Monday, May 5, 2008
Stocks to pick: ONGC, Sterlite Industies, TCS
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ONGC
RESEARCH:DEUTSCHE BANK
RATING:HOLD
CMP:RS 1,055
Deutsche Bank maintains 'hold' rating on ONGC by cutting the company's earnings and price target to Rs 1,106 per share based on the forecast rise in its subsidy provision, resulting from surging industry subsidies over FY08-10 estimates. ONGC's subsidy sharing is set to rise 87% YoY to Rs 8,700 crore in Q4 FY08E, even assuming the status quo for upstream sharing at 33%.
This is driven by a 46% QoQ rise in industry gross subsidies to Rs 31,100 crore in Q4 FY08E based on a 9% rise in oil prices. The situation can get worse if the government hikes ONGC's share, as it did in the past. ONGC has an attractive domestic and overseas E&P portfolio.
A find of 1 billion boe net reserves by ONGC can add $5-10 billion to the company's valuation. However, the modest reserve accretion relative to its scale and concerns over future cash flows being diverted towards subsidy-sharing are detracting from robust growth prospects offered by E&P under $100/bbl oil.
Deutsche Bank has valued ONGC at Rs 1,106 per share based on: (i) existing reserves; (ii) investments; (iii) enhanced recovery benefits at Bombay High marginal fields; (iv) likely development of 6 trillion cubic feet (tcf) of gas in the KG basin; and (v) hit from ad-hoc 10% hike in its subsidy share.
STERLITE INDUSTIES
RESEARCH:CLSA
RATING:OUTPERFORM
CMP:RS 836
CLSA maintains 'outperform' rating on Sterlite Industries with a revised target price of Rs 900. Sterlite will continue to deliver strong operational growth over FY09-10. Hindustan Zinc's (HZL's) expanded capacities will boost zinc output at 22% compound annual growth rate (CAGR) over FY09-10 and will compensate for lower zinc prices.
Commissioning of Vedanta Aluminium's smelting capacity will boost aluminium output. Sterlite Energy will commence production in FY10 and will contribute to consolidated profits. Buy-out of HZL and Balco stakes from the government has been much delayed. But with the government in need of funds to finance the farm loan waiver, CLSA sees a reasonable likelihood of both transactions completing by end-FY09.
CLSA lower its consolidated EPS estimates by 9% for FY09 to Rs 60.8 and upgrades FY10 estimates by 17% for FY10 to Rs 70. The revised estimates factor in lower zinc prices, higher aluminium prices, higher by-product prices and higher volumes in Vedanta Aluminium, as well as contribution from Sterlite Energy in FY10. The target price of Rs 900 is arrived at by assigning 50% probability each to the two events.
TATA CONSULTANCY SERVICES
RESEARCH:MOTILAL OSWAL
RATING:BUY
CMP: RS 890
Motilal Oswal maintains 'buy' rating on TCS with a target price of Rs 1,100 and upside of 24%. TCS reported revenues of Rs 6,095 crore in Q4 FY08 — a growth of 2.9% QoQ (versus the estimate of 4.4%). EBITDA was at Rs 1,552 crore versus estimate of Rs 1,653 crore — a decline of 118 bps QoQ — on account of increased manpower and other costs as a percentage of revenues. A few of TCS' key US-based BFSI clients, who were supposed to ramp up during the quarter, postponed their IT budgets to the next quarter.
Net profit was at Rs 1,256 crore versus the estimate of Rs 1,357 crore — down 5.6% QoQ and up 12% YoY. TCS has a diversified range of offerings, with less than 50% in the ADM business and the remaining spread across enterprise solutions, business intelligence, consulting infrastructure management and BPO.
It is the leader in emerging services like infra, BPO and enterprise solutions and focuses on consulting. TCS' subsidiary, Diligenta, won a £100-million BPO contract from Sun Life Financials of Canada. TCS has unveiled development of a new 20,000-seat campus in Pune, to be completed by '10. It has also signed a multi-year contract with Chrysler to provide a comprehensive portfolio of IT services.
