TATA POWER
Reco price: Rs 1,357.05
Current market price: Rs 1,361.3
Target price: Rs 1,651
Upside: 21.3%
Brokerage: Macquarie Research
Our global commodities team has increased its forecasts for 2010-12 annual contract settlements by 2-8 per cent. The 2010 revision is to reflect the current spot price and the 2011/12 revisions reflect the potential of increasing demand from the Indonesian domestic market (20mt) and Indian imports (30mt) as electrification rates increase. Tata is leveraged to thermal coal prices due to its 30 per cent ownership in KPC and Arutmin coal mines. It is forecasted that these coal mines to cumulatively increase production to 100mtpa in FY15. Partially offset by the coal requirements for its Mundra power plant, it is believed that Tata Power will be 'net-long' thermal by around 20mtpa over the next five years. It should be noted that all of Tata's other power plants have a fuel cost pass-through.
Tata is on track for a 180 per cent increase in capacity from 2.9GW (2009) up to 8.1GW (2014), which is roughly three times faster than the Indian power sector. Reiterate "Outperform" on the back of higher coal price assumptions and lower WACC assumptions, driven by Indonesia's low risk profile, going forward.
CAIRN INDIA
Reco price: Rs 298
Current market price: Rs 295
Target price: Rs 315
Upside: 6.8%
Brokerage: Angel Securities
Post the comprehensive review of the Rajasthan block's resource potential, Cairn India (CIL) has revised upwards the production targets, in-place reserves and discovered reserves. CIL has augmented its discovered resource base in the Rajasthan basin to 4 billion barrel of oil equivalent (bn boe) from the earlier estimates of 3.7 bn boe. Core MBA (Mangala, Bhagyam and Aishwarya) formation estimates remains unchanged at 2.1 bn boe.
However, estimates of the Rajasthan small fields and other Rajasthan fields (prominent being Barmer Hill formation) have been hiked from 1.7 bn boe to 1.9-2.0 bn boe. This increase does not enhance valuations, as higher recoverable volumes have been factored in the estimates. CIL has also raised potential resource base of the Rajasthan block to 6.5 bn boe on account of the increase in gross un-risked reserve estimate to 2.5 bn boe
According to the management, CIL's enhanced resource base provides a vision to up the plateau production rate to 240,000 bpd (175,000 bpd currently). The production rate from the Mangala fields has been increased to 150,000 bpd from 125,000 bpd earlier. This is due to better-than-expected well deliverability and better reservoir quality. Thus, factoring in the Rajasthan Exploratory Portfolio upsides (addition of Rs 25 per share to target price) and advancing production from the MBA block (addition of Rs 20 a share to target Price), the fair value for the stock stands revised upwards at Rs 315 per share (earlier Rs 269). Maintain neutral.
LARSEN & TOUBRO
Reco price: Rs 1,640
Current market price: Rs 1,635.55
Target price: Rs 1,678
Upside: 2.6%
Brokerage: Sharekhan
In the current quarter, the company announced order inflows worth Rs 15,242 crore with the infrastructure sector leading with a 41.5 per cent contribution. The order inflow from the hydrocarbon, process and power sectors stood at 19.9 per cent, 14.1 per cent and 18 per cent respectively with the defence sector forming the remaining portion. To meet its revised guidance of a 30 per cent increase in order inflows in FY2010, the company needs to bag orders worth around Rs 21,351 crore in Q4FY2010.
While the company may fall short of its revised guidance for fresh order inflows in FY2010, the brokerage remains positive on L&T as it is the best proxy for India's infrastructure growth story. Expect significant order flow in the coming months on the back of bulk tendering by NTPC and improving traction in order flow from the engineering and defence space. The brokerage is revising its stand-alone earnings estimates upwards to Rs 51.7 for FY2010 and to Rs 64.5 for FY2011. Accordingly, SOTP-based price target is increased to Rs 1,678 from Rs 1,658 earlier.
TECH MAHINDRA
Reco price: Rs 910
Current market price: Rs 907.25
Target price: Rs 1,130
Upside: 24.6%
Brokerage: Anand Rathi Research
During Q3, FY10, BT, Tech Mahindra's (TM) largest client, renegotiated billing rates for long-term contracts. While rate-cuts are detrimental, re-structuring provides stability to TM in terms of volume commitment and scope for long-term BT deals (Barcelona, Strada and Andes). Emerging markets telecoms business has seen traction. It consists of a significant end-to-end and systems integration kind of work. These revenues tend to be lumpy. AT&T (Tech Mahindra's second largest client) now has an 8.1 per cent stake. It is believed, with this increased interest of AT&T in Tech Mahindra, business visibility from the former has increased and provides greater revenue assurance.
The advance revenue (Rs 968 crore) will help the company maintain its existing level of operating margins, of 24 per cent. Besides, it increased headcount by 15 per cent, indicating traction in other clients as well. The company has yet to spell out the details of the re-structuring in terms of pricing, volume and scope of BT projects. However, the 20 per cent correction in the share price over the last two months provides a good buying opportunity. Maintain buy.
RELIANCE INDUSTRIES
Reco price: Rs 1,075
Current market price: Rs 1,099.1
Target price: Rs 1,257
Upside: 14.4%
Brokerage: Centrum Research
Global gross refining margins (GRMs) bottomed out in Q3 FY10 and are expected to improve with the global economic recovery. Expect RIL's GRM to rise from $5.9/bbl in Q3 FY10 to $11/bbl in FY11 and further to $12/bbl in FY12, in tandem with the rise in benchmark Singapore GRMs. Further expansion in light-heavy spreads would provide additional upside to RIL's GRMs. The refining business is at seven times its FY12 estimated EV/EBITDA, which generates a fair value of Rs 580/share.
The exploration and production business has primarily driven the company's profitability over the last four quarters. The business is valued at Rs 459/share, factoring cash flows and upsides from the D6 and PMT blocks. Expect D3, D9, NEC 25, etc, blocks to drive profitability over the long-term, once their reserves are appraised and developed. Nevertheless, RIL's petrochemical margins have peaked, and expect pressure from new competition. While margin decline is inevitable, RIL's integrated business model and robust domestic demand would help the company weather the trough. The petrochemicals business is valued at Rs 314 a share - eight times its FY12 estimated EV/EBITDA, in-line with global peers. However, gas litigation and a double-dip global recession pose key risks. Initiate a buy on the stock with a sum-of-the-parts target of Rs 1,257 a share.
Current market prices as on March 26
