Buy Thermax; target of Rs 562: Citigroup

Citigroup Research, is bullish on Thermax and has recommended buy rating on the stock with a target of Rs 562.

Initiate With Buy: Captivating Growth

Leader in small & medium-sized boilers in India

Thermax has a 21% share of the overall boiler market in India, and is the only scale player other than BHEL (which has 69% of the overall market). With BHEL focusing on higher capacity utility boilers, Thermax is poised to capture a larger share of the market in industrial boilers and smaller capacity utility boilers.

Play on power and industrial capex

Thermax is in a sweet spot given 1) India’s captive power capacity is set to grow by 63% in the next five years due to a lack of quality power supply and high industrial tariffs; 2) Industrial capex is expected to grow 181% in FY06-10E driven by strong demand and peak capacity utilizations.

Niche player in environment-friendly technologies

A key revenue driver for Thermax will be its products and solutions for industrial and waste water treatment, waste heat recovery and air pollution control. Globally and domestically, demand is rising for environment-friendly technologies as a result of tightening emission norms under global initiatives like the Kyoto Protocol.

Buy/Low Risk, target price of Rs 562 (20x FY09E EPS)

Our target price for Thermax is based on the target multiple we use for BHEL. Our rating is supported by: 1) EPS CAGR of 34% over FY07E-10E; 2) projected ROEs of ~35%; 3) a growing share in India’s boiler market.

Key risks

Pending lawsuit in the US, low pricing flexibility, rising interest rates, increasing competition, manpower shortages, rupee appreciation, decline in oil prices.

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Buy Dr Reddy’s Laboratories; target of Rs 803: Citigroup

Citigroup is bullish on Dr Reddy’s Laboratories and has recommended a buy rating on the stock with a target of Rs 803.

Avandia cardiovascular (CV) safety questioned:

A paper in the New England Journal of Medicine concludes that Avandia treatment was associated with a significant (30-40%) increased risk of heart attack and an increase in the risk of death from CV events that has borderline significance. While there are possible implications for DRL, they are not material enough to change our rating.

May not be too serious:

Our US analyst, Kevin Wilson, who covers GSK Plc believes that the study has significant limitations including pooling of data from trials not originally intended to explore CV outcomes, absence of central adjudication of CV outcomes in most trials and unavailability of definitions of heart attacks. Besides, GSK has provided an unpublished interim analysis of the RECORD study of CV outcomes with Avandia to the FDA, which provides contradictory evidence, according to FDA. Pending analyses, and with no specific risk, FDA has not asked GSK to take any action.

DRL is FTF on Avandia:

DRL believes it has a first to file position in its patent challenge on Avandia and enjoys shared exclusivity. Avandia has annual sales of c .USD 2 billion in the US, and is a potentially large opportunity for DRL, if it prevails in the litigation. As such, any erosion in Avandia’s franchise or a global withdrawal would have an adverse impact on DRL.

Will all ‘glitazones’ be affected?

The other question is whether the problems apply only to Avandia or other drugs using the same pharmacological mechanism (glitazones). If yes, this may include DRL’s balaglitazone, which is stated to enter phase III clinical trials over the next year. Our price target includes an option value of Rs 6 per share built in for balaglitazone.

Valuation:

Valuing DRL is a challenge as it has a high exposure to patent challenges and NCE research, where costs are front ended and returns likely to come through in future. As such, a pure P/E based approach would be insufficient and we use sum-of-the-parts valuation approach. We use a target multiple of 20x to value sector leaders, which is at a premium of about 40% to the broad market and is justified given that the sector is IPR driven and has the potential for significant earnings growth. At 20x June’08E earnings, we value DRL’s base business at Rs 703 per share. We value DRL’s Para IV pipeline and drug discovery efforts separately at Rs 31 per share. For patent challenges we use a success probability of20% and a discounted cash flow (discount factor 15%) for the opportunities being targeted over the next few years. We maintain Rs 68 per share value for DRL’s new drug discovery efforts. Together, these values give us a target price of Rs 803.

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Buy SAIL; target of Rs 170: Khandwala Securities

Khandwala Securities is bullish on Steel Authority Of India (SAIL) and has recommended a buy rating on the stock with a 12-month target of Rs 170.

Result Highlights: Q4FY2007

Net sales grew by 15.7% to Rs 119,351.8 million for the Q4FY2007 as against Rs 103,072.3 million for the corresponding quarter last year; QoQ increase of 21.3%.

