY07-10 driven by improving realisations across segments and healthy operating margins. At Rs 727, the stock traded at 4.8 times estimated FY10 earning per share (EPS) of Rs 152.2. The brokerage recommends "buy" with a one-year price target of Rs 952.