Company: Reliance Petroleum
Research: CLSA
Rating: Underperform
CMP: Rs 221
CLSA downgrades Reliance Petroleum's rating to 'underperform' with a target price of Rs 195 per share based on an average of the earnings multiples and replacement cost benchmarks. Reliance Petroleum has quadrupled since the initiation in April '07 and now implies an asset value of $4,129/complex-bpd – 2.4x those of its US peers and a 50-70% premium to even the most expensive refinery new-build quotes in the market ($2,500). Its premium valuations ($57,800/bpd) are justified to an extent, however, given its higher earnings potential because of (a) lower capital costs ($740/complex-bpd, reflected in lower interest, depreciation), (b) tax savings due to SEZ-unit status and (c) savings from substitution of liquid fuels with lower-priced natural gas. In hindsight, CLSA's April '07 earnings estimates now appear too low and is upgrading FY09-12CL EPS by 52-71%. The refinery remains well-ahead of schedule as well and the FY09CL estimate builds a phased start-up from 2QFY09 (60% overall utilisation). CLSA's fair value estimate for RPL is Rs158/share but the market is likely to look at alternative methods like earnings multiples, replacement costs, asset valuations and M&A benchmarks.
Company: PNB
Research: ABN Amro
Rating: Buy
CMP: Rs 534
ABN Amro retains its 'Buy' recommendation on Punjab National Bank. However, it has lowered the target price despite the rollover of valuations to FY09F. PNB's stock has underperformed the BSE Sensex by 32% in the past one year. This underperformance has been due to declining NIMs and an increase in bad loans over the past two quarters. The decline in NIMs was partly due to a decline in low-cost deposits as a proportion of total deposits, an increase in the cost of funds and a reversal of interest income on the increased bad loans. ABN now forecasts a dip in the ratio of low-cost deposits from 46.1% for FY07 to 45.4% in FY08, and further to 43.4% by FY10 and expects NIMs to fall from 3.47% in FY07 to 3.27% in FY08, before rising marginally to 3.29% in FY09-10. PNB's low-cost deposit ratio, at about 44%, is still among the highest for an Indian stateowned bank, which makes it better placed relative to peers in terms of ability to protect declining net interest margins. PNB's low funding costs also compensate for the bank's higher intermediation costs relative to peers. At 2.2% of average working funds in FY08F, the bank's operating expenses are higher than those of many of its peers. At a revised target price of Rs 605, the stock would trade at 9.2x earnings and 1.6x adjusted book value for FY09F after writing off 100% pre-tax net NPLs.
Company: Reliance Comm
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 705
Morgan Stanley maintains its 'Overweight' rating on Reliance Communications and revises upward the '08/09 estimates by 1-3% based on F2Q08 results. They introduce '10 estimates, increase net adds, raise their longer-term ARPU estimates by 7-8%, incorporate revised exchange rate estimates, and lift their price target to Rs 891. FY'07-10E operating and net profit growth are 40.2% and 42.0% p.a. respectively. Key positives include strong net adds and quarterly results, RCom's unlocking of value in the tower business and its international operations through Flag Telecom, and Rcom's getting the GSM spectrum for its new circles. RCom's overall margins expanded 69 bps, to 42.8%, due to lower sales and distribution costs, as well as lower interconnect costs, despite higher network costs. Absolute EBITDA missed the estimate by 2.8%, even as RCom accounted for Rs 170 crore worth of income from the government pertaining to previous years. Still, lower depreciation charges, as well as lower tax rate and interest costs, led to net profits coming in 5.2% above the estimate. Aggressive rollout plans for '08: RCOM invested $1.3 bn in 2Q '08 and plans to invest $4-5 billion in '08, the highest capex by any private operator in the country. This should enable it to enhance its passive infrastructure to 40,000 towers covering 23,000 towns and 600,000 villages and reaching 90% of India's population.
Company: BHEL
Research: Merrill Lynch
Rating: Buy
CMP: Rs 2, 794
Merrill Lynch maintains BHEL as its top pick with a target price of Rs 3,000. On October 31, BHEL emerged as the sole bidder for yet another super-critical order – the 2x800-MW Krishnapatnam power plant of APGenco in a global competitive bid. This not only demonstrates BHEL's ability to win supercritical orders in a competitive bid; but also takes it closer to reach a threshold level of 10 sets to achieve 90% indigenisation. BHEL is now the lowest bidder tied up for a total of six supercritical sets totalling to 4,520 MW in the last two months. Merrill Lynch expects solid new order inflows from supercritical technology to be the core driver of surprises ahead. It's raining super-critical orders at BHEL.. The response to the global tender indicates tightness of the quality supply of super-critical power equipment. Merrill Lynch expects BHEL to outperform as the company a) addresses Chinese competition, b) gets super-critical orders in '07, and c) looks to improve competitiveness through operating leverage - ~50% capacity expansion with less than 10% rise in labour.