EBITDA grew by 102.6% to Rs 30,235.6 million for the Q4FY2007 as against Rs 14,921.8 million for the corresponding quarter last year; QoQ increase of 24.3%.

Profit after tax grew by 72.4% to Rs 19,018.8 million for the Q4FY2007 as against Rs 11,032.0 million for the corresponding quarter last year; QoQ increase of 29.3%.

SAIL achieved a record production of 3.25 million tonne of saleable steel in the current quarter.

EBITDA margin was at 29.11% as compared to 16.62% in Q4 last year, an increase of 1249 basis point YoY and 63 basis point QoQ.

EBITDA margin was higher on account of high steel prices and cost reduction due to economic of scales.

Other income was higher by 35.9% to 2,387.9 million thanks to its high cash balance.

Inspite of increase in volume and raw material cost, the company was able to reduce the overall cost by 1.7% from the corresponding quarter last year.

Interest cost was lower by 47.7% to 554.8 million due to reduction in loan outstanding.

EPS for the quarter increased to Rs 4.60 from Rs 2.67 for the corresponding quarter last year, an increase of 72.4%.

Result Highlights: FY2007

Net sales grew by 21.4% to Rs 402,917.5 million for the FY2007 as against Rs 331,779.7 million for the last year.

EBITDA grew by 48.9% to Rs 101,270.2 million for the FY2007 as against Rs 68,003.5 million for the last year.

Profit after tax grew by 54.6% to Rs 62,022.9 million for the FY2007 as against Rs 40,129.7 million for the last year.

SAIL achieved a record production of 12.6 million tonne of saleable steel and the highest ever sale of 11.9 million tonne in FY2007.

EBITDA margin was at 28.91% as compared to 23.65% for the last year, an increase of 526 basis point.

Other income was higher by 44.9% to 8,392.1 million thanks to its high cash balance.

Interest cost was lower by 29.0% to 3,321.3 million due to reduction in outstanding loan.

EPS for the year increased to Rs 15.02 as compared to Rs 9.72 for the last year, an increase of 54.6%.

Valuation:

The phased capacity additions and merger with IISCO along with modernization of existing capacities would translate into a robust topline growth of 16.3% in FY2008E and consequently 33.2% increase in bolltomline. The cost structure is set to improve in view of better operating efficiencies (lower coke consumption, higher labor efficiency and increase in production through continuous casting route). Rupee appreciation will also help the company to improve its profit margins, as it will reduce the import cost of coking coal. Merger with IISCO would further unlock the value, as SAIL would have access to IISCO’s underutilized iron ore and coalmines. At the current price of Rs 144.9, SAIL is trading at a P/E multiple of 9.65x and 7.25x FY2007 and FY2008E earnings respectively. Thus at the P/E of 8.5x, we recommend a ‘BUY’ with a 12-months price target of Rs 170.

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Buy Patel Engineering; target of Rs 506: Man Financial

Hydro-powered:

Patel Engineering’s end markets hydropower, irrigation, urban infrastructure, and transportation are in a strong growth phase. Its order book at Rs 50 billion is 4.6x (Last 4 quarter sales). We expect FY06-09E revenue CAGR of 33%.

Margin improvement by 80 bps over FY06-08E, as 80% of revenues coming from higher margin business (hydropower and irrigation), increasing proportion of revenues from high-margin standalone Patel Engineering, Equipment constrains of the sector, increasing average project size, and better project selection.

Foray into realty with a land bank of 500 acres to give a big push to revenues over a period and to valuations in near future. We have valued its realty business at Rs 141 per share (+33% CMP). We believe that cash flows from realty will help further strengthen its core business.

Investment rational:

• Strong earnings visibility and revenue growth. Hydropower projects of Rs 900 billion (~1,8000MW) along with strong investments (Rs 250 billion per year each) in irrigation and urban infrastructure segments are expected during the 11th plan. Patel will be one of the key beneficiaries of these investments. Also the micro tunneling market size is expected to be Rs 5 billion per year (Patel’s share of 20%).
• Favorable project mix of the hydro projects (50%), irrigation (28%), and micro tunneling transportation and others (22%) will ensure that the margins remain high. We expect the margins to improve by 80 bps over FY06-08.
• Earnings expected to grow at a healthy CAGR of 42% over FY06-09E.
• The management is actively seeking inorganic expansion to gain qualifications and capabilities in upcoming segments. Michigan Engineering is its recent acquisition (turnover of Rs 250 million) in the urban infrastructure segment.

