Bull's Eye: Views on stocks

STATE BANK OF INDIA

RESEARCH: MOTILAL OSWAL

RATING: BUY

CMP: Rs 1,481

Motilal Oswal maintains ‘buy’ rating on State Bank of India (SBI). The bank’s rural and agri-business unit comprises: (1) all the business done at its rural and semi-urban branches; and (2) agriculture business done at any branch. SBI has 7,100 branches in rural and semi-urban areas which account for ~70% of its total branch network strength.

About 50% of its employees work in the agri-rural business (ARB) division. The bank’s ARB loan book is currently more than Rs 1 trillion; this accounts for ~23% of SBI’s total loan book and ~28% of its domestic loan book. About 45% of these are farm loans. ARB deposits stand at ~Rs 1.7 trillion and account for ~30% of SBI’s deposits.

SBI’s ARB loan and deposits account for 21-22 % of the industry, while its ARB branch network accounts for 13% of the industry. SBI is consistently gaining market share in this segment. Motilal expects the bank to report consolidated earnings per share (EPS) of Rs 155 in FY09E and Rs 187 in FY10E.

Consolidated book value (BV) will be Rs 1,110 in FY09E and Rs 1,282 in FY10E. Return on assets (RoA) and return on equity (RoE) are expected to be ~1% and 15-16 %, respectively , over the next two years. Adjusted for value of SBI Life at Rs 205/share, the stock trades at 1x FY10E consolidated BV.

LANCO INFRATECH

RESEARCH: UBS INVESTMENT

RATING: BUY

CMP: Rs 179

UBS Investment has upgraded its rating on Lanco Infratech to ‘buy’ , but has reduced the target price by 28% to Rs 250. It has also cut its EPS estimates by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution.

It has factored in a 10% discount to power, EPC (engineering, procurement & construction) and infrastructure valuations. The contributions to value are from power (44%), EPC (40%) and real estate (15%).

The stock is trading at 9.5x FY09E EPS, which is a good buying opportunity. The key risks are fuel availability , execution and a further slowdown in the real estate sector.

TITAN INDUSTRIES

RESEARCH: JP MORGAN

RATING: OVERWEIGHT

CMP: Rs 1,078

JP Morgan maintains ‘overweight’ rating on Titan Industries with a March ’09 target price of Rs 1,475 based on a forward price-to-earnings (P/E) multiple of 23x. The company has seen a revival in demand for its watches and jewellery, post-June ’08.

It continues to maintain its previous guidance of 33% growth in revenue to Rs 4,000 crore and similar profit growth for FY09. Specialty and lifestyle retailing will remain the company’s core focus as there are many organic growth opportunities in a nascent market like India.

Titan aims to add 750 stores over the next five years, but it has no immediate plans to expand its international business . Several initiatives in the jewellery and watch businesses should help to sustain good growth over the next 1-2 years. Goldplus, Golden Harvest Scheme and innovative collections such as ‘Jodhaa Akbar’ should support double-digit volume growth in the jewellery business.

The company has planned exciting new launches in the watch segment, such as a new children’s brand and automatic watches, over the next 6-9 months.

Prospects of the eyewear business look encouraging and the company plans to add 60 stores in the next one year and 200 stores over the next three years. It is targeting sales growth of 50% through its own brands to improve margins. JP Morgan feels Titan is the best proxy for attractive growth opportunities in the specialty retail space.

HINDUSTAN ZINC

RESEARCH: CITIGROUP

RATING: SELL

CMP: Rs 405

Citigroup has downgraded Hindustan Zinc’s (HZL) rating to ‘sell’ by reducing the target price to Rs 430 on the back of an earnings cut of 22% for FY09 and 27% for FY10.

Citigroup’s new estimates incorporate changed zinc and lead forecasts, updated trends in rupee-dollar exchange rates and small changes in volumes based on management feedback .

Zinc prices are expected to fall 41% year-on-year (y-o-y ) in FY09, further fall 10% y-o-y to reach a bottom in FY10, and recover thereafter in FY11. HZL enhanced its zinc capacity by 88,000 tonnes per annum (tpa) to 669,000 tpa in April ’08 (total zinc-lead capacity to 755,000 tpa).

In addition, HZL has announced further capital expenditure (capex) to enhance zinc capacity by 210,000 tpa and lead capacity by 100,000 tpa — taking the total to 1.07 million tpa by ’10, together with additional mining and captive power capacities.

Citigroup sees a fall in earnings and EBITDA margins despite positive factors for HZL, such as its status as one of the lowest-cost producers globally, strong zinc volume growth (20% in FY09E and 40% in FY10E), high realisations for by-products like sulphuric acid, and savings from commissioning of captive power.

NESTLE

RESEARCH: EDELWEISS

RATING: ACCUMULATE

CMP: Rs 1,650

Edelweiss initiates coverage on Nestle with an ‘accumulate’ recommendation . Nestle is expanding into tier-II and III cities by introducing stock-keeping units (SKUs) below Rs 10.

Also, its turnover from innovations /renovations, positioned on the health and wellness platform (priced at a substantial premium to existing products) has increased fivefold over the past few years. The turnover is expected to remain at high levels, going forward, on the back of the company’s strong product pipeline.

At the current market price, the stock is trading at P/Es of 28.9x and 23.5x to CY08E and CY09E earnings, respectively. Nestlé is trading near the upper end of its recent band of 23-27 x forward earnings. Edelweiss believes these levels are sustainable, given Nestlé’s strong growth and defensive nature of its business.

Amidst volatile capital market conditions , the stock looks attractive over the long term. Edelweiss has valued Nestle at 26x CY09E earnings, which results in a target price of Rs 1,830. It expects Nestlé’s earnings to witness a compounded annual growth rate (CAGR) of 25.5% over CY07-09 E.


JAIPRAKASH ASSOCIATES

RESEARCH: MERRILL LYNCH

RATING: BUY

CMP: Rs 116

Merrill Lynch has maintained a ‘buy’ rating on Jaiprakash Associates (JPA), but has reduced the target price to Rs 335 from 395. This is because it has reduced the value of Yamuna Expressway due to indefinite delay in the proposed Greater Noida International Airport, higher expressway cost and lower real estate realisations till FY11E.

This can impact development of realty at three (3,750 acres) of the five land parcels (6,250 acres) of JPA’s Yamuna Expressway located in and around Noida airport. Hence, Merrill Lynch has removed these parcels from the valuations till visibility emerges.

It has also factored in a higher cost of the expressway at Rs 7,400 crore on higher land/construction costs and lower realisation assumptions on the Noida land bank till FY11E on continued weakness in the realty market in National Capital Region (NCR).

Key triggers are: a) Improved macro situation — lower inflation/rates; b) Execution of power/infrastructure projects on time; and c) Monetisation of realty land bank.


Source: Economic Times