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Brokerage Recommendations

Saturday, June 23, 2007

Buy Ipca labs; target of Rs 900: Karvy

We are upgrading our FY 2008E and FY 2009E nos by 4.5 % and 5.4 % respectively on back of lower R & D cost. We have reduced our R & D cost by Rs 81 million in FY 2008E to Rs 319 million and by Rs 110 million to Rs 376 million. We upgrade our earnings by 4.5 % in FY 2008E to Rs 55.8 and by 5.4 % to Rs 76.1 in FY 2009E. We upgrade our price target by 18 % to Rs 900 based 11.8x FY 2009E (EPS Rs 76.1) a 7 % discount to current valuations) and rate the stock as a BUY.

The company's revenue momentum should be driven by renewed growth in Europe generics business (25 % on Rs 1190 million) and 25 % plus growth in promotional markets of CIS, Africa and Asia. With Ipca focusing on high growth segments in the domestic formulations market we believe the company would be able to achieve 15 % growth in FY 2008 and 12 % growth in FY 2009. We have factored in USD 10 million revenues in FY 2009 on account of ANDA launches in USA markets. The year FY 2008 would be the last year for high capex of Rs 800 million and going ahead it should be maintenance capex. We have not factored in upsides in the API business from Losartan and Metaprolol in FY 2009. We rate the stock as a BUY.

Indian Hotels an outperformer; target of Rs 195: HDFC Sec

Q4FY07 & FY07 Results Review; Marginally below expectation:

IHCL reported a turnover of Rs 15,445 million for the year ended March 31, 2007, and a PAT of Rs 3223.9 million, which were 40% and 75% higher yoy. The healthy topline growth was led by 28% rise in ARRs (Rs 9,234) and 3% rise in occupancy (73%).

For the quarter ended March 07, the turnover of Rs 5051.6 million and PAT of Rs 1345.2 million were higher by 45% and 71% yoy, respectively. The top line growth was aided by 25% rise in ARRs and 4% rise in occupancy.

OPM for the quarter improved 638 bps to 42%, while for the full year, it jumped a whooping 745 bps to 36.5%.

Other income during the quarter and the year ended March 31, 2007, included the benefits of higher dividends received, profit booked on sale of shares and foreign currency gain.

The consolidated top line rose by 36.7% to Rs. 25115 million, against our estimate of Rs. 24300 million, a gap of 3.2%. The bottom line stood at Rs 3699 million, a growth of 48.7% against our estimate of Rs 3849 million.

Outlook and Valuation

Envisaging a tight demand-supply mismatch in the luxury category (incremental demand of over 55,000 rooms in the next 5 years, against the planned expansion of 18,000 rooms), we believe, ARRs would continue to be on the uphill, at least for a year or two. Also, within IHCL, over 1000 rooms would be added in the next 2 years. With standalone IHCL expected to do better (assuming a proxy to the industry), a turnaround in the performance of subsidiaries and higher share of profits through JVs and associates, would remain key to future earnings growth. IHC’s extensive geographic reach, strategy of spreading itself into all segments, from star deluxe to budget hotels and increasing tie-ups for management contracts would not only give it a competitive advantage, but de-risk its revenue stream too.

We value the target price at Rs 195, offering 36% upside from current levels. The stock is available at a PER of 16.0x FY08E & 11.1x FY09E EPS of Rs 9 and Rs13. We re-iterate “Outperformer”.

City Union Bank an outperformer; target of Rs 250: Karvy

We re-iterate our Out Performer rating on City Union Bank (CUB) mainly due to strong business growth, healthy margin, improvement in asset quality and comfortable capital adequacy. Proposed preferential allotment of 6.8 million equity shares to six entities would further increase transparency and corporate governance. We increase our target price to Rs 250 from Rs 202 on the back of increased book value and sustainable RoE.

Strong growth in business:

We expect that the bank's total business would grow by 20% CAGR (FY2007-09) on the back of 19% growth in deposits and 22% growth in advances during the period. We expect the bank would maintain low-cost deposits (LCDs) of 24% in FY2008 and advances growth would mainly be driven by agriculture, SMEs sectors. At present the bank doesn't have any exposure to retail sector, the bank is planning to begin lending to retail sector.

Margin may come under pressure:

Expected increase in cost of deposit, comparatively lesser increase in advances' yield and marginal leverage cost could reflect in decline in net interest margin (NIM). We expect NIM would come down to 3.4% in FY2008 from 3.7% in FY2007.

Asset quality improvement:

Stringent credit appraisal and containment in slippages would improve the bank's asset quality. We expect that in FY08 gross non-performing assets and net NPAs would decline by 23% and 24% respectively to Rs 671 million and Rs 275 million respectively. In percentage term, GNPA and NNPA would reduce to 1.6% and 0.7% respectively. Provision coverage ratio would increase marginally to 59% in FY08.