Valuation:

We have used sum-of-the-parts methodology to arrive at a fair value of Rs 506. Our DCF based 12-month target for its core business is Rs 365 and for its realty business it is Rs 141.

CMP valuations: Adjusted (for realty value) PER of 14.4x FY08E, 11x FY09E, EV/EBITDA of 7.6x FY08E

Target valuations: Adjusted PER of 14x FY09E, EV/EBITDA of 7.8x FY09E.

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Buy Deepak Fertilisers; target of Rs 123: Emkay

Emkay Research is bullish on Deepak Fertilisers & Petrochemicals (DFPCL) and has recommended a buy rating on the stock with a target price of Rs 123.

Emkay Research report on Deepak Fertilisers & Petrochemicals:

Deepak Fertilisers & Petrochemicals (DFPCL) Q4FY07 & FY07 results were above than expectations primarily on firm methanol prices. Q4FY07 net sales increased 23.8%YoY / -13.4% QoQ to Rs 2.1 billion while adjusted PAT increased by 103.6%YoY /11.9% QoQ to Rs 278 million. During the quarter methanol prices were strong (however the same has came down sharply now) and up by ~50% YoY. For FY07, net sales at Rs 8.3 billion was up 48% and PAT at Rs 945 million was up by 41%. However segment margins in chemical business declined by 400 bps to 31.9% while margins in fertilisers business bettered but continued to report loss. DFPCL has reported an Adj. EPS of Rs 10.7 for FY07 (Rs 7.6 in FY06). We expect an EPS of Rs 13.4 for FY08 and maintain our ‘BUY’ recommendation with a price target of Rs 123.

Results highlights:

DFPCL’s Q4FY07 net sales increased by 23.8%YoY -13.4%QoQ to Rs 2.1 billion. Fertilisers contributed 24% (39%) of the total revenues while dropped by -24.7%YoY/-37.8%QoQ to Rs 526 million. Chemicals contributed 75% (61%) of the total revenues and increased by 50.9%YoY / -1.7%QoQ to Rs 1.63 billion.

EBITDA margins increased by 750 bpsYoY/ 280 bps QoQ to 19.5% primarily due to margins improvement in fertiliser business. However margins in chemical segment declines sharply to 27% from 34%.

Adj. PAT at Rs 278 million was up by 103.6% YoY / 11.9% QoQ, resulting EPS of Rs 3.2.

During the quarter methanol prices were up by approx 50%YoY (USD 500 per meter). However methanol prices have crashed in recent time and are hovering at USD 320 per meter at present.

Net sales in FY07 increased by 48% to Rs 8.3 billion. Fertilisers contributed 35% to total revenues and increased by 61% to Rs 3 billion. Chemicals contributed 65% to the revenues and were up by 41.2% to Rs 5.6 billion.

EBITDA margins for the year stood at 17.3% in FY07 as against 18.4% in FY06.Margins declined in chemicals segment by 400 bps to 31.9% but improved from -13.2% to -8.9% in fertiliser segment.

Adj. PAT for FY07 at Rs 945 million increased by 41% and company reported an EPS of Rs 10.7 as against Rs 7.6.

Recommendation and valuation:

We maintain our ‘BUY’ recommendation on the stock with a price target of Rs 123; based on our FY08E EPS of Rs 13.4 in FY08 we expect profitability to improve from better utilisation of IPA plant and commissioning of Ishanya mall in pune.

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Hold Bajaj Auto; target of Rs 2544: Emkay

Emkay Research continue to remain positive on the long-term prospects of Bajaj Auto and recommended a hold rating on the stock with a reduced target price of Rs 2544.

Emkay Research report on Bajaj Auto:

Financial Estimates:

We assign a target price of Rs 2544 to the BAL stock based on the Sum Of Parts Value. We are downgrading our target price mainly because of lower core EPS estimates due to weakening of two wheeler demands in FY08E and reduced economic interest of BAL in insurance business (we have assumed it to be 51%). At the current market price of Rs 2195, the BAL stock discounts FY08E and FY09E earnings at 16x and 14x respectively. We continue to remain positive on the long-term prospects of BAL and recommend a HOLD on the stock with a reduced target price of Rs 2544.

