Colgate Palmolive
Research: Merrill Lynch
Rating: Buy
CMP: Rs 282
For the first time in 10 years, Colgate is available 6% cheaper than the market at a P/E of 19x FY09E. The 'buy' rating is underpinned by the defensive nature of the business, powerful brand and quality management. Colgate's toothpaste volumes are growing at a safe, but unexciting rate of 10%, in an era when income levels are rising sharply.
The management highlighted that economic growth has not trickled down to Colgate's key growth market — rural India. Higher urban incomes are less relevant for Colgate as penetration levels in urban India are over 70%. Moreover, toothpaste is a low-priority item on the shopping list and uptrading trends are typically less common than in other consumer categories. The management stated that, contrary to popular belief, HUL is not lying low in toothpastes and other competitors such as Anchor have sharply upped their marketing budgets.
Colgate is gaining market share gradually, supported by an advertising-to-sales ratio of ~15%. This ratio is unlikely to fall in the near future. Over the next two years, Merrill Lynch forecasts Colgate's sales to grow at 15%, led by 10-11% volume growth. Input cost increases have slowed down and are offset by retail price increases of ~3-4%. Merrill Lynch believes there is upside risk to its EPS estimates as the tax rate is likely to be increased.
DLF
Research: Citigroup
Rating: Buy
CMP: Rs 944
DLF has formed an equal partnership with the founder of Aman Resorts to acquire the company at an enterprise value (EV) of $400 million (including debt of $150 million). While this appears aggressive, it includes an agreement to acquire a controlling interest in Aman Resorts. The acquisition will be largely financed through debt. Aman Resorts is a luxury hotel chain operating 22 hotels (650 keys), many with villas (172 keys). It owns properties in France, Phuket, Bali, Sri Lanka and India. DLF will work closely with founder Adrian Zecha to drive future growth. Aman Resorts enjoys average room rate (ARR) of $778-1,000 and is likely to generate CY07 revenues of $120 million with EBITDA of $27 million. With six new properties (300 keys, fully funded) in various stages of development likely to become operational by '08-09, the management expects earnings to grow at 20%. It believes DLF's land bank and growth capital will complement this growth. The acquisition is in line with DLF's plans to grow big in the hotel space. While the acquisition at 15x CY07E EV/EBITDA appears aggressive versus 10x EV/EBITDA for most global hotel chains, Aman Resorts has inherent value of real estate assets, which should add significant value in the long term.
Oriental Bank of Commerce
Research: CLSA
Rating: Buy
CMP: Rs 256
CLSA maintains 'buy' rating on Oriental Bank of Commerce. OBC has underperformed the Sensex and Bankex by 36% and 43%, respectively, over the past one year. Its gross non-performing loans (NPLs) have declined 50% from their peak and margins have bottomed out. The bank's fee income is estimated to witness a compound annual growth rate (CAGR) of 24%.
While OBC acquired a large NPL portfolio via the acquisition of GTB in FY05, it has recovered a substantial part of it. Hence, gross NPLs have declined 41% from December '05. OBC's net NPLs of 0.6% and coverage ratio of 79% are among the best for Indian banks. Its margins are estimated to have contracted by 20-30 bps due to re-pricing of some of its high-yielding G-Sec portfolio and moderation in credit demand. With credit growth expected to pick up and most of the re-pricing having already been done, CLSA expects margins to rebound by at least 10-20 bps in the next few quarters. CLSA expects earnings to witness a 20% CAGR over FY07-10CL, led by strong credit growth, margin expansion of 10-20 bps and rising fee revenues (24% CAGR).
Low bond yields will also result in lower mark-to-market hits on the bond portfolio (MTM hit was 30% of operating profit in FY07). Further, given the relatively lower proportion of its bond portfolio being in held-to-maturity (HTM), the bank will also have a lower amortisation cost versus its peers. At 0.9x FY09CL adjusted book and 5.5x FY09CL EPS, OBC trades at the lowest end of the valuation range among Indian banks. With a return on equity (RoE) of 18.3% in FY09CL, it can trade up to 1.2x 12-month forward adjusted book, with earnings growth being the key catalyst.
TVS Motor
Research: Morgan Stanley
Rating: Equal-Weight
CMP: Rs 65
MORGAN Stanley retains 'equal-weight' rating on TVS Motor, but lowers the price target to Rs 50 from Rs 56. Morgan Stanley believes execution risk has come down significantly, with the showcase of the company's new products and commencement of operations at Himachal Pradesh and Indonesia. Earnings recovery is likely to lag as these new projects take time to show an improvement in operating performance. Morgan Stanley cuts its FY09 earnings forecasts by 29% to reflect year-to-date performance, delay in launch of new products — three-wheeler, new executive motorcycle and premium motorcycle — and reduction in its volumes forecast from such new launches.
TVS Motor trades at 16.3x FY09 estimates. Key risks to the valuation will be a further delay in the launch of new products and intense price competition between the market leaders — Bajaj Auto and Hero Honda — leading to overall lower profitability. The stock is likely to trade in the range of Rs 50-60 per share in the near term as the market prices in improvement in volumes. Morgan Stanley may turn more positive on the stock once it has obtained visibility on the earnings from the company's new projects — especially from the Indonesian operations — and volume potential of the three-wheeler segment.
