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Stocks you can pick up this week

Monday, July 30, 2007

Research: Credit Suisse First Boston
Rating: Outperform
CMP: Rs 171.80

Credit Suisse First Boston (CSFB) has initiated coverage on ITC with an outperform rating. ITC’s cigarette profits tend to grow even in an adverse tax environment. Moreover, net price realisations tend to outpace volume falls in a declining market, resulting in net sales growth. However, total cost falls, as most costs are linked to sales volume, resulting in margin expansion. ITC has hiked prices by 20%, which may result in a 9.4% increase in net realisations. CSFB expects EBIT margins from cigarettes to increase by 150 bps and absolute EBIT to grow 6% in FY08E. The company should resume a double-digit growth thereafter (10.5% p.a. from FY08-10E). ITC Paperboards should benefit from pulp capacity expansion, while supply-demand in the hotel business remains conducive to profitable growth.

The company’s foods business may turn profitable by early FY09, though entry into the home & personal care (HPC) business is likely to drag down segmental profitability. CSFB expects EPS to grow 14.8% p.a. from FY07-10E and RoE to remain steady at about 25%, despite high investments. The market is excessively focused on short-term volume growth in cigarettes, or the lack of it, and will be positively surprised by segmental profit growth. CSFB believes the consensus is on underestimating the extent of a rise in net realisation in the cigarette business. ITC has underperformed the market by 41% in the past 12 months and now trades at 19.3x FY08E, which is at a 10% premium to the broader market. CSFB has set a sum-of-the-parts fair value of Rs 188, based on Rs 110 for cigarettes (16.5x FY09E cigarette earnings). Key risks include a further hike in cigarette tax and cyclicality in other businesses.

Satyam Computer Services
Research: ABN Amro
Rating: Buy
CMP: Rs 472.35

ABN Amro has maintained its buy recommendation on Satyam Computer as consolidated revenue grew 10.6% QoQ to $449 million and realisations jumped 110 bps QoQ. Volume growth, at 9.5% QoQ, was ahead of its peers. In rupee terms, the company’s revenue grew 2.9% QoQ due to the currency impact. EBITDA margin fell 64 bps due to the currency impact at Nipuna, Satyam’s BPO subsidiary. PAT fell 3.9% QoQ to Rs 378 crore on forex losses of Rs 6 crore. ABN Amro expects the volume momentum to be sustained, given the 7.5% headcount addition in Q108 after a 36.5% rise over FY07. The deal pipeline remains healthy. Satyam recently announced a new deal worth $100 million and a $75-million renegotiated contract with Nestle. The company’s QoQ increase in realisation — 1.3% onsite and 1.5% offshore — is the highest ever. Attrition fell to 14.9% in FY07 — the lowest since FY03.

The management’s US dollar revenue growth guidance of 35-36% is ahead of Infosys’ 29-31%. The implied volume growth at 33-34% is also ahead of Infosys’ 28%. ABN Amro believes growth in large deal pipelines could add to volume growth; but it is cautious on realisation outperformance. Also, it believes utilisation is at near optimum levels and if the level of freshers hired remains the same in FY08, ABN Amro sees little scope for improvement.

The management has factored in a 125bps YoY decline in EBITDA margin in its FY08 guidance, net of currency impact. ABN Amro has revised its estimates to reflect better-than-expected realisation growth and headcount guidance. It believes the lack of pricing power has been a major reason for Satyam’s sub-par margins and valuations versus its larger peers. Satyam trades at a 20% discount to Infosys, in line with an 18-month average, and at 17.8x 12-month forward EPS, the mid-point of its trading band. Improved performance over the past two quarters on the pricing front should drive a gradual near-term re-rating.

ABG Shipyard
Research: Citigroup
Rating: Buy
CMP: Rs 526.65

ABG Shipyard has won a $360-million contract from Precious Shipping of Thailand for constructing 12 Handymax bulk carriers (32,000 DWT, $30 million each) for deliveries between ’10 and ’12. The order win is a positive development, especially in light of the lack of new order win announcements in recent months. The company’s total order book now stands at Rs 5,600 crore, with the unexecuted portion providing a cover of 5x FY08E sales. Citigroup’s cumulative shipbuilding revenue forecast of Rs 4,700 crore over FY08-10 is completely covered by the company’s unexecuted order book. ABG has placed a bid to buy out Western India Shipyard.

A successful bid could be positive for ABG due to the strategic location of its facilities (in Goa), giving it a strong presence in the high-margin ship and rig repair business. Strong order book visibility should help drive an EPS CAGR of 43% over FY07-10E. Citigroup maintains its positive outlook for the sector and reiterates buy/medium risk rating on the stock, which trades at a P/E of 10x FY09E, a discount to its regional peers.

Research: DSP Merrill Lynch
Rating: Buy
CMP: Rs 1,914.85

HDFC is trading at 3.7x FY08E book. With an RoE of 25%, it could continue to trade at 4x FY09E book, given the high visibility of earnings growth sustaining at +22-24%, strong asset quality and benefits from the changing competitive landscape. HDFC’s Q1 FY08 earnings at Rs 370 crore, up 26% YoY, were 5% higher than DSP Merrill Lynch (DSPML)’s estimates.

The earnings were driven by loan growth at 25% and margin expansion of ~5bps QoQ as the company benefited from repricing of loans. DSPML is impressed by HDFC’s ability to gain market share. Asset quality continued to be comfortable, with gross non-performing loans (NPLs) at 1.2% and net NPLs at less than 0.3%. Q1 FY08 results highlight the benefits accruing to HDFC from the change in the competitive landscape, as banks shy way from mortgage lending due to rising interest rates and emergence of corporate growth opportunities. DSPML has raised its earnings estimates by 6-7% for FY08/09, capturing the $760 million equity infusions and higher-than-expected loan growth. It expects earnings CAGR of 24%, driven by loan growth sustaining at 22-24% and margin expansion of 10-12 bps on the back of $760-million equity infusion.

Yes Bank
Research: Edelweiss
Rating: Buy
CMP: Rs 179.65

YES bank reported a YoY growth of 113% in net profit and 67% growth in net interest income. NII growth was in line with expectations, while profit growth was higher due to strong fee income growth and lower provisioning. Margins were under pressure due to increased cost of funds. Edelweiss likes the bank for its high operating growth and quality management. The bank’s NII grew 67% YoY, net interest margin declined sequentially by 30 bps to 2.6%, balance sheet grew 118% YoY, fee-based income growth was higher than expected, and the number of branches increased to 54 during the quarter.

The bank has launched a $100-million private equity fund. Advances grew 10% QoQ, which were lower than that witnessed in previous quarters. Investment book has grown strongly, suggesting incremental deposit mobilisation flowing towards investments rather than lending. The low-cost proportion in deposits has improved QoQ to 6.6%. Corporate book continues to dominate with 65% share, while SME constitutes 34%. Net interest margins have declined sequentially due to higher cost of funds.

Yields on advances and investments have improved by ~ 100 bps, but were overshadowed by 129 bps increase in cost of funds. Edelweiss expects margins to pick up in the next quarter as the wholesale funding rate has softened. Non-interest income grew on robust performance from treasury, financial advisory and third-party distribution segments. The bank continues to derive 59% of its net revenues from fee-based income. Yes bank started its depository services during the quarter. It opened 14 branches and added 342 employees in Q1.


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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.