Suzlon: valuation gains

ANALYSTS' CORNER

JM Morgan Stanley has downgraded Suzlon Energy from "overweight-V" to "equal weight-V" due to rich valuations. The report states that the company is trading at an 83 per cent premium to its IPO price with valuations at a significant premium to the market.

Given the shorter track record of the industry and potential risks in terms of competition, pricing and regulation, the report believes most of the positives are already priced in and risk reward looks less favourable. The report recommends taking money off the table and would be waiting for an opportune entry level.

Nevertheless, it is estimated that the company will post revenue growth of 62 per cent y-o-y during FY05-08, with market share of 54 per cent and 6.3 per cent in the domestic and global market (excluding India), respectively, by FY08.

It is estimated that India will post 23 per cent y-o-y growth in market size in FY05-09. Its international business is also likely to contribute nearly 41 per cent to revenues by FY07, given strong demand in markets such as the US and China.

ONGC: Crude benefits

CLSA Research recommends a "buy" on ONGC. The report states that ONGC is among the best plays in a stable $50/bl crude price regime, a level that should allow policy overhang (oil sector subsidies) to ease significantly.

ONGC has also taken multiple steps to shore up production (domestic and overseas) and its core earnings trajectory will move up each year as additional production comes online. A move towards upstream deregulation (gas price equalisation with imported LNG and no subsidies) has the potential to move up earnings by 50 per cent.

Crude prices have eased for the fourth month in a row and are down 20 per cent from highs. Global demand growth has moderated and should return to a more realistic 1.5 mbpd range in 2006 (3 mbpd in 2004) and beyond.

In addition, both Opec and non-Opec production capacity is increasing and overall spare capacity should increase to 2.5 mbpd over the next 12-18 months.

NTPC: Firmly on growth path

CLSA Research rates NTPC as an "outperformer". The report states that the company's dispute with Reliance Industries on the gas agreement may not have any major impact on its longer-term growth.

The management is upbeat on growth in domestic power demand situation and expects the company to maintain its market share. The company has aggressive plans for its coal mining business (50 mt capacity by 2012), which could provide significant upside to earnings over the medium term.

During the 11th plan period (FY08-12), NTPC plans to set up part of its capacity as merchant power plants, which, unlike its existing plants, will not have long-term power purchase agreements or regulated tariffs. Considering NTPC's position as a low-cost generator, the merchant power plants should boost overall profitability.

Moreover, merchant power plants will enable NTPC to incentivise better performing states and leverage supply to power deficient states for improved payment performance.