Research: Merrill Lynch
Rating: Buy
CMP: Rs 282
For the first time in 10 years, Colgate is available 6% cheaper than the market at a P/E of 19x FY09E. The 'buy' rating is underpinned by the defensive nature of the business, powerful brand and quality management. Colgate's toothpaste volumes are growing at a safe, but unexciting rate of 10%, in an era when income levels are rising sharply.
The management highlighted that economic growth has not trickled down to Colgate's key growth market — rural India. Higher urban incomes are less relevant for Colgate as penetration levels in urban India are over 70%. Moreover, toothpaste is a low-priority item on the shopping list and uptrading trends are typically less common than in other consumer categories. The management stated that, contrary to popular belief, HUL is not lying low in toothpastes and other competitors such as Anchor have sharply upped their marketing budgets.
Colgate is gaining market share gradually, supported by an advertising-to-sales ratio of ~15%. This ratio is unlikely to fall in the near future. Over the next two years, Merrill Lynch forecasts Colgate's sales to grow at 15%, led by 10-11% volume growth. Input cost increases have slowed down and are offset by retail price increases of ~3-4%. Merrill Lynch believes there is upside risk to its EPS estimates as the tax rate is likely to be increased.
DLF
Research: Citigroup
Rating: Buy
CMP: Rs 944
DLF has formed an equal partnership with the founder of Aman Resorts to acquire the company at an enterprise value (EV) of $400 million (including debt of $150 million). While this appears aggressive, it includes an agreement to acquire a controlling interest in Aman Resorts. The acquisition will be largely financed through debt. Aman Resorts is a luxury hotel chain operating 22 hotels (650 keys), many with villas (172 keys). It owns properties in France, Phuket, Bali, Sri Lanka and India. DLF will work closely with founder Adrian Zecha to drive future growth. Aman Resorts enjoys average room rate (ARR) of $778-1,000 and is likely to generate CY07 revenues of $120 million with EBITDA of $27 million. With six new properties (300 keys, fully funded) in various stages of development likely to become operational by '08-09, the management expects earnings to grow at 20%. It believes DLF's land bank and growth capital will complement this growth. The acquisition is in line with DLF's plans to grow big in the hotel space. While the acquisition at 15x CY07E EV/EBITDA appears aggressive versus 10x EV/EBITDA for most global hotel chains, Aman Resorts has inherent value of real estate assets, which should add significant value in the long term.
Oriental Bank of Commerce
Research: CLSA
Rating: Buy
CMP: Rs 256
CLSA maintains 'buy' rating on Oriental Bank of Commerce. OBC has underperformed the Sensex and Bankex by 36% and 43%, respectively, over the past one year. Its gross non-performing loans (NPLs) have declined 50% from their peak and margins have bottomed out. The bank's fee income is estimated to witness a compound annual growth rate (CAGR) of 24%.
While OBC acquired a large NPL portfolio via the acquisition of GTB in FY05, it has recovered a substantial part of it. Hence, gross NPLs have declined 41% from December '05. OBC's net NPLs of 0.6% and coverage ratio of 79% are among the best for Indian banks. Its margins are estimated to have contracted by 20-30 bps due to re-pricing of some of its high-yielding G-Sec portfolio and moderation in credit demand. With credit growth expected to pick up and most of the re-pricing having already been done, CLSA expects margins to rebound by at least 10-20 bps in the next few quarters. CLSA expects earnings to witness a 20% CAGR over FY07-10CL, led by strong credit growth, margin expansion of 10-20 bps and rising fee revenues (24% CAGR).
Low bond yields will also result in lower mark-to-market hits on the bond portfolio (MTM hit was 30% of operating profit in FY07). Further, given the relatively lower proportion of its bond portfolio being in held-to-maturity (HTM), the bank will also have a lower amortisation cost versus its peers. At 0.9x FY09CL adjusted book and 5.5x FY09CL EPS, OBC trades at the lowest end of the valuation range among Indian banks. With a return on equity (RoE) of 18.3% in FY09CL, it can trade up to 1.2x 12-month forward adjusted book, with earnings growth being the key catalyst.
TVS Motor
Research: Morgan Stanley
Rating: Equal-Weight
CMP: Rs 65
MORGAN Stanley retains 'equal-weight' rating on TVS Motor, but lowers the price target to Rs 50 from Rs 56. Morgan Stanley believes execution risk has come down significantly, with the showcase of the company's new products and commencement of operations at Himachal Pradesh and Indonesia. Earnings recovery is likely to lag as these new projects take time to show an improvement in operating performance. Morgan Stanley cuts its FY09 earnings forecasts by 29% to reflect year-to-date performance, delay in launch of new products — three-wheeler, new executive motorcycle and premium motorcycle — and reduction in its volumes forecast from such new launches.
TVS Motor trades at 16.3x FY09 estimates. Key risks to the valuation will be a further delay in the launch of new products and intense price competition between the market leaders — Bajaj Auto and Hero Honda — leading to overall lower profitability. The stock is likely to trade in the range of Rs 50-60 per share in the near term as the market prices in improvement in volumes. Morgan Stanley may turn more positive on the stock once it has obtained visibility on the earnings from the company's new projects — especially from the Indonesian operations — and volume potential of the three-wheeler segment.
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