Saturday, March 29, 2008

More stocks with Good valuations

Nestle India (BUY, TP INR 1500)
With more than 50 years of experience in India, Nestlé India is
well placed to benefit from growth opportunities offered by an
expanding foods and beverages market and a shift in
consumer preference towards packaged foods. The recent
organizational restructuring should also enable the company to
improve its penetration levels, and thus achieve a growth rate
that is higher than the industry. The high dividend payout ratio
should support the stock valuation in times of uncertainty. We
expect 23% CAGR in earnings for the period 2006A09E,
primarily driven by 22% CAGR in sales. Our HOLT-DCF
derived target price is INR 1500.

Educomp Solutions (BUY, TP INR 5347)
A large and underpenetrated market, strong government focus
and an increasing realization that technology is a better
medium to deliver education will provide Educomp Solutions,
which has the first-mover advantage, with enormous growth
opportunities. Initiatives such as expansion into new markets,
online tutoring and setting up schools will enable the company
to maintain a strong growth momentum. We expect a 100%
CAGR in earnings for the period FY200710 (FY ending
03/2007). The stock trades at a P/E 2009E of 50.1.
Although the stock appears expensive in the near term, we
believe the company is in strong secular growth mode and the
valuation appears reasonable on a longer-term basis. Our
HOLT-DCF derived one-year price target is INR 5347.

Axis Bank Ltd. (BUY, TP INR 1230)
Indian privately held banks are in a sweet spot, characterized
by a rising market share, strong pipeline for corporate lending
and increasing consumer lending. We believe that Axis Bank,
with its increasing branch network, strong technology platform
and a wide range of product offerings, is well placed to tap this
opportunity. With the recent capital increase, the bank is in a
good position to grow its loan book and earnings by more than
30% over the next few years. We expect Axis Bank to report a
CAGR of 42% in earnings over the FY 2007–10 period. The
stock trades at a P/E 2009E of 19.4, which we believe is
justified by the strong earnings momentum and superior
operating parameters. Using the Gordon growth model, we
arrive at a price target of INR 1230.

Bharat Heavy Electricals (BHEL) is one of India’s largest
power equipment and engineering companies. The power
sector capex is likely to increase by more than 2x in the next
five years, compared with the past five years. A strong
corporate capex and a healthy order book position of 3x FY
2007 sales provide good visibility in earnings growth. The
company targets USD 10 bn in sales by FY 2012 compared
with the current USD 4 bn, implying a CAGR of 20% p.a. Our
HOLT-DCF derived one-year target price is INR 3022

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