Snapshots of Recommendations from Investment Houses

This selection of research reports gives information and opinions on companies and industries.They are often filled with jargon, which we must reluctantly inflict on readers sincethe excerpts are verbatim. Seven such terms occur in these extracts: EBITDA = EarningsBefore Interest,Tax, Depreciation,Amortisation, EV = Enterprise Value, EPS = Earnings Per Share, PE = Price-Earnings, PAT/PBT = Profit After/ Before Tax,YoY = Year-on-year.

July 14, 2008 | Updated 18:27 IST

Asian Paints

ICICI Securities remains optimistic about Asian Paints (APL) continuing to outpace the decorative paints industry: “We reiterate buy on APL despite the stock having undergone a significant rerating over the past two years. Though APL holds nearly half of the decorative paint market, its market share is significantly higher in high-growth, premium segments
such as emulsion paints, exterior paints and wood paints. On the back of stronger growth in these segments, APL is likely to
register above industry growth and continue to improve its revenue mix in favour of premium paints. By strategically targeting to maintain margins despite improved revenue mix, it has been able to reduce its price premium over the
unorganised sector, providing a further boost to sales.

In the light of stronger-thanexpected revenue growth, we are upgrading APL’s earnings estimates by 6% and 10% for 2006-7
and 2007-8 respectively. Our 2008-9 estimates, translate into compounded earnings growth of 20.3% between 2005-6 and 2008-9.

Robust growth outlook, strong entry barriers, strengthening of APL’s dominance in the industry, strong pricing power and
increased commitment by the promoters (reflected in creeping acquisition) are favourable factors. Despite a significant re-rating over the past two years, we maintain BUY on the stock, which is currently trading at 2007-8 PE of 21.”

Polaris Software

First Global initiates coverage of Polaris Software with an outperform rating: Polaris Software Labs is turning around after the problems that dogged it for two years. As in most turnarounds, the bang-for-the-buck is much more
than for steady performers. For Polaris too, the EBIDTA margin expansion from 9.2% in 2005-6 to 16.7% in 2006-7 would mean the net margin more than quadrupling from 2.6% to 10.1%, the EPS quintupling to Rs 10.8 and the RoE expanding from 3.9% to 18.1%. All of these will drive re-rating.

Despite the recent re-rating, valuations remain reasonable and retain room for expansion.

Polaris has attempted to break free from its overdependence on a single customer by strengthening its product range as well as customer base. And as its dependency on one customer diminishes, Polaris is maturing from being just a generic IT solutions provider to a company providing a complete software platform—for integrating the various processes of financial institutions in the banking, financial services and insurance domain.”

Sun Pharma

SSKI recommends Sun Pharma due to its focused and highly scaleable business model: 'Sun Pharmaceuticals' (Sun) focused
strategy of growing its Indian and US businesses is yielding good results. While focus on chronic segments and specialty products is driving the domestic business, aggressive Abbreviated New Drug Application (ANDA) filings are creating
a platform for the US business. Given these ANDA filing trends, Sun’s US portfolio can potentially grow to about 100 products by 2009-10 (from the current 27). Sun continues to be among the most consistent performers in the sector offering high profitability and strong organic earnings growth visibility. Valuations of 22 times 2007-8 and 18.2 times 2008-9, consolidated earnings (fully diluted) look attractive. Reiterate outperformer with a 15- month price target of Rs 1,135.

We expect 26% CAGR in Sun's consolidated revenues over FY 06-09 to Rs 32 billion, driven by steady growth in the domestic business, and acceleration in sales to USA and unregulated markets. Sun has considerably ramped up its ANDA filings,
which will lead to significant expansion in the US product portfolio from 2008-9. Revenue contribution from recent acquisitions is also expected to scale up from 2008-9. We expect Sun to broadly maintain its operating margins at 33-34%. Over 2007-8, margins are likely to be impacted by a sharp ramp up in R&D investments. However, margins will improve with increasing revenue contribution from recent acquisitions.

With its focused and highly scalable business model, Sun remains our top pick in Indian generics. With about $450 million cash, it is best placed to benefit from the ongoing consolidation in the generics space. Demerger of the R&D business will
be another value unlocking trigger.

Zee Telefilms

ICICI Securities maintains its sell rating on Zee after the demerger: This report is focused on determining the value of the new entity Zee which started trading from 18 December 2006, following the demerger of Zee News (ZNL) and Wire & Wireless (WWIL). We forecast the business outlook of Zee Entertainment & Dish TV. Based on benchmark sumof- the-parts assessment, we arrive at Rs 204 per share as fair value for the ‘new Zee’. Above this, we advise booking profits.

We believe India is on the verge of a digital revolution in the cable space. With Dish TV, Tata Sky and CAS finally being rolled out, we expect ‘addressability’ to catch up in a big way. By end-2010-11, we expect digital cable to account for
43% of total C&S households.

Apart from improved viewership, flagship channel, Zee TV is expected to witness an increase in revenues and EBITDA margin due
to across-the-board ad rate improvements. The biggest drag for ZEL is the fledgling Zee Sports channel. Zee Sports was expected to breakeven by end-2007-8 without factoring in cricket broadcasting rights. Taking that into account, we believe that Zee Sports will be in the red for longer.

