Suzlon Energy
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,948
Merrill Lynch has raised its target of Suzlon Energy to Rs 2,150 on a 4-10% earnings upgrade over FY08-10E following Suzlon's Street-beating result. An expanding order book at Rs16,300 crore ($4 billion) a +21%QoQ and 76%YoY growth in second quarter volumes led by an inventory sell-down and a 16% improvement in margins should reassure the stock market. Suzlon has also doubled its capacity expansion plans to 3 giga watts (gw) by FY09E to reach an installed base of 5.7 gw of wind turbines.
Merrill Lynch has reiterated its 'Buy' recommendation on the stock. Suzlon's EBITDA margin rose to its long-term guidance of 16% (7.2% in Q1FY08) led by a 76%YoY growth in volumes led by resolving of law and order issues in the domestic market, improved deliveries in the international market and a sell-down of inventory. This, coupled with cost control, led to a 68%YoY growth in PAT at Rs 390 crore, much ahead of the Street estimate of Rs 250 crore.
Suzlon has announced capacity increase across its businesses — wind turbines to 5.7 gw vs 2.7 gw currently; Hansen to 14.6 gw (3.6 gw) and REpower to 1.7 gw (0.9 gw). WTG capex has now been increased to Rs 3,000 (Rs 1,500 crore). Suzlon also announced a $1.3-billion capital raising plan through equity/quasi equity. Suzlon's global delivery model, macro tailwind and multi-fold expansion in the addressable market, are driving its 49% EPS CAGR over FY07-10E.
Hotel Leela Venture
Research: Citigroup
Rating: Buy
CMP: Rs 47
Citigroup has put a 'Buy' rating on Hotel Leela Venture with a target price of Rs 62 based on 18x September '08 P/E. Hotel Leela Venture is a well-known hotel chain in India catering primarily to the premium segment. With rapid growth in room demand, the company plans to expand its presence in the growth cities of Hyderabad, Chennai, Pune and New Delhi through management contracts.
It is the flagship company of Leela Group, which holds a 49% stake in Hotel Leela Venture. Leela has a solid 65% earnings growth vs 38% for the sector in FY08E, leveraging on additional rooms operational in Mumbai and Bangalore (ahead of expected supply in mid-'08).On the flip side, Leela's high dependence on the Bangalore market (where ARR growth is peaking) and lack of a presence in key growth markets are limitations.
However, with the completion of Mumbai refurbishments (133 rooms) and Bangalore room expansion (101 rooms) starting in Q4FY07, Citigroup see additional rooms and sustained high ARRs driving Leela's out-performance with an earnings growth of 65%. While the risks of high dependence on Bangalore and lack of scale remain, Citigroup sees upside potential from current valuations of 13x September '08E P/E (at a discount to the sector and below the stock's two-year historical P/E band of 16-25x).
Opto Circuits
Research: CLSA
Rating: Buy
CMP: Rs 430
CLSA has reiterated its 'Buy' recommendation on Opto Circuits and raised the target price to Rs 700. Opto Circuits exceeded the expectations in its Q2FY08 reported results. Net sales grew 121% YoY and PAT grew 96% YoY. Net sales for the quarter stood at Rs 124 crore, up 121% YoY while for H1FY07, sales touched Rs 220 crore, up 110.6%.
EBIDTA for Q1FY08 was Rs 36.5 crore, up 100.8% YoY while the corresponding number for the first half was Rs 66.1 crore, up 107.1% YoY. PAT for Q1FY08 was up 96% YoY at Rs 34.1 crore and for the first half the corresponding number was Rs 61.9 crore (up 114.3% YoY). The pricing for most of Opto's core business products are fixed around January.
Hence its pricing for CY07 was fixed on the basis of a Re/$ rate of 44 approximately. With of a 10% appreciation from those levels in the rupee, it's almost entirely US-dollar denominated business lost about 3% EBIDTA margin on a YoY basis for the quarter.
The company's paclitaxel drug eluting cardiac stent Taxcor has just undergone a trial of a non-controlled sample of 45 people. Results have been cited on the Minerva Cardioangiologica and the conclusions state "The paclitaxeleluting stent Taxcor appeared to be effective and safe up to six months following implantation".
On the back of the strong traction in revenues and the expected turnaround in the operating margins by the year-end, CLSA has upgraded its FY08CL and FY09CL estimates by 12.2% and 12.4% respectively.
Finolex Cables
Research: HSBC
Rating: Overweight
CMP: Rs 81
HSBC has maintained its 'Overweight' rating on Finoloex Cables. However, it has lowered the target price from Rs 139 to Rs 124. In its Q2FY08 results, Finolex Cables reported sales growth of 21% YoY and EBITDA margin growth from 9.6% in Q1FY08 to 11.7% in this quarter.
