Anand Rathi is positive about the prospects of Infotech Enterprises and the overall engineering outsourcing industry in India:
“Infotech Enterprises is a global software services company specialising in geospatial, engineering design and IT solutions. It operates from 22 locations, including six development centres and serves customers in 26 countries. It has over 4,500 employees.
According to Nasscom, global spending for engineering services is currently estimated at $750 billion per year, which is expected to increase to more than $1 trillion by 2020. Engineering services outsourcing currently accounts for 2-3% of the worldwide spending.
India has a market share of 12% of the offshore market of $10-15 billion. By 2020, Nasscom estimates that as much as 25-30% of the $150-225 billion market for offshore engineering services could belong to India, yielding $40 billion in annual revenues. Worldwide, the addressable market in geographic information system revenues will be increasing from $8 billion to $14.8 billion by 2009.
Infotech’s revenues have been growing at healthy rates, moving in the range of 40-65% (YoY) over the last four quarters, with 59% growth in July-September 2006. The engineering segment has grown at over 50% in the last three quarters. Infotech expects the momentum to continue with revenues growing at 40%.”
Angel Broking recommends a buy on Bharati Shipyard with a 12-month target of Rs 450 for the following reasons:
“Strong Global Orderbook: World orderbook has registered a 29% CAGR over the period 2003-06. Going forward, a similar trend is expected as a result of replacement demand and capex boom in offshore.
India well placed to gain market share: India’s current market share in the world ship building industry is around 0.3% in dead weight tonne (dwt). It is all set to gain market share on the back of cost competitiveness and availability of technically qualified manpower. India also has locational advantage (a coastline of 7,516 kms).
Bharati geared to ride growth: Bharati Shipyard is expanding capacity at Ratnagiri as well as a Greenfield expansion at Mangalore. Post expansion, it will be able to build 60,000 dwt vessels (current capacity 15,000 dwt). Bharati’s orderbook has shown robust CAGR of 135% over three years. The current orderbook size of Rs 2,335 crore will sustain growth through 2008-9.”
Angel Broking initiates coverage on Indraprastha Gas Limited (IGL) with a buy recommendation and a 12-month target of Rs 160: “Indraprastha Gas Limited (IGL) is promoted by GAIL and BPCL (each holding 22.5%) along with the National Capital Territory of Delhi.
CNG volumes surge: CNG, which formed about 93% of the revenues (Rs 476.4 crore) during 2005-6 continues to show robust growth. Only about 5% of the entire vehicle population is converted to CNG leaving lot of scope for IGL growth. We expect this segment to grow at a rate of about 7-8%.
PNG demand on an upswing: PNG which formed about 7% of total revenues (Rs 44.5 crore) during 2005-6 is growing much faster than CNG. Currently, only about 1.6% of 35 lakh domestic customers are catered by IGL, leaving sizeable opportunity for future growth.
Firm commitment for Natural Gas supplies: IGL has a firm allocation of 2.0 mmscmd gas from GAIL’s Hazira-Vijaypur-Jagdishpur pipeline for the Delhi market as it is covered by a Supreme Court order (valid till 2010). Currently IGL is utilising about 80% (1.6 mmscmd) of the allocated natural gas keeping a leeway of 20% for further growth.
Stable operating margins: IGL enjoys healthy 41% operating margins. We expect margins improvement of 0.5-1% over the next two years on strong volume growth.
New markets: IGL has over 910 km of pipeline network. IGL plans to spread across Greater Noida, Ghaziabad and Sonepat-Panipat.
Valuation: We expect revenue growth of about 16.4% CAGR over 2005-6 to 2008-9. PAT is likely to improve by 19.6% CAGR till 2008-9. The stock is available at attractive valuations of 9.3 times its 2008-9 earnings. We initiate a buy with a price target of Rs 160.”
Enam Securities flags Tata Power as an underperformer relative to the sector: “Tata Power (TPC) has outperformed its peers over the past six months due to positive news flow on new projects and possible value unlocking of the telecom portfolio. However, a breakdown of its valuations implies that about 20% of the price buildup takes into account contributions from capacity additions post 2008-9 and the ‘option value’ associated with the ultra mega power plants. We recommend a switch to Reliance Energy (REL), which trades near its book value (BV).
Breakdown of TPC’s valuations: We value TPC on the sum of three primary assets: (1) Mumbai power business (2) Delhi distribution and other power generation assets (3) Investment portfolio.
We value the combined power assets at Rs 222 per share and estimate the investment portfolio at Rs 262 per share. The current price of TPC already factors in about 20% upside (1) Trombay expansion (2) captive plants (3) Maithon project and (4) possible upside from ultra mega power plant, which are expected to contribute post 2008-9 only.
REL’s current valuations reflect only existing operations. Due to the uncertainty over fuel purchase agreement, valuations do not build in any upside from its proposed gas-based initiatives.
