Stocks to watch

United Phosphorus Research: Citigroup Rating: Buy CMP: Rs 392 Citigroup initiates coverage on United Phosphorus (UPL) with a ‘buy’ rating. The Street may focus on FY09 earnings over the next few months as the Cerexagri restructuring benefits start reflecting in UPL’s earnings. Citigroup expects catalysts in the form of robust EPS growth and more colour on Advanta’s (UPL’s 49.9% associate company) efforts to capitalise on its Nutrisun project. It is a high stearic, high oleic oil, positioned as having greater nutritional value and similar/better functionality than the oils currently used in bakery products, ice-creams, frying, margarine, etc. Commercialisation is expected in late CY09/early CY10. UPL has finalised a redundancy plan for 22% of the French work force and decided to shut down one out of four sites in France, the work is being shifted to other sites and its UK plant. Citigroup expects a material improvement in margins from Q4 FY08 onwards and finds UPL attractive at 12.5x FY09E EPS, given the forecast 35% EPS CAGR (FY07-10E) and the option to participate in the potential upside if the Nutrisun project pans out as expected. Jubilant Organosys Research: Morgan Stanley Rating: Overweight CMP: Rs 308 Jubilant has entered into a multi-million-dollar long-term agreement with Syngenta for supply of pyridines for the latter’s manufacture of herbicide, starting from early ’08 and covering an extension period of up to five years. This contract is an extension of Jubilant’s existing multi-year relationship with Syngenta. Jubilant’s pyridine and derivative products represent a high-growth area within its pharmaceutical and life science products business. These serve as key intermediates that are used to make its pharma and agro-chemical products. Jubilant has the largest production facilities for such products in India and it has strengthened its position by expanding its capacity for pyridines and picolines. Jubilant’s upstream integration of raw material production gives it cost advantages in its contract research and manufacturing services (CRAMS), as well as agro-chemical businesses. Morgan Stanley is positive on considerable opportunities in global outsourcing trends for CRAMS in India, and believes Jubilant is set to benefit from this trend. Jubilant trades at a 12-month forward P/E of 17.7x and P/B of 4.3x vs 27% RoE on FY08 estimates. Adlabs Films Research: Enam Securities Rating: Outperformer CMP: Rs 549 Enam Securities maintains its sector outperformer rating on Adlabs Films. The company’s results were in line with expectations. It posted revenues of Rs 51 crore and PAT of Rs 20.4 crore (69.4% YoY) during the quarter ended June ’07 (Q5 FY07) on a standalone basis. Revenues and EBITDA from film processing grew in line with expectations by 24% YoY to Rs 20.3 crore and Rs 7.9 crore, respectively in Q5 FY07. Adlabs processed ~5,287 prints across 68 films in Q5 FY07, representing a 100% YoY increase in number of films processed. While exhibition revenues rose by 44% to Rs 27.4 crore, EBITDA remained flat at Rs 4.5 crore on a consolidated basis YoY. Since the company did not release any of its under-production films, revenues and EBITDA from film production and distribution were lower at Rs 13.2 crore and Rs 2.9 crore, respectively. The revenue mix continues to change, with the exhibition and film divisions increasing their contribution to the overall pie. Adlabs plans to open an additional ~150+ screens to reach a total of ~250 screens by FY08. Adjusting for June ending, Enam Securities’ EPS estimates are Rs 20.4 (FY08E) and Rs 25.0 (FY09E) on a fully diluted basis. At current market price, the stock trades at 23.6x FY08E earnings. Rolta India Research: Macquarie Rating: Outperform CMP: Rs 523 Macquarie initiates coverage on Rolta India with an ‘outperform’ rating. Unlike most Indian IT firms, Rolta derives ~60% of its revenues from the domestic market. This enables it to participate in India’s growth story and mitigate currency risks. More importantly, Rolta offers niche services such as geospatial information systems (GIS) and engineering design & automation (EDA) to key players in the infrastructure, power, oil & gas and defence sectors. These sectors are poised for high capacity additions in the coming years. Infrastructure spending, as well as oil & gas refining capacity addition are expected to increase at a compounded annual growth rate (CAGR) of 28% over FY07-12E; the growth rate of power capacity addition is expected to increase by 10x in the 11th Five-Year Plan.