Net profit was up 25% at Rs 26.8 crore, which includes other income of Rs 10.8 crore. The Board has approved capex of Rs 60 crore to enhance capacity for compact fluorescent lamps (CFL) and cables. New power cables capacities at Roorkee in Uttarakhand have been delayed to April '09. EBITDA margin has recovered from the lows in Q4FY07.
But in spite of this recovery it will fall short of HSBC's FY08e yearly EBITDA target of 12.1%. Thus, EBITDA margin forecast to 11.3% (-77bps) and 11.6% (-97bps) for FY08e and FY09e. The company has repaid its working capital loan which should mean savings on interest cost. HSBC, therefore, has cut its interest cost estimates by 26% and 22% respectively for FY08e and FY09e.
These changes affect HSBC's EPS targets by -2.7% and -5.5% for FY08e and FY09e respectively. This is the mid-point of HSBC's direct cash flows (DCF) fair value of Rs 117 and P/E multiple-based fair value of Rs 93 along with Rs 19 per share for Finolex Industries (FCL holds c32.4%). The stock is trading at a low P/E multiple of 10.2x FY09e EPS. Further fluctuation in copper prices remains the key risk to HSBC's valuation.
Asian Paints
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,010
Merrill Lynch has reiterated its 'Buy' rating on Asian Paints. The company reported Q2 consolidated profit of Rs 113.9 crore, up 38% YoY. Results were 13% ahead of the estimates owing primarily due to better margins. There was a small benefit from higher other income.
Domestic EBITDA margin increased 160 bps to 17%. This was led primarily by a stronger rupee, which offset rising crude oil prices. In the international business, margin gains were much sharper — margins doubled to 12.6%. Scale benefits are beginning to come through, especially in the Middle East and South Asia. In addition, divestment of loss-making geographies is aiding margin expansion.
Domestic demand growth in Q2 at 13% was lower than the trend witnessed over the past few quarters. This was due to prolonged monsoon and the timing of the crucial Diwali festival sales — this was in Q2 last year and this year comes in Q3. For the full year, Merrill Lynch has forecast sales to grow 20% and does not see risk to its forecasts.
Asian Paints is a high-quality domestic consumption story, with market leadership and strong brands in a category where penetration of branded products is less than 30%. Merrill Lynch sees structural growth factors in branded paint demand driven by rising incomes and improving lifestyles.
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,948
Merrill Lynch has raised its target of Suzlon Energy to Rs 2,150 on a 4-10% earnings upgrade over FY08-10E following Suzlon's Street-beating result. An expanding order book at Rs16,300 crore ($4 billion) a +21%QoQ and 76%YoY growth in second quarter volumes led by an inventory sell-down and a 16% improvement in margins should reassure the stock market. Suzlon has also doubled its capacity expansion plans to 3 giga watts (gw) by FY09E to reach an installed base of 5.7 gw of wind turbines.
Merrill Lynch has reiterated its 'Buy' recommendation on the stock. Suzlon's EBITDA margin rose to its long-term guidance of 16% (7.2% in Q1FY08) led by a 76%YoY growth in volumes led by resolving of law and order issues in the domestic market, improved deliveries in the international market and a sell-down of inventory. This, coupled with cost control, led to a 68%YoY growth in PAT at Rs 390 crore, much ahead of the Street estimate of Rs 250 crore.
Suzlon has announced capacity increase across its businesses — wind turbines to 5.7 gw vs 2.7 gw currently; Hansen to 14.6 gw (3.6 gw) and REpower to 1.7 gw (0.9 gw). WTG capex has now been increased to Rs 3,000 (Rs 1,500 crore). Suzlon also announced a $1.3-billion capital raising plan through equity/quasi equity. Suzlon's global delivery model, macro tailwind and multi-fold expansion in the addressable market, are driving its 49% EPS CAGR over FY07-10E.
Hotel Leela Venture
Research: Citigroup
Rating: Buy
CMP: Rs 47
Citigroup has put a 'Buy' rating on Hotel Leela Venture with a target price of Rs 62 based on 18x September '08 P/E. Hotel Leela Venture is a well-known hotel chain in India catering primarily to the premium segment. With rapid growth in room demand, the company plans to expand its presence in the growth cities of Hyderabad, Chennai, Pune and New Delhi through management contracts.
It is the flagship company of Leela Group, which holds a 49% stake in Hotel Leela Venture. Leela has a solid 65% earnings growth vs 38% for the sector in FY08E, leveraging on additional rooms operational in Mumbai and Bangalore (ahead of expected supply in mid-'08).On the flip side, Leela's high dependence on the Bangalore market (where ARR growth is peaking) and lack of a presence in key growth markets are limitations.
