Sterlite Industries
Research: Merrill Lynch
Rating: Buy
CMP: Rs 612

Merrill Lynch has reiterated its ‘buy’ rating on Sterlite Industries. The company’s sustainable low-cost advantage implies that at Merrill Lynch’s long-term price forecasts, it will offer a high EBITDA margin of 57% in zinc and 29% in aluminium. Since Merrill Lynch has raised its estimates of metal prices as part of its global commodity price review, it has upgraded the company’s FY08E earnings per share (EPS) by 3% and FY09E EPS by 11%. In the near term, it offers a healthy compounded annual growth rate (CAGR) in volumes — 14% in zinc, 10% in aluminium and 11% in copper smelting. In addition, the management has a credible track record of project delivery and proven skills in identifying new growth businesses. It plans to increase its stake in its zinc subsidiary from 65% to 94% by the end of the year. Despite the company’s continuing hurdles in hiking stake in its other aluminium subsidiary, the probability of success is much higher in the case of zinc. This is due to precedence of a stake hike in ’03 and also because valuation may be more in sync with current market prices.

Bank of India
Research: IDBI Capital
Rating: Buy
CMP: Rs 249

Bank of India’s (BoI) Q1 FY08 results were impressive, with a 51% YoY jump in net profit. The loan loss provisions were lower, but were 18% higher YoY. Strong growth in net interest income (NII) and other income, and lower operating expenses boosted the bank’s operating income by 45% YoY.

The bank is likely to maintain its performance with strong business growth, robust margins and good growth in fee income. Operating expenses in FY08 may show a modest growth as a major part of core banking solutions (CBS) expenses were booked by BoI in FY07. The bank maintains a large workforce; it has a substantial branch network and overseas operations and has more than 1,100 branches out of a total 2,845 (including extension counters) under CBS.
The bank has good asset quality with gross non-performing assets (GNPAs) at 2.3%, while net NPAs are at 0.69%. BoI has tried to maintain most of its retail portfolio collateralised. This gives comfort on the asset quality front, going forward. Given the bank’s profit growth, its average book value (ABV) is likely to increase to Rs 130-135 in FY08. Hence, BoI’s fair value lies in the Rs 270-280 range.

GMR Infrastructure
Research: HSBC Global
Rating: Underweight
CMP: Rs 780

HSBC Global has initiated coverage on GMR Infrastructure with ‘underweight’ rating. The company has a risk-mitigation strategy with a good mix of assets under operation and under-development across different sectors and a diverse list of clients.

The airport business has also benefited from real estate appreciation as GMR has 1,250 acres of land on a 60-year government lease, ready to be developed commercially as the Delhi and Hyderabad airport projects. HSBC Global estimates that this real estate contributes 41% to the company’s overall valuation. GMR has expanded outside India and has 40% equity stake in a consortium that has won a contract to operate Sabiha Gokcen International Airport (SGA) in Istanbul.

The company is trying to turn around its power portfolio, changing its strategy to focus on assured fuel supply. In the roads sector, GMR has unlocked value through financial engineering and securitising receivables. The company’s business fundamentals remain strong, but its valuation has run ahead of its one-year earnings prospects. HSBC Global has valued all of GMR’s projects as most of them are for fixed duration. Based on this, the company is valued at Rs 19,710 crore, or a per-share value of Rs 595 — 20.5% below its current share price.

Cipla
Research: Goldman Sachs
Rating: Sell
CMP: Rs 181

Goldman Sachs has revised Cipla’s rating with a ‘sell’ recommendation based on the company’s guidance of lower profit for FY08. Even after Cipla’s recent underperformance (down 23% in the past three months), it is one of the most expensive stocks. It trades at a 31% premium to its peers on FY08E EV/EBITDA and has a P/E growth of 1.9x versus a sector average of 1.3x.

The stock has an implied growth rate of 18% versus the forecast of 13% sales growth over FY07-FY10E. Cipla’s premium rating reflects a de-risked business model (the management has been adverse to high-risk patent challenges) and a track record of delivering consistent growth in sales and earnings. The ‘sell’ recommendation for Cipla is based on the view that its track record is under pressure from higher overheads and a deteriorating business mix. Goldman Sachs believes Cipla will underperform its peers as the market narrows its premium in the face of slower growth and lacklustre margins.

Punj Llyod
Research: Citibank
Rating: Buy
CMP: Rs 305

Citigroup has revised Punj Llyod’s rating with a ‘buy’ recommendation. It has revised earnings by 14-16% over FY08E-10E on the back of: (1) 73% YoY sales and 101% YoY PAT growth in Q1 FY08; (2) 22% higher sales growth on faster execution of orders and 50 bps higher margins in Punj; (3) Dilution because of the recent equity placement and promoter warrants. L&T’s order backlog is 2.7x that of Punj Lloyd + Sembawang Engineers & Constructors, but its market capitalisation (m-cap) is 7.5x and is 32% more expensive than Punj Lloyd.

Citigroup expects this valuation and m-cap gap to narrow as it forecasts that Punj Lloyd will start delivering earnings growth at a pace superior to that of L&T over the next three years. Punj Lloyd is perhaps the only mid-cap engineering & construction company that can leapfrog into the next level, which is occupied by L&T with its diversified skill sets. The first sign that Punj Lloyd can actually deliver on its potential came when the company reported Q4 FY07 PAT of Rs 88.9 crore. In FY07, Punj Lloyd acquired Sembawang Engineers & Constructors, which scaled up its expertise to upstream oil & gas, airports, jetties and tunnelling.

Transport Corp of India
Research: SSKI
Rating: Outperformer
CMP: Rs 115

SSKI has initiated coverage on Transport Corporation of India (TCI) with an ‘outperformer’ rating. TCI, one of the largest cargo transportation (trucking) companies in India, occupies a 15% market share in the organised sector. It has built strong infrastructure in terms of a wide network (over 1,000 destinations), warehousing space (6.5 million sq ft) and tracking technology. This has enabled the company to grow at a strong pace in the transportation division and enter the fast-growing express distribution business.

TCI has also diversified into coast-to-coast shipping, rail and over dimensional cargo (ODC) to capture growth in these segments. In order to emerge as one of the largest supply chain solutions (SCS) providers, TCI is investing heavily into warehouses and trucks, which will enable its SCS revenues to witness 55% CAGR over FY07-09E.

TCI is trading at 12.8x earnings and 7.4x EV/EBITDA for FY09E (adjusted for Rs 15/share real estate value). The valuations are attractive, considering robust 28% earnings CAGR over FY07-09, TCI’s strong position in the express distribution (XPS) business, its ability to ramp up its SCS business at a fast pace and the fact that it trades at a 10-15% discount to its peers.