ADANI POWER
Reco price: Rs 100.85
Current market price: Rs 100.30
Target price: Rs 88
Upside: 12.3%
Brokerage: Citi Investment Research
Adani Power (APL) is an interesting case of private sector entrepreneurship, capitalising on India’s persistent power deficits and exploiting high medium-term merchant tariffs which should reduce the payback of projects, and also having lower execution time cycles by using Chinese equipments. Also, progress on the 4,620 MW Mundra plant and the group’s experience in executing mega projects successfully does bolster the investment case. However, quite a few loose ends need to be tied, such as insufficient coal for the 6,600 MW of capacities for 25 years, coal mining license risk, fuel pricing for Indonesian coal from AEL and dependence on reasonable merchant rates to extract higher than regulated peer value.
The brokerage has given APL, the benefit of the doubt and models in flawless execution of 6,600 MW to arrive at a fair value of Rs 93 per share. It has initiated coverage on APL with a sell or medium (3M) risk rating with a target price of Rs 88 (5 per cent discount to the flawless execution value). It says that it is worth noting that delays in commissioning of any of the power plants would have a significantly higher impact on APL than on any other regulated projects as the higher than peers value is contingent on APL exploiting opportunities in the merchant markets prior to the start of the PPAs.
APOLLO TYRES
Reco price: Rs 55
Current market price: 52.50
Target price: Rs 61
Upside: 16.2%
Brokerage: IIFL Research
Apollo Tyres’ September quarter results were above expectation with standalone sales up 24 per cent year-on-year (y-o-y) and net profit up 12 times due to volume growth of 24 per cent y-o-y on the back of strong demand from replacement and OEM segments. Sequentially, volumes were up by 4 per cent. The brokerage expects a volume growth of 12 per cent in 2009-10 on account of improving demand and due to lower base effect.
The y-o-y fall in raw material prices has caused a marked expansion in EBITDA margin in the September quarter. These are expected to expand substantially y-o-y in the next two quarters. Demand has revived for the South Africa-based Dunlop (a 100 per cent subsidiary of Apollo Tyres) in the September 2009 quarter, after a poor performance in June quarter. This helped Dunlop post profit of Rs 11.6 crore in September quarter as against a loss of Rs 20.9 crore in June quarter. Netherlands-based Vredestein, which was acquired by Apollo in the June quarter, reported Rs 550 crore sales, EBIDTA margins of 11 per cent and PAT margin of 2 per cent for September quarter. The brokerage has raised its 2009-10 and 2010-11 earnings estimates for Apollo Tyres by 10 per cent to reflect higher volume growth.
HINDUSTAN ZINC
Reco price: Rs 868
Current market price: 934
Target price: Rs 950
Upside: 1.7%
Brokerage: Angel Broking
On the back of improved demand outlook and prices, the brokerage has upgraded its 2009-10 and 2010-11 EPS estimates for Hindustan Zinc by 3 per cent and 11.7 per cent, respectively. The company has posted a mere 1.6 per cent growth in revenue to Rs 1,818 crore for September 2009 quarter, which was lower than estimates. Sales grew primarily on account of the increase in zinc and lead realisations, besides an 11 per cent depreciation in the rupee’s value. Notably, refined zinc and lead realisations grew 16.6 per cent and 9.3 per cent y-o-y, respectively, during the quarter.
On the operating front as well, EBITDA margins improved by 430 basis points to 59.1 per cent y-o-y mainly due to higher sales volumes and realisations of refined zinc and silver. Fall in various expenses also helped improve margins. Hindustan Zinc’s net profit fell marginally by 2.6 per cent to Rs 935 crore on account of lower other income (down 15 per cent y-o-y) and higher tax rate. The brokerage has upgraded the stock to ‘accumulate’ valuing the stock at 5.5 times its 2010-11 estimated enterprise value (EV)/EBITDA.
STERLITE TECHNOLOGIES
Reco price: Rs 313
Current market price: 314.50
Target price: Rs 365
Upside: 16.1%
Brokerage: Emkay Research
Sterlite Technologies reported a net profit of Rs 54.7 crore in September 2009 quarter, slightly ahead than estimates, led by strong margin expansion and lower interest expenses. Although revenues fell by 30 per cent y-o-y to Rs 465.8 crore, EBIDTA was in line with estimates, helped by healthy conversion margin of Rs 17,000 per tonne in the power conductors business compared to Rs 13,000-14,000 per tonne guided by the management. The EBIDTA margins at 19.1 per cent were highest in last 7 years, and were also helped by increased optic fibre realisations. Revenues fell due to lower than expected revenues from copper cables business and lower realisation of conductors due to fall in aluminium prices. Due to lower revenues from copper cables business and delay in capacity expansion in H2 of 2009-10, the brokerage has reduced its revenue estimates by 8.3 per cent and 1.4 per cent for 2009-10 and 2010-11, respectively. But, EBIDTA estimates have been increased by 6-8 per cent, due to higher conversion margin in conductors, resulting in an EPS upgrade of 11 per cent each for the current and next two fiscal years. Given the improving margin profile, strong earnings growth and improving return ratios, the stock is due for further re-rating.
ULTRATECH CEMENT
Reco price: Rs 824.75
Current market price: 772.85
Target price: Rs 890
Upside: 15.2%
Brokerage: Macquarie Research
UltraTech Cement posted better-than-expected results, led by a lower-than-expected drop in realisation. For September 2009 quarter, it reported a 10 per cent y-o-y rise in net sales, driven by an improvement of 6.5 per cent in volume and a 3.5 per cent in realisations. EBITDA was up 58 per cent y-o-y, due to lower power and fuel costs. Net profit at Rs 250 crore was up 53 per cent y-o-y.
Cement prices have been on a decline since late-August 2009, due to some oversupply and slower demand. Thus, realisation could drop sequentially by about Rs 200 per tonne December quarter. However, costs should also drop by a similar amount as economies of scale return with higher volumes and lower maintenance costs. Its blending ratio is one of the lowest (1.26 compared against industry average of 1.36) and its proposed grinding unit should help it to narrow the gap and reduce costs. UltraTech is also planning to add waste heat-based power plants to lower its power cost.
The proposed merger with Grasim’s cement vehicle, Samruddhi, will make UltraTech the largest pure-cement company in the country, with combined capacity of 47 million tonne. It would also become more diversified geographically and should re-rate. Valuations remain compelling at an EV per tonne of around $100 and PE of 8.4 times its 2009-10 earnings.
Current market prices as on October 23
