Stock Picks and Recommendations

Stocks with Buy rating:
Mahindra & Mahindra
Current market price: Rs 545
Target price: Rs 725
Upside: 33.02%
Brokerage: Emkay
Recommendation: Buy

The broking house said that M&M`s 4QFY10 standalone net profit at Rs 5.7 billion was above our estimates of Rs 4.6 billion driven by higher net sales (Rs 53 billion vs estimate of Rs 51 billion) and higher EBIDTA margins (15.9% vs estimate of 14.6%). Higher net sales are largely due to sharp increase in sales of FES (QoQ avg realization are up by 4%). Balance sheet surprised positively with strong cash balance Rs 17.5 billion vs estimate of Rs 13 billion).
The broking house has upgraded their FY11 volume estimates by 2% to 468,618 units but lower our EPS to Rs 33.9. They are factoring in EBIDTA margin compression of 130 bps to 13.4% in FY11, the most in their auto universe; we introduce our FY12 estimates with volume growth of 7.4% and EPS of Rs 37.7. They have upgraded their SOTP based target to Rs 725 (from Rs 630). They have upgraded the standalone business value to Rs 575 (from Rs 470) and lowered value of subsidiaries to Rs 150 (from Rs 160). They have upgraded their rating from Accumulate to Buy.
SAIL
Current market price: Rs 202
Target price: Rs 235
Upside: 16.33%
Brokerage: ICICI Sec
Recommendation: Buy
The broking firm says that at this point they have not changed their estimates for FY11E and FY12E, as there has been no major development on that front so far. They believe steel prices could fall slightly on growing concern over China. International prices have also fallen during the past two or three weeks.
With SAIL (Q,N,C,F)* being an integrated player with increasing focus on the value added segment, they feel it would be least affected in any negative scenario. The domestic presence would also continue to help the company to maintain its sales volume.
At the current market price (CMP) of Rs 202, the stock is discounting its FY12E earnings by 9.3x and FY12E EV/EBITDA by 5.7x. They value the stock at 6.5x FY12E EV/EBITDA, which translates to a fair value of Rs 232. They continue to maintain their target price of Rs 235 and assign a `Buy` rating to the stock.
Jaiprakash Associates
Current market price: Rs 120
Target price: Rs 173
Upside: 44.16%
Brokerage: Sharekhan
Recommendation: Buy
The broking house said that they have fine-tuned our earnings estimates downward to incorporate a lower than expected Q4FY2010 performance. Consequently, their revised EPS for FY2011 and FY2012 on diluted equity works out to Rs 5.2 and Rs 6.5 respectively.
They continue to value the stock using SOTP valuation methodology. They have valued the cement business at 6x FY2011 enterprise value (EV)/earnings before interest, tax, depreciation and amortization (EBITDA), which they continue to value the real estate business at 1x of its net asset value.
For power projects, they have considered those projects in their valuation that are either operational or financially closed. In terms of the hotel business, they have valued the same at 7x FY2011 EV/EBITDA. The fair value based on SOTP works out to Rs 173 per share. They maintain our Buy recommendation on stock with a revised price target of Rs 173. At the current market price, the stock is trading at 23.1x FY2011 and 18.6x FY2012 earnings estimate.
Stocks with Sell rating:
Hindustan Unilever (HUL)
Current market price: Rs 235
Target price: Rs 204
Downside: 13.19%
Brokerage: Anand Rathi
Recommendation: Sell
Hindustan Unilever (HUL) reported a weak 4QFY10, with net profit declining 12%. the broking house expect it to post mere 3% earnings CAGR over FY10-12, given market share loss and lower margins. They retain our Sell rating and target price of Rs 204. Revenue grew a lacklustre 8% y-o-y, single-digit growth for the fifth straight quarter. Volumes grew 11%, but the price cuts of major brands led to revenue growth of 8%.
Soap and Detergent revenue fell 1.9%, mainly due to price cuts. Personal products revenue grew 18.9%, maintaining its growth momentum. EBIT margin in Soaps and Detergents and Personal products declined 377 bp and 86 bp because of price cuts and higher media costs. EBITDA margin was down 90 bp, with adspend as percent of net sales rising 320bp. The effective higher income tax rate led to a 12% fall in net profit.
The broking house has reduced FY11/12 earnings estimates 2.6% and 7.6%, respectively, to factor in higher raw material costs, media costs and higher taxes. They retain their target price of Rs 204, at 20x 12-month forward earnings. Their target PE is at a 25% premium to the Nifty, compared with its 10-year average premium of 87%. Given the lower margins and earnings, we expect the premium to fall.
ITC
Current market price: Rs 282
Target price: Rs 251
Downside: 10.99%
Brokerage: Anand Rathi
Recommendation: Sell
The broking firm said that despite good 4QFY10 results, they reiterate Sell as they expect cigarette volume to drop 4% in FY11. With its largest cash generator cigarette business under pressure, its premium valuations are unjustified, in their view. They reiterate their Sell rating, but raise the target price to Rs 251. In 4Q, ITC`s (Q,N,C,F)* revenue grew 29.9% y-o-y. All divisions did well: cigarette revenue rose 14%, other FMCG 34%, agri 88% (in 4Q09 revenue declined 51%), paper 12% and hotels 14% (after five quarters of decline).
EBITDA margin fell 200 bps y-o-y, mainly because of the rise in the low-margin agri-business. Higher other income and a lower tax rate helped the company post net profit growth of 27%. Given the excise and VAT hike of almost 19% in Budget 2010, the broking house expects cigarette volume to drop 4% in FY11. A weak performance by cigarettes is likely to crimp ITC`s profitability. They estimate revenue and net profit CAGR of 9% and 7%, respectively, over FY10-12.
Their revised target price to Rs 251 (from Rs 209) is at 20x FY12e earnings. Our target PE is at a 25% premium to the Nifty PE, compared with an average premium of 16% over the past 10 years. They expect the premium valuation to fall from the current 60% to the Nifty given our view of lower cigarette volume growth.
Hero Honda
Current market price: Rs 1,918
Target price: Rs 1,800
Downside: 6.15%
Brokerage: Anand Rathi
Recommendation: Sell
The broking firm said that Hero Honda`s (HH) May `10 volumes grew 13.9% yoy (17.3% mom), to 435,933 units. The month-over-month sales growth came on the lower Apr `10 base when HH faced an acute battery shortage for two weeks, and led to nearly 50,000 fewer units being dispatched. May `10 volumes were its highest ever. Pleasure was the best performing model for HH in May, with 65% yoy growth to over 24,000 units.The past four months have seen HH sustaining scooter volumes of over 22,000 units per month.
HH introduced two new models in April - the refreshed Glamour and Glamour FI. It plans to continue to build on its strategy of innovation and technology focus by introducing new products and product refreshes. HH recently crossed a significant milestone by covering 100,000 villages under its rural initiative: ``Har Gaaon Har Angan``. This umbrella platform for all rural initiatives has helped in steadily widening its presence in rural and upcountry markets, taking its contribution to sales to 42% of the total. Mounting competition and new launches from Bajaj Auto have resulted in HH`s market share coming under pressure. At present valuations of 16x FY11, the stock is fairly valued. Re-iterate Sell.