However, with the completion of Mumbai refurbishments (133 rooms) and Bangalore room expansion (101 rooms) starting in Q4FY07, Citigroup see additional rooms and sustained high ARRs driving Leela's out-performance with an earnings growth of 65%. While the risks of high dependence on Bangalore and lack of scale remain, Citigroup sees upside potential from current valuations of 13x September '08E P/E (at a discount to the sector and below the stock's two-year historical P/E band of 16-25x).
Opto Circuits
Research: CLSA
Rating: Buy
CMP: Rs 430
CLSA has reiterated its 'Buy' recommendation on Opto Circuits and raised the target price to Rs 700. Opto Circuits exceeded the expectations in its Q2FY08 reported results. Net sales grew 121% YoY and PAT grew 96% YoY. Net sales for the quarter stood at Rs 124 crore, up 121% YoY while for H1FY07, sales touched Rs 220 crore, up 110.6%.
EBIDTA for Q1FY08 was Rs 36.5 crore, up 100.8% YoY while the corresponding number for the first half was Rs 66.1 crore, up 107.1% YoY. PAT for Q1FY08 was up 96% YoY at Rs 34.1 crore and for the first half the corresponding number was Rs 61.9 crore (up 114.3% YoY). The pricing for most of Opto's core business products are fixed around January.
Hence its pricing for CY07 was fixed on the basis of a Re/$ rate of 44 approximately. With of a 10% appreciation from those levels in the rupee, it's almost entirely US-dollar denominated business lost about 3% EBIDTA margin on a YoY basis for the quarter.
The company's paclitaxel drug eluting cardiac stent Taxcor has just undergone a trial of a non-controlled sample of 45 people. Results have been cited on the Minerva Cardioangiologica and the conclusions state "The paclitaxeleluting stent Taxcor appeared to be effective and safe up to six months following implantation".
On the back of the strong traction in revenues and the expected turnaround in the operating margins by the year-end, CLSA has upgraded its FY08CL and FY09CL estimates by 12.2% and 12.4% respectively.
Finolex Cables
Research: HSBC
Rating: Overweight
CMP: Rs 81
HSBC has maintained its 'Overweight' rating on Finoloex Cables. However, it has lowered the target price from Rs 139 to Rs 124. In its Q2FY08 results, Finolex Cables reported sales growth of 21% YoY and EBITDA margin growth from 9.6% in Q1FY08 to 11.7% in this quarter.
Net profit was up 25% at Rs 26.8 crore, which includes other income of Rs 10.8 crore. The Board has approved capex of Rs 60 crore to enhance capacity for compact fluorescent lamps (CFL) and cables. New power cables capacities at Roorkee in Uttarakhand have been delayed to April '09. EBITDA margin has recovered from the lows in Q4FY07.
But in spite of this recovery it will fall short of HSBC's FY08e yearly EBITDA target of 12.1%. Thus, EBITDA margin forecast to 11.3% (-77bps) and 11.6% (-97bps) for FY08e and FY09e. The company has repaid its working capital loan which should mean savings on interest cost. HSBC, therefore, has cut its interest cost estimates by 26% and 22% respectively for FY08e and FY09e.
These changes affect HSBC's EPS targets by -2.7% and -5.5% for FY08e and FY09e respectively. This is the mid-point of HSBC's direct cash flows (DCF) fair value of Rs 117 and P/E multiple-based fair value of Rs 93 along with Rs 19 per share for Finolex Industries (FCL holds c32.4%). The stock is trading at a low P/E multiple of 10.2x FY09e EPS. Further fluctuation in copper prices remains the key risk to HSBC's valuation.
Asian Paints
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,010
Merrill Lynch has reiterated its 'Buy' rating on Asian Paints. The company reported Q2 consolidated profit of Rs 113.9 crore, up 38% YoY. Results were 13% ahead of the estimates owing primarily due to better margins. There was a small benefit from higher other income.
Domestic EBITDA margin increased 160 bps to 17%. This was led primarily by a stronger rupee, which offset rising crude oil prices. In the international business, margin gains were much sharper — margins doubled to 12.6%. Scale benefits are beginning to come through, especially in the Middle East and South Asia. In addition, divestment of loss-making geographies is aiding margin expansion.
Domestic demand growth in Q2 at 13% was lower than the trend witnessed over the past few quarters. This was due to prolonged monsoon and the timing of the crucial Diwali festival sales — this was in Q2 last year and this year comes in Q3. For the full year, Merrill Lynch has forecast sales to grow 20% and does not see risk to its forecasts.
Asian Paints is a high-quality domestic consumption story, with market leadership and strong brands in a category where penetration of branded products is less than 30%. Merrill Lynch sees structural growth factors in branded paint demand driven by rising incomes and improving lifestyles.
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