TECH MAHINDRA
Reco price: Rs 907
Current market price: Rs 907
Target price: Rs 1168
Upside: 28.7%
Brokerage: Angel Securities
Tech Mahindra’s recent deal restructuring with BT has been excessively discounted by the markets, even as positive news flow such as new deal wins, etc. is improving the outlook on Satyam. Currently, the consolidated EBITDA margin outlook is relatively weak due to the BT deal as well as the uncertainty regarding Satyam. However, considering the company’s pedigree of a Tier 1 IT player, margins should eventually revive close to peer levels. Expect Tech Mahindra to record a CAGR of 11.3 per cent in top-line over FY10E-12E (excluding Mahindra Satyam), while the bottom-line is expected to grow at a rate of 13 per cent over FY10E-12E.
Based on this premise, including Satyam, the stock is looking attractive on EV/sales basis relative to peers, trading at 1.9x FY2010E sales, at a substantial discount to its peer’s average of 3.5x. TechM (excl. Satyam) on SOTP basis is valued at 13x FY2012E EPS and value its 42.7 per cent stake in Mahindra Satyam at Rs 287 per share based on current market cap, applying a 25 per cent holding company discount, to arrive at a target price of Rs 1,168, implying an upside of 28 per cent. Maintain buy.
HINDUSTAN CONSTRUCTION COMPANY
Reco price: Rs 140
Current market price: Rs 137.5
Target price: NA
Brokerage: IDFC SSKI
HCC does not have a presence in the fast growing building construction segment in India. However, with the acquisition of 66 per cent stake in Karl Steiner AG for CHF 35 million, HCC would now be qualified for projects in this segment, specifically for high-end high-rise buildings that use the latest technology for integrating aspects of durability, safety, energy efficiency and low lifecycle cost of ownership and maintenance. HCC expects to leverage the acquisition to establish a presence in this segment in the Indian and the West Asian markets.
HCC expects to fund the current payout by combination of internal accruals and debt. HCC has Rs 150 crore of cash on books as on date. The deal is subject to the requisite statutory permissions both from Swiss authorities and the RBI.
Although KSAG’s financials are not yet available, the infusion of entire acquisition payout in to KSAG is positive, as this would enable KSAG to fund its growth plans. Prima facie, the acquisition seems to be a strategic fit for HCC, filling in a key gap in its portfolio.
HDFC
Reco price: Rs 2,688
Current market price: Rs 2,693.05
Target price: Rs 3,000
Upside: 11.7%
Brokerage: BNP Paribas Securities
The brokerage factors Rs 15,000 crore in loan disbursals in Q4 FY10. If this estimate is met, loan growth for FY10 would be about 12 per cent. Expect a loan growth of 20 per cent in FY11 and a spread in the range of 2.2-2.3 per cent even if interest rates increase in the next few months. Compared to SBI’s single instance of PLR reduction, HDFC cut PLR three times in the past nine months. Besides, HDFC launched its 8.25 per cent home-loan plan during December 2009 to February 2010. Prepayments during the year were 11.4 per cent of the opening balance, versus the historical range of 10-14 per cent, so no serious impact from aggressive pricing by competitors. About 45 per cent of prepayments were part prepayments and not full, indicating risk aversion by borrowers rather than migration. HDFC earns 125 bps for loans sold on buyback agreement while it makes 225 bps on the priority-sector loans sold. This gives HDFC a blended spread of 180 bps on all loans sold to HDFC Bank, compared to its average spread of 220 bps on entire portfolio. The core mortgage book currently trades at 2.9x our FY11E BV and 16.8x FY11E EPS.
APOLLO TYRES
Reco price: 74
Current market price: Rs 77.90
Target price: Rs 84
Upside: 7.8%
Brokerage: Sharekhan
To meet the strong demand in the auto sector, almost all the tyre companies are operating at full capacity utilisation. Apollo Tyres, with the commencement of 100-tonne-per-day additional capacity at its new Chennai plant this month is likely to be a key beneficiary.
Natural rubber, which constitutes about 58 per cent of the total raw material cost for Apollo, has seen a sharp rebound from its nine-month average of Rs 104 per kg to Rs 150 per kg currently. To partially offset the recent surge in natural rubber prices, in January 2010 Apollo had taken a price hike. Though the higher raw material prices are likely to dent the margins of the tyre companies, the impact is likely to be softer on account of the strong demand environment, which also gives a good bargaining power to the tyre manufacturers. For Apollo, its international operations have also seen demand looking up.
Furthermore, the increasing radialisation of truck and bus tyres in the country and with the company’s new Chennai plant all set to produce TBR tyres, Apollo Tyres is likely to benefit from the structural shift to radialisation. At Rs 74, the stock is trading at 8.1 times its 2010-11 estimated earnings of Rs 9.2. Maintain buy.
EDUCOMP SOLUTIONS
Reco price: Rs 735
Current market price: Rs 767.95
Target price: Rs 865
Upside: 12.6%
Brokerage: IIFL
A large ‘under-24’ population of about 500 million, and low literacy rates and number of schooling years (5.1) in the world, promise long-term growth. According to Central Board of Secondary Education, by 2011-12, India will need about 150,000 more private schools – twice as many as it has at present. Various education services, including more schools, smart classrooms and faculty training – all of which face serious shortages today – will be needed.
Educomp enjoys a unique competitive position and early-mover advantage in the Indian education industry. IIFL believes that Educomp’s Smartclass (and similar products) will increasingly be adopted by schools, fuelled by product superiority and peer pressure among schools. Educomp’s product, currently in 2,574 schools (forecast to exceed 16,000 schools by 2014-15) is the clear class leader. Educomp is also increasing focus on the K-12 business at the right time, wherein IIFL feels it will be in use in over 200 schools by 2014-15 (currently 36). Acceleration will gain visibility in the coming quarters (management has guided for 2,500 Smartclass schools in 2010-11, compared to 355 added in December 2009 quarter). IIFL has put a buy on the stock with DCF-based target price of Rs 865.
Current market prices as on March 19