EXIDE INDUSTRIES
RESEARCH:MERRILL LYNCH
RATING:BUY
CMP:RS 73
Merrill Lynch has cut the target price on Exide Industries by 14% to Rs 95 on the back of lower earnings, following a negative earnings surprise of 26% in Q4 FY08. However, it maintains 'buy' rating on the stock due to healthy PAT growth of 24% in FY09E and 20% in FY10E. The target price is based on the following: (1) core lead acid battery business at 16.5x FY10E EPS of Rs 4.9 equals Rs 80; and (2) 50% stake in ING Vysya Life at 16x FY09E NBAP equals Rs 15 per share.
Exide's Q4 FY08 net profit, at Rs 62.8 crore, is up 63% YoY, but is 26% lower than estimates. Merrill Lynch has cut the company's earnings estimate as it expects EBITDA per unit of battery sales to remain flat due to: (1) the company no longer increasing battery prices amid rising competition and stable lead price; (2) cost-savings bottoming out; and (3) slower industrial battery growth at 19% in FY08 versus 25% in FY07.
The key risk to Exide's rating is higher lead price — the company's earnings can decline by 63% if lead costs rise by 15% without a commensurate rise in battery prices. Exide has managed to improve its margins despite tripling of lead price in the past three years, with pricing power and cost-savings. Merrill Lynch expects the same to continue, going forward.
SATYAM COMPUTER
RESEARCH:IL&FS INVESTSMART
RATING:ACCUMULATE
CMP:RS 445
IL&FS Investsmart downgrades its recommendation on Satyam Computers Services to 'accumulate'. Satyam reported better-than-expected performance in Q4 FY08. While its revenues increased by 10% QoQ to Rs 2,416 crore, its net profit fell below expectations of Rs 500 crore, to Rs 470 crore, on the back of forex losses of Rs 46.1 crore.
EBITDA margin rose by 133 bps in Q4. The management has set a guidance of 24-26% growth in overall revenues and 17-19% growth in EPS for FY09E (Indian GAAP).
IL&FS estimates an EPS of Rs 30.6 and Rs 33.1 during FY09E and FY10E, respectively, implying a three-year EPS CAGR of 16.2%. Currently, the stock is trading at a price-earnings ratio (P/E) of 14.3x FY09E EPS and 13.2x FY10E EPS. At these levels, it is quoting at 18.3% and 17.5% discount, respectively, to IL&FS' target Infosys P/E; this is a fair discount.
TITAN INDUSTRIES
RESEARCH:HSBC GLOBAL
RATING:NEUTRAL
CMP:Rs 1,119
Gold prices are likely to hover around their current high levels in FY09E. Inflation rate is likely to be 28% YoY due to a weak US dollar, high commodity prices and increased investment in gold.
HSBC expects pan-India jewellery demand to decline by over 10% in FY09E, but expects to see a recovery in FY10E as gold prices decline. It estimates Titan's plain gold jewellery volume growth to slow to 10% in FY09E from a trend growth of 30% due to slower same-store sales growth and store roll-out linked to gold price volatility.
Diamond jewellery volumes may be largely unaffected. Volume growth is likely to recover in FY10E as gold prices decline, albeit on a lower base. From FY10E, competitive pressures are likely to increase. HSBC lowers the company's EPS target by 6% in FY08E, 11% in FY09E and 16% in FY10E.
P/E valuations now yield a 12% lower target price of Rs 1,362 (previously Rs 1,555), leading to a rating downgrade to 'neutral'. Risks to the valuation include lower-than-expected gold prices on the upside and a market de-rating of the stock on the downside. Titan has lost 26% of its market cap year to date, but with volatile gold prices and a bearish market, HSBC cannot rule out further downside over the next few weeks.