Based on the technical and execution capabilities, REL and TPC are equally poised to win the ultra mega power plant. However, TPC’s current valuations already build in a partial upside from the ultra mega power projects. We believe that the near-term upside is reflected in TPC’s premium valuation of 2.1 times the 2006-7 BV Estimates (versus 1.3x2006-7 BV of REL). We downgrade TPC to Sector Underperformer.”
All set to Take-off
ICICI Securities has initiated coverage of the civil aviation sector on 11 December 2006 because “The aviation sector in India is set to jet—underpinned by low cost carriers (LCC) that promise to make use of the tremendous traffic potential (28.2% CAGR through 2008-9). Further, surging tourism, expected conversion to air travel and upsides from regulatory and infrastructural changes would provide muscle to the aviation curve. Apprehensions such as price wars, oversupply and lower load factors seem overdone as fares have bottomed out, capacity is rationalised and tier II cities are emerging as growth pockets.
SpiceJet BUY: SpiceJet stands out as it provides a play on the true LCC model. After correcting from a high of Rs 84 a share in May ’06, the stock presents a buying opportunity at current market price of Rs 53. Globally, LCCs command premium valuation over full service carriers with higher EV/EBITDAR and market capitalisation/sales multiples. LCCs trade at an average 2.8 times market capitalisation/sales (actual), 15.2 times EV/EBITDAR (actual) and $65 million EV/fleet, while FSCs trade on average multiples of 0.8 times, 7.9 times and $74 million respectively. LCCs’ premium valuations are justified because of the sustainability of the business model and greater reach among the masses. SpiceJet is best positioned to benefit; it has the capability to overcome the current overcast environment on the back of high operational efficiency, ontime performance and sustained high-load factor. SpiceJetmaintains a high focus on minimising costs and is set for a turnaround by 2008-9. It is poised to expand its fleet, targetting more than 20 high-growth destinations. We believe that the worst is over and recommend a BUY with a target price of Rs 91 a share.
Jet Airways HOLD: Jet Airways’ outlook is delicately poised due to medium-term pricing pressure on the back of growing clout of LCCs & ‘value airlines’ in domestic operations and high start-up costs in international operations. While margin pressure in the domestic market is expected to be offset by ongoing cost reduction, visibility on profits from international operations is restricted as footprint expansion would continue over the next 12- 15 months. Even as domestic operations are expected to turnaround in the second half of 2006-7, competitive scenario in international routes from India remains challenging. At current market price of Rs 653 the riskreward ratio does not seem favourable. We initiate coverage on Jet Airways with a HOLD recommendation.”
SSKI is jumping on the real estate bandwagon with its coverage of Unitech: “ Unitech, India’s largest listed real estate company, is expected to be a significant beneficiary of about 16 billion sq ft of development expected to be undertaken in Indian real estate by 2010. Unitech has strong brand equity and pan-India presence with a focus on residential development— the most profitable segment. The focus on outright selling of non-residential properties improves the capital utilisation and enables it to grow its land bank rapidly. Our NAV-based fair value of Unitech’s land bank of 14,211 acres and SEZs works out to Rs 621 per share. We initiate coverage with an Outperformer rating.
Indian real estate metamorphosis: A progressive regulatory framework and increasing urban development are transforming the real estate landscape. We see sustained growth in all real estate segments. Robust internal rate of returns throw up a big opportunity over the next 4-5 years. Unitech’s two-pronged strategy of focusing on residential development and outright selling of developed nonresidential properties would help it to effectively grow its land bank. We expect Unitech to sell about 215 million sq ft by 2009-10, driving a 23x rise in revenues to Rs 28,500 crore and 113x increase in profits to Rs 11,200 crore over 2005-6 to 2009-10. The discounted free cash flows from all its projects works out to Rs 621 per share.”
Godrej Consumer Products
ANAND RATHI has a positive view on Godrej Consumer products Limited (GCPL) and an interesting commentary on the soap business: “Soap is one of the highest penetrated product categories. The penetration is around 91%. Hence, the growth potential is limited. However, the soap usage per person is very low. Assuming one person uses 100 grams in 45 days, the penetration level is only 45%. The soap industry has immense opportunity to grow consumption per person.
The soap industry is dominated by Hindustan Lever with 55% market share. GCPL (20%) is at number two and Nirma (9%) is at third. The company management has plans to grow its market share by 100 basis points with the increase in market size. They are basically selling value for money (VFM) products where customers get a good quality product which is available in a lot of variants at a relatively cheaper price. The company is also increasing the selling prices whenever possible so as to maintain the value growth. Given the huge installed capacity, low capacity utilisation and volume growth, we believe GCPL will not be required to incur capex for 6-7 years. Working capital requirements are limited as GCPL is working on negative working capital. We believe the strong free cash generation will result in higher dividends or acquisitions.
The business has good growth potential. At the current market price of Rs 159 and 2005-6 earnings, the GCPL stock is trading at P/E and EV/EBITDA of 30.9 and 25.7 respectively.”