IDFC: multiples likely to sustain

ANALYSTS' CORNER

Merrill Lynch, initiating coverage on IDFC, recommends a 'Buy' on the scrip. The report states that although IDFC, specialised infrastructure finance provider, trades (3.5x FY06E adjusted book) at the higher end of its valuation universe, the multiples are likely to sustain.

This is because the company has the most leveraged exposure to expanding infrastructure growth story (with infra spend forecast at $100 billion over the next three years) with 25 per cent spend likely by the private sector.

It has the best operating efficiencies supported by a C-I ratio of seven per cent, the lowest among peers. It has strong asset quality with gross NPLs at about one per cent, coverage at over 100 per cent and minimal interest rate risk as it has minimal g-sec portfolio.

The report expects CAGR earnings growth of 19 per cent over FY05-08E after factoring in 100 bps margin contraction through FY08 principally owing to the absence of a deposit franchise (its key challenge).

India Cements: higher volumes expected

Enam Securities report states that India Cements is focusing on deleveraging, increasing volumes and keeping its costs under control. The company expects to record higher volumes on the back of strong growth prospects in the southern markets.

It is raising $100 million through GDR in October 2005. It expects to produce 7.2 million tonne cement in FY06 and eight million tonnes in FY07. The company expects to achieve volume growth through higher utilisation of its clinker units and is also raising its blending ratios.

Demand in the southern region is expected to grow at about 15 per cent for FY06. The company avers that while in FY07 there will be a balanced situation in south India, FY08 could well witness a deficit.

It is expected that incremental demand would push cement prices up from the current level. To keep its cost of production under control, the company is looking to invest in joint ventures for setting up of captive thermal power plants.

Gujarat Alkalies: sales upswing

Dimensional Research recommends a 'Buy' on Gujarat Alkalies & Chemicals. It states that the Indian chlor-alkali industry has witnessed impressive rise in sales, which in turn led to increase in profitability on the back of firm prices as a result of robust demand from the user industries.

All user industries, viz. soaps & detergents, textiles, paper and aluminium are growing in tandem with the buoyant Indian economy. Electrochemical unit (ECU), a measure of chlor-alkali plant performance has improved from Rs 17,132 per tonne in FY03-04 to Rs 20,700 per tonne in FY04-05, registering a healthy growth rate of 21 per cent.

The ECU further improved to Rs 25,000 per tonne in the first quarter, but is expected to come down to the levels of Rs 21,000 per tonne in the September quarter.

To take advantage of the current upswing in the sector, the company has decided to go for fresh investments of over Rs 280 crore for a brownfield expansion of its caustic soda plant and a new hydrogen peroxide manufacturing unit at Dahej. The stock trades at 4.7x FY06E EPS of Rs 31.1 and 4x FY07E of Rs 36.5.