Preferential allotment to six entities; return ratio to drift down:

CUB's Board of Director (BoD) in its recent EGM has given consent to make preferential allotment of 6.8 million equity shares to six entities subject to Reserve Bank of India (RBI) approval. According to the proposed allotment, L&T and LIC would be allotted equity shares at Rs 169 per share and rest four entities would be allotted at Rs 190 per share. Equity dilution would lead to decline in return on equity (RoE) to 18.4% in FY08 from 22% in FY07.

Capital adequacy comfortable:

After raising equity capital through proposed preferential issue, the bank's tier I capital would go up to 12.9% in FY2008 from 10.87% in FY2007. In FY2007, the bank had raised Rs 100 million of subordinated debts and we expect that in FY09 the bank would further raise Rs 150 million of sub-ordinated debts. In FY08, CAR would go up to 14.5%.

Hedged investment portfolio:

As on March 2007, almost 25% of the bank's aggregate investment book was in AFS (available-for-sale) category with duration of less than 2 years. The bank's investment portfolio is almost hedged against interest rate risk.


We expect that CUB would report net profit of Rs 853 million and Rs 1.03 billion in FY08 and FY09 respectively. In FY08, estimated book value and adjusted book value would be Rs 175 and Rs 166 respectively. At current price, the stock quotes at 1.2x FY08 BVPS and 1.0x FY09 BVPS; we determine the bank's intrinsic worth at Rs 250 per share. We expect the stock would be re-rated due to consistent high performance and attractive valuation. We rate the stock as an Out Performer with a target price of Rs 250 per share.

Buy Great Offshore; target of Rs 1164: P-Sec

Sustained up tick in oil prices has ensured upstream companies are flushed with cash which has been diverted to scaling up of efforts to increase Oil reserves resulting in higher demand for Oil Rigs and Offshore support vessels.

Great offshore the demerged arm of Great Eastern shipping has been one of the prime beneficiaries of this increased demand for oil exploration assets.

Great Offshore’s biggest advantage is the relative age of its assets which is significantly below industry average. As offshore exploration gets deeper, Oil majors are looking for younger assets and are ready to pay a premium. Plus the companies low leverage allows it the opportunity to acquire any asset as when available.

Strong earnings visibility over the next three years (topline CAGR of 24% and 36% CAGR in net profits) with incremental growth coming from increasing assets plus incremental revenues from existing assets.

We initiate coverage with a Buy with an eighteen month target of Rs 1164.

Buy Indian Hotels; target Rs 180: Sharekhan

The FY2007 results of Indian Hotels Company Ltd (IHCL) are above our expectations. However, on a stand-alone basis the FY2007 results are not comparable with the results of FY2006 as the former take into account the effect of the merger of five companies into IHCL with effect from April 1, 2006.

The company reported a consolidated total income of Rs 26.66 billion for FY2007 as against Rs 19.14 billion for FY006. That implies a growth of 39%. Operating profit showed a growht of 39.5% from Rs 5.12 billion to Rs 7.15 billion in FY2007. The interest and depreciation charges were higher in FY2007 due to the merger of the five companies in the year. IHCL posted a consolidated profit after tax (PAT) of Rs 3.699 billion in FY2007 as against Rs 2.487 billion in FY2006. This resulted in earnings per share (EPS) of Rs 6.1.

The healthy trend in the top line is due to the rise in the number of foreign tourist arrivals in India, which has pushed up the average room rate (ARR) and the occupancy rate (OR). The hotel industry has witnessed continued buoyancy in the arrival of foreign tourists. The number of foreign tourist arrivals increased to 40 lakh from 44 lakh in FY2007, representing a 15% growth year on year (yoy).

In FY2007 the ARR grew by 28.4% to Rs 9,234 from Rs 7,186 in FY2006; the OR increased from 70% in FY2006 to 73% in FY2007.

IHCL has issued 16,219,670 equity shares to the members of Indian Resort Hotels, and Gateway Hotels and Getaway Resorts which has led to equity dilution of 2.76%. The new equity capital is 60.3 crore.

Strong revenue growth of 42% yoy

The company's revenue saw a strong growth of 42% yoy in Q4FY2007 to Rs 5.052 billion. The strong revenue growth was driven by a sharp rise in the ARR in most of the Taj properties. The food and beverage income showed a strong growth with a faster growth in banquets. The other income for Q4FY2007 grew from Rs 128 million in Q4FY2006 to Rs 337 million and included a profit of Rs16.7 crore on sale of investments as well as a foreign exchange gain. The OR has increased from 79% to 83% where as the ARR grew by 24% to Rs 11,082 in the fourth quarter of FY2007.