RESEARCH:DEUTSCHE BANK
RATING:HOLD
CMP:RS 1,055
Deutsche Bank maintains 'hold' rating on ONGC by cutting the company's earnings and price target to Rs 1,106 per share based on the forecast rise in its subsidy provision, resulting from surging industry subsidies over FY08-10 estimates. ONGC's subsidy sharing is set to rise 87% YoY to Rs 8,700 crore in Q4 FY08E, even assuming the status quo for upstream sharing at 33%.
This is driven by a 46% QoQ rise in industry gross subsidies to Rs 31,100 crore in Q4 FY08E based on a 9% rise in oil prices. The situation can get worse if the government hikes ONGC's share, as it did in the past. ONGC has an attractive domestic and overseas E&P portfolio.
A find of 1 billion boe net reserves by ONGC can add $5-10 billion to the company's valuation. However, the modest reserve accretion relative to its scale and concerns over future cash flows being diverted towards subsidy-sharing are detracting from robust growth prospects offered by E&P under $100/bbl oil.
Deutsche Bank has valued ONGC at Rs 1,106 per share based on: (i) existing reserves; (ii) investments; (iii) enhanced recovery benefits at Bombay High marginal fields; (iv) likely development of 6 trillion cubic feet (tcf) of gas in the KG basin; and (v) hit from ad-hoc 10% hike in its subsidy share.
STERLITE INDUSTIES
RESEARCH:CLSA
RATING:OUTPERFORM
CMP:RS 836
CLSA maintains 'outperform' rating on Sterlite Industries with a revised target price of Rs 900. Sterlite will continue to deliver strong operational growth over FY09-10. Hindustan Zinc's (HZL's) expanded capacities will boost zinc output at 22% compound annual growth rate (CAGR) over FY09-10 and will compensate for lower zinc prices.
Commissioning of Vedanta Aluminium's smelting capacity will boost aluminium output. Sterlite Energy will commence production in FY10 and will contribute to consolidated profits. Buy-out of HZL and Balco stakes from the government has been much delayed. But with the government in need of funds to finance the farm loan waiver, CLSA sees a reasonable likelihood of both transactions completing by end-FY09.
CLSA lower its consolidated EPS estimates by 9% for FY09 to Rs 60.8 and upgrades FY10 estimates by 17% for FY10 to Rs 70. The revised estimates factor in lower zinc prices, higher aluminium prices, higher by-product prices and higher volumes in Vedanta Aluminium, as well as contribution from Sterlite Energy in FY10. The target price of Rs 900 is arrived at by assigning 50% probability each to the two events.
TATA CONSULTANCY SERVICES
RESEARCH:MOTILAL OSWAL
RATING:BUY
CMP: RS 890
Motilal Oswal maintains 'buy' rating on TCS with a target price of Rs 1,100 and upside of 24%. TCS reported revenues of Rs 6,095 crore in Q4 FY08 — a growth of 2.9% QoQ (versus the estimate of 4.4%). EBITDA was at Rs 1,552 crore versus estimate of Rs 1,653 crore — a decline of 118 bps QoQ — on account of increased manpower and other costs as a percentage of revenues. A few of TCS' key US-based BFSI clients, who were supposed to ramp up during the quarter, postponed their IT budgets to the next quarter.
Net profit was at Rs 1,256 crore versus the estimate of Rs 1,357 crore — down 5.6% QoQ and up 12% YoY. TCS has a diversified range of offerings, with less than 50% in the ADM business and the remaining spread across enterprise solutions, business intelligence, consulting infrastructure management and BPO.
It is the leader in emerging services like infra, BPO and enterprise solutions and focuses on consulting. TCS' subsidiary, Diligenta, won a £100-million BPO contract from Sun Life Financials of Canada. TCS has unveiled development of a new 20,000-seat campus in Pune, to be completed by '10. It has also signed a multi-year contract with Chrysler to provide a comprehensive portfolio of IT services.