Top line grows by 7% YoY only due to flat sales volume growth inQ4FY07:

Bajaj Auto Ltd (BAL) reported below expectation results for Q4FY07. Net sales forQ4FY07 went up by 7% YoY to Rs 23,136 million backed by sales volume growth of0.8% YoY to 625,357 vehicles and a healthy net realization growth of 6% YoY to Rs 36,996 per vehicle. BAL’s sales volume was impacted mainly due to weakening of demand in entry level motorcycle segment. We believe rising interest rates and higher down payment demands from the financing institutions have impacted the sentiments of two wheeler customers.

For FY07, net sales of BAL grew by 24% YoY to Rs 95,204 million backed by sales volume growth of 19% YoY to 2,721,178 vehicles and net sales realization growth of4% YoY to Rs 34,986 per vehicle. BAL outperformed the two-wheeler industry inFY07. BAL has started its plant in Uttarakhand with an initial motorcycle capacity o f 300,000 unit’s p.a. from April 2007 and the company has said they would manufacture mainly Platina motorcycle in this plant. BAL improved its market share in motorcycles from 31% in FY06 to 34% in FY07.On a consolidated basis, BAL’s net revenue for FY07 grew by 25% YoY to Rs 101 billion on the back of revenue growth of 24% YoY in auto, 72% YoY in insurance and 25%YoY in investment business. Input costs put pressure on EBITDA margins BAL’s raw material cost as a percentage of net sales went up by 451bps YoY to73.1% and other expenditures went up by 118bps YoY to 9.8%. Both these costs have impacted the EBITDA of the company for Q4FY07.

BAL’s absolute EBITDA declined by 23% YoY to Rs 3,263 million and EBITDA margins came down drastically by 552 bps YoY to 14.1% in Q4FY07.For FY07 EBITDA of BAL grew only by 5% YoY to Rs 14,170 million and EBITDA margins declined by 280bps YoY to 14.9%. On a consolidated basis BAL reported growth of12% YoY in EBITDA to Rs20bn and EBITDA margins declined by 223 bps YoY to19.8%.

Business Outlook and Valuation:

BAL is the second largest two-wheeler manufacturer in India. BAL has outperformed two-wheeler industry in terms of sales volume growth, but the EBITDA margins remained under pressure for Q4FY07 mainly because of increase in raw material prices. We believe the rising interest rates and higher down payments demand from financing institutions would impact the two-wheeler sales in the short-medium term. We estimate the sales volume of BAL would grow by 11.3% YoY to 3.2 million in FY08E and 12.9%YoY to 3.4 million in FY09E.BAL’s insurance business grew by 72% in FY07 and we estimate BAL to maintain its 2nd position in both life and general insurance. But the call option given to its insurance partner Allianz could be a negative in the long term for BAL’s shareholders, according to us.

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Buy Everest Kanto Cylinder; target of Rs 1500: HDFC Sec

HDFC Securities is bullish on Everest Kanto Cylinder (EKC) and has maintained buying rating on the stock with a target of Rs 1500.

Positives:

In Q4 FY07, EKC achieved a net turnover of Rs 1.33 billion, a growth of 66.7% over Q4 FY06.

In FY07, the net turnover was at Rs 4.25 billion, a growth of 80.5% over FY06.

Operating profit margins expanded significantly in Q4 FY07 to 25.6% from 19.6% in Q4 FY06.

Operating profits in the quarter went up 117.5% y-o-y to Rs 342.6 million and PAT increased 157.6% to Rs 263 million. Operating profits grew sharply due to a significant decline in raw material costs as a percentage to sales.

OPM’s increased 600 bps to 25.6% in Q4 FY07 from 19.6% in Q4 FY06, mainly due to a significant increase in EBIDTA to 49% at Rs 2525.2 in FY07, compared to Rs 1630.3 in FY06.

During the year, the company sold 472,000 cylinders (FY07), against 361,041 cylinders in FY06, a growth of 31% in volumes. CNG cylinders accounted for 56% of the volumes and 74% of the sales value.

Others:

Exports formed 61% of its revenues in FY07 to Rs 2.59 billion and domestic revenues accounted for the balance Rs 1.65 billion.

The company has given a guidance of 40% volume growth in FY08E, translating into 661,000 cylinders for FY08E.

The company has embarked on an expansion and modernization plan, with a projected outlay of approx USD 60million. The Board of Directors approved, in principle, the expansion plan and its funding through equity linked instruments. This will be for a green field plant in India, to cater to domestic and export demands.

