Recommendations from investment houses

This selection of research reports gives information and opinions on companies and industries.

Print Edition: December 28, 2006


ICICI Securities has downgraded MTNL to hold despite being positive about the long-term potential of its new IPTV offering:

“We downgrade MTNL to Hold on lower earnings estimates to reflect margin pressures on account of recent tariff revision for local & NLD calls (under the new OneIndia plan) and higher-than-expected dip in mobile average revenues per user. We have also accounted for income tax refunds over 2006-7 to 2008-9 as extraordinary income.

Accordingly, we value core operations at Rs 117 a share, tax-related upside at Rs 30 a share and surplus real estate value at Rs 27 a share. While additional triggers (IPTV, VRS, international operations, other tax litigations, etc) and dividend yield at 3% limit the downside, we believe high sensitivity to other income (more than two thirds of PBT) and delays in capacity expansion (in mobile segment) would continue to affect the stock over the medium term.

IPTV: MTNL is the first (and so far only) player in India to launch IPTV services. As an introductory offer, a bouquet of 30 pay channels and 30 free-to-air channels is available for Rs 250 a month. In addition, consumers will pay Rs 75-125 a month as rental for set-topboxes. MTNL has signed revenue sharing deals with Aksh Optifibre, IOL Broadband and Times Broadband for content syndication and marketing. We do not expect IPTV to significantly contribute to financials in the near future.”

Balrampur Chini

IDBI Capital maintains a buy on Balrampur Chini Mills despite a downturn in the business cycle:

“Sales for the quarter ended September 2006 are up 35% YoY but operating margins dropped 4.28%, leading to decline in PAT by 7% YoY at Rs 32.2 crore. Net profit declined due to increase in depreciation and interest expenses.

Revenues from sugar increased at 38% on the back of enhanced capacity leading to higher volumes and better realisations.

Realisation at Rs 17,640/MT is up 4% YoY. Revenues from distillery saw decline of 23% YoY on account of lower average realisations and reduced offtake of products. Going forward, the distillery segment is expected to report improved performance. BCML sold 48m units of power to UP Power Corporation leading to 161% YoY increase in revenues at Rs 14 cr.

BCML’s integrated business model is well placed to handle cyclical revenues. The expansion plans augur sustainable topline growth and good EBIDTA margins supported by byproducts portfolio. We recommend a ‘Buy’ on the stock.”

GAIL (India)

First Global maintains a neutral stance on GAIL despite incorporating an earnings downgrade:

“GAIL’s performance in the second quarter of 2006-7 was impacted by the floods in Gujarat and a hefty subsidy bill. Gas supplies have now stabilised after the floods and we expect it to be normal for the rest of the year. Currently, the petrochemical cycle is at a peak and we expect the petrochemical business to provide growth impetus for the rest of the year. The uncertainty regarding subsidy still acts as an overhang on the valuations although we expect a reduction in GAIL’s subsidy burden.

According to our estimates, the sum of parts value for GAIL’s core business stands at Rs 330 per share. We have valued GAIL’s gas transmission business at 5.5 times the 2006-7 EV/EBITDA and its petrochemical business at five times 2006-7 EV/EBITDA. The company’s investments in ONGC, Petronet LNG, Indraprastha Gas and Gujarat Industries Power Co. Ltd. have been valued at a 10% discount to the current market price. Based on this method, we have arrived at a value of Rs 330 per share for GAIL. In view of the negative surprises in the current quarter, we have lowered our 2006-7 EPS estimate to Rs 25 from Rs 29. We have modelled for an increase in other expenditure, as GAIL will write off exploration expenses, and taking into account the lower LPG prices due to lower crude prices. Currently, GAIL is trading at a 2006-7 PE multiple of 10, which appears low in comparison to that of other global majors. However, given the high regulatory risks in India, we think that GAIL’s low PE multiple is justified. Although there are potential triggers in the form of a new gas policy and unbundling of gas transmission and trading business, timing of these still remains uncertain.”