Margin up 640 basis points, ahead of expectations

IHCL's raw material cost as a percentage of sales decreased by 60 basis points yoy to 7% during Q4FY2007. The staff cost as a percentage of sales too dropped from 17.9% in Q4FY2006 to 14.6% in Q4FY2007 on a year-on-year basis. The other expenses increased from 23.8% of net sales in Q4FY2006 to 26.4% in Q4FY2007. The other expenses were higher due to the higher expenses incurred to promote the Taj brand in the international market. The licence fee, on the other hand, decreased from Rs 378 million in Q4FY2006 to Rs 318 million in Q4FY2007. This is paid by the company for those properties that are on lease and is linked to the top line growth. The decrease was due to the merger of Taj Lands End into IHCL.

Net profit zooms 70% yoy due to higher other income, merger of five companies

The strong revenue growth and the healthy expansion in the OPM saw the net profit grow by a whopping 70% yoy to Rs 1.34 billion in Q4FY2007. The interest cost went up from Rs 35.9 million in FY2006 to Rs 22.86 in FY2007. It rose primarily due to the regrouping of elements after the merger of the five companies. The licence fee paid to Taj Lands End, which was earlier shown as an expense, has now been regrouped under "interest cost".

Acquisition of Hotel Campton Place, San Francisco, USA

IHCL has acquired Hotel Campton Place, San Francisco and this acquisition was done through its 100% US subsidiary. The acquisition would be made at a cost of USD 60 million (including the estimated transaction cost). The deal will be financed through a mix of debt and equity (USD 30 million each of debt and equity).

Outlook continues to remain positive

On industry per se: The company has communicated a positive outlook for the hotel industry of India. Its optimism springs from (1) the strong demand in the hotel industry; (2) slower execution of projects leading to delayed inventory addition; (3) and the rising domestic customers, both the leisure and the business class. On ARR front: The company expects a continuous rise in the ARR across the country (barring in Bangalore and Hyderabad where the ARR is at its zenith and OR is expected to come down) driven mainly by the supply-demand mismatch in the market. However the growth rate would not be the same as in the last two years. Some part of the new inventory is expected to hit the market in FY2009, thus we expect a modest increase in the ARR in FY2009. On occupancy front: With all the Taj properties operating at +70% OR in FY2007, there exists little headroom for growth. We expect the OR to come down in FY2009 with the new supplies coming in. This is quite evident from the fact that the OR has come down in Delhi from 80% to 75% and from 81% to 67% in Hyderabad. This was mainly due to the new supplies of rooms, which have come up in the last year. A key beneficiary of the robust industry environment The tight demand-supply scenario in the hotel industry lends a positive bias to the ARR in the short term and we expect IHCL (the largest hotel company in India) with its pedigree of hotels to be the key beneficiary of this uptrend. Though we also believe that in the first half of the current financial year, the effect of rupee appreciation would be visible till the contracts are revised in September-October 2007. At the current market price of Rs144 the stock is quoting at a PER of 20x FY2008E consolidated EPS of Rs 7.4 and 16X FY2009E consolidated EPS of Rs 9.2. We maintain our Buy recommendation on the stock with a revised price target of Rs 180.

Buy Reliance Communication; target of Rs 600: Citigroup

Citigroup Research has recommended buy rating to Reliance Communication and has revised target price from Rs 510 to Rs 600.

Citigroup Research report on Reliance Communication:

Target up on non-core drivers

While RCOM remains leveraged to Indian wireless growth, earnings upgrades are muted as higher sub adds are offset by likely margin pressures on subsidies. Target moves up though to Rs 600, incorporating value from towerco (Rs 60) and FLAG (Rs 20).

CDMA back in focus, at least for the time being

The uncertainty regarding the timing of spectrum release and RCOM’s status in the “queue” has led to company reverting to CDMA, with cheaper/discounted handsets as their main tool. While we have more or less maintained RCOM’s share of net adds over FY01-10E, EBITDA margin gains will likely be more muted than peers.

Towerco - unlocking ahead of peers?

While we favor Bharti’s towerco in terms of size and visibility, RCOM may set the valuation benchmark. RCOM’s accelerated tower rollout target (20,000 in FY08) despite lack of clarity on GSM spectrum could be a result of growing realization of the “first mover” advantage in a nascent industry likely to be dominated by 1-2 mega towercos.

Potential positive triggers in the short term

RCOM will take a decision on value unlocking in the Towerco in next six months. This along with FLAG listing is potential trigger even as material discount to Bharti’s valuations (20- 25% on FY08-09E EV/EBITDA) provide downside support. We reiterate Buy.


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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.