HDFC BANK
*RESEARCH: *GOLDMAN SACHS
*RATING: *NEUTRAL
*CMP: *RS 1,107
GOLDMAN Sachs maintains its 'neutral' rating on HDFC Bank with a target
price of Rs 1,260. The bank reported 44% growth in net profit to Rs 460
crore in Q1 FY09, which was ahead of the consensus expectation of Rs 440
crore. Strong revenue growth, mainly NII growth, and a modest rise in credit
costs are the key drivers of this positive surprise in consensus
expectations. Sluggish growth in non-interest income will surprise
expectations negatively. CASA deposits declined to 44.9% from 51.5% in Q1
FY08. But efficiency improvements in CBoP franchise should help HDFC Bank
improve this ratio during the current financial year. The key metrics for
asset quality have held steady, even after the merger of CBoP's balance
sheet with HDFC Bank, but the management continues to maintain a cautious
stance. An upside to NII growth is likely, based on the reported
performance, but non-interest income growth may remain sluggish. Goldman
Sachs believes the upside to NII growth expectations may be offset by
sluggish fee income growth. Realisation of benefit ahead of expectations
presents the upside risk to the stock, while downside risks arise from
delays in realising the merger synergies.
*ITC
**RESEARCH: *CLSA
*RATING: *BUY
*CMP: *RS 188
CLSA continues to remain positive on ITC and a potential weakness in the
stock on the back of lower-than-expected earnings will present a 'buy'
opportunity. For the first time, ITC reported a y-o-y decline of 4.4% in
earnings during Q1 FY09. This 15% lower-than-expected profit was due to
higher losses in the company's new FMCG business, which is a cause for
worry. Moreover, the company booked one-time expenses related to certain
writeoffs, due to discontinuation of its non-filter cigarettes business, as
well as additional point-of-purchase expenditure incurred in upgrading
consumers to the filter category. On the positive side, ITC's overall volume
drop in the cigarette business was only 3%, driven by 20% volume growth in
filter cigarette volumes, which was much better than expected. After a
negative surprise in Q4 FY08, the losses recorded by ITC's new FMCG business
further increased to Rs 122 crore during Q1, against expectations of Rs 50
crore. This is attributable to a sharp rise in input costs and higher ad
spend to support new product launches. The company will hike prices in Q2,
but the impact of this will be felt only from Q3. The impact of higher
losses in ITC's FMCG business gets neutralised with its lower cigarette
volume drop assumption. CLSA maintains its earnings forecast and positive
view on the stock.
*UNITED SPIRITS
**RESEARCH: *MERRILL LYNCH
*RATING: *BUY
*CMP: *RS 1,284
UNITED Spirits' standalone profit grew 34% in the June quarter to Rs 110
crore, led by stronger sales. Merrill Lynch maintains its full-year
estimates on the stock, but acknowledges that there is upside risk if retail
price hikes begin to come through. At P/E of 18x FY09E and 15x FY10E, the
company's valuations are attractive. Domestic sales grew 25-26% in Q1, led
by volume growth of 19%. The company's key premium brands grew 17%. The
management expects key premium brands to grow 12-13% in FY09, but tactical
moves to tap low price brands may lead to stronger volume growth. Some
evidence of this was witnessed in Q1 as well. June quarter EBITDA grew 27%,
while margins fell 90 bps, led by a 55% jump in ad spend. For the full year,
the management expects to offset rising molasses and glass prices through
price hikes, mix gains, buying power, light weighting of glass bottles and
increased share of tetra-packs. Input costs are likely to be higher in the
September quarter, but these may be offset by lower advertising costs
relative to the June quarter. The company's Q1 sales grew 40% and EBITDA
grew 70%. The management reiterated its full-year EBITDA guidance of 15-20%
growth and highlighted that scotch prices will remain strong.
*HINDUSTAN CONSTRUCTION
**RESEARCH: *RELIGARE
*RATING*: BUY
*CMP: *RS 91
RELIGARE retain its 'buy' rating on HCC with a target price of Rs 230. The
company's net sales increased by 18.8% y-o-y in Q1 FY09. About 37% of its
revenue came from the power segment, 36% from the transport segment, 25%
from the water segment and 2% from other segments. EBITDA increased by 15.6%
y-o-y. HCC's interest cost increased by 21% y-o-y, while depreciation rose
by 11% y-o-y. Interest cost increased due to higher working capital
requirements, capex and investments in real estate. Adjusted PAT rose by 37%
y-o-y, mainly due to higher other income and lower tax rate. The company
reported forex losses worth Rs 50.6 crore on account of overseas borrowings
and a gain of Rs 61.9 crore from the transfer of land to its group company.
At its CMP, the stock trades at a P/E of 24x FY09E diluted earnings.
Religare is revising its target price downwards to Rs 230 from Rs 280, due
to a downward revision in the valuation of Lavasa because of higher
discounting rates. It had earlier valued Lavasa based on the discounted rate
of 13%, which has now increased to 14.5%. The company is in advanced stages
of finalising a stake sale of 5-10% in Lavasa to PE investors. This will set
the benchmark for valuing Lavasa, which is the key trigger for the stock.
*ADHUNIK METALIKS
**RESEARCH: *INDIA INFOLINE
*RATING: *BUY
*CMP: *RS 114
INDIA Infoline recommends a 'buy' rating on Adhunik Metaliks (AML) with a
target price of Rs 244 per share, implying an upside of 121.4%. In Q1 FY09,
AML reported strong results. Its trading income fell 8.2% y-oy to Rs 56.3
crore from Rs 65.8 crore in Q1 FY08. The share of trading income to total
sales in Q1 FY09 reduced to 15% from 29% in the corresponding quarter last
year. The rise in PAT growth was curtailed by a jump in interest and
depreciation costs. In the second half of FY08, the company had raised debt
to fund its expansion plans. This pushed up its interest cost 77.4% y-o-y to
Rs 22.5 crore. With the new steel melting shop operational in Q3 FY08,
depreciation for the company increased 49.3% y-oy to Rs 7.4 crore. PAT stood
at Rs 23.5 crore in Q1 FY09, compared to Rs 17.8 crore in Q1 FY08, and was a
mere 7.5% higher than Rs 21.9 crore in Q4 FY08. During the past two years,
AML has been in a major expansion phase. It is not only increasing its
steel-making capacity, but is also going up the value chain. AML is doubling
its sponge-iron and billet-making capacity. The expansion is being done in
two phases. In the first phase, it is increasing its billet-making capacity
to 0.45 mtpa, and setting up a rolling mill of 0.1 mtpa and a ferro-chrome
plant of 37,760 tpa. India Infoline has valued AML based on the sum-of-parts
method, which is primarily based on the EV/EBITDA multiple for its steel and
mining business and discounted cash flow for its power business. Based on
4.5x FY10E EV/EBITDA for the Rs 680-crore steel and mining business, India
Infoline has arrived at a fair value of Rs 209 per share.
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