Company: HDFC
Research: Deutsche Bank
Rating: Buy
CMP: Rs 2,562
Deutsche Bank maintains the `Buy' rating on HDFC with an increased target price of Rs. 2,925 from Rs 2,200. HDFC remains one of the finest examples of steadiness - the mortgage business volume growth has stayed above 25% in the last four quarters when the rest of the sector has clearly decelerated. Asset quality is intact and spreads have actually broken out of the 2.15-2.2% band and moved closer to 2.3%. Life insurance is back to aggressive growth after the rapid increase in distribution investments. Two distinct upside possibilities to the assumption of tempered growth are real estate prices coming off and commercial banks competing less intensely than before. Dynamic resource-raising, no duration mismatch on the balance sheet and increased access to deposits should help HDFC maintain loan spreads. Asset quality is expected to remain under control, due to the rapid rise in individual income and HDFC's historically low ticket size. Deutsche estimates gross NPLs to remain at the current level of ~1% and values HDFC on a sum-of-parts, at Rs 2,925. The core business is valued at 24x Mar '09E EPS. The life business is valued on appraisal value; the asset management business on AUM, the stake in HDFC Bank at the latter's target price and the rest on earnings.
Company: Suzlon Energy
Research: Citigroup
Rating: Buy
CMP: Rs 1,888
Citigroup increases its target price on Suzlon Energy to Rs 2,227 from Rs 1,700 as they factor in: (1) A higher P/E multiple of 26x (from 23x earlier) in line with the multiple for BHEL on FY07-10E earnings CAGR of 49% (from 44% earlier); and (2) Roll forward of our multiple to Sep '09. Citigroup also accorded Rs 43 per fully diluted share of Suzlon for REPower and change thier risk rating to Low from Medium as (1) Uncertainties on the REPower acquisition are a thing of the past; (2) Confidence of EBITDA margins being in the 15–17% band over the medium term; (3) Reduced component shocks as Suzlon backward integrates. ~16.1% EBITDA margins look achievable — Suzlon delivered 1,000MW in 1HFY08 and is set to deliver 1,500+MW volumes in 2HFY08.
Research: CLSA
Rating: Underperform
CMP: Rs 221
CLSA downgrades Reliance Petroleum's rating to 'underperform' with a target price of Rs 195 per share based on an average of the earnings multiples and replacement cost benchmarks. Reliance Petroleum has quadrupled since the initiation in April '07 and now implies an asset value of $4,129/complex-bpd – 2.4x those of its US peers and a 50-70% premium to even the most expensive refinery new-build quotes in the market ($2,500). Its premium valuations ($57,800/bpd) are justified to an extent, however, given its higher earnings potential because of (a) lower capital costs ($740/complex-bpd, reflected in lower interest, depreciation), (b) tax savings due to SEZ-unit status and (c) savings from substitution of liquid fuels with lower-priced natural gas. In hindsight, CLSA's April '07 earnings estimates now appear too low and is upgrading FY09-12CL EPS by 52-71%. The refinery remains well-ahead of schedule as well and the FY09CL estimate builds a phased start-up from 2QFY09 (60% overall utilisation). CLSA's fair value estimate for RPL is Rs158/share but the market is likely to look at alternative methods like earnings multiples, replacement costs, asset valuations and M&A benchmarks.
Company: PNB
Research: ABN Amro
Rating: Buy
CMP: Rs 534
ABN Amro retains its 'Buy' recommendation on Punjab National Bank. However, it has lowered the target price despite the rollover of valuations to FY09F. PNB's stock has underperformed the BSE Sensex by 32% in the past one year. This underperformance has been due to declining NIMs and an increase in bad loans over the past two quarters. The decline in NIMs was partly due to a decline in low-cost deposits as a proportion of total deposits, an increase in the cost of funds and a reversal of interest income on the increased bad loans. ABN now forecasts a dip in the ratio of low-cost deposits from 46.1% for FY07 to 45.4% in FY08, and further to 43.4% by FY10 and expects NIMs to fall from 3.47% in FY07 to 3.27% in FY08, before rising marginally to 3.29% in FY09-10. PNB's low-cost deposit ratio, at about 44%, is still among the highest for an Indian stateowned bank, which makes it better placed relative to peers in terms of ability to protect declining net interest margins. PNB's low funding costs also compensate for the bank's higher intermediation costs relative to peers. At 2.2% of average working funds in FY08F, the bank's operating expenses are higher than those of many of its peers. At a revised target price of Rs 605, the stock would trade at 9.2x earnings and 1.6x adjusted book value for FY09F after writing off 100% pre-tax net NPLs.