Revision in Estimates:

We are revising our profit estimates for FY09E by 12% to Rs 1.46 billion, form Rs 1.30 billion earlier. This is mainly due to the expansion in OPMs in FY09E to 29% from 26.9% in FY07, due to the commissioning of new facilities in Dubai and China. We believe, the current margins of 25%+ is sustainable, going forward, due to adequate booking of raw materials for its existing needs and also because of improved realizations.

Outlook:

KC’s financial performance was above our expectations due to the positive surprise on the margin front. While maintaining the margins will remain a challenge, we feel, it is sustainable mainly due to the absence of competition in this segment. FY08E and FY09E are critical years for the company as it plans to graduate to the big league’ in terms of size and profitability. At the CMP 1151, the stock trades 23x and 15.3x its expected fully diluted earnings of FY08E and FY09E respectively. We reiterate our ‘BUY’ rating on the stock, with a target price of Rs 1500 (upside of 30%).

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Buy Jaiprakash Associates; target of Rs 850: Sharekhan

Sharekhan Research is bullish on Jaiprakash Associates and has maintained buy rating on the stock with a target price of Rs 850.

Result highlights:

The overall revenue growth of Jaiprakash Associates (Jaiprakash) was muted at3.6% year on year (yoy) to Rs 886 crore during the quarter.

The cement revenues increased by 45.8% yoy to Rs 602 crore whereas the construction revenues fell by 34% yoy to Rs 330 crore as the new projects were in the ramp-up phase while the old projects were close to completion during the quarter.

Jaiprakash's overall operating margin (OPM) improved sharply by 1,170 basis points to 29.7%, thanks to the sharp jump in the earnings before interest and tax (EBIT) margin of the cement business by 1,660 basis points yoy to 35% on the back of strong realisations and cement volumes during the quarter.

The interest expenses increased by 12% yoy to Rs 65 crore during the quarter while the depreciation charge increased by 11% yoy to Rs 42 crore mainly due to the commissioning of the 38-megawatt (MW) captive power plant (CPP) inQ2FY2007. The other income during the quarter fell by 44% yoy to Rs 30 crore.

The net profit witnessed a strong growth of 87% yoy to Rs 130 crore.

The cement business will contribute increasingly to the revenues of the company. The construction revenues will provide the stability to the company's overall business with the cement cycle turning downwards in FY2009. The Taj project as well as the real estate business will add value to the company's share. We are keeping our FY2008 earnings per share (EPS) estimate of Rs 29.5 unchanged and introducing our FY2009 EPS estimate at Rs 33.2. At the current market price of Rs 671, the stock is trading at 20x its FY2009 EPS. We continue to remain positive on the company's outlook and maintain our sum-of-the-parts (SOTP) price target of Rs 850 per share.

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Areva T&D an outperformer; target of Rs 1486: HDFC Sec

HDFC Securities has recommended an outperformer rating on Areva T&D with a target price of Rs 1486.

Key Positives:

Mainly the 11th Plan target of adding over 66,000 Mw of power, high demand for super-critical power equipment and strong support from the parent company will trigger strong earnings CAGR (FY06-09E) of 48.2%.

AREVA T&D India, after its hive off of the non-T&D division, is more focused on its core competence, contributing to improved margins. Merger with subsidiaries of AREVA T&D SA, France, will add to its strength, as these small companies are also in the same sphere of business, T&D.

AREVA T&D India has planned a capex of Rs 4 billion over 3 years to boost the production of high-end transformers, set up a new plant at Vadodara for Rs 2 billion and augment the Bangalore instrument transformer unit.

AREVA T&D SA, France, plans to turn its Indian operations into a key manufacturing and global sourcing base for its T&D business. It intends to increase India’s contribution from 9% currently, to over 14% by FY’2010.

Key Concerns & Risks:

AREVA competes with the likes of ABB, Siemens, BHEL and Crompton Greaves. Going forward, it could face stiff competition from these companies to garner orders.

Any delay in the power capex would result in a slowdown for T&D companies. AREVA will not be an exception.

Outlook & Valuation:

Considering AREVA’s global expertise in the T&D business and its thrust on India as a global manufacturing base, we believe, it will outperform in spite of its limited exposure in the Indian market. With major expansion in power generation capacity on the cards, the demand for critical power equipment will grow. Ultra Mega Power Projects too will add to the demand for high end T&D equipment. ABB,

Siemens and AREVA are among the few companies with the expertise in manufacturing such equipment. We believe, the company has a significant growth potential, going forward and consequently rate AREVA as an OUTPERFORMER, with a price target of Rs 1486 (+16%).