EXIDE INDUSTRIES
RESEARCH:MERRILL LYNCH
RATING:BUY
CMP:RS 73
Merrill Lynch has cut the target price on Exide Industries by 14% to Rs 95 on the back of lower earnings, following a negative earnings surprise of 26% in Q4 FY08. However, it maintains 'buy' rating on the stock due to healthy PAT growth of 24% in FY09E and 20% in FY10E. The target price is based on the following: (1) core lead acid battery business at 16.5x FY10E EPS of Rs 4.9 equals Rs 80; and (2) 50% stake in ING Vysya Life at 16x FY09E NBAP equals Rs 15 per share.
Exide's Q4 FY08 net profit, at Rs 62.8 crore, is up 63% YoY, but is 26% lower than estimates. Merrill Lynch has cut the company's earnings estimate as it expects EBITDA per unit of battery sales to remain flat due to: (1) the company no longer increasing battery prices amid rising competition and stable lead price; (2) cost-savings bottoming out; and (3) slower industrial battery growth at 19% in FY08 versus 25% in FY07.
The key risk to Exide's rating is higher lead price — the company's earnings can decline by 63% if lead costs rise by 15% without a commensurate rise in battery prices. Exide has managed to improve its margins despite tripling of lead price in the past three years, with pricing power and cost-savings. Merrill Lynch expects the same to continue, going forward.
SATYAM COMPUTER
RESEARCH:IL&FS INVESTSMART
RATING:ACCUMULATE
CMP:RS 445
IL&FS Investsmart downgrades its recommendation on Satyam Computers Services to 'accumulate'. Satyam reported better-than-expected performance in Q4 FY08. While its revenues increased by 10% QoQ to Rs 2,416 crore, its net profit fell below expectations of Rs 500 crore, to Rs 470 crore, on the back of forex losses of Rs 46.1 crore.
EBITDA margin rose by 133 bps in Q4. The management has set a guidance of 24-26% growth in overall revenues and 17-19% growth in EPS for FY09E (Indian GAAP).
IL&FS estimates an EPS of Rs 30.6 and Rs 33.1 during FY09E and FY10E, respectively, implying a three-year EPS CAGR of 16.2%. Currently, the stock is trading at a price-earnings ratio (P/E) of 14.3x FY09E EPS and 13.2x FY10E EPS. At these levels, it is quoting at 18.3% and 17.5% discount, respectively, to IL&FS' target Infosys P/E; this is a fair discount.
TITAN INDUSTRIES
RESEARCH:HSBC GLOBAL
RATING:NEUTRAL
CMP:Rs 1,119
Gold prices are likely to hover around their current high levels in FY09E. Inflation rate is likely to be 28% YoY due to a weak US dollar, high commodity prices and increased investment in gold.
HSBC expects pan-India jewellery demand to decline by over 10% in FY09E, but expects to see a recovery in FY10E as gold prices decline. It estimates Titan's plain gold jewellery volume growth to slow to 10% in FY09E from a trend growth of 30% due to slower same-store sales growth and store roll-out linked to gold price volatility.
Diamond jewellery volumes may be largely unaffected. Volume growth is likely to recover in FY10E as gold prices decline, albeit on a lower base. From FY10E, competitive pressures are likely to increase. HSBC lowers the company's EPS target by 6% in FY08E, 11% in FY09E and 16% in FY10E.
P/E valuations now yield a 12% lower target price of Rs 1,362 (previously Rs 1,555), leading to a rating downgrade to 'neutral'. Risks to the valuation include lower-than-expected gold prices on the upside and a market de-rating of the stock on the downside. Titan has lost 26% of its market cap year to date, but with volatile gold prices and a bearish market, HSBC cannot rule out further downside over the next few weeks.
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This post was written by: Franklin Manuel
Franklin Manuel is a professional blogger, web designer and front end web developer. Follow him on Twitter
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