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| Analysts' corner | | RESEARCH CALLS |
| S I Team / Mumbai Dec 29, 2008, 00:29 IST |
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CAIRN INDIA
Reco price: Rs 160
Current market price: Rs 159.75
Target Price: Rs 240
Upside: 50.2%
Brokerage: Kotak Securities
Cairn India’s new discovery of oil and gas in its Rajasthan block (RJ-ON-90/1) is a positive trigger for the stock. Although, the management has not disclosed details of the reserves, this discovery increases the likelihood of upward revision to Cairn’s reserve estimates. The brokerage believes that the market is penalising the stock, due to the sharp correction in crude oil prices. The stock is currently discounting low crude oil prices in perpetuity and no accretion to reserves.
The reverse valuation exercise of the brokerage suggests that Cairn’s current stock price of Rs 160 is discounting $52 per barrel (dated Brent basis) from CY09E (start of production from Rajasthan block) in perpetuity. However, it is discounting $30 per barrel from CY13E in perpetuity versus the brokerage’s long-term normalised crude price assumption of $75 per barrel (from CY13E) if CY09-12E assumptions turn out to be correct. The brokerage has modelled $70 per barrel for CY09E, $73 per barrel for CY10 and $75 per barrel for CY11-12E and $75 per barrel from CY13E in its base earnings model and long-term rupee-dollar exchange rate at 45. It advises investors to make use of this opportunity to buy the stock given favourable risk-reward balance at current levels. At Rs 160, the stock is trading at a P/E of 12.8 times and EV/EBITDA of 8.4 times its CY09E earnings. Maintain buy.
EDUCOMP SOLUTIONS
Reco price: Rs 2,804
Current market price: Rs 2,409
Target Price: Rs 3,550
Upside: 47.3%
Brokerage: KR Choksey Shares and Securities
During the quarter, Educomp Solutions added 231 schools under its Smart class program, wherein real-time media digital content is provided to a teacher in the classroom. The total number of schools under this program has now reached 1,267. Similarly, the instructional and computing technology (ICT) segment, which provides educational infrastructure in government schools, has seen similar traction in numbers.
With the addition of 1,626 schools during the quarter, the total number of ICT schools has reached 8,915, spread across 14 states. Educomp acquired 50 per cent stake in Eurokids International during the quarter for Rs 39 crore. Eurokids operates more than 400 pre-schools across India and has been in the business for more than seven years. This acquisition enhances Educomp’s portfolio of services and will help in becoming an end-to-end provider of services across the education spectrum.
Educomp has presence in the Millennium school business (brick and mortar owned schools) and increased the number of schools to 11. The company has procured a line of credit and debentures of Rs 725 crore from Axis Bank towards financing the capex in this business. The company also acquired 51 per cent stake in Takshila Management Services, which has expertise in setting up schools in Tier III cities. Post this acquisition, Educomp is now in the process of setting up schools in three cities, which are expected to be ready by June 2009. Maintain buy.
HCL TECHNOLOGIES
Reco price: Rs 134
Current market price: Rs 113.35
Target Price: Rs 144
Upside: 27%
Brokerage: Emkay Global Financial Services
HCL Technologies (HCL Tech) has recently announced the completion of the Axon buy for $701 million. Although Axon brings with it much wanted significant front-end SAP consulting capabilities for HCL Tech, the worsening macro environment could impact Axon’s business prospects negatively.
HCL Tech has announced order wins of over $1 billion in the December 2008 quarter so far. However, the case remains balanced with a ramp down/loss of significant business from existing clients. HCL Tech’s FY10 organic revenue growth is expected to be close to 11 per cent, which is higher than its peers.
However, the company’s profitability might still remain under pressure, given Axon’s lower margins (Axon’s EBIT margins at about 13 per cent vis-à-vis HCL’s standalone margins of about 17 per cent), impact of rupee’s appreciation against the pound (HCL’s BPO business derives nearly two-third of revenues from UK) and probable hedging losses. At Rs 134, the stock trades at 7.1x FY09E and 7.4x FY10E earnings. Maintain ‘neutral’ rating on the stock, with a revised target price of Rs 144 (Rs 197 earlier).
FEDERAL BANK
Reco price: Rs 147
Current market price: Rs 157
Target Price: Rs 178
Upside: 13.4%
Brokerage: Religare Hichens, Harrison & Co
Federal Bank stands to benefit from the falling interest rates through a reversal of mark-to-market (MTM) losses and potential trading gain opportunities. At the end of September 2008, the bank held 33 per cent of its investments in the available-for-sale (AFS) category with a tenure of 3.8 years, which implies reasonably high potential for MTM write-backs and treasury gains.
However, the bank has seen a marked increase in slippages in H1FY09. If this trend continues, it would nullify the positive impact of lower interest rates on the investment portfolio. Gross and net NPAs at the end of H1FY09 stood at 2.62 per cent and 0.4 per cent, respectively, while the slippage ratio was high at about 3.7 per cent.
Federal Bank’s incremental credit-deposit ratio is expected to decline as credit off take slows down. With RBI rate cuts, Federal Bank is likely to pare down its prime lending rates. This coupled with lower interest on incremental investments would put pressure on net interest income. At the end of Q2FY09 itself, the management had indicated that its margin may not sustain at the quarter’s level of 4.38 per cent.
Based on Gordon growth model, the brokerage has a revised target price of Rs 178 for the stock (Rs 205 earlier). Maintain accumulate.
BAJAJ HINDUSTHAN
Reco price: Rs 60
Current market price: Rs 63.80
Target Price: Rs 58.5
Upside: 8.3%
Brokerage: Brokerage: India Infoline
Bajaj Hindusthan (BJH) reported adjusted losses amounting to Rs 47.2 crore in FY08 (up 403 per cent year-on-year) on the back of high interest costs, to the tune of Rs 207.1 crore (up 126 per cent y-o-y). The recent high-court ruling in support of state administered price (SAP) of Rs 140 per quintal, adjusting for transportation cost of Rs 10.58 per quintal, leaves BJH with little leeway to cover its high interest costs. A significant improvement in ethanol pricing as well as volume off-take is not expected during FY10 as crude oil prices of less than $45 leaves oil companies with little incentive to increase ethanol blending.
BJH’s high leverage (2.1x long-term debt-equity) and the dominance of foreign currency debt in the composition of long-term debt (close to 47 per cent) is likely to weigh heavily on earnings, even if sugar prices see an uptick from current levels. The brokerage has revised its FY09 and FY10 earnings downwards by 21 per cent and 31 per cent respectively, to account for higher interest costs and input costs (in-line with the recently announced SAP). Maintain reduce.
Current market price as on December 26, 2008
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