Analysts' corner

Coal India, NTPC, Bajaj Auto

COAL INDIA
Reco price/date: Rs 351/September 3
Current/target price: Rs 360/Rs 398
Coal India (CIL)'s board of directors has agreed to the proposed modifications in new fuel supply agreements (FSAs). Analysts maintain the graded penalty structure for new FSAs is not prohibitive, and CIL could continue to earn incentives (on a net basis) by supplying more than the annual contracted quantity in its pre-FY10 FSAs. They add the coal price pooling mechanism, whenever adopted, would be revenue-neutral for CIL. However, CIL would assume the 'delivery risk' of imported coal---from ports to power projects. The recent interaction of analysts with policymakers suggests the adoption/implementation of a coal price pooling mechanism would potentially take at least a few more months (earliest by 2012-end). Maintain 'Buy'.

Nomura Equity Research

NTPC
Reco price/date: Rs 168/August 31
Current/target price: Rs 168/Rs 173
Strong regulatory equity growth of 15 per cent through FY12-14 would help the company maintain return on equity at 12-13 per cent levels. But a low plant availability factor and plant load factor would prevent a meaningful increase beyond 13 per cent levels. On May 12, the stock fell to Rs 140 levels; investors could have ideally bought. In the last three months, NTPC has outperformed the BSE Sensex by 6.9 per cent and Power Grid Corporation by one per cent. NTPC should trade at a price/book value of 1.7 times for FY14, against 2.2 times for Power Grid Corporation. Analysts believe this is justified, given the slow growth, low return on equity and higher risks of generation against transmission. 'Neutral'.

Citigroup

BAJAJ AUTO
Reco price/date: Rs 1,617/September 3
Current/target price: Rs 1,664/Rs 1,800
Deutsche Bank Markets Research prefers Bajaj over Hero, owing to slowing growth and increasing competition in the domestic market, which is affecting Hero (90 per cent of revenue) more than Bajaj (50 per cent). Also, Hero faces heightened technology risks, as it would need new products to defend domestic share and enter export markets. Analysts forecast Hero's current profitability gap with Bajaj (700 basis points on the earnings before interest and tax margin) would persist due to relatively lower pricing power and higher marketing costs, as it tries to defend its market share. Bajaj's capital efficiency improvements and cash flow are already better than Hero's, and this trend should continue in the medium term, as Hero embarks on a large investment plan. Maintain 'Buy'.

Deutsche Bank Markets Research