Trading basket

Trading basket

ONGC, Buy- 2 weeks

ONGC IN Equity

- Possible gas pricing reforms to improve ONGC's gas realization leading to positive impact on ONGC's earnings - APM gas constitute 45% of ONGC' hydrocarbon production.

- OVL's expected high production CAGR of ~8.5% over the next 4-5 yrs would increase the proportion of revenues from non-regulated business.

- ONGC's development and re-development plans (INR ~250 bn for FY07-12) would not only help sustain their currently falling oil and gas production but increase production by 12% from current levels.

- With all negatives of rupee appreciation and higher subsidy burden (FY07) priced in we believe that (1) news on gas re-pricing and oil, and (2) gas discoveries would drive stock performance going forward.

- At CMP of INR 847, ONGC trades at 9.0x and 8.8x our FY08 and FY09 EPS estimates. On an EV/EBITDA basis it trades at 3.8x and 3.6x our FY08 and FY09 estimates.

National Aluminum, Sell - 2 weeks

NACL IN Equity

- Last week, NALCO had to shut down two power plants (100 MW of total capacity of 960MW) due to coal availability issues. The company is sourcing the power requirement from Orisa Gridco temporarily at higher price leading to increase in power cost of Rs 144 mn.

- This leaves the company more vulnerable to potential power cuts from the grid. In case power gets totally cut off the aluminum smelters would stop functioning and in such a situation it would take 2 to 3 months for the smelters to be restarted even after power is available. At this stage the company is vulnerable to that risk.

- Having said that, this is a short term scenario as the coal is expected to be available in the next 2 weeks to start the CPP

- From a longer term perspective, the outlook is not bright for NALCO since (i) prices of alumina (the company's key product) are expected to decline next year onwards and (ii) capacity expansion is coming on stream only by end of CY08 i.e. there will be no volume growth till then since NALCO is operating at over 100% of current capacity.

- We currently have a SELL on the stock from a fundamental perspective

India Cements, Buy - 2 weeks

ICEM IN Equity

- Price hikes in the south have been much sharper at INR 20-25/bag between April '07 to July '07 vis-à-vis INR 3-5/bag increase elsewhere. Demand-supply continues to be extremely tight with inventory levels of less than 5 days and waiting period of ~7 days for large orders. India Cements is a direct beneficiary of southern price hikes with 90% of its sales being in the south.

- With the price hikes, realization growth stands at 23% Y-o-Y for FY08E and 1.2% Y-o-Y for FY09E higher than earlier estimates of 18% Y-o-Y for FY08E and flat growth for FY09E.

- The stock trades at EV/EBITDA of 5.7 x FY08E and 4. 6 x FY09E. At the last leg of cycle upturn, we consider 5.5x to be a fair valuation at middle of the EV/EBITDA band.

- While there are concerns on industry acting as a cartel, we believe the MRTPC probe does not have a strong case against the cement companies.

Bajaj Auto, Buy - 2 to 3 weeks

BJA IN Equity

- Revaluation of life insurance business based on higher than estimated NBAP margin (at 22% compared with 15.5% assumed earlier).

- Life insurance business valued at INR 724 per share, vs. 441 per share earlier (both on the basis of 26% effective stake of Bajaj Auto). INR 300 upside.

- Core business margins to improve sequentially from Q2FY08 onwards to 15% plus by Q3/Q4FY08.

- SOTP value is at INR 2750 per share.

Fundamental basket

Rolta, Buy- 6 months

RLTA IN Equity

- All-time high order book and pipeline bids. Order book stands at INR 8.4 bn (more than 12 months of trailing revenues) while deal pipeline that the company is bidding for is an additional INR 16 bn. The company's success rate in converting the pipeline into wins has been high at nearly 60%-70%.

- All business segments witnessing strong traction: engineering, GIS and e-solutions. Engineering and e-solutions are both growing at over 40% annually, while GIS a respectable 25%-30%.

- Billing rates on a sustained uptrend given the progressive success in moving from projects to larger solutions.

- On the engineering side demand the environment continues to be buoyant and seems to be on the threshold of a demand upsurge, similar to what was seen in IT services three-four years back. Rolta, being a strong player in this segment, should benefit from the favorable macro-environment.

- Rolta is a strong growth story in the mid-cap space. It is consolidating itself in the current environment priming itself to expand its opportunity space unlike several others that are now attempting to fix issues in their business. THE INR appreciation, which has also contributed in taking the wind out of the sails of the mid-tier pack, has minimal impact on Rolta.

Tata Motors, Buy - 12 months

TTMT IN Equity

- Commercial vehicles sales trajectory to improve further Aug-Sep onwards based on feedback from dealers, transporters and vendors. This will be further supported by robust IIP growth, improved flow of credit and some softening in interest rates and credit norms.

- Freight rates have been steady to improving for the past 4 weeks.

- Mini-truck ACE to continue to drive volumes in LCV with the launch of passenger version. New plant commissioning in Uttaranchal for ACE to provide incremental EPS of nearly INR 2-3 per share in FY08 due to excise and I-T benefit.

- Post correction, valuations are extremely attractive with EV/EBITDA of 10. 6 x FY08E and 9x FY09E consolidated earnings. High level of confidence in earnings estimates

Jindal Saw, Buy - 12 months

JSAW IN Equity

- JSL is a well diversified pipe player manufacturing LSAW, spiral pipes (HSAW), seamless pipes and tubes for industrial applications, and DI pipes for water and sewage transportation.

- Domestic volumes are expected to increase at 25% CAGR (FY07-09). SAW pipes are expected to grow at 23% CAGR while seamless pipes are expected to grow at a CAGR of 60%.

- EBITDA margins are set to improve from 10.6% in FY06 to 12.1% in FY07 and to 12.7% in FY09 due to better operational efficiency and higher capacity utilization especially in DI and Seamless segments.

- Jindal Saw's current order book of USD 1.2 bn (1.3x its FY06 revenue) provides revenue visibility.

- At CMP of INR 6 28 , the stock trades at 9x and 6.9 x our FY08 and FY09 earnings. On an EV/EBITDA basis the stock trades at 5. 5 x and 4.2 x our FY08 and FY09 earnings estimates.

AIA Engineering, Buy - 12 months

AIAE IN Equity

- AIA is a niche player in the value added, impact, abrasion, and corrosion resistant high chrome metallurgy segment manufacturing products like grinding media, liners, diaphragms and vertical mill parts.

- Due to strong focus on quality and its ability to reduce the total cost of ownership for customers, it has over 98% market share of Indian cement market. In addition it also has 22% market share of global ex-China cement market.

- The annual global replacement demand in the above mentioned sectors is estimated at ~ 3 mn MT, with demand from the mining sector at ~2.4 mn MT.

- In order to cater to this strong growth, AIA is ramping up aggressively from 65000 MT in FY06 to 269000 MT by FY09E, a 4x increase. The new plant at Changodhar has started and is expected to roll out production of 6000 MT during Q2FY07 (2500 MT in Q1FY07) and subsequently ramp up to 12000 MT from Q3FY07 onwards.

- Q1FY07 results have been disappointing due to adverse currency movement and low production. But we believe this is transient in nature as only 25% of the total order book is export orders.

- We expect the company to increase sales and PAT at a 32% and 48% CAGR to INR 10.9 bn and INR 1.7 bn in FY09E.