Monday, July 7, 2008

Bull's Eye,

Analysts` corner

RESEARCH CALLSS I Team / Mumbai July 7, 2008, 0:51 IST

Larsen & Toubro
Reco price: Rs 2,140
Current market price: Rs 2,234.05
Target price: Rs 3,034
Upside: 35.8%
Brokerage: Emkay Share & Stock Brokers

L&T is sitting on comfortable order backlog of Rs 52,700 crore, equivalent to 2.2x FY08 revenues. This order inflow momentum is expected to continue, owing to ongoing capex wave and asset creation drive in hydrocarbon and infrastructure segments. Consequently, the order backlog to revenue ratio is likely to remain intact at 2.1x-2.2x in FY2008-10E period. L&T's FY08 consolidated results were below estimates on account of losses on commodity hedging and muted performance of its key subsidiary, L&T Infrastructure Development Projects Limited.

L&T is bullish on prospects in West Asia with ongoing construction boom in the region, which will help in compensating for any slowdown in order inflows from India. L&T expects stable margins despite rise in raw material prices due to price escalation clauses built in customer contracts.

Consequently, its standalone earnings (EPS) estimates have been revised upwards by 11 per cent to Rs 84.7 and Rs 104.4 for FY09E and FY10E, respectively. However, consolidated earnings estimates are revised downwards by 7 per cent and 15 per cent to Rs 107 and Rs134 for FY09E and FY10E, respectively.

IRB Infrastructure Developers
Reco price: Rs 149
Current market price: Rs 151.75
Target price: Rs 246
Upside: 62.1%
Brokerage: Pinc Research

IRB Infrastructure Developers Limited (IRB) is a Mumbai-based infrastructure development and construction company with vast experience in building roads and highways, both as a contractor as well as an operator.

The company operates via two business verticals viz. road build-operate-transfer (BOT) projects and engineering and construction (E&C) divisions.

Being a fully integrated company, implementing EPC as well as operations and maintenance activities give IRB a better control on costs incurred and meeting stringent project time lines.

IRB presently has 14 BOT projects under its belt, with daily toll collection amounting to about Rs 1.35 crore. With IDAA and Surat-Dahisar becoming fully operational by FY10, the same will increase to Rs 3 crore per day.

A steady flow of revenues from operational road assets, the company is expected to report CAGR of 56 per cent in net sales and 83 per cent in net profit over FY08-11E. At Rs 149, the company is trading at a P/E of 7.7x and EV/EBIDTA of 5.6x its FY10E earnings. The sum-of-total-parts valuations peg IRB's fair value per share at Rs 246. Maintain Buy.

Pfizer
Reco price: Rs 551
Current market price: Rs 553.80
Target price: Rs 732
Upside: 32.2%
Brokerage: Prabhudas Lilladher

Pfizer has launched Champix, its first patented anti-smoking drug in India in February 2008. This product will be imported from Germany and will be marketed by Pfizer. Unlike other drugs, it does not contain nicotine and has a success rate of 44 per cent in the US.

The company has also introduced Cycklokapron, used for reducing blood flow during surgery. Pfizer has a string of new product launches in the pipeline, likely to be future growth drivers for the company.

The company sold its four over the counter brands to Johnson & Johnson for Rs 215 crore. These brands had combined sales of Rs 60 crore.

The government plans to increase the number of drugs under price control from 74 to 354 based on WHO list of essential drugs. Also, one of Pfizer's key raw materials, Codeine Phosphate, is in short supply. These developments may affect sales and profitability of the company going forward.

The company is expected to report CAGR of 7 per cent in net sales and 14 per cent in net profit over FY07-09E. EBIDTA margins are likely to improve from 22.5 per cent in FY07 to 24.7 per cent in FY09 due to restructuring and new product launches. At Rs 551, the stock trades at 9.8x FY09E EPS of Rs 56.3. Maintain Buy.

India Cements
Reco price: Rs 137
Current market price: Rs 124.80
Downside: N.A.
Brokerage: Edelweiss Securities

India Cements is a leading cement player in South India with close to 92 per cent of its FY08 dispatches being in that region. The company has seven plants with current installed capacity of about 9.9 mtpa.

India Cements' Q4FY08 results were below expectations as staff, freight, and other expenses maintained their upward bias. Affected by higher costs and muted realisation increase, EBITDA margin came off 200bps Q-o-Q to 31 per cent.

The company recorded extra-ordinary loss of Rs 48.1 crore on one-time settlement with lenders. While India Cements is likely to end FY09E with an installed capacity of 14 mtpa, bulk of the expansion is expected to come on-stream only by Q4FY09E. There is a two-quarter delay (approximately) from the initial timelines guided by the company.

The outlook for the sector remains negative as supply influx will curtail pricing power of cement companies. India Cements' core earning is likely to come off by about 27 per cent in FY10E vis--vis FY08.

Faced with pricing inflexibility and cost pressures, EBITDA margins are expected to decline to 27.4 per cent in FY10E from 35.5 per cent in FY08. Based on revised project timelines and absence of any near-term positives, the brokerage has revised its volume estimates downwards by 8.1 per cent in FY09E and 6.5 per cent in FY10E.

Tata Steel
Reco price: Rs 729
Current market price: Rs 657.45
Target price: Rs 870
Upside: 32.3%
Brokerage: India Infoline

Steel prices in Europe have risen by over 45 per cent in the past six months. The world's sixth-largest steelmaker, Tata Steel has indicated that Corus will see a cost increase of 230/tonne in FY09.

The company has taken a price increase of a similar amount till July 2008, and this should offset the cost increase. While Q1 FY09 earnings may show some weakness due to time lag in cost pass-through, a strong performance from Q2 FY09 is likely to take place. Tata Steel expects to achieve about $600 million increase in Corus's EBITDA in FY09.

Tata Steel commissioned its new H-blast furnace in May 2008. The company expects this furnace to increase its production of saleable steel by 0.8 million tonnes per annum (mtpa) in FY09 (about 20 per cent higher than in FY08).

Additionally, the company will sell 0.3 mtpa of pig iron during the year, as its caster is likely to come on stream two months after the blast furnace. Capital expenditure for FY09 is estimated at $2 billion.

The company expects to start construction at Kalinganagar's 6 mtpa greenfield expansion in two months. Tata Steel's current valuations P/E of 6.7x and EV/EBITDA of 5.6x on FY09E earnings, are attractive with P/E at about 33 per cent discount to global peers. This discount is expected to narrow, as firm steel prices in Europe improve Corus' earnings visibility.

(Current market price as on July 3, 2008 published in Business Standard dt. 3.7.2008))

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