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| Analysts' corner |
| S I Team / Mumbai Mar 23, 2009, 00:50 IST |
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STERLITE INDUSTRIES
Reco price: Rs 293.05
Current market price: Rs 315.65
Target price: Rs 518
Upside: 64.1%
Brokerage: Macquarie Research
The research outfit’s commodity team has increased zinc price forecasts for FY09 and FY10 by 4 per cent and 3 per cent to $1,572 and $1,251, respectively, but has reduced it by 4 per cent for FY11 to $1,488. Aluminium price forecast, too, has been cut by 9 per cent to $1,461 for FY10 and 18 per cent to $1,626 for FY11.
With cash costs of $670 per tonne, Sterlite’s zinc business remains highly profitable and continues to drive 65 per cent of its operating profit. Sterlite is also cutting its high-cost aluminium production by 7 per cent (sequentially) in Q4FY09. Sterlite 2,400 mw power project, which is likely to commission in Q3 FY10, could add Rs 11 (20 per cent) to FY11 EPS.
Sterlite’s FY10 and FY11 EPS estimates have been cut by 4 per cent and 11 per cent, respectively. Sterlite, which has a cash-rich balance sheet and low-cost profile, is trading at 0.7x P/BV, 0.4x EV/EBITDA and 5.3x PER on FY09E. With uncertainty over Asarco deal over, the stock should react positively to rebounding zinc prices. The sum-of-the-parts target price has been marginally reduced from Rs 540 to Rs 518, to reflect reduced earnings.
GTL INFRASTRUCTURE
Reco price: Rs 29
Current market price: Rs 28.20
Target price: Rs 34
Upside: 20.6%
Brokerage: India Infoline
American Tower has acquired Xcel Telecom’s portfolio of 1,400 towers, while Essar is in talks for a possible merger with WTTIL-Quippo. WTTIL and Quippo also merged recently (share 16,000 towers) and aim to have 22,000 towers by April 2009. There is scope for further consolidation as tower companies try to realise benefits of economies of scale. This would prompt the likes of GTL Infrastructure (GTLI) to look for inorganic growth opportunities to build scalability and compete with new entities.
There are concerns on the inability of independent tower companies in providing transmission backbones—an advantage that operator-owned tower companies enjoy. However, the demand pipeline for GTLI remains strong, with an upside possible from big plans of BSNL (65,000 sites) and some leaks from Vodafone and Idea in non-Indus circles.
Aircel also plans to double its slot requirements in the current year, while similar demands are expected from Shyam-Sistema. Etisalat likely to start operations by Q2FY10 and GTLI should gain a share of this pie as well.
GTLI targets to reach 15,000 towers (10,000 now) by FY10 and 25,000 towers by FY12. It has attained financial closure to fund the planned addition of 15,000 towers. Maintain Add.
IVRCL INFRASTRUCTURES
Reco price: Rs 113
Current market price: Rs 112.40
Target price: Rs 154
Upside: 37%
Brokerage: Motilal Oswal Securities
IVRCL Infrastructure’s current order book of Rs 14,300 crore (up 30 per cent y-o-y) implies a book-to-bill ratio of 3x FY09 revenues. It has one of the best pre-qualifications in water and irrigation segments; it bagged 40 per cent of Rs 4,000 crore projects awarded by Narmada Valley (Madhya Pradesh).
But, higher Andhra Pradesh (AP) exposure at 38 per cent of order backlog exposes IVRCL to possible execution/project delay risks given the state elections in April 2009. To mitigate higher receivable risk from AP projects, it has increased sub-contracting.
For IVRCL, revenues should grow at CAGR of 22 per cent in FY09-11 (45 per cent CAGR in FY06-09). This moderation would shorten working capital cycle and improve cash flows. Its FY09E net debt-equity ratio at 0.8x is comfortable. Since all BOT projects will be commissioned in FY10, possible monetisation could improve cash flows.
Interest costs as a percentage of sales should decline 60 bps to 2.2 per cent in FY11. Its earnings estimates for FY09 and FY10 are being cut by 8 per cent and 12.3 per cent, respectively to factor in execution challenges and lower margins due to increased sub-contracting and competition. The stock is trading at 7x FY09 and 6x FY10E.
NAVNEET PUBLICATIONS
Reco price: Rs 44
Current market price: Rs 44.10
Target price: Rs 59
Upside: 33.8%
Brokerage: Sharekhan
With the growth in publication business moderating, Navneet Publications has been banking on stationery business to drive top line growth. As a result, stationery business revenues are expected to grow by 57 per cent in FY09 to Rs 214 crore; contribution has increased from 34 per cent in FY07 to 44 per cent now. To expand its non-paper stationery portfolio, Navneet plans to launch office stationery products under a new brand in 4-5 months.
For Q4FY09, Navneet’s top line should grow by 33.8 per cent y-o-y driven by the stationery business. Operating margins should improve by 46 bps due to decline in other expenses; higher raw material cost will arrest a higher expansion in margins. Thus, operating profit should grow by 40.6 per cent to Rs 7.7 crore. Higher incidence of tax and lower other income will result into a 21.6 per cent y-o-y rise in adjusted net profit (pre-foreign exchange loss) to Rs 2.5 crore.
In the near term, Navneet’s revenue growth will be driven by stationery business, as publication business growth will be subdued till further syllabi changes are announced. A distant growth driver that Navneet is building on is the e-learning venture. The stock is trading at attractive valuations of 7.1x its FY09 expected earnings and 6.1x its FY10 expected earnings.
VOLTAS
Reco price: Rs 37
Current market price: Rs 39.45
Target price: NA
Upside: NA
Brokerage: Edelweiss Securities
In the electro-mechanical projects (EMPS) business, Voltas is focused on execution, even as enquires have been increasing over the past three months. Due to uncertain economic environment, Voltas has been circumspect in taking new orders; order backlog was Rs 5,600 crore at end-Q3FY09. Voltas expects significant orders from the Middle East in FY10; we are projecting a 23 per cent y-o-y dip in order accretion in FY10.
Its engineering and agency services (EAS) and unitary cooling (UCL) businesses reported a decline in revenues in Q3. EAS has been impacted by slowdown in mining and construction activities; any significant recovery is unlikely over the next six months. In UCL, there are likely upsides from payouts pertaining to the Sixth Pay Commission, which could result in higher sales in Q1FY10. But, any significant recovery is unlikely over the medium term due to lack of consumer confidence.
The stock is trading at 5.4x and 5.2x revised FY10E and FY11E earnings, respectively. The downsides from these levels are unlikely. However, in the absence of indicators pointing to recovery in domestic capex, valuation upsides could be capped over medium term. Key order wins from Middle East could however, address revenue visibility. Accumulate.
Current market price as on March 20, 2009
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