Bharti Airtel
Reco price: Rs 405
Current market price: Rs 411.5
Target price: Rs 453
Upside: 10.1%
Brokerage: Sharekhan
For June 2009 quarter, Bharti Airtel attained gross revenue market share of 33.8 per cent and maintained subscriber share at 24 per cent, despite the tough competition due to entry of new players. Despite strong fundamentals and revenue market share, Bharti’s stock price has relatively under-performed the Sensex. This is mainly due to uncertainty surrounding the proposed Bharti-MTN deal, deterioration in key operating metrics, expected shift in subscriber and revenue market share with the anticipated introduction of number portability and, introduction of per second billing system by Tata DoCoMo and Shyam-Sistema, which is expected to intensify the price war.
MTN’s implied deal valuation of 5.7 times enterprise value (EV) to earnings before interest, depreciation, tax and amortisation (EBIDTA) is inexpensive in comparison to Indian telecos. Further, as a long-term strategy, it would provide Bharti entry into fast-growing and under-penetrated markets like Africa. Moreover, the operating metrics of MTN is better than Bharti’s.
The positives for Bharti are its low-cost business model that would help it sustain EDIDTA margin in the range of 40-42 per cent, superior execution capabilities and healthy return ratios. The stock trades at 13.4 times its 2010-11 estimated earnings and 7.4 times EV/EBITDA. Maintain buy.
Maruti Suzuki
Reco price: Rs 1,276.5
Current market price: Rs 1,385.75
Target price: Rs 1,542
Upside: 11.3%
Brokerage: Citi Investment Research
Urban consumption is on the cusp of a nascent recovery and Maruti Suzuki with around 70-75 per cent of volumes from cities would benefit more than peers. Aggregate industry growth is estimated to be around five per cent CAGR over FY08-10; pent-up demand could positively surprise in FY11-12. Additionally, improvement in consumer financing should support volume growth. Both cost pressures and competitive intensity are forecasted to gradually increase, but given its dominant market position and pricing strengths, expect Maruti to respond to both. The brokerage has increased its EPS estimates by 17-24 per cent over FY10-11. This is driven by 3.3 per cent and 8.2 per cent increase in domestic volumes in FY10 and FY11, respectively and margin expansion of 10-70 basis points (bps).
The target price has been revised upwards to Rs 1,542 (from Rs 1,079), reflecting earnings upgrades and an increase in the target multiple to 12.5 times price-to-cash EPS – a 25 per cent premium to the long-term average of 10 times, considering 36 per cent earnings CAGR over FY09-12. Valuations are slightly on the higher side but still comfortable, given the stock has corrected 15 per cent from its peak. However, Toyota’s small car launch poses a risk from a 2011-12 perspective. Near-term risk is from Hyundai’s i10 and Tata’s Nano. Maintain buy.
Mphasis
Reco price: Rs 517
Current market price: Rs 518.25
Target price: Rs 560
Upside: 8.1%
Brokerage: Emkay Research
Mphasis’ revenues grew by 9.2 per cent quarter-on-quarter (q-o-q) to $232 million. While operating profit stood at Rs 292 crore (up 3.6 per cent q-o-q), margins at 26.4 per cent were down 50 bps q-o-q impacted by currency appreciation. Net profits at Rs 229.2 crore (up 2.1 per cent q-o-q) beat estimates driven by higher revenue, lower forex losses as well as lower effective tax rate. The company reduced overall employee count by 1,057 after strong hiring over the past two quarters. Pricing remained stable, negating some Street talk of price discounts being demanded by HP during the quarter. However, Mphasis did not rule out the possibility of price reductions going forward, which remains a key downside risk. The brokerage has increased its FY09 and FY10 earnings estimates for Mphasis by 12.6 per cent and 26.5 per cent to Rs 41.3 and Rs 42.8, respectively. The target price has been increased to Rs 560 from Rs 310, based on 12.5 times one-year rolling forward P/E multiple. Emkay has downgraded the stock from Buy to Accumulate as it expects the stock to take a breather considering the tear away rally in the past six months.
OnMobile Global
Reco price: Rs 525.9
Current market price: Rs 520.2
Target price: Rs 700
Upside: 34.6%
Brokerage: Macquarie Research
OnMobile has entered into separate strategic deals with two leading international telecom operators – Vodafone and Telefónica – to provide a suite of value-added services (VAS). The brokerage believes that these developments are positive for the stock and there is potential upside from these deals. Also, revenues from the two international deals are expected to cross Rs 110 crore in FY11, which amounts to 14 per cent of overall revenues. The brokerage has revised downwards its EPS estimates by 38 per cent for 2009-10 and by 13 per cent for 2010-11 but has upped it by 12 per cent for 2011-12.
However, the near-term profitability for OnMobile will likely be under pressure due to investments that are needed to be made in the two international deals. The brokerage estimates revenue and EBITDA to grow at a CAGR of 37 per cent and 47 per cent, respectively, for FY10-13. Thus, investors should value OnMobile as a hyper-growth stock and not assign undue importance to the company’s near-term quarterly performance. The target price has been revised to Rs 700 from Rs 325. Other catalyst to price would be the launch of operations in Telefónica markets. Maintain outperform.
Unitech
Reco price: Rs 83
Current market price: Rs 85.75
Target price: Rs 60
Downside: 30%
Brokerage: Kotak Securities
Unitech Community Parks (UCP) is going slow on development of properties until demand picks up. UCP is receiving rentals from 0.7 million sq. ft of commercial space. Another 1.8 million sq. ft is committed under binding pre-lease agreements and 0.2 million sq. ft is committed under letter of intent. UCP has advanced short-term loans totalling GBP 97.8 million (UCP’s 60 per cent share works to GBP 58.7 million) at commercial rates of interest to Unitech as a related party transaction. The aggregate advances to Unitech for FY09 were Rs 920 crore, of which, the outstanding balance as of March 2009 is Rs 710 crore. As per the management, all the advances have been subsequently repaid by July 10, 2009.
In line with the weak demand environment for commercial properties, Knight Frank, the independent valuer, has reduced the value of assets by 34 per cent since March 2008. The decline is largely because of increase in WACC (weighted average cost of capital), increase in cap rates and extension of the STPI scheme till FY12 will likely have an adverse impact on the movement of tenants from IT parks to SEZs. Maintain cautious.
Current market prices as on August 21
