IDFC
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 177
Morgan Stanley has maintained its ‘overweight’ rating on Infrastructure Development and Finance Corporation (IDFC) with an increased price target of Rs 200. IDFC is entering a phase where loan growth is strong, spreads are improving and fees are very strong. During financial year 2005 and 2007 , IDFC delivered the best core earnings progression among Indian private banks and financial institutions at a 55% componded annual growth rate (CAGR). This trend will continue, resulting in out-performance. Morgan Stanley has raised it FY08 earnings estimates by 5%. IDFC has launched the first tranche of its proposed $2 billion project equity fund along with Citi.
This will result in a doubling of assets under management in 1-2 months. Moreover, its investment in the National Stock Exchange (NSE) is performing strongly, as NSE’s turnover is now averaging close to $18 billion. Given IDFC’s 8% stake in NSE, this can be very valuable. SSKI (IDFC owns two-thirds of SSKI) is also performing well. The stock is trading at 24.8x F2009E earnings, in line with private banks.
However, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 30% of value. Hence, core valuations are lower at 19x (cheaper than private banks, with better earnings profile) and could rise, given strong earnings growth expectations.
Bharati Shipyard
Research: Citigroup
Rating: Buy
CMP: Rs 614
Citigroup has reiterated its ‘Buy’ rating on Bharati Shipyard with a medium risk and a price target of Rs 790. Bharati Shipyard last week announced a $89-million order for constructing four AHTS vessels from Shipping Corporation of India for delivery in 2011. With this, the company has now announced order wins of ~Rs 1,600 crore over the past six months, primarily for offshore supply vessels, reiterating Bharati Shipyard’s strong global presence in this space, which now accounts for over 60% of the company’s current order book. With the new order win, Bharati
Shipyard’s total order book now stands at Rs 4,400 crore, with the unexecuted portion providing a cover of 5.3x FY08E sales. More significantly, the cumulative ship-building revenue forecast of Rs 3,400 crore over FY08-10E is now completely covered by the company’s unexecuted order book, providing comfort to earnings estimates. Its Mangalore expansion remains largely on track with the project likely to be commissioned this quarter. Following the acquisition of Swan Hunter’s equipment in April, the company is further exploring options to increase the Mangalore facility capacity to build larger vessels (up to 100,000 DWT).
Tata Steel
Research: UBS
Rating: Buy
CMP: Rs. 848
UBS has maintained its ‘Buy’ rating on Tata Steel with a price target of Rs 875. Tata Steel’s 1:5 rights issue is unchanged at a price of Rs 300. But, it has changed the terms of its cumulative convertible preference shares. It will issue cumulative convertible preference shares (with a face value of Rs 100) amounting to Rs 5,480 crore ($1,380 million) in the ratio of 9:10, 6 of which will be converted into equity shares at Rs 600 on September 1, ’09.
The new financing terms would cut the number of fully diluted equity shares issued from 851.2 million to 822.1 million (-3.5%). Tata Steel may also not make an ADR issue, which was earlier part of the dilution assumptions for FY09.
A lower issue of shares and the timing difference in the dilution assumptions has led UBS to raise FY08E EPS target from Rs 107.2 to Rs 112.05 and FY09E EPS from Rs 112.1 to Rs 119.79 Wire reports indicate that Tata Steel may sell off the Corus’ aluminium business. This could result in a small inflow of less than $100 million, which will not have any material impact on the financing requirements or earnings of the combined entity Changing product prices and increasing raw material costs can have a material impact on Corus’ earnings in ’08.
Infosys
Research: Credit Suisse
Rating: Outperform
CMP: Rs. 1930
Credit Suisse has maintained its ‘outperformer’ rating on Infosys as it finds the valuation of Infosys reasonable on a 12-month basis. Infosys reported strong September ’07 results. Revenues were 1% above estimates, EBIT margins 180 bps above the numbers and operating profit 8% above estimates. Lower financial income and higher tax led to EPS coming 2% below expectations. The company raised FY3/08 EPS guidance to $1.99 (from $1.92-1.94) or Rs 79.49-79.88 (from Rs 78.2-79).
Revenue guidance was increased by 3% in dollar terms and 1.3% in rupee terms. Operating numbers also remain strong, with a 2.5-3.0% increase in pricing and 7.7% QoQ growth in volumes. While quarterly gross hiring was lower than guidance (actual 8,500, guidance 11,000), this could be due to timing mismatch. For the full year, company increased its gross hiring target to 28,500 (excluding acquisitions) from 26,000. However, visibility remains limited both on further rupee appreciation and US macro environment. This could impact the near-term performance of the share .
Bharat Electronics
Research: CLSA
Rating: Buy
CMP: Rs 1,895
After four year of stagnation in order backlog, BEL ended FY07 with record new order inflows at Rs 6,450 crore and order backlog of Rs 9,130 crore, up 38% YoY. It launched 25 new products and the share of revenues from indigenized products increased from 73% in FY06 to 81% in FY07.
During FY07 share of revenues from civilian products increased from 14% in FY06 to 26%, with the MTNL project of convergent billing being a major part of it. The balance sheet remains strong with negligible debt. BEL will be a likely beneficiary of the estimated $10 billion opportunity arising from offset agreements. To capitalise on the opportunities BEL has entered into MoUs with leading aerospace companies like Lockheed Martin, Northrop, Boeing and EADS. BEL will also provide its international partners with ‘Build to Print’ and ‘Build to Spec’ services. Over a period of time, BEL will also be able to indigenise these designs.
BEL is also open to acquiring high-end niche technology companies, Indian as well as those overseas which it can fund through its Rs 2,300 crore in cash reserves. The elevation to the ‘Navratna’ status gives BEL operational freedom for capex and investments. Adjusting for Rs 260/share of cash, the stock is trading at an attractive 13.0x FY09CL. The risks to stock performance are from lumpy quarterly performance and possible decline in margins in quarters were incidence of imports is high
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