Everest Kanto
Research: CLSA
Rating: Buy
CMP: Rs 277
CLSA has initiated a coverage on Everest Kanto with a ‘buy’ recommendation and a 12-month target price of Rs 306. Everest Kanto Cylinders manufactures high-pressure cylinders for CNG and industrial applications. Present in geographies that are slated to see exciting growth (especially in CNG segment) and higher-realisation markets than India, profitable growth opportunity looms ahead. It augurs well for the company that the fastest growing market (Iran) is also the highest realisation market ($315/unit vs $240/unit in India). Everest Kanto has a long standing sourcing relationship with Tenaris. This, along with approvals in 16 countries and two decades of manufacturing experience, makes it one of the best-poised players to cash in on the opportunity. The company is pursuing aggressive expansion plans in its Gandhidham facility and is setting up a greenfield plant in China at an attractive capital cost. Even after assuming a hike in raw material costs from current levels, it’s slated to see a compound annual growth rate (CAGR) of 39% and 44% in sales and EPS.
Sobha Developers
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 926
Morgan Stanley has reiterated an ‘overweight’ rating on Sobha Developers (SDL) on strong fundamentals and reasonable valuations. SDL reported FQ208 results — ahead of expectations: sales were up 2% YoY (up 24% QoQ), which led to a 51% rise in net profit to Rs 56.2 crore. The performance was driven by its ongoing projects in Bangalore and Trissur and SDL’s contractual business. Forthcoming projects pipeline gives a good scale-up as well as earnings growth visibility. A good portion of the projects is in new markets, including Pune, Coimbatore, Mysore and Chennai, which should de-risk earnings. Out of the total land cost of Rs 2,370 crore, the company has paid Rs 1,430 crore. The balance is estimated to be paid over the next one-and-a-half to two years, according to SDL. Its net debt-to-equity ratio, as of September 30, ’07 is 1.15. The stock is trading at a 15% discount to Morgan Stanley’s forward NAV and 20x F09 EPSe.
Raymond
Research: Citigroup
Rating: Buy
CMP: Rs 353
Revenues grew 9% YoY driven by branded retailing, while EBITDA fell 36% and earnings before taxes declined (Rs 39.6 crore) 63% YoY — primarily due to increased denim losses and woollen fabric JV. However, this was better than Q1 earnings (Rs 2.7 crore). Standalone results are not comparable due to the de-merger of the denim division in August ’06. The 50:50 denim JV losses increased to Rs 30.4 crore in Q2 (vs Rs 13.3 crore in Q1) with revenues down 9% QoQ. High cotton prices, an appreciating rupee, high overheads in the US and EU plants are the key reasons for the losses. Raymond is taking initiatives to improve utilisations, enrich the product mix, but this is unlikely to reduce near-term losses materially. Muted growth was due to store additions and promotion of recently launched women’s range in Park Avenue and Colorplus. Profitability will improve in the second half (H2), as new stores begin to contribute to earnings. Fabric revenues were up 6% YoY, while PBIT was down 20% YoY, margins also improved to 18% against 5% in Q1. There’s an upside to the stock at 7.7x EV/EBITDA for FY09E, with a high potential to unlock value of real estate assets.
Redington
Research: Lehman Brothers
Rating: Buy
CMP: Rs 345
Lehman Brothers has initiated a coverage on Redington with an investment rating of ‘overweight’. Redington is the second-largest IT distributor in India and the largest IT distributor in the Middle East. It posted revenue CAGR of 50% for FY05-07. The momentum in revenue growth will continue, driven by increased penetration of IT products in both India and the Middle East. The company’s operating history is impressive, with bad debts averaging 0.08% of sales during the past five years and inventory write-downs in the 0.03% area. At current market price, the stock is trading at a P/E of 15.6x FY09E EPS of Rs 23.5. The 12-month forward price target is Rs 455, implying potential upside of 24% from the current share price. At the current market price, the stock trades at a forward P/E of 15.5x its FY09E EPS of Rs 23.5 and a price-to-book value ratio of 3.2 on its FY09E BV of Rs 114.3/share. The stock is inexpensive at current levels and compares favourably with global peers given its higher growth prospects.
Divi’s Lab
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,738
Merrill Lynch has upgraded Divi’s Laboratories to ‘buy’ on strong results. The FY08E and FY09E EPS are higher by 73% and 106% respectively and the target price of Rs 2,250/share includes Rs 2,050/share for the base business and Rs 200/share for carotenoids, which implies 30% upside from current levels. Divi’s sharp margin surprise is driven by high CMS contribution which is expected to grow to 65% of revenues by FY09E against the current ~50%. Merrill Lynch forecasts a 48% EPS CAGR (FY07-10E) on the back of a 37% CAGR in revenue (FY07-10E) and tax benefits. Divi’s’ likely launch of eight nutraceutical products under the ‘Vivital’ brand is expected to start generating revenues from Q3 onwards and estimate scale-up to at least $40-45 million p.a. over the next three years. Divi’s clearly has the first mover advantage to capture a significant share of pharma outsourcing by innovator companies. Despite the stock’s significant relative outperformance over the past six months, the strong earnings momentum and take-off of the nutraceuticals business will likely drive further outperformance.
SBI
Research: UBS
Rating: Buy
CMP: Rs 2,252
SBI’S net profit at Rs 1,600 crore in Q2 FY08 grew 36% YoY and 13% QoQ, around 17% higher than consensus and estimates. The stronger-than-expected growth was driven by higher trading gains and write-back of loan loss provisions against expectations of a provisioning charge. While net profit was strong, there was pressure on net interest margin (NIM) and declining provisioning cover. Net interest income (NII) grew 6% YoY and declined 10% QoQ. Fees were healthy, up 12% YoY and 7% QoQ but growth has decelerated. Provisioning cover declined to 45%. The management has guided towards an improvement in both NIMs and loan growth in H2 FY08. While Q2 was mixed, the stock may hold up due to management’s focus on new growth areas like the launch of general insurance and private equity. The management hopes to raise at least Rs10,000 crore as fresh equity by March ’08. Excluding the value of non-bank subsidiaries, SBI is trading at 1.7x P/BV FY09E.
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