Reliance Communications Reco
Price: Rs 276
Current market price: Rs 292.25
Target price: Rs 303
Upside: 3.67%
Brokerage: Emkay Global Financial Services
The brokerage believes that the recent deals signed by Reliance Infratel (RTel) with Etisalat DB, S-Tel, Aircel, Shyam Sitema and TTSL would bring external tenancy on RTel's towers, save costs and create value for RTel as a standalone business. With transfer of optic fiber assets from RCom to RTel, the company now not only provides passive infrastructure but also transmission and carriage services.
RTel currently has a portfolio of 50,000 towers with tenancy of 1.6 times entirely coming from captive usage by Rcom's CDMA and GSM services. While the contract signed with Etisalat would increase the tenancy to 2.2 times, RTel aims to achieve tenancy of 3 times by FY11 on the back of contracts with other operators.
Considering the contracts signed for tower business and the incremental profit accretion from external tenants, the brokerage has increased value for the Infratel arm from Rs 25 per share earlier to Rs 78 per share now factoring in external tenancy of 1.4 times on 40,000 towers. With this, the target price for the stock has been raised to Rs 303 from Rs 225 earlier.
HPCL
Reco Price: Rs 361
Current market price: Rs 387.6
Target price: Rs 470
Upside: 21.25%
Brokerage: Anand Rathi Financial Services
Recent statements from the government (specifically, the Ministry of Petroleum and Natural Gas) have been positive, indicating the possibility where OMCs might not have to bear any subsidy. Also, brokerages expect lower crude/product prices in months ahead and subsequent lower debt load.
With the steep fall in crude prices and lower product prices, the working capital requirements and debt load of HPCL have fallen sharply compared to FY09. These along with lower interest cost should help the company to report improved profitability. This is also a reason that the brokerage forecast a 92 per cent y-o-y jump in FY10E EPS over FY09 to Rs 42.6, on the back of lower under-recoveries (partially on cooking fuels), lower interest costs and inventory gains. The brokerage recommended the stock at Rs 361 and raised its target price to Rs 470, which is based on 50 per cent historical discount to Sensex PE of 17 times and value of its investments in MRPL, at a 25 per cent of holding company discount.
EMCO
Reco Price: Rs 95
Current market price: Rs 91.2
Target price: Rs 115
Upside: 26%
Brokerage: Sharekhan
In FY2009, Emco booked Rs 7.96 crore of loss in forex, adjusting for which the company's operating performance was better. The transformers division reported 1.9 per cent increase in volumes during the year while the realisation dropped by 2.2 per cent y-o-y on account of a fall in commodity prices.
Recently, CESC has acquired 50 per cent stake in Dhariwal Infrastructure that is setting up a 600 MW power plant. Taking this deal as a benchmark, Emco should have been able to garner close to Rs 350-400 crore for its subsidiary Emco Energy.
Emco has currently invested Rs 43.5 crore in the subsidiary. If this is true, Emco could actually partially pay off of its debt on books easing the company's financial cost and boosting its profits. Assuming the repayment of the advanced amount, earnings for the stand-alone entity could increase by 5-10 per cent.
The brokerage has upgraded earnings estimates by 4.4 per cent to Rs 11 in FY2010. Further, it has not factored in any cash flow from the sale of the plant, which would be an upside to current estimates. Emco is fast emerging as a strong end-to-end solution provider in the power transmission and distribution (T&D) space in the country. It feels the order inflow for the company would remain robust with the spending in power T&D space expected to remain buoyant.
The company is expected to report a CAGR of 17.3 per cent and 19.4 per cent in the turnover and the net profits respectively over FY2009-11. At the recommended price of Rs 95, the stock trades at 8.6 times and 7.4 times FY2010 and FY2011 estimated EPS respectively.
Power Grid Corporation
Reco Price: Rs 107.5
Current market price: Rs 107.10
Target price: Rs 100
Downside: -6.62%
Brokerage: IIFL Research
In the first two years of the XI Five Year Plan, Power Grid has spent Rs 14,800 crore (of estimated Rs 55,000 crore) on network augmentation. Given this implementation, the brokerage believes PGCIL is better placed to complete the national grid project on time by FY12. Adjusting for capital work in progress (37 per cent of the net worth), PGCIL's RoE on operational assets works out to 17 per cent in FY09, a marginal improvement over FY08 (16.4 per cent).
However, as of FY09, PGCIL has cash and cash equivalents of Rs 3,200 crore, and estimated cash flow through FY12 can support equity for only Rs 33,600 crore projects, as compared to the proposed Rs 40,000 crore. Thus, PGCIL is expected to raise equity of Rs 1,800-2,000 crore over the next 12-15 months.
Overall given the visibility on the capital expenditure programme and new regulations that increase the benchmark RoE form 14 per cent to 15.5 per cent, the brokerage upgrades FY10-11 earnings estimates by 10 per cent and 7 per cent respectively. At the recommended price of Rs 107.5 the stock trades at 3 times core book value on FY11. The brokerage thinks valuations adequately reflect these positives, and are unlikely to trigger outperformance hereon.
Koutons Retail
Reco Price: Rs 354
Current market price: Rs 353
Target price: Rs 500
Upside: 41.6%
Brokerage: Edelweiss Research
Koutons Retail's USP is its ability to cut down intermediaries and bring fashion to masses at affordable prices. The brokerage is positive on the company's growth based on its business model, expansion plans, and higher margins compared to other retailers on account of integrated operations. It initiates coverage on the stock with buy recommendation and values it at 12.5 times FY11E EPS (50 per cent discount to Pantaloon's FY11 P/E multiple) to arrive at a target price of Rs 500.
The report mentions that organised retail is expected to grow at CAGR of 19 per cent over the next four years to reach Rs 202,400 crore by FY13E. Clothing and fashion accessories, which account for 38 per cent of this will be one of the key beneficiaries. The brokerage believes, low penetration, favourable demographics, steady economic growth, increasing availability of credit, and improving cost structures will reverse the now sagging fortunes of organised retail.
Koutons plans to convert its existing stores to family stores and rationalise stores based on demand. We expect interest costs to dip due to restructuring of high cost debt and softening of interest rates. This is likely to increase its PAT margins over the coming quarters with earnings CAGR of 24.6 per cent over FY09-11E likely.
Current market prices as on September 4
