Northgate Technologies
Research: Citigroup
Rating: Buy
CMP: Rs 580
Citigroup has initiated a coverage on Northgate Technologies with a 'buy' rating and Rs 700 as the target price. Northgate is a leading provider of internet marketing and advertising technology services, combined with a number of unique products (VoIP, social networking) and high-capacity, highly scalable data centres. It is a beneficiary of the strong secular growth in online advertising due to its online ad agency business, online ad serving technology and multi-pronged aggregation strategy.
The company's business model is straightforward: It aggregates internet traffic from various sites and through various means; monetises this traffic with comprehensive, targeted advertising solutions via its in-house developed ad serving engine; and takes advantage of a more cost-effective approach by operating the data centres and telecom connections. Northgate has three primary businesses: 1. Axill, an interactive ad network with a strong presence in the UK and a growing presence in Asia; 2. Globe7, a leading VoIP-based product/community with a significant presence in China; and 3. Bharatstudent.com, one of India's fastest-growing social networking sites.
The story, however, is about more than just what Northgate is currently doing. Using its data centres, Northgate plans to grow, particularly in Asia, via both new company-owned sites and managed hosting arrangements.
Centurion Bank of Punjab
Research: Credit Suisse
Rating: Underperform
CMP: Rs 55
Credit Suisse has raised its target price for Centurion Bank of Punjab (CBoP) to Rs 44.5, but downgraded the rating to 'underperform'. The stock has risen 34% in a week and currently trades at 4.2x FY3/09E book value (BV) and 36.0x EPS. Credit Suisse expects growth to remain strong, though the focus is shifting toward lower-yielding small and medium enterprise (SME) lending and mortgages. This, and a lower current account and saving account (CASA) ratio, should lead to a modest pressure on margins.
Credit Suisse has reduced the EPS estimates by 17-19% over the next two years due to the recent dilution for Lord Krishna Bank (LKB) merger, capital-raising, lower margins and higher loan-loss provisioning. Credit Suisse has valued CBoP on 3.15x FY3/09E P/BV, or Rs 44.5 (3.25x FY03/08E earlier) and has increased the discount to HDFC Bank's target multiple to 25% (earlier 20%) on a weaker deposit profile and a challenging retail lending environment.
The target price increase factors in recently raised capital and a lower cost of equity assumption from 14% to 12.5%, in line with Credit Suisse's assumption for private banks. Factoring in the dilution for warrants/Esops, the target price implies a valuation of 3.3x FY3/09E BV and 27.4x EPS, for a return on equity (RoE) of 13.5% in FY09E. CBoP is likely to need capital infusion in FY10.
Indian Oil
Research: ABN Amro Bank
Rating: Buy
CMP: Rs 628
Indian Oil (IOC) was formed in 1964 by the merger of Indian Refineries (1958) and Indian Oil Company (1959). IOC is India's largest company by sales and controls 10 of India's 19 refineries. Its refining capacity is 60.2 mmtpa or 1.2 million barrels per day — the largest share among refining companies in India. It accounts for 40.4% of the national refining capacity. IOC also has a cross-country pipeline network of nearly 9,300 km length and 61.72 mmtpa capacity.
IOC is on its way to becoming a major player in petrochemicals, besides making large investments in exploration and production (E&P) and import/marketing ventures for oil and gas in India and abroad. IOC has outlined ambitious growth plans with an outlay of about Rs 45,000 crore for capacity augmentation, de-bottlenecking, bottom and quality upgradation. In addition, petrol quality upgradation projects are underway at Panipat, Mathura, Barauni, Guwahati and Digboi refineries and are expected to be completed by the end of '09.
In-principle approval of the company's Board to set up a 15-mmtpa grassroots refinery integrated with petrochemicals units (paraxylene, propylene and styrene) at Paradip (scheduled to be completed by October '11) has been obtained and the detailed feasibility report is under preparation. During FY07, the company's consolidated net sales grew by 24% to Rs 2,01,500 crore, while net profit grew by 47% to Rs 6,690 crore. In H1 FY08, its standalone net sales grew 2.5% to Rs 1,09,000 crore. Net profit rose 25% to Rs 5,290 crore, buoyed by higher operating EBITDA margin at 6% (2.4% in H1 FY07).
