TATA MOTORS
Reco price: Rs 705
Current market price: Rs 711.05
Target price: Rs 407
Upside: 42.7%
Brokerage: Centrum Research
Tata Motors (TML) is expected to report a consolidated profit of Rs 130 crore for Q3FY10, its first since the JLR acquisition. Expect JLR to report operating profit of £93 million vis-a-vis a profit of £41 million in Q2FY10 on the back of strong volume growth of 28 per cent q-o-q. Its EBITDA margin is expected to improve by 215 bps q-o-q to 5 per cent. However, the company is expected to report a loss of £31 million vs £61 million in Q2FY10 at the net level. On a standalone basis, TML reported a net profit of Rs 400 crore (11.4 per cent q-o-q). With improved M&HCV sales during the quarter, its subsidiaries like Tata Motor Finance, HV Axles & HV Transmissions are expected to show superior performance in Q3 FY10.
HAVELLS INDIA
Fair value: Rs 614
Current market price: Rs 516.80
Fundamental grading: 4/5
Valuation grading: 4/5
Research house: CRISIL Equities
Havells, in India, is engaged in manufacturing electrical equipments and is amongst the top ten players in all its business segments. Its products derive demand from expenditure in the power T&D and real estate sectors wherein huge spending is expected over the next 7-8 years.
The fans segment witnessed tremendous growth (28-30 per cent) in 2006-07 and 2007-08, due to significant investments in the real estate market and growth in replacement demand. The underlying fan industry drivers should remain strong, leading to 14 per cent CAGR in industry. While the Indian lighting industry witnessed a 13 per cent CAGR during 2006-09, the compact fluorescent lamp (CFL) segment saw a robust 29 per cent growth due to increasing focus on using energy-efficient lighting. Going forward, expect CFL’s market to grow strongly benefiting Havells.
In April 2007, Havells bought over the worldwide lighting business of the thinly-profitable SLI Sylvania for €227 million, except brand rights in the US, Canada, Mexico, Australia and New Zealand. While Sylvania’s revenue growth should remain muted, benefits would accrue from improving bottom line on the back of restructuring plans introduced.
CRISIL Equities sees Havells’ gross revenues at Rs 7,480 crore by 2012-13 (4-year CAGR of 7.5 per cent) and OPMs at 10.8 per cent from 6 per cent in 2008-09 – EPS to increase from negative Rs 27.5 to Rs 74.2 during the same period. The valuation grade indicates potential upside, while fair value has been calculated by using a sum of parts method (Havells standalone and Sylvania) using the discounted cash flow method.
BHARTI AIRTEL
Reco price: Rs 280
Current market price: Rs 276.35
Target price: Rs 380
Upside: 37.5%
Brokerage: Religare Hichens, Harrison
Bharti Airtel (Bharti), post acquisition of Zain Africa (Zain), would compete with MTN/Vodafone, its largest rival in eight of the 15 sub-Saharan African geographies. For nine months ending September 2009, these eight geographies contributed 79 per cent, 74 per cent, and 68 per cent of Zain’s subscriber base, revenues, and EBITDA, respectively. Additionally, Bharti would be competing with Vodacom, a Vodafone-controlled entity, in Tanzania, and the Democratic Republic of Congo and Safaricom in Kenya.
Zain has the potential to significantly enhance Bharti’s earnings and return ratios on turn-around. However, Bharti’s acquisition of Zain at an enterprise value of $10.7 billion appears expensive, prima facie at 9.2 times (full EBITDA of Zain Africa) and 11.6 times (Bharti’s proportionate share adjusted for minority interest) its EV/EBITDA based on estimated CY09 numbers. However, the valuation remains distorted due to the sharp depreciation of African currencies on dwindling oil revenues against the dollar in CY09 vis-à-vis CY08. On the constant currency base of CY08, the deal valuation would scale down to 7.8 times (full value) and 10 times (proportionate share), respectively. This is a reasonable valuation taking into consideration the premium for acquiring a controlling stake in Zain as well as the growth opportunities that the African market offers. Maintain buy.
THERMAX
Reco price: Rs 565
Current market price: Rs 582.95
Target price: Rs 662
Upside: 13.6%
Brokerage: Sharekhan
Thermax has entered into an amicable settlement with Purolite International (Purolite) ending a five-year long legal dispute regarding its ion exchange resin business in USA. As per the out-of-court settlement, Thermax will pay Purolite four instalments of $9.5 million each spread over calendar year 2010 to settle the litigation. The two parties will now be joint co-owners in perpetuity of the information and technology in dispute. The agreement permanently resolves all claims and counter claims. Though there will be one-time extraordinary expense of Rs 43.9 crore in March 2010 quarter and Rs 131.8 crore in 2010-11 assuming an exchange rate of Rs 46.23 to a dollar, it is a long-term positive given the uncertainties associated with jury trials as well as cost and time.
Edelweiss remains positive on Thermax’ long-term business prospects and its possible entry into super critical boiler business in the near term. Nonetheless, the quantum of settlement charges has surprised negatively. The management has, however, indicated that there are no more litigations of such nature in the offing. Hence, Edelweiss maintains its adjusted earnings estimates at R 22.7 for 2009-10 and Rs 29.7 for 2010-11. The stock is trading at 21.3 times 2010-11 EPS. Maintain hold.
SOUTH INDIA BANK
Reco price: Rs 139
Current market price: Rs 138.95
Target price: NA
Brokerage: Edelweiss Securities
Gold loans formed 16 per cent of South India Bank’s (SIB) advances and accounted for a third of year-to-date growth in advances. The management intends to remain aggressive in this segment, but is adopting a cautious stance on expanding its housing loan book. Contribution of Kerala in overall business is steadily declining; it is likely to decline further to 35 per cent over the next three years. Loan book growth is likely at 30 per cent by 2009-10-end. SIB has appointed a full time DGM and 150 temporary staff for a year (to be confirmed on performance basis) to sell insurance products.
Until eight months ago, the bank was in corporate agency relation with ICICI Prudential. It recently broke the pact and entered into corporate agency relationship with LIC, which resulted in loss of commission income during the transition phase. However, income from insurance sales is likely to pick up in 2010-11.
Over the past few quarters, SIB has posted stable margins while balance sheet growth has continued to be resilient with low restructuring, lower slippages, and strong provision coverage ratio. The stock is trading at attractive valuations of 0.9 times estimated 2010-11 book-value. Maintain buy. Current market prices as on February 25
