| Analysts' corner | |
| RESEARCH CALLS | | S I Team / Mumbai December 1, 2008, 20:32 IST | |
RELIANCE INDUSTRIES
Reco price: Rs 1,124
Current market price: Rs 1,131.60
Target Price: Rs 1,499
Upside: 32.5%
Brokerage: ICICI Securities
Reliance Industries’ (RIL) stock price has fallen 53 per cent in the past three months due to slowdown in demand (which has resulted in lower refining and petchem margins), concerns over the RIL-Reliance Natural Gas Resources (RNRL) court case and the delay in production from Reliance Petroleum (RPL) refinery.
Indian refining margins in Q3FY09 have ventured into the negative territory at $0.1 per barrel versus $6.5 per barrel in Q2FY09 due to significant fall in fuel prices. RIL’s KG-D6 production is expected to begin in Q4FY09. However, RPL’s operations are expected to be delayed to April 2009 as the company will likely prefer the tax shield benefit for another year, especially given the low refining margins at present.
The brokerage has reduced RIL’s fair value (target price) to Rs 1,499 per share on the back of de-rating of petchem and refining businesses (valued at FY10E EV/EBITDA of 5x); reduction in value of investments in RPL, retail and SEZ, and lower valuation of future reserve accretion. If the court case were to go against RIL, the government may penalise RIL and calculate its profit sharing at the approved price of $4.2 per mmbtu, despite RIL realising lower price from RNRL and NTPC. This is a significant risk for RIL shareholders as RIL’s fair value would then stand reduced by 7.6 per cent to Rs 1,379 per share.
HDFC
Reco price: Rs 1,348
Current market price: Rs 1,463.90
Target Price: Rs 2,062
Upside: 40.9%
Brokerage: Kotak Securities
HDFC's loan book grew by 31 per cent during H1FY09 to about Rs 81,190 crore. Its management continues to target growth in disbursements of over 20 per cent, despite the present macro-economic headwinds. Measures adopted by the RBI to ease liquidity in the banking system have facilitated fund availability. Recently, HDFC raised nearly Rs 8,000 crore (10 years maturity) through sale of bonds. Meanwhile, the cost of funds remains high due to which HDFC has not reduced the lending rates.
Demand for mortgage loans is expected to remain steady during the H2FY09 in the backdrop of reduction in property prices. HDFC's healthy asset quality is attributable to its lower loan to value (LTV) ratio and strict surveillance, which help contain slippages. Corporate loan comprise of over 30 per cent of the total loan book, whereas the builders loan is 12 per cent of total loans.
HDFC has not witnessed any default from the real estate developers; however developers inventory turnover remains slower. HDFC’s net profit growth is likely to be 3.1 per cent and 15.6 per cent in FY09 and FY10, respectively. At Rs 1,348, the stock is trading at 15.4xFY09E and 13.4xFY10E earnings. The company’s core operations are valued at Rs 1,369, while its subsidiaries and associates are valued at Rs 694 per share. Thus, the fair price target for the stock is Rs 2,062. Maintain buy.
WIPRO
Reco price: Rs 228
Current market price: Rs 243.30
Target Price: Rs 200
Downside: 17.8%
Brokerage: BNP Paribas Securities (Asia)
Wipro got about 55 per cent of its last twelve month’s revenue from approximately 50 key accounts and like its peers, is heavily dependent on the biggest IT spenders for growth. What is more concerning is Wipro’s higher-than-peers’ exposure to the technology sector (29.5 per cent of Q2FY09 revenue; peers at 19-24 per cent), given the recent weak results/negative news flow from the likes of Dell, Cisco and Nokia. Wipro also counts General Motors (GM) among its strategic clients. Recent news from GM not only points to weakening auto sales, but also the weak financial position of the company.
Wipro has done well to hold up pricing through H1FY09, but this could be temporary as deal flows dry up. The company also has forex losses related to currency hedging of close to Rs 1,380 crore (about $280 million) in the balance sheet, which is expected to move into the profit and loss account over the next several quarters and this could put strain on its profitability. According to the brokerage, Wipro’s new FY10 dollar-based IT services revenue estimate calls for a growth of 3.4 per cent y-o-y (growth of 9.9 per cent y-o-y in rupee terms). This translates into an EPS growth of 5.2 per cent y-o-y in rupee terms. Accordingly, it has downgraded Wipro from ‘hold’ to ‘reduce’ with a target price of Rs 200 (Rs 320 earlier).
DABUR INDIA
Reco price: Rs 75
Current market price: Rs 81.85
Target Price: Rs 110
Upside: 34.4%
Brokerage: Religare Hichens, Harrison & Co.
Dabur India (Dabur) has acquired a 72.15 per cent stake in Fem Care Pharma (Fem) for Rs 203 crore (Rs 800 per share). The acquisition is expensive considering Fem's FY08 financials (net sales of Rs 93.8 crore and net profits of Rs 10.9 crore). However, there are multiple benefits that Dabur will accrue from this deal.
Firstly, Fem has a strong presence in niche categories with market leadership in bleaching products where it holds 60 per cent market share. The acquisition also gives Dabur an entry into the skincare segment with an established brand name and strong product development capabilities. Fem has a presence in the Middle East markets and the same can be expanded using Dabur's network. The acquisition is also likely to provide cost synergies in terms of marketing, supply chain and distribution.
Fem is expected to clock revenues of Rs 120 crore in FY10 with operating margins of 17 per cent, in line with the Dabur's margins. The acquisition has been fully funded by internal accruals and it is unlikely to be EPS accretive for Dabur in FY10. Dabur is currently trading at a multiple of 16.7xFY09E and 14.8xFY10E earnings.
GVK POWER AND INFRASTRUCTURE
Reco price: Rs 15
Current market price: Rs 16.56
Target Price: Rs 22
Upside: 32.9%
Brokerage: India Infoline
GVK Power and Infrastructure’s (GVK) gas-based power plants are stranded as 684MW out of the 900MW generation capacity is idle due to non-availability of gas. The gas supplies from KG basin likely to commence by Q1 FY10, ensuring both Jegrupadu phase-II and Gautami Power project would become operational and boost the cash flow to the company.
Once these plants are operational, the company could look to monetise its power assets. On the airport asset side, traffic decline at Mumbai airport has been sharper with domestic passenger traffic declining by 8 per cent y-o-y in H1FY09. The brokerage expects a 22 per cent y-o-y decline in domestic traffic at Mumbai in H2FY09, factoring out any significant improvement in regulatory environment and tariffs remaining static.
The traffic on GVK’s Jaipur-Kishangarh expressway grew by 9 per cent, while net profit grew by 25 per cent. The brokerage expects that road assets would be among the most resilient infrastructure assets in a decelerating growth environment. The company plans to monetise this asset by selling a minority stake to a strategic investor.
The cash raised would add to the Rs 200 crore cash available in the parent’s balance sheet and help meet its equity commitment for projects under development. The brokerage maintains a buy with a target at Rs 22 (based on sum-of-parts valuation).
Current market price as on November 28, 2008
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