ICICI Bank
Research: CLSA
Rating: Buy
CMP: Rs 1,157
ICICI Bank is a direct play on the fast-growing Indian economy due to its dominance across all financial services segments. It is the largest retail bank in India and is also a key beneficiary of rising demand for project financing. It is the largest private sector insurance player and a leader in asset management, broking and private-equity. The bank has also built up strong international operations and now has a presence in 18 markets, with international loans accounting for 22% of its consolidated asset base. The recent concerns about rising non-performing loans (NPLs) are exaggerated, as most of the increase is due to rising proportion of unsecured loans, which are priced for higher loss rates.
The net profit growth forecast of 33% CAGR over FY07-10 factors in a 3x rise in provisioning for NPLs over FY07-10 due to increasing proportion of unsecured loans. Key earnings growth driver will be strong volume growth, margin expansion of 50 bps (due to changing loan mix and re-pricing of high-cost liabilities) and healthy growth in fee revenue (38% CAGR). CLSA has valued ICICI Bank's insurance, asset management, broking and venture fund businesses at $12.2 billion (Rs 442/share) in FY10. The price target of Rs 1,400 is based on sum of parts methodology, in which, we have valued the banking operation at 2.2x FY10CL adjusted book. ICICI Bank is awaiting regulatory approvals to form a holding company to transfer its stake in the insurance and asset management business, and plans to list the holding company over the next 12 months.
DLF
Research: Merrill Lynch
Rating: Buy
CMP: Rs 961
Merrill Lynch has maintained its 'buy' rating on DLF with a target price of Rs 1,160 per share. DLF has recently signed a joint venture with Prudential Financial of the US to enter into the asset management business in India. DLF will hold a 39% stake in the venture. The total amount expected to be brought in by the parties is $50 million. Prudential Financial, based in the US, had $637 billion of assets under management (AUM) as of September 30, '07.
DLF has stated that it expects to receive regulatory approval and set up the distribution in 3-6 months. While DLF is expected to bring its brand name and distribution network, Prudential Financial will bring in the fund management experience.
The company is close to finalising a chief executive officer, who is expected to be a new hire from the financial services industry. Asset management companies are normally valued at 9-12% of the AUM. However, since the company has stated that these are early days to determine the size of the AUM, Merrill Lynch has not given any value to the JV.
While it is concerned about the entry of DLF into financial services, which is unrelated to real estate, Merrill Lynch draws comfort from the fact that DLF will be a minority partner and the involvement will be limited to helping in the distribution network and providing a known brand.
Research: Citigroup
Rating: Buy
CMP: Rs 580
Citigroup has initiated a coverage on Northgate Technologies with a 'buy' rating and Rs 700 as the target price. Northgate is a leading provider of internet marketing and advertising technology services, combined with a number of unique products (VoIP, social networking) and high-capacity, highly scalable data centres. It is a beneficiary of the strong secular growth in online advertising due to its online ad agency business, online ad serving technology and multi-pronged aggregation strategy.
The company's business model is straightforward: It aggregates internet traffic from various sites and through various means; monetises this traffic with comprehensive, targeted advertising solutions via its in-house developed ad serving engine; and takes advantage of a more cost-effective approach by operating the data centres and telecom connections. Northgate has three primary businesses: 1. Axill, an interactive ad network with a strong presence in the UK and a growing presence in Asia; 2. Globe7, a leading VoIP-based product/community with a significant presence in China; and 3. Bharatstudent.com, one of India's fastest-growing social networking sites.
The story, however, is about more than just what Northgate is currently doing. Using its data centres, Northgate plans to grow, particularly in Asia, via both new company-owned sites and managed hosting arrangements.
Centurion Bank of Punjab
Research: Credit Suisse
Rating: Underperform
CMP: Rs 55
Credit Suisse has raised its target price for Centurion Bank of Punjab (CBoP) to Rs 44.5, but downgraded the rating to 'underperform'. The stock has risen 34% in a week and currently trades at 4.2x FY3/09E book value (BV) and 36.0x EPS. Credit Suisse expects growth to remain strong, though the focus is shifting toward lower-yielding small and medium enterprise (SME) lending and mortgages. This, and a lower current account and saving account (CASA) ratio, should lead to a modest pressure on margins.
Credit Suisse has reduced the EPS estimates by 17-19% over the next two years due to the recent dilution for Lord Krishna Bank (LKB) merger, capital-raising, lower margins and higher loan-loss provisioning. Credit Suisse has valued CBoP on 3.15x FY3/09E P/BV, or Rs 44.5 (3.25x FY03/08E earlier) and has increased the discount to HDFC Bank's target multiple to 25% (earlier 20%) on a weaker deposit profile and a challenging retail lending environment.
