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Hold Cipla stocks, cut down on ICICI

Foreign institutional investment has been three times more than Indian investment in stock markets.

Print Edition: May 31, 2007

Cipla ICICI

Securities is cautious of the earnings volatality and downgrades the stock:

“Cipla’s consolidated recurring net profits dipped 34% YoY to Rs 126 crore in Q4, 2006-7 against our 22% growth estimates. This was mainly on account of 27% dip in active pharmaceutical ingredient exports. EBITDA margin crashed 814 basis points (bps) to 15.7% on account of poor sales mix and significantly higher costs as regards R&D, power and fuel and one-time repair.

Though Cipla’s business model is low-risk, the earnings volatility in the recent past and reclusive management are two main concerns. As per the company’s disclosed earnings guidance PAT growth will be 10-12% in 2007-8. This growth is less than half of past two years’ average of 36%.

Consequently, we have downgraded EPS estimates 17% and 15% in 2007-8 earnings and 2008-9 earnings. Based on the above, deceleration in EPS CAGR (21% during 2007-9 earnings versus 36% during 2005-7) and likely worsening of investor perception, we have cut fair value estimate to Rs 240 a share from Rs 327 a share. We downgrade the stock to ‘Hold’ from ‘Buy’.”

Grasim Industries

IDBI Capital is bullish on the Birla flagship company:

“Grasim’s Q4, 2006-7 results were quite ahead of our expectations. Good performance by both the major segments— viscose staple fibre (VSF) and cement—helped post impressive results. The consolidated revenue of the company for 2006-7 was up 38% YoY to Rs 14,167.3 crore.

The EBITDA for Q4, 2006-7 at Rs 771.8 crore earned a margin of 31% as against 25.6% for the same quarter last year. The EBITDA margins for 2006-7 at 30% were 600 basis points (bps) higher than previous year. PAT was up 104% YoY to Rs 2,359.4 crore. The EPS for the year was Rs 214.6 as compared to Rs 113.5 in the last fiscal.

Higher capacity utilisation and strengthening of operational efficiencies resulted in both revenues and profits surpassing their previous levels. The stock is currently trading at an EV/EBITDA of 8 times, EV per tonne of $207 and a PE of 11 times 2007-8 earnings. While we are positive on the stock on account of strong demand for VSF we are revising the target price down to Rs 2,651 following price corrections for cement which may come in 2008-9. We maintain our ‘Buy’ recommendation.”

ICICI Bank

Edelweiss Securities is downgrading:

“ICICI Bank’s Q4, 2006-7 numbers were below our and Dalal Street’s expectations, primarily due to higher loan loss provisioning and lower fee income. Loan book grew lower than expectations at 34%, retail non-performing assets (NPA) increased to 2.42% of the retail loans, return on assets dipped to 0.8% during Q4, 2006-7 from 0.9% in Q3, 2006-7.

The bank has proposed to raise Rs 20,000 crore. This fund raising exercise is likely to double the bank’s net worth to Rs 47,100 crore by 2007-8 earnings leading to an equity dilution of approx 20% (of post-issue capital). We are raising our profit forecast for 2007-8 and 2008-9, however due to equity dilution EPS estimates stand reduced by 18% for 2007-8 earnings and by 12% for 2008-9 earnings. We expect the bank to generate 14% EPS CAGR over 2007-9 earnings. The stock is currently trading at 18 times 2007-8 earnings which is higher than 18 months average—15 times earnings (one year forward).

On price to book multiple, the stock is trading at 1.5 times book value multiple (one year forward), despite lower return on equity (RoE) forecast (down by 4-5%).

We believe the current valuations are fair and see downward pressure on the stock price in the medium term due to weak EPS and RoE progression and an equity overhang post the proposed issue. We revise our rating to ‘Reduce’.”

Idea Cellular

Enam Securities revises its ratings to neutral:

“Idea’s Q4, 2006-7 topline and operating profit at Rs 1,310 crore and Rs 440 crore were almost in line with our expectations. Lower interest outgo and depreciation led to an impressive PAT at Rs 190 crore (roughly 66% YoY growth). A 22.5% quarter on quarter (QoQ) increase in consolidated MoUs cushioned the 5.7% QoQ decline in averaged realised rates and roaming tariffs.

Idea’s approx 50% YoY growth in Q4, 2006-7 revenues in eight established circles leads operating profit performance. These with 38.7% EBITDA margin had a stellar performance on the back of 81.4% YoY growth in subscriber base, higher average revenues per subscriber per month and a higher percentage of voice activated services revenues. However, its three new circles continue to be in an investment phase causing a dent of roughly 7% to consolidated EBITDA.

Idea’s $2 billion investments in the ensuing years are likely to increase its market share and lead to better growth rates. However, with a 20% discount to Bharti’s target multiple of 18 times 2007-8 EV/EBITDA for the wireless business, the price upside is limited. We are thus revising our rating from sector ‘Outperformer’ to ‘Neutral’.”

Power Finance Corporation

Enam Securities is bullish about growth prospects of the financier to the power sector:

“PFC is one of the best plays on power financing in India. The company enjoys ratings that are at par with sovereign ratings and hence has the ability to borrow funds at very competitive rates. Taking advantage of the huge funding potential, PFC managed to almost double its market share to more than 20% from the ninth to the tenth five-year plan.

Around 81% of the lending exposure of PFC is to state power sector utilities (SPSUs). PFC enjoys a healthy asset quality due to the effectiveness of the escrow mechanism. The company’s gross NPAs stood at 0.1% and net NPAs at 0.06% in 2006-7. Loan disbursements and outstanding loan portfolio have grown at 22% CAGR for the last 5 years.

We expect net interest income (NII) to grow at a higher rate of 31% in 2007-8, driven by expansion in spread and 24% growth in loan book. Thereafter, we expect, NII to grow at 24% in 2008-9 and 21% in 2009-10, as we expect spreads to start converging to 2% levels from 2009-10 onwards. With Tier-I capital of 18.5%, PFC has enough room to improve its RoE.

Also with leverage of just five times, strong asset quality and high growth visibility, we believe that the stock can potentially quote at 1.8 times 2008-9 earnings book value, in next one year. We are initiating coverage with a sector outperformer rating on the stock and a price target of Rs 175. ‘Buy’."

Siemens

Prabhudas Lilladher maintains a buy rating on the engineering MNC:

“For halfyear 2006-7, Siemens reported an 88.7% topline growth to Rs 3,760 crore. However EBIDTA grew only by 42% due to lower margins. The raw material cost more than doubled due to additional cost incurred on bought out components. Net profit for the quarter witnessed a decline of 8.3% to Rs 108 crore. For half year 2006-7, order intake increased by 23% to Rs 7,070 crore as compared to Rs 5,750 crore in half year 2005-6.

The major contributors were the power, industrial solutions and services and automation and drives businesses. Total order book for the company stands at Rs 10,880 crore, an increase of 43% from last year.

Margins were under pressure across all divisions of the company, with the industrial solutions and services business witnessing the largest decline of 400 bps. The power segment witnessed the highest growth of 150.2% YOY to Rs 1,180 crore during the quarter, though margins were lower at 5.9%, a dip of 260 bps from the same period last year.

At the current market price of Rs 1,118, the stock trades at 32.9 times 2006-7 earnings and 22.9 times 2007-8 earnings. On an EV/EBIDTA basis, the stock trades at 20.2 times and 13.4 times 2006-7 and 2007-8 estimates. Maintain ‘Buy’.”

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