Pantaloon Retail
Research: JM Morgan Stanley
Recommendation: Overweight
CMP: Rs 1,641 (Face Value Rs 10)
12-Month Price Target: Rs 2,050
PANTALOON Retail (PRIL) has laid down a capital expenditure plan of around $850 million for the period '07-10, and expects to fund 60% of the investments from internal accruals. PRIL plans to meet a part of the remaining fund requirement by diluting a few of its subsidiaries. Interestingly, the company expects the value of three of its subsidiaries – Home Solutions, Central and Future Media – to be around $0.5 billion, which is around 50% of its current market cap. PRIL expects to raise equity capital in at least these three subsidiaries over the next 12 months. PRIL is well-placed to capitalise on the huge growth opportunity in the organised retail space in India. Not only does the company have firstmover advantage, it also has strong brands under various formats; locked in its real estate at competitive rates; and is creating/monetising value created in its subsidiaries. In our view, PRIL remains the best way to play the retail story in India.
Tata Tea
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 819 (Face Value Rs 10)
12-Month Price Target: Rs 950
TATA Tea (TTL) announced its big-ticket acquisition of 30% stake in Glaceau, US, the maker of enhanced water products. This has provided a lateral leap to TTL from the black tea segment (growing at a benign 2%) to a vibrant, enhanced water market with an estimated annual growth rate of 25% through '05-10. In the initial stages, the management is keen on strengthening the US market reach of Glaceau, followed by geographical extension into other developed markets. Glaceau's debt-free status enhances its ability to pursue aggressive growth strategies. For TTL, this will provide a wider distribution reach for its Tetley brand in the US market. Enam expects Glaceau stake to be treated as a strategic investment and dividend payouts to be included as other income in TTL's consolidated financials. Gearing is likely to shoot up from 1.1 times in FY06 to an estimated 2.7 times in FY07E. Interest burden is likely to go up by Rs 250 crore in FY07.
Gokaldas Exports
Research: Citigroup
Recommendation: Buy
CMP: Rs 634 (Face Value Rs 10)
12-Month Price Target: Rs 800
CITIGROUP's target price of Rs 800 is based on 16.5 times P/E for FY07E earnings, a premium to the domestic industry average of 12 times FY07E P/E. The premium valuation is a function of Gokaldas' largest garment capacities, and expected earnings CAGR of 28% for FY06-08E. P/E captures the strong earnings growth potential and hence, is Citigroup's primary valuation tool. The stock is trading at a P/E of 10.6 times FY07E earnings, nearly on par with the domestic industry and at 0 39% premium to its global peers. With global reforms seeming to favour India since the removal of quotas, and with anti-surge measures on China, Citigroup expects this premium to continue. On an EV/sales basis, the stock is also trading at an attractive-looking valuation of 1.1 times FY07E EV/sales, a 30% discount to the domestic industry. Citigroup expects Gokaldas' changing product mix, which favours higher value-added garments like outerwear, to drive valuations to the sector average of 1.5 times EV/sales for FY07E.
Yes Bank
Research: ULJK Securities
Recommendation : Buy
CMP: Rs 90 (Face Value Rs 10)
12-Month Price Target: Rs 108
YES Bank's Q1 FY07 net profit grew 50% to Rs 16.9 crore from Rs 11.3 crore in Q1 FY06 due to ramp-up in advances and fee income, with nil NPAs. The bank is also aggressive in retail banking activities and branch expansion, which will boost its mobilisation of low-cost deposits. Its one-bank approach will continue to leverage the existing client relationships effectively by cross-selling a wide range of financial products and services. Yes bank may go in for a follow-on public offer, besides raising capital from tier-II instruments, which will help it to decrease interest expenses and to earn better yield on advances. Despite higher margin pressures and deterioration in operating efficiency due to expansion of the distribution network, ULJK expects earnings to grow 67% and 52% in the next two years, led by strong loan growth of 108% and rising fee income. The key challenge for Yes Bank is to build a deposit franchise, especially given the delay in its branch expansion plans. At the current market price, the stock trades at 26.84 times and 17.65 times its earnings for FY07E and FY08E respectively.
Hexaware Technologies
Research: Karvy Stock Broking
Recommendation: Buy
CMP: Rs 155 (Face Value Rs 2)
12-Month Price Target: Rs 190
HEXAWARE is well set to step up its growth in coming years due to various reasons like: (a) Client additions are picking up momentum and data points suggest it can only improve, (b) Loss of revenues from the domestic software centre of PeopleSoft is being restored, (c) PeopleSoft - ERP itself is experiencing good recovery on account of new version release, (d) Focus has been to grow the top client accounts by stepping up mining, (e) Infusion of capital by GAP will give it the leeway to fund capital expenditure. Besides, the forward valuations, after adjusting for cash, are extremely attractive. The stock has little downside, since the strategic investor GAP is at Rs 142. The stock is currently trading at a P/E of 14 times CY07E and 10.5 times CY08E. At present, the cash and bank is 20% of the stock price. Hence, if Karvy adjusts for it, the stock is trading at 11 times CY07 and 8 times CY08 earnings. In terms of m-cap/sales, it is one of the cheapest stocks in Karvy's coverage universe.
ONGC
Research: Edelweiss
Recommendation: Accumulate
CMP: Rs 1,203 (Face Value Rs 10)
12-Month Price Target: NA
EARNINGS of ONGC are positively correlated to increase in crude prices, as increasing proportion of international revenues (ONGC Videsh), which is deregulated, will lead to higher realisations on crude. On the other hand, the government's prevailing subsidy sharing formula suggests that the company will be shielded from a fall in crude prices. ONGC's realisation from domestic crude is only $45/bbl compared to the equivalent traded crude at $70/bbl, indicating the extent of downside protection. Edelweiss' sum-of-the-parts valuation under existing operating assumptions pegs the fair value at Rs 1,346 per share, compared to the current price of Rs 1,191. ONGC trades at an asset valuation of $4.1/boe of reserves, compared with the average of $14.8/boe for comparable global E&P companies. While 70% of the gap is explained by higher reserves/production ratio and government regulations (subsidy on crude, cap on natural gas prices), 30% or $3.2/boe appears unjustified, creating room for expansion in valuations over time. Potential triggers that will narrow the valuation gap include gradual deregulation, depreciation of the rupee and announcement of large discoveries.