International subscription revenues contributed about 24% of 2005-6 ZEL revenues. Late entrants Star and Sony are catching
up in subscriber base at much more aggressive pricing, resultingmin a decline of Zee’s internationaln ARPU. However, growth in domestic subscription revenue will more than compensate.

We believe the demerger would create value; we also maintain that high growth areas such as Dish TV would take time to bloom. We arrive at Rs 204 per share fair value comprising ZEL’s Rs 170 and Rs 34 for 57% stake in Dish TV.

Projecting Revenues

Enam Research has done a detailed report on Indian infrastructure sector. The analysis incorporates a comparision of several companies in the infrastructure space.

A $20 billion market is growing at 24% per annum. Power, roads and water account for 50% of infrastructure investments and are all witnessing robust growth. Half of incremental investments will come from the private sector and increasing average ticket size will favour larger companies and attract FDI.

Execution capability and balance sheet strength are key determinants of growth. Most infra companies can have an order backlog of 10x their net worth a threshold in our estimate.

Significant orders from the road sector has deteriorated the quality of the order book. The execution cycle is in excess of 24 months and margins are lower at 6-8%.

In this backdrop, we favour companies with high RoI and/or other assets. The competitive intensity is expected to reduce. Dilution, if any, would be more accretive for companies with high RoI. Most companies have real estate or (build-own-transfer (BOT) assets. We favour HCC and Patel Engg as our top picks

BUY: HCC has a potential upside of 8% given a target of Rs 158 by March 2007. It has pre-qualifications in Hydro and Nuclear. It is amongst five Indian companies to take up EPC hydro projects, concentrating on cash contracts and not BOT. Over the years, HCC has absorbed complex engineering technology in hydro, nuclear, etc through various JVs. Ahead of peers on the learning curve and hence geared to take large, complex EPC projects. It has bagged initial orders for a gas pipeline JV. Profitability to improve from 2008-9.
Management refocus towards hydel power is reflected by increased share from 11% in 2004-5 to 38% in 2005-6.

Patel Engineering BUY: Player with technology edge and potential upside of 7% at target price of Rs 486. Strong focus on
hydro-power projects and a historical success to bid ratio of 70% for irrigation and 25% for hydro projects. Land bank of about 350 acres in Hyderabad, Bangalore, Karjat and Panvel likely to be developed over the next few years. Expect about 29% CAGR in revenues over 2006-8 with a Rs 40 billion order backlog. Return ratios of about 18% are sustainable.

Finolex Cables

Asit Mehta suggests that Finolex Cables is a buy: Finolex Cables Ltd (FCL) is engaged in manufacturing electrical and communication cables. Electrical cables find application in electrification of residential, commercial and industrial establishments, electrical panel wiring, consumer electrical goods, automobile industry and irrigation. Under communication cables, it manufactures copper-based jellyfilled telephone cables (JFTC), LAN cables, PE insulated telephone cables and glass based optic fibre cables. FCL has set up a strong distribution network, comprising channel partners and dealers throughout India. FCL is setting up a plant to manufacture power cables in the range of 3.3 KVA to 66 KVA used in underground application in the intra-city electricity distribution system. It is also undertaking new projects likem manufacturing modular electrical switches, compact fluorescent lamps (CFL) and miniature circuit breakers.

For 2005-6, sales of electrical cables formed 64% of its total revenues, while communication cables was 23%. Electrical cables sales increased 25% and sales of communication cables were up by 17% over the earlier year.

At the CMP of Rs 487, the stock trades at 19.6X of its trailing earnings (2005-6). Looking at the initiatives in newer projects and the benefits FCL derives from its strong distribution network, one can consider investment.


Enam Securities discusses rumours of ONGC’s recent gas discoveries in the Krishna- Godavari offshore and says that this could be very significant:

Potentially, this could enhance ONGC’s Oil & Gas in Place (OGIP) by about 21 tcf or 4 billion barrel of equivalent (current proven reserves 5.1 billion BoE ). (Some formal communication on the size of the discovery is expected in mid-January according to media reports).

Although ONGC’s annual reserves accretion to production ratio has usually been about 1, thisbhas been largely achieved through investments in sweating existing fields. Reserves accretion through discoveries in the recent past has been low, since ONGC had a limited success in its exploration. The gas find is therefore a very significant milestone for ONGC’s exploration activity. Apart from issue of subsidies, limited success in the exploration front has been a value depressant for ONGC.

Investors have viewed ONGC’s growth contingent to its success in exploration and attributed a significant risk premium, despite sufficient reserves to sustain operations for 16 years. Such large discoveries would certainly address the growth concerns and reduce the risk premium.

ONGC's value after netting off:
(1)estimated value of OVL (at 37%
of current market price)
(2) investment portfolio
(3) new gas discovery,

This implies a payback of under two years. ONGC’s residual valuations imply an Enterprise Value/BoE of 2.2 times over proven reserves base of 5.1 billion BoE against a global average of 15 times proven reserves.

(The extracts are sourced from www.securities.com. MONEY TODAY does not take any responsibility for investment decisions made on the basis of the above information.)

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