Nestle India
Reco price: Rs 1,431
Current market price: Rs 1,500
Target price: Rs 1,926
Upside: 28.4%
Brokerage: SBICAP Securities
Nestle India’s net sales continued to grow by strong double digits in the December 2008 quarter, up by 21.7 per cent to Rs 1,090.1 crore, driven by both volume and price hikes. Domestic sales grew by a healthy 25.4 per cent whereas exports fell by 10.2 per cent, mainly due to declining exports to Russia, one of the largest export destinations in Nestle India’s portfolio.
A softening raw material prices scenario coupled with economies of scale and cost optimisation initiatives have led to a higher profit growth. Operating profit (excluding other income) grew by 27.5 per cent to Rs 195.7 crore. Tax benefits at the Pantnagar plant led to higher net profit growth of 29.4 per cent to Rs 121.1 crore. Overall, revenues for CY08 were up by 23.5 per cent to Rs 4,324.2 crore and net profit grew by 29.1 per cent to Rs 534.1 crore. Nestle has been growing at 20 per cent plus rate for the past 8 quarters. However, considering the current economic scenario and weakening consumer sentiment, the brokerage has reduced sales and earnings estimates for CY09. At Rs 1,926, the stock trades at 25x estimated CY09 EPS of Rs 69.1. Maintain Buy.
Hindustan Zinc
Reco price: Rs 356
Current market price: Rs 370.8
Target price: Rs 490
Upside: 32.1%
Brokerage: Kotak Securities
Hindustan Zinc is setting up a new silver refinery having an annual output of 350 tonnes taking its total capacity to 500 tonnes by 2012, making it Asia’s largest primary silver producer with about 2.5 per cent of global silver output. The expansion on silver refining is driven by discovery of high silver grades at the Sindesur Khurd (SK) mines in Rajasthan. The new silver refinery would be set up at the new Dariba smelting complex close to the Sindesur Khurd mines. The Dariba complex’s Phase III would be ready for commissioning by Q3 FY10, and would make Hindustan Zinc the world’s largest zinc company with fully integrated operations.
The sharp 33 per cent quarter-on-quarter drop in zinc metal prices has led to a cut-back in zinc mining output and a spate of mine closures globally. While zinc prices are expected to remain subdued in near term owing to current surpluses and high inventories, the brokerage believes swift supply side response would restore market equilibrium, albeit with a lag. On the back of weakness in the rupee, FY10 and FY11 EPS estimates have been revised higher by 8.5 per cent and 15.2 per cent respectively to Rs 64 and Rs 81, respectively. The stock is trading at less than 2x EV/EBITDA and 5.5x PE based on FY09 estimated numbers. Maintain Buy.
Zee Entertainment Enterprises
Reco price: Rs 99.7
Current market price: Rs 93
Target price: Rs 90
Downside: 3.2%
Brokerage: Macquarie Research
There is a possibility of a shift in advertising revenue away from Zee TV, the number 3 player in the Hindi general entertainment channel (GEC) segment, to Colors. The latter is a joint number 1 in Hindi GECs genre and is continuing to observe a shift in advertising revenues in its favour. The ad revenue growth for Zee has slumped to 1.7 per cent year-on-year (y-o-y) in Q3 FY09. The management asserted in Q3 earnings call that the slump in advertising revenue was entirely due to the economic slowdown. Going ahead, from April 1, Colors will be distributed as part of the ‘One Alliance’ bouquet and would be positive driver for Colors, as it means wider distribution and reach.
The brokerage says that regional channels are better placed compared to Hindi GECs to ride the slowdown. Zee News continues to have a leadership in its key regional GEC markets of Maharashtra and Bengal. Amid the current macro environment, it favours exposure to news and regional language channels over Hindi GECs. Given the tough macroeconomic outlook and with Colors now considered joint number1, upside risk to FY10’s ad revenue growth forecast of 5 per cent y-o-y is not there.
Bombay Dyeing
Reco price: Rs 115
Current market price: Rs 122.45
Target price: Rs 230
Upside: 87.8%
Brokerage: Angel Broking
Bombay Dyeing (BD) has a huge land bank at prime locations of Worli (20 acres) and Dadar (40 acres) in Mumbai, which is being developed. BD’s existing real estate business is valued at Rs 196 per share on NAV basis. It is assumed that the projects would be completed over the next six-seven years as against the earlier estimates of four years, in wake of current slowdown in the real estate sector.
BD has shifted two of its textile mills out of Mumbai to Ranjangaon and Patalganga as part of its restructuring exercise, to consolidate its manufacturing facilities and prune operational costs. The company’s textile business is valued at 3x FY10E EV/EBIDTA translating into Rs 34 per share.
The brokerage has reduced the target price to Rs 230 from Rs 900 after factoring EV/EBITDA of 3x (6x previously) for its textile business, also a 10-20 per cent dip in realisations per sq ft in its real estate business and a 60 per cent discount to NAV of the real estate business in line with its peers. BD has entered into a joint venture with L&T to bid for re-development projects but due to lack of clarity in this space, these developments have not been considered for valuation. Maintain buy.
Bharti Airtel
Reco price: Rs 588
Current market price: Rs 558.7
Target price: Rs 710
Upside: 27.1%
Brokerage: India Infoline
The amended IUC regulations (effective 1 April 2009) will come as a relief for Bharti, despite a MTC (mobile termination charge) cut from 30 paisa to 20 paisa. It could have been worse: the rival lobby had been pushing for an MTC cut to zero, which would have significantly dented Bharti’s earnings. Besides, a cut to zero would have enabled RCOM and other start-up networks to price outgoing cross-network plans far more effectively and possibly resulted in congestion in Bharti’s network. On the other hand, the cut does represent a setback to Bharti’s rural expansion economics. Mobile-to-fixed termination charge has also been cut from 30 paisa to 20 paisa, and this is favourable to wireless operators.
Incoming termination charge on international long distance has been raised only to 40 paisa from 30 paisa, well below our expectation. TC cuts has been estimated after factoring in licence fees, spectrum charges and service tax and will take 3.2 per cent off Bharti’s EPS in FY10 and FY11. The termination amendments are seen as end of a lengthy period of uncertainty for Bharti. For the present, there are no significant regulatory threats, despite imminent change at the helm in TRAI. RCOM’s gains from this mild move will be limited, whereas Idea should be relatively unaffected. Maintain buy.
Current market price as on March 13, 2009
