Ambuja Cements
Reco price: Rs 72
Current market price: Rs 73.35
Target price: Rs 72
Downside: 1.8%
Brokerage: Emkay Global Financial
Ambuja Cements’ (ACL) net profit stood at Rs 248 crore in Q4 CY08 (below expectations) on account of higher than expected power and fuel cost. Revenues grew by 6.7 per cent y-o-y (year-on-year) to Rs 1,570 crore, driven by 6.3 per cent volume growth and balance due to marginal increase in realisation. ACL was not able to benefit from the 40 per cent drop in international coal prices during the Q4 CY08 as the company utilised high cost coal inventory carried over from earlier quarter. Its EBIDTA margins were at 23.5 per cent (decline of 988 basis points; bps) on account of high coal cost.
ACL’s capex plans include spending Rs 3,500 crore over the next two-three years for augmenting its cement capacity by about 6 million tonnes. During the year, ACL also commissioned a one million tonne grinding unit at Surat in Gujarat. The recent cuts in central excise duty and fall in international coal and crude oil prices has significantly moderated the cost pressures witnessed by cement companies, thus improving the business fundamentals. The brokerage has valued ACL at $80 a tonne and 11x its CY09 earnings. Maintain hold.
Bharat Bijlee
Reco price: Rs 437
Current market price: Rs 429.80
Upside: NA
Brokerage: Sharekhan
During Q3 FY09, the total operating income of Bharat Bijlee (BBL) grew 25.5 per cent y-o-y to Rs 140.4 crore. The operating profit margin contracted by 90 bps to 17.5 per cent on the back of high raw material cost, which as a percentage of sales increased by 107 bps. Consequently, net profit increased by 8.1 per cent to Rs 13.3 crore during the quarter.
BBL has brought on-stream an additional capacity of 3,000MVA during the quarter, which was expected to drive the volume growth in FY09. The transformers segment has seen orders from private sector slow down, while from state electricity boards it should slow down during H1 FY10. For motors, the demand is primarily driven by the private sector. With pruning of capex by private companies, demand off-take for motors would be sedate.
Building in slower volumes and lower realisations, BBL’s revenues are expected to grow at a CAGR of 6.9 per cent over FY08-10E. The brokerage has downgraded its earlier earnings estimate for FY09 and FY10 by 3.6 per cent and 16.3 per cent, respectively. BBL is trading at 3.8x earnings and P/BV of 0.9x its FY10E. The brokerage has recommended to ‘book profit’.
GMR Infrastructure
Reco price: Rs 83
Current market price: Rs 79.05
Target price: Rs 67
Downside: 15.2%
Brokerage: India Infoline
The government has approved application of Airport Development Fee (ADF) at Delhi airport on an ad-hoc basis for a period of 36 months. The ADF considerably eases the fund crunch faced by the Delhi airport and obviates the need for its joint venture partners to bring in additional equity. The government has approved ADF as other sources of funding had dried up and the modernisation-cum-expansion project could not be delayed in view of the Commonwealth Games to be held in Delhi in October 2010.
The levy (Rs 200 for domestic and Rs 1,300 for outgoing international passenger) removes the overhang on the development schedule of the Delhi airport, and should come as a major relief for GMR. However, these levies are limited for a period of three years and are subject to periodic review based on actual passenger traffic. The continuity of ADF is contingent on review of land deals after six months, and the total amount to be mobilised is also capped. However, as ADF replaces real estate monetisation assumed in most SOTP calculation, the sum-of-parts valuation of GMR’s asset portfolio remains unchanged. Maintain reduce.
Steel Authority of India
Reco price: Rs 87.75
Current market price: Rs 90.65
Target price: Rs 90
Upside: NA
Brokerage: Macquarie Research
Coking coal accounts for 48 per cent of total cost for Steel Authority of India (SAIL). SAIL has been trying to renegotiate its existing contracts, but talks with its main supplier BHP Billiton does not seem to fall through. As per reports, SAIL plans to lift only 130,000 tonnes in January 2009 (830,000 tonnes in December 2008); it has also floated a tender to buy coking coal in the spot market for April and May 2009 deliveries, but the benefit of lower prices will be fully seen only by May or June.
Since HRC prices of SAIL have declined by $100 per tonne in December, with costs not falling, its margins could be severely affected in Q4. The Ministry of Steel is pushing SAIL’s to continue with its $11 billion expansion plans at a fast pace (in view of the upcoming elections). The brokerage believes that this could lead to SAIL’s net cash position of $3.5 billion to debt of $4 billion in 2-3 year’s time.
The stock is now trading at a P/E of 8x and 1.2x P/BV of its FY10 earnings. While maintaining neutral on SAIL, the brokerage has also recommended a switch to its top pick JSW Steel.
Fag Bearings
Reco price: Rs 261
Current market price: Rs 261
Target price: Rs 350
Upside: 34.1%
Brokerage: Angel Broking
For Q4 CY08, FAG Bearings clocked 9.6 per cent growth in net sales to Rs 186.8 crore (exceeded expectation of Rs 169 crore). FAG recorded an upside of 47.4 per cent y-o-y in bottom-line for Q4 to Rs 21.4 crore (exceeded expectation of Rs 12 crore). The latter was on account of a reduction in other manufacturing costs, which led to a 252 bps improvement in EBITDA margins. Tax rate, too, was lower by 950 bps; tax outgo thus, remained unchanged.
FAG Bearings’ prospects are derived from demand arising in the capital goods and automobile industry. It is believed that industry valuations are likely to remain subdued in the near term due to overall slowdown in the sector. The company posted CAGR of 14 per cent and 30 per cent in revenue and profit over the last five years, respectively. Going ahead, over CY08-10E, volumes are expected to record a CAGR of 7-8 per cent, which would drive around 9-10 per cent growth in revenues and 10 per cent growth in net profit. Revenue growth would be largely driven by higher contribution from new products. Further, its debt-free status would help it post better net profit growth amidst a high interest rate regime. At Rs 261, the stock is quoting at 4.5x CY09E, which is much lower than its historical P/E of 14x. Maintain buy.
Current market price as on 13 February 2009