The target price increase factors in recently raised capital and a lower cost of equity assumption from 14% to 12.5%, in line with Credit Suisse's assumption for private banks. Factoring in the dilution for warrants/Esops, the target price implies a valuation of 3.3x FY3/09E BV and 27.4x EPS, for a return on equity (RoE) of 13.5% in FY09E. CBoP is likely to need capital infusion in FY10.
Indian Oil
Research: ABN Amro Bank
Rating: Buy
CMP: Rs 628
Indian Oil (IOC) was formed in 1964 by the merger of Indian Refineries (1958) and Indian Oil Company (1959). IOC is India's largest company by sales and controls 10 of India's 19 refineries. Its refining capacity is 60.2 mmtpa or 1.2 million barrels per day — the largest share among refining companies in India. It accounts for 40.4% of the national refining capacity. IOC also has a cross-country pipeline network of nearly 9,300 km length and 61.72 mmtpa capacity.
IOC is on its way to becoming a major player in petrochemicals, besides making large investments in exploration and production (E&P) and import/marketing ventures for oil and gas in India and abroad. IOC has outlined ambitious growth plans with an outlay of about Rs 45,000 crore for capacity augmentation, de-bottlenecking, bottom and quality upgradation. In addition, petrol quality upgradation projects are underway at Panipat, Mathura, Barauni, Guwahati and Digboi refineries and are expected to be completed by the end of '09.
In-principle approval of the company's Board to set up a 15-mmtpa grassroots refinery integrated with petrochemicals units (paraxylene, propylene and styrene) at Paradip (scheduled to be completed by October '11) has been obtained and the detailed feasibility report is under preparation. During FY07, the company's consolidated net sales grew by 24% to Rs 2,01,500 crore, while net profit grew by 47% to Rs 6,690 crore. In H1 FY08, its standalone net sales grew 2.5% to Rs 1,09,000 crore. Net profit rose 25% to Rs 5,290 crore, buoyed by higher operating EBITDA margin at 6% (2.4% in H1 FY07).
ICICI Bank
Research: CLSA
Rating: Buy
CMP: Rs 1,157
ICICI Bank is a direct play on the fast-growing Indian economy due to its dominance across all financial services segments. It is the largest retail bank in India and is also a key beneficiary of rising demand for project financing. It is the largest private sector insurance player and a leader in asset management, broking and private-equity. The bank has also built up strong international operations and now has a presence in 18 markets, with international loans accounting for 22% of its consolidated asset base. The recent concerns about rising non-performing loans (NPLs) are exaggerated, as most of the increase is due to rising proportion of unsecured loans, which are priced for higher loss rates.
The net profit growth forecast of 33% CAGR over FY07-10 factors in a 3x rise in provisioning for NPLs over FY07-10 due to increasing proportion of unsecured loans. Key earnings growth driver will be strong volume growth, margin expansion of 50 bps (due to changing loan mix and re-pricing of high-cost liabilities) and healthy growth in fee revenue (38% CAGR). CLSA has valued ICICI Bank's insurance, asset management, broking and venture fund businesses at $12.2 billion (Rs 442/share) in FY10. The price target of Rs 1,400 is based on sum of parts methodology, in which, we have valued the banking operation at 2.2x FY10CL adjusted book. ICICI Bank is awaiting regulatory approvals to form a holding company to transfer its stake in the insurance and asset management business, and plans to list the holding company over the next 12 months.
DLF
Research: Merrill Lynch
Rating: Buy
CMP: Rs 961
Merrill Lynch has maintained its 'buy' rating on DLF with a target price of Rs 1,160 per share. DLF has recently signed a joint venture with Prudential Financial of the US to enter into the asset management business in India. DLF will hold a 39% stake in the venture. The total amount expected to be brought in by the parties is $50 million. Prudential Financial, based in the US, had $637 billion of assets under management (AUM) as of September 30, '07.
DLF has stated that it expects to receive regulatory approval and set up the distribution in 3-6 months. While DLF is expected to bring its brand name and distribution network, Prudential Financial will bring in the fund management experience.
The company is close to finalising a chief executive officer, who is expected to be a new hire from the financial services industry. Asset management companies are normally valued at 9-12% of the AUM. However, since the company has stated that these are early days to determine the size of the AUM, Merrill Lynch has not given any value to the JV.
While it is concerned about the entry of DLF into financial services, which is unrelated to real estate, Merrill Lynch draws comfort from the fact that DLF will be a minority partner and the involvement will be limited to helping in the distribution network and providing a known brand.
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