ONGC
Reco price: Rs 1,140
Current market price: Rs 1,115
Target price: Rs 1,377
Upside: 23.5%
Brokerage: Edelweiss Research
ONGC’s Q3 FY10 revenues were up 23.1 per cent y-o-y to Rs 15,310 crore on account of higher crude prices and realisations on value added products, and lower subsidy. Core profit increased 23.4 per cent y-o-y and declined 40 per cent q-o-q, to Rs 3,050 crore, lower than estimates.
In line with crude prices, ONGC’s gross crude realisation for the nominated crude increased 29.9 per cent y-o-y and 8.7 per cent q-o-q to $76.7/bbl. The company bore a subsidy burden of Rs 3,497 crore for Q2 FY10, implying a discount of $18.97/bbl. Net realisations were up 69.7 per cent y-o-y and 2.3 per cent q-o-q, to $57.7/bbl. Standalone crude production and sales declined 4.5 per cent y-o-y (6.64 MMT) and 0.9 per cent y-o-y (5.65 MMT). However, natural gas production and sales were up marginally.
Quarterly earnings were below estimates on higher recouped costs and lower other income, which are non-recurring. Consequently, PAT estimates for FY10 have been reduced and some of the parts valuation has also been revised downwards to Rs 1,354 a share. At Rs 1,140, ONGC is trading at P/E of 9.7x and 9.4x its FY11 and FY12 estimated earnings and 4.9x and 4.6x its estimated EV/Ebidta, respectively. Maintain buy.
BHEL
Reco price: Rs 2,297
Current market price: Rs 2,372.20
Target price: NA
Brokerage: Angel Securities
BHEL reported a strong performance in December 2009 quarter with a 35.7 per cent year-on-year growth in its bottom line to Rs 1,072.6 crore, which was in line with estimates. Though the company disappointed on the top-line front and clocked a mere 17.9 per cent growth to Rs 7,100 crore on the back of slower-than-expected execution, it made up for this with a higher-than-expected expansion in operating margins. BHEL reported a sharp rise in the EBITDA margins by 323 basis points to 20.2 per cent, which was above expectations. This was primarily driven by lower raw material costs, which reduced by 269 basis points to 55.5 per cent of net sales, on account of benefits of lower commodity prices. The substantial reduction in other expenses also aided margin expansion during the quarter, leading to higher net profit growth.
The Indian power equipment market is in the midst of a structural change, with intensifying competition, both from the domestic and overseas players. Additionally, the changing mix of the power projects in the 12th Plan, towards relatively weaker areas of BHEL, would offer better opportunities for competitors to eat into BHEL’s pie. At Rs 2,297, the stock is quoting at 21.2 times and 17.8 times 2010-11and 2011-12 estimated EPS, respectively. Given the structural long-term concerns, we maintain our neutral view on the stock.
ICICI Bank
Reco price: Rs 851
Current market price: Rs 840
Target price: Rs 940
Upside: 11.9%
Brokerage: Angel Securities
Strict adherence to its cautious growth strategy enabled ICICI Bank to fortify its balance sheet during Q3FY10. While the loan book contracted sequentially, a sharpened focus on garnering current and saving accounts (CASA) deposits along with benefits of re-pricing high-cost deposits paid-off in the form of higher net interest income (NII) and net interest margins (NIM). NIMs for the quarter increased 10bps q-o-q to 2.6 per cent supported by an increase in the CASA proportion to 39.6 per cent vis-à-vis 36.9 per cent at Q2FY10-end. Utilisation of excess liquidity on its balance sheet (which is yielding negative spreads) and sustained focus on CASA deposits would drive NII growth and keep NIMs firm going ahead. The growth in the loan book is expected to be driven by higher disbursals to meet the priority sector lending (PSL) norms and increased lending to corporates. The research firm has put a buy on the stock with a target price of Rs 940. This includes Rs 252 as the valuation of its stake in its banking and non-banking subsidiaries.
Jindal Steel & Power
Reco price: Rs 655.7
Current market price: Rs 674.8
Target price: Rs 943
Upside: 39.7%
Brokerage: Macquarie Research
The base case valuation of power division, based on a long-term merchant rate of Rs 2.96/kWh and 5,380 MW, is $10.4 billion. If we were to include the 6,100 MW proposed hydroelectric project, the estimated value rises to $12 billion. For every 10 per cent increase in the long-term merchant rate, valuation increases by 10.5 per cent.
The steel business, which currently contributes 42 per cent to earnings and likely to contribute 72 per cent by FY13, is being valued at a mere $2-4 billion. The new 6 metric tonnes per anuum (mtpa) steel capacity at Angul is on course. The company is set to become a 10 mtpa steel producer by 2013. JSPL is estimated to be sitting on 2.5 billion tonne of coal and 1 billion tonne of iron ore, making it the biggest private-sector resource owner in India. It is already the largest private sector coal miner in India with production of 12 mtpa. It currently mines 5–6mtpa of iron, but has approvals to mine up to 18mtpa. Maintain outperformer.
Kewal Kiran Clothing
Fair price: Rs 336
Current market price: Rs 270.50
Fundamental grading: 3/5
Valuation grading: 5/5
Research house: CRISIL Equities
Kewal Kiran Clothing (KKCL) is a leading apparel player in the domestic market. It owns four brands namely, Killer, Lawman Pg3, Integrity and Easies. Killer has emerged as one of the strongest domestic brands in the casual men’s wear segment, especially in the denim category. CRISIL Equities expects domestic readymade garment to grow at a healthy rate on the back of rising income levels, preference for ready-to-wear apparel, organised retailing and increasing brand consciousness. KKCL has also forayed into retail with the launch of ‘K-Lounge’, a multi-brand outlet that distributes all its four brands. It plans to expand the outlets from 135 to 400 by 2013-14 in Tier II and III cities. KKCL compares favourably with its peers on account of its strong brands and premium pricing in the readymade garment sector. It commands a high return on equity (RoE) and has comfortable liquidity position. CRISIL Equities expects KKCL’s revenues to grow at a CAGR of 20.2 per cent over the next three years to Rs 252 crore in 2011-12 mainly driven by volume growth of 15.9 per cent. EBITDA margins are expected to be around 24.4 per cent in 2009-10 and thereafter likely to stabilise at around 22 per cent. Net profit is expected to grow from Rs 14.3 crore in 2008-09 to around Rs 33.1 crore in 2010-11 while EPS is expected to more than double from Rs 11.6 to around Rs 26.8. CRISIL Equities has assigned fundamental grade of 3/5 indicating that KKCL’s fundamentals are ‘good’ relative to other listed securities. The valuation grade of 5/5 indicates ‘strong upside’ from Rs 265 level based on the discounted cash flow method.
Current market prices as on January 22
