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| Analysts' corner |
| S I Team / Mumbai Sep 15, 2008, 00:12 IST |
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Sterlite Industries India
Reco price: Rs 576
Current market price: Rs 487.10
Target price: Rs 953
Upside: 95.6%
Recent restructuring of Sterlite Industries India’s (Sterlite) existing businesses, namely power, zinc, copper and aluminium would be value-neutral in nature.
As per the new scheme of arrangement, seven shares of Madras Aluminium (MALCO) will be given for four shares held in Sterlite, in lieu of the aluminium business of BALCO and energy business of Sterlite Energy being transferred to MALCO. The scheme now implies that if the value of shares of MALCO moves up, the effective value of Sterlite should also move up.
Acquisition of Konkola Mines (KCM) in Zambia can either create or destroy value for Sterlite. With production of 400 kilo tonne of copper in FY10, KCM is likely to generate EBITDA of $945 million. The deal for KCM appears to be valued at 3.8x FY10E EV/EBITDA.
Acquisition of American Smelting and Refining Company (ASARCO) also compares favourably with that of KCM. Sterlite is likely to acquire ASARCO for $2.6 billion in an all-cash deal. With a total production volume of 0.23 million tonne, ASARCO is likely to generate EBITDA of $690 million.
On FY10E, ASARCO also appears to be valued at 3.8x on EV/EBITDA basis. There is a possibility of ASARCO being acquired by Sterlite as early as December 2008, which might result in additional value creation for shareholders of Sterlite. Maintain Buy.
IVRCL Infrastructures & Projects
Reco price: Rs 310
Current market price: Rs 277.20
Target price: Rs 460
Upside: 66%
Brokerage: Kotak Securities
The annual report analysis of IVRCL Infrastructures & Projects (IVRCL) for FY08 reflects a strong business model, excellent order inflow and in line growth in subsidiaries’ performance.
IVRCL has a robust order book of Rs 15,000 crore diversified across water, building, power and transportation space. Water and irrigation segment continues to remain the key growth driver for the company; contributing 64 per cent to the current order book.
With the planned investment of Rs 199,100 crore in the water supply and sanitation in the 11th five year plan, IVRCL is expected to remain the key beneficiary.
One of its subsidiaries, Hindustan Dorr Oliver (HDO) is focused on high growth sectors of oil business, mineral beneficiation and environmental engineering. HDO grew at a CAGR of 46 per cent between FY06-FY08 and is expected to maintain its growth momentum going forward.
IVRCL’s revenues are expected to grow at a CAGR of 31 per cent between FY08-FY10E. At Rs 310, stock is trading at 17.6x and 14.2x its P/E multiples on FY09 and FY10 estimates, respectively. The brokerage has revised its earnings estimates to incorporate higher working capital cycle as well as higher borrowings. The revised price target for the stock is Rs 460 as against Rs 474 earlier. Maintain Buy.
Reliance Communications
Reco price: Rs 404
Current market price: Rs 391.95
Target price: Rs 529
Upside: 35%
Brokerage: India Infoline
Reliance Communication’s (Rcom) broadband business (including enterprise business) grew by 56 per cent in FY08, almost double the rate at which Bharti’s corresponding business grew, whereas global revenues grew only by 6 per cent.
In the flagship wireless business, the ARPU declined sharply relative to peers, and while Rcom’s subscriber additions were robust, global division (dominated by subsidiary, FLAG) had the lowest asset turnover and EBITDA margins. Wireless, global and broadband businesses contribute 68 per cent, 24 per cent and 8 per cent, respectively to the revenue mix.
Rcom’s strategy of leaving forex loans unhedged proved 340 basis points more expensive than its investment yield, amplified by the massive size of the investments of nearly $3 billion. Aggressive investment of $1.5 billion (over three years) into FLAG, the sharply-lower asset turnover along with squeeze on margins, gives out worrying signals. Rcom had 5.26 crore subscribers as on July 2008 and 30,295 towers at end-June 2008.
Rcom’s wireless capacity is substantially underutilised and it can create incremental capacity, especially in CDMA quite economically. The brokerage has downgrade Rcom’s FY09 earnings by 21 per cent on account of expected forex loss of more than Rs 400 crore in Q2 FY09 and expectation of weakness in wireless results. The DCF-based target price for the stock is Rs 529.
Hindustan Construction Company
Reco price: Rs 97
Current market price: Rs 96.40
Target price: Rs 157
Upside: 62.9%
Brokerage: Religare Hichens, Harrison & Co
Hindustan Construction Company’s (HCC) order book as on June 30, 2008 was strongly poised at Rs 8,250 crore (excluding the Sawalkote project under dispute) as against Rs 8,200 crore on March 31, 2008.
The company is awaiting decisions on submitted tenders worth Rs 4,900 crore (including the Rs 2,700 crore Kishanganga hydro power project in Jammu & Kashmir), while tenders in the process of submission total Rs 11,000 crore. The target completion date for the Southbound carriageway (first lane) of the Bandra-Worli sea-link project is indicated as January 2009.
HCC’s working capital days have reduced from 195 days of net sales in FY07 to 169 days in FY08, mainly because a number of projects have crossed the revenue threshold limit, thereby resulting in a free positive cash flow in FY08.
Going forward, working capital is expected to reduce to 150 days of sales. At Rs 97, the stock trades at a P/E of 26.3x FY09E diluted earnings. While the core business has been valued at Rs 54/share (10x FY10E earnings), the Lavasa project is pegged at Rs 87/share (a 30 per cent discount to its NAV). With a high-risk rating on the stock, the brokerage maintains a Buy with a price target of Rs 157. Tata Steel
Reco price: Rs 569
Current market price: Rs 523.45
Target price: N.A.
Brokerage: Motilal Oswal Securities
Tata Steel’s UK-based Corus subsidiary has been able to achieve most (around 80 per cent) of spot price hikes announced for Q2 FY09. Price increases will be able to recover cost increases in Q2 FY09.
As much as 100 percent and 60 per cent of cost increases, on account of higher coking coal prices and iron ore prices, respectively are yet to be reflected in the financials. Corus is expected to produce 21 million tonne (mt) in FY09. Long products annual contracts have been renegotiated for further hike from October 2008.
Tata Steel’s domestic production will increase by 0.8 mt to 5.7 mt in FY09. Steel melt shop expansion has been completed in August 2008. Price hikes on annual contracts (25 per cent of domestic sales) to automobile sector have mostly been realised in Q1 FY09. Its subsidiaries, namely Tata Steel Thailand and Nat Steel were able to gain market share in their respective markets as other producers are primarily re-rollers, who have suffered on account of working capital requirement due to credit crunch.
The valuations of the company are compelling, as the stock is currently trading at a P/E of 3.6 times, EV/EBITDA of 3.6 times and P/BV of 0.9 times FY09E earnings (RoE of 25 per cent). Maintain buy.
Current market price as on September 12, 2008.
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