Hindalco
Reco price: Rs 152
Current market price: Rs 149.75
Target price: Rs 179
Upside: 19.5%
Brokerage: Angel Securities
Hindalco’s subsidiary, Novelis, reported strong set of numbers for December 2009 quarter. While top-line fell by 2.9 per cent year-on-year to $2.112 billion, EBITDA grew by a robust 212 per cent as margins expanded by a substantial 701 basis points to 10.2 per cent. Reported net income came in at $68 million versus a Loss of $1.8 billion in December 2008 quarter. Further, the management guided annualised cost savings of $140 million by September 2010 quarter, with $100 million savings being achieved till date.
Capacity utilisation was high in Asia and South America at around 90-95 per cent. While Europe witnessed an average utilisation rate of around 85 per cent, these were lower in North America at around 80 per cent. Management expects 3-4 per cent improvement in utilisation rates next year. Following expiry of Novelis’ metal price ceiling contracts in the last quarter and new contracts being set without a price ceiling effective January 1, 2010, expect the company to register sequential improvement in its operating performance. Consequently, its 2011-12 EPS estimates have been revised upwards by 26.9 per cent to Rs 18, by the brokerage. At Rs 152, the stock is trading at 7.6 times its estimated 2010-11 EV/EBITDA.
FAG Bearings
Reco price: Rs 554
Current market price: Rs 525
Target price: Rs 600
Upside: 14.3%
Brokerage: HDFC Securities
FAG Bearings India (FBIL) has reported poor results for fourth quarter ending December 2009. The company reported a growth of 17 per cent in net sales to Rs 219 crore on the back of demand from auto and industrial segments. However, the company’s EBIDTA margin dropped by 710 basis points to 12.4 per cent due to increase in material cost. Material costs as a percentage of net sales jumped by 830 basis points from 54.9 per cent to 63.2 per cent due to higher metal prices and FAG’s inability to pass on this increase to customers. As a result of the decline in EBIDTA margins, net profits declined by 23 per cent year-on-year to Rs 16.5 crore.
For the year ending December 2010, net sales is expected to rise by 13 per cent and net profit by 29 per cent due to improvement in EBIDTA margin from 15.2 per cent in CY09 to 17 per cent in CY10. FAG Bearings, which is debt-free, is poised for rapid growth led by demand from the auto and industrial sector. The brokerage maintains a 'HOLD' rating on the stock with a target price of Rs 600 (10 times CY10 earnings).
GlaxoSmithKline Pharma
Reco price: Rs 1,580
Current market price: Rs 1,649.65
Target price: Rs 1815
Upside: 10%
Brokerage: Religare, Hitchens & Harrisons
GSK Pharma launched five products (including one vaccine – Cervarix) in CY09. The vaccine portfolio has seen a positive surprise in terms of demand. Going ahead, the company is expected to launch 6–8 products per year. Some of these will be positioned in the niche segment. In addition to the in-house product range, the company will have access to the dermatology portfolio of Stiefel.
The management has guided for revenue growth of 12–13 per cent for CY10 and CY11, up from the 9–10 per cent run-rate posted in the past two years. New product launches are expected to underpin the growth shift. GSK Pharma’s EBITDA margin increased 10 basis points to 36 per cent in CY09. The company intends to increase its field force and raise promotional expenses to support its new product basket. However, these incremental costs will be offset by an improving product mix and stronger operating leverage. In addition, niche product opportunities will offer a margin upside. The brokerage has revised its earnings estimates for Glaxo by 2–3 per cent for CY10 and CY11 to reflect the upbeat growth prospects, and maintains buy on the stock, which is currently trading at a P/E of 23 times its estimated CY10 earnings.
Mahindra & Mahindra
Reco price: Rs 1,013
Current market price: Rs 998.90
Target price: Rs 1,280
Upside: 28.1%
Brokerage: IIFL
The company will launch a completely new SUV (priced higher than the Scorpio) in the December 2010 quarter. There are another 6-7 new products to be launched on existing platforms targeted at niche markets in which the company is not currently present. This will include three variants of Maxximo, a variant of Xylo and a passenger variant of the Gio. M&M’s management expects a 200 basis points hike in excise duty and an additional surcharge of Rs 15,000-20,000 per vehicle on diesel SUVs. The Chakan plant is owned by its 100 per cent subsidiary, Mahindra & Mahindra Vehicle Manufacturer (MVML), which will supply fully-built vehicles on cost-plus basis to both M&M and MNAL (a CV venture with Navistar). MVML will produce all variants of Maxximo, new variants of Xylo, a new SUV and all M&HCVs. This will in effect shift a part of the margin from standalone M&M to MVML, along with shifting the depreciation and capex. This will lead to a fall in M&M’s EBITDA margin, but a rise in its return on capital employed. The company will launch a 25-tonne vehicle in March and a 31-tonne vehicle in June. The 40-tonne and 49-tonne vehicles will be launched by the end of the year and the tippers, buses and 16-25-tonne range vehicles will be launched in 2011-12.
Tata Steel
Reco price: Rs 577
Current market price: Rs 562.55
Target price: Rs 700
Upside: 24.4%
Brokerage: Ambit Capital
The third quarter saw a strong jump in Tata Steel’s consolidated EBITDA, led by improvement in its European operations. Consolidated net sales at Rs 26,010 crore were lower than expected. Stripping out India operations, subsidiaries recorded a 3.7 per cent EBITDA margin, a significant swing into the black from the last quarter's lower (negative 8.2 per cent) margin. In the two coming quarters, production volumes will be impacted by planned repairs (over 4 weeks) at a blast furnace in Ijmuiden. Management guided for higher sequential sales volume and has the slab inventories created in December quarter to do so. It mentioned that there are opportunities to hike prices, particularly in flat products. Together, these prices should offset the higher input costs.
The management of both, ArcelorMittal and Tata Steel, have indicated a 15 per cent growth in apparent demand in Europe in CY10, led by the base effect. Even with a reduced capacity, Tata Steel is well placed to cater to the improved demand. Teesside mothballing will impact volumes. However, margins can come higher following recent price increases, gradual demand recovery in Europe and drop in headcount by another 1,600. At Rs 577, the stock is trading at 5.8 times its estimated 2010-11 EV/EBITDA and 7.5 times 2010-11 Price/adjusted EPS. Maintain buy.
Current market prices as on February 19
