Cairn India
Reco price: Rs 276
Current market price: Rs 271.95
Target price: Rs 225
Downside: 17.3%
Brokerage: Kotak Institutional
Crude oil prices have declined by $6.6 per barrel (or 8.3 per cent) since December 1, 2009 led by rise in crude inventories in the US, strengthening of the dollar and financial crisis in Dubai, which have increased concerns on the pace of the global economic recovery. However, Cairn’s stock price declined moderately by 3.3 per cent in this period. This is surprising in light of the high correlation between Cairn’s stock price and crude oil prices. The brokerage rules out a steep increase in crude oil prices in CY2009-10E due to the large spare capacity with OPEC and increase in non-OPEC production that would offset a moderate recovery in global oil demand.
Cairn’s current stock price is discounting $89 a barrel in perpetuity, which is high. The brokerage perceives value in the stock at Rs 180-190, which discounts a more reasonable crude oil price of $60-65 in perpetuity. The recent decline in crude oil prices will result in muted performance of Cairn’s stock price.
The downside risks to earnings and stock performance stem from the decline in crude oil prices, slower-than-expected ramp-up in production, unfavourable outcome in the cess issue (impact of Rs 10-22 per share), payment of VAT at 4 per cent (impact of Rs 10 per share) and stronger rupee. Maintain reduce.
Tata Chemicals
Reco price: Rs 315
Current market price: Rs 314.95
Target price: Rs 341
Upside: 8.3%
Brokerage: Sharekhan
During November 2009, Tata Chemicals acquired additional one million equity shares of Rallis India for Rs 908.50 each, raising its stake from 46 per cent to 50.1 per cent, and thereby, making Rallis its subsidiary. The acquisition will lead to consolidation benefits as well as improved business synergies for Tata Chemicals, going ahead. Currently, the company is a dominant player in the crop nutrition segment but is more or less absent in the crop protection space.
The acquisition of the majority stake in Rallis would provide Tata Chemicals an entry into the crop protection business. Rallis’ consolidation should increase Tata Chemicals’ PAT by Rs 51.6 crore adding six per cent to its estimated 2010-11 earnings.
Tata Chemicals’ stock has seen a significant up-move in reaction to the Rallis acquisition, extension of safeguard duty on Chinese imports and, likely re-pricing of the international soda ash contracts. Consequently, the price target has been revised to Rs 341. At Rs 315, the stock is trading at 11.3 times and 9.2 times its 2009-10 and 2010-11 expected earnings (excluding Rallis’ financials), respectively. Maintain hold.
Gujarat Gas Company
Reco price: Rs 231
Current market price: Rs 228.10
Target price: Rs 268
Upside: 17.5%
Brokerage: Prabhudas Lilladher
Gujarat Gas’ distribution volumes received a fillip in the recent past due to availability of regassified LNG (RLNG) at competitive prices. With over 0.7 mmscmd (million metric standard cubic meter per day) RLNG, the company is now distributing about 3.2 mmscmd of natural gas in Surat, Bharuch and Ankleshwar. Existing infrastructure can absorb about 3.8-4 mmscmd of gas volumes. However, the company has been constrained from gas supplies. Nevertheless,
Gujarat Gas is expected to invest about Rs 150 crore to expand its network anticipating future gas supplies. Gujarat Gas is awaiting PNGRB’s authorisation for the existing geographies, though it has been permitted to expand its infrastructure. Incrementally, the new geographies will be awarded through a competitive bidding process. Hence, the current focus will be on expanding operations in the existing territories.
The contentious issue over incremental gas supplies has been mellowed down by RLNG supplies and a probable allocation from KG D6 gas. These two sources would negate the worries over gas supplies. Gujarat Gas’ existing geographies offer a potential of over 15-20 per cent volume growth over the next couple of years. With about 15 per cent expected volume growth and return on equity of 21-22 per cent, the stock commands higher valuation. It is currently available at 12.1 times its earnings and 2.4 times its price to book-value, based on CY2011 projections. Maintain accumulate.
Titan Industries
Reco price: Rs 1,352
Current market price: Rs 1,336.40
Target price: NA
Brokerage: Edelweiss Securities
Volumes in Titan Industries’ jewellery business declined significantly (around 11 per cent) in H1, 2009-10. Given the uptick in discretionary spending and lower base for H2, 2008-09, volume growth is likely to bounce back in H2, 2009-10.
Titan expects to end the year with 300 World of Titan, 119 Tanishq and 25 Fastrack, outlets. TIL aspires to be a $2.5 billion company in the next five years. On the retail front, the company is gearing up to take its multi-brand watch boutique, Helios, to more cities outside Bangalore. It is also planning to set up two large-format exclusive outlets in Mumbai and Kolkata.
Currently, 30 per cent of total sales are from studded jewellery, 50 per cent from plain gold, 16 per cent from gold coins, and 4 per cent from others. The company’s margins are related to value addition, and thus, making charges for studded jewellery are about 2.5 times that of plain gold jewellery, which in turn are 2.5 times that on gold coins.
Expect the watch and eye wear divisions to see an uptick due to higher discretionary spending and improving consumer sentiment. At Rs 1,352, the stock trades at 29.4 times and 24.5 times its estimated 2009-10 and 2010-11 earnings, respectively. Maintain hold.
Hero Honda Motors
Reco price: Rs 1,676
Current market price: Rs 1,670.80
Target price: Rs 1,830
Upside: 9.5%
Brokerage: Religare Hichens, Harrison
Rural demand for two-wheelers has remained robust despite the weak monsoons, with Hero Honda recording a 21 per cent y-o-y growth over April-November 2009. The two-wheeler manufacturers indicate that demand remains robust even after the festive season and is expected to remain so in the months to come. The company’s management has indicated that it has more than six new launches lined up for the next few months. This would continue to generate volume momentum in spite of increasing competition. The brokerage has raised its volume growth estimates for Hero Honda to 19 per cent and 8 per cent for 2009-10 and 2010-11, respectively.
Here Honda is set to produce 13.5 lakh units (30.5 per cent of its volumes) in 2009-10 and 18 lakh units (36.6 per cent of its volumes) in 2010-11 from the Uttaranchal plant. Thus, expect its EBITDA margins to be slightly higher with a lower effective tax rate than earlier estimated. Thus, EPS estimates are increased for 2009-10 and 2010-11 by 6 per cent to Rs 102.5 and 10 per cent to Rs 114.4, respectively. The stock is trading at 16.4 times its estimated 2009-10 and 14.7 times its 2010-11 earnings.
Current market prices as on December 11