Enam Securities flags SAIL as an outperformer relative to the sector:

“SAIL is best placed on the India growth story due to its sizable presence and domestic leadership. It has captive resources, which are scalable and integrated. It has growing dominance—backed by cash flows and resources.

The capacity is to rise from 12mn to 21+mn tonnes in 2011-12 through combination of internal growth and acquisitions. Sail is cost competitive due to its captive resources (iron ore,coal) and modernisation. It has a rich product mix translates to higher valueadded sales Globally it is a cost competitive player in steel. It is vertically integrated and one of the lowest cost producers (hot rolled coils) at $325 per tonne and that is a hedge against cyclical downturns in the global economy. While short-term (6-9 months) concern is on account of tightening interest rates that could hurt growth in the steel industry, in the medium to long term, consolidation and revival in growth rates could impart stability to prices. Coal prices have doubled over the last two years.

SAIL’s cost of production of steel is significantly below world average cost. SAIL is partly protected due to 25-30% of its coking coal requirements coming from domestic sources (not linked to international prices) SAIL is working on its captive coal mines and Coal India JV. We expect moderate earnings growth following strong recovery in EPS in 2006-7. We forecast an EPS of Rs 15 for 2006-7 and Rs 15.90 for 2007-8—revised down by about 4% respectively to factor our change in dollar:rupee forecast. At the CMP of Rs 84, SAIL trades at 5.3 times estimated 2007-8 earnings—enough to maintain sector Outperformer rating.”


EILFS Investmart sees smooth growth for CIPLA until 2007-8:

Cipla is the third largest company in India with 18 brands in its product portfolio. During the next two years, we expect Cipla to register strong earnings growth, with an EPS of Rs 10.1 in 2006-7 and Rs 12.2 in 2007-8. At the current price of Rs 271, the stock trades at a PE of 26.8 times 2006-7 EPS. We initiate coverage with a ‘Buy’ rating and a price target of Rs 329.

Low-risk business model: Cipla’s partnership model is robust with high growth and low risk. It has entered into global tie-ups with various generic players for supplying its generic products. This strategy enables Cipla to leverage local market knowledge of its partners and utilise its own R&D, development, and manufacturing skills.

Strong product pipeline: During the past two years, Cipla has filed 658 Drug Master Files and 71 Abreviated New Drug Apllications in the US. The company has also secured 170 authorisations in Europe and 4,000 global product registrations. Cipla has been granted nine patents in India and 21 patents internationally. We believe this would translate into a 29% CAGR in exports over two years. Valuations: A robust pipeline, global tieups and significant capex of Rs 500 crore for the next two years are expected to fuel a sales CAGR of 21% and PAT CAGR of 22% to 2007-8. We have set a price target of Rs 329; this is at a 21% upside from its CMP.”

State Bank of India

ICICI Securities advises investors to ignore “ trifling inconveniences” and maintains a buy on SBI:

“State Bank of India (SBI) continues to enjoy favourable growth-margin outlook with maximum excess SLR in an environment of expected tightening. We, however, reduce our earnings estimates due to high effective tax rate for 2006-7 as well as large tier II issuances impacting net interest income—essentially ‘non-operational’ issues.

Continued favourable growthmargin outlook: SBI’s well-moderated loan growth (19.1% CAGR 2005-6 to 2007-8) and the highest excess statutory liquidity ratio (7%) imply a favourable net interest income growth outlook, particularly as liquidity is expected to tighten shortly. The fact that downward pricing of investment yields has stopped is an added positive.

Higher tax rate and tier II issuances lead to earnings revision. SBI’s effective tax rate in 2006-7 is expected to be 39% (36% in 2005-6), primarily due to higher deferred tax charges. The bank has raised Rs 69,400 crore of upper tier II bonds leading to an annualised difference of 3% to interest expenses. However, these are non operational issues, which affected earnings and hence less of a concern.

Maintain Buy, but pension accounting the key risk: SBI is at the cusp of several positives— strength in margins, acceleration in fees and reduced loan/investment charges.

However, transition to the future benefits method of pension accounting remains the key risk. The recent run-up in the share price has already factored in some of the positives.We maintain ‘Buy’.”

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