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ABB, Bharat Earth Movers make a goob buy

The foreign institutions continue to remain bullish but the I ndi an funds are still bearish—or booking profits. A nnual results of companies will dictate market sentiments in the next few weeks.

Print Edition: May 3, 2007

ABB

IDBI Capital says the 11th Plan would boost ABB’s order book:

“ABB is a very strong player in the transmission arena. We believe that the thrust on power transmission in 11th Plan augurs well. It is virtually debt free.

Reforms in the power sector and focus to reduce T&D losses have created a strong demand for ABB’s products and project management services. Power technologies contributed 60% to 2006 revenues, and may grow by 38% CAGR over next two years. The strong CAGR growth in top line of 42% between 2003 and 2005 has resulted in strong growth in net worth which stood at Rs 904 crore at end 2005. The current ratio is comfortable and EBITDA margins are between 11% and 12.5%.Over the past five years ABB’s revenues have grown four times to Rs 4274 crore.

We estimate two-year revenue and PAT CAGR growth of 45.5% and 48%. Our DCF values ABB at Rs 4,029. At the current Rs 3,556, the stock is quoting at 31.1 times 2007 earnings (EPS Rs 114.2) and 20.2 times 2008 earnings (EPS Rs 175.9). We recommend a ‘Buy’ with a one-year target of Rs 4,029.”

Bharat Earth Movers

KRC Research sees revenue expansion in store for BEML:

“BEML has consolidated its operations under three major business groups—mining and constructions/defence/rail and Metro. The company has set a revenue target of Rs 5,000 crore by FY 2013. The unexecuted order book stands at Rs 2,000 crore (excluding the Delhi Metro Rail order of roughly Rs 1,500 crore) ensures revenue visibility. BEML is focusing beyond India. It has entered in JV to set manufacturing plant in Brazil with investment of Rs 100 crore and estimated revenue of Rs 500 crore in next three years.

The top line has shown flattish growth of roughly 5% YoY to register net sales of Rs 544.68 crore basically on account of supply chain bottlenecks in its defence and railway business. However, the revenue is estimated to pick up. Increase in operating expenses by 7.2% reduces operating profit by 14.4% and subsequently transpired into degrowth in the net profit by 5% to Rs 53 crore. At current market price of Rs 1,050, BEML is quoting at a PE of 20.23 times. On EV/Sales and on EV/EBIDTA basis it is quoting at 1.53 times and 11.31 times of its TTM earnings respectively. ‘Buy’.”

HPCL

KRC Research believes the refining cycle is improving:

“HPCL has reported an improved quarterly performance in December 2006, thanks to the receipt of oil bonds worth Rs 1,026 crore from the central government. As a result, HPCL clocked a net profit of Rs 407.31 crore as compared to a loss of Rs 1,077.75 crore during the corresponding quarter in the previous year. Revenue increased by 22% to Rs 22,150.20 crore as against Rs 18,231.19 crore.

HPCL’s Mumbai refinery has undertaken mega project at a cost of Rs 1,850 crore to produce Euro III and Bharat Stage II compliant fuel. The project also envisages enhancing refining capacity from current level of 5.5 to 7.9 million tons per annum. Also, Vizag refinery has undertaken clean fuels project at an approved cost of Rs 2,147 crore to upgrade the quality of fuel and increase the refining capacity from 7.5 to 8.3 million ton per annum. Besides the expansion-cummodernisation of refineries, HPCL is also implementing two major product pipeline projects connecting Mundra-Delhi and Loni-Solapur at estimated cost of Rs 1,960 crore.

At the current market price of Rs 249.75, HPCL is quoting at a P/E of 2.79 times. On EV/sales and on EV/EBIDTA basis, it is now quoting at just 0.13 times and 2.79 times of its 2005-6 earnings respectively. Hence, we recommend investors to ‘Hold’ the stock.”

Sical Logistics

Edelweiss Securities tracks Sical’s restructuring:

“SICAL has sold off its non-logistics businesses in its effort to emerge as an integrated logistics company. It has raised Rs 1 billion which will be deployed in projects like an iron ore terminal at Ennore, the MIHAN rail and road terminal, a container train project, and the PSA-Sical container terminal. In addition, Sical has also raised Rs 1.1 billion through private placement to IDFC.

Sical has also announced that it is in the process of raising another $25 million through the qualified institutional placement route. This will help it address the concerns of a high-gearing ratio and post QIP, the gearing ratio is expected to come down from the current 1.8 to approximately 1. We expect Sical’s EPS to grow at a CAGR of 15.6% to Rs 16.6 and Rs 20.8 in 2007-8 earnings and 2008-9 earnings, respectively. At Rs 178, it trades at a P/E of 10.7 times and 8.6 times on the above earnings. This does take in to account its holdings in projects of iron ore and the Tuticorin and Chennai container terminals. For Sical’s holding in these projects, we arrive at a value of Rs 55 a share. Adjusted for these holdings, it trades at a P/E of 8.2 times and 6.6 times our 2007-8 and 2008-9 EPS estimates, respectively. ‘Buy’.”

Genus Overseas

SKP Securities is bullish about this small power meter manufacturer:

“Genus Overseas Electronics manufactures electronic energy meters, turnkey power distribution projects and allied products. The current order book is Rs 420 crore (twice 2005-6 net sales). Recently, Genus has secured two orders of Rs 75 crore and Rs 20 crore. We expect the revenues to grow by 47% for 2006-7 earnings, 46% for 2007-8 earnings and 2008-9 earnings.

The EBITDA margin has improved to 13.6% in 2005-6 as compared to 12.1% in 2004-5. We expect the EBITDA margin to go up to 14.6% in 2006-7 earnings. For 2007-8 earnings and 2008-9 earnings we expect the margin to be around 15%.

The net profit after tax is expected to grow at a CAGR of 68% for the period FY 2006-9. The growth in PAT margin will follow growth in revenues. The return on capital employed (RoCE) and return on equity (RoE) is expected to be at 31.3% and 35.3% in 2008-9 earnings, respectively.

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