Company: Reliance Comm
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 705
Morgan Stanley maintains its 'Overweight' rating on Reliance Communications and revises upward the '08/09 estimates by 1-3% based on F2Q08 results. They introduce '10 estimates, increase net adds, raise their longer-term ARPU estimates by 7-8%, incorporate revised exchange rate estimates, and lift their price target to Rs 891. FY'07-10E operating and net profit growth are 40.2% and 42.0% p.a. respectively. Key positives include strong net adds and quarterly results, RCom's unlocking of value in the tower business and its international operations through Flag Telecom, and Rcom's getting the GSM spectrum for its new circles. RCom's overall margins expanded 69 bps, to 42.8%, due to lower sales and distribution costs, as well as lower interconnect costs, despite higher network costs. Absolute EBITDA missed the estimate by 2.8%, even as RCom accounted for Rs 170 crore worth of income from the government pertaining to previous years. Still, lower depreciation charges, as well as lower tax rate and interest costs, led to net profits coming in 5.2% above the estimate. Aggressive rollout plans for '08: RCOM invested $1.3 bn in 2Q '08 and plans to invest $4-5 billion in '08, the highest capex by any private operator in the country. This should enable it to enhance its passive infrastructure to 40,000 towers covering 23,000 towns and 600,000 villages and reaching 90% of India's population.
Company: BHEL
Research: Merrill Lynch
Rating: Buy
CMP: Rs 2, 794
Merrill Lynch maintains BHEL as its top pick with a target price of Rs 3,000. On October 31, BHEL emerged as the sole bidder for yet another super-critical order – the 2x800-MW Krishnapatnam power plant of APGenco in a global competitive bid. This not only demonstrates BHEL's ability to win supercritical orders in a competitive bid; but also takes it closer to reach a threshold level of 10 sets to achieve 90% indigenisation. BHEL is now the lowest bidder tied up for a total of six supercritical sets totalling to 4,520 MW in the last two months. Merrill Lynch expects solid new order inflows from supercritical technology to be the core driver of surprises ahead. It's raining super-critical orders at BHEL.. The response to the global tender indicates tightness of the quality supply of super-critical power equipment. Merrill Lynch expects BHEL to outperform as the company a) addresses Chinese competition, b) gets super-critical orders in '07, and c) looks to improve competitiveness through operating leverage - ~50% capacity expansion with less than 10% rise in labour.
Company: HDFC
Research: Deutsche Bank
Rating: Buy
CMP: Rs 2,562
Deutsche Bank maintains the `Buy' rating on HDFC with an increased target price of Rs. 2,925 from Rs 2,200. HDFC remains one of the finest examples of steadiness - the mortgage business volume growth has stayed above 25% in the last four quarters when the rest of the sector has clearly decelerated. Asset quality is intact and spreads have actually broken out of the 2.15-2.2% band and moved closer to 2.3%. Life insurance is back to aggressive growth after the rapid increase in distribution investments. Two distinct upside possibilities to the assumption of tempered growth are real estate prices coming off and commercial banks competing less intensely than before. Dynamic resource-raising, no duration mismatch on the balance sheet and increased access to deposits should help HDFC maintain loan spreads. Asset quality is expected to remain under control, due to the rapid rise in individual income and HDFC's historically low ticket size. Deutsche estimates gross NPLs to remain at the current level of ~1% and values HDFC on a sum-of-parts, at Rs 2,925. The core business is valued at 24x Mar '09E EPS. The life business is valued on appraisal value; the asset management business on AUM, the stake in HDFC Bank at the latter's target price and the rest on earnings.
Company: Suzlon Energy
Research: Citigroup
Rating: Buy
CMP: Rs 1,888
Citigroup increases its target price on Suzlon Energy to Rs 2,227 from Rs 1,700 as they factor in: (1) A higher P/E multiple of 26x (from 23x earlier) in line with the multiple for BHEL on FY07-10E earnings CAGR of 49% (from 44% earlier); and (2) Roll forward of our multiple to Sep '09. Citigroup also accorded Rs 43 per fully diluted share of Suzlon for REPower and change thier risk rating to Low from Medium as (1) Uncertainties on the REPower acquisition are a thing of the past; (2) Confidence of EBITDA margins being in the 15–17% band over the medium term; (3) Reduced component shocks as Suzlon backward integrates. ~16.1% EBITDA margins look achievable — Suzlon delivered 1,000MW in 1HFY08 and is set to deliver 1,500+MW volumes in 2HFY08.
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