Monday, June 22, 2009

Bull's Eye: Punjab National Bank, Marico, ICICI Bank, Indian Hotels, Triveni Engineering

Punjab National Bank

Research: Goldman Sachs

Rating: Buy

CMP: Rs 642 Goldman Sachs upgrades PNB to `Buy’ from `Sell’ with a target price of Rs. 730 due to earnings upgrade and higher long-term growth expectations. The key argument for the change in rating is pro-cyclical environment contributing to strong rebound in earnings from 2010E. Barring unforeseen factors such as setbacks in non-performing loan/credit costs, PNB has compelling growth at reasonable price ideas. Goldman Sachs upgrades the earnings forecast for PNB by 57%-71% during 2009E-2011 E mainly due to lower credit cost assumptions, well below mid-cycle levels. PNB is currently trading at 1.0x 2010E P/B, much lower than its historical median of 1.3x. PNB’s share price rose 22% since we added it to our `Sell’ list on September 9, ‘08 versus the BSE Sensex which was flat as our concerns over a significant deterioration in credit costs did not materialise.



Rating: Buy

CMP: Rs 72 BNP Paribas raises the 12-month price target of Marico to Rs 89, based on 20x FY11 EPS. The meeting with Marico’s management confirmed that the core Parachute coconut oil has remained immune in the current slowdown, and the company has not had to cut prices, despite fall in copra prices. Growth in Saffola is back on track following price cuts to partially pass on the input cost benefit. BNP Paribas expects a 20.3% y-o-y growth in FY10 driven by a 10% domestic volume growth and margin expansion on lower input costs. Kaya clinics, which have now attained critical mass, will add zing to earnings growth. The fall in input costs combined with relatively stable endproduct pricing gives us confidence that Marico will gain back at least 200 bps (basis points) out of the 300 bps it lost in FY09 (excluding Kaya) on the raw materials line. Even if the company increases its advertising spend to 12% of revenue to support new products, we are confident of a 70-bp EBITDA margin expansion in FY10. An additional 100-bp margin expansion can provide a 10.6% upside to the FY10 EPS estimate.


Research: Credit Suisse

Rating: Neutral

CMP: Rs 714 Credit Suisse maintains `Neutral’ rating on ICICI Bank with a target price of Rs. 661. The bank management reiterated that the bank is still not pursuing asset growth, as it is keen to first consolidate its balance sheet. While the bank is now more active in some segments like mortgages and infrastructure lending, with continued shrinkage in other retail segments and international loans, overall asset growth will be muted this year. Credit Suisse expects stronger loan growth from FY11 and forecast a 40% growth in total assets over FY09-12.

The management, presumably looking to manage expectations, is guiding only to modest net interest margin improvements for now. The bank had pulled back from this segment five quarters ago and with a 360-day write-off policy on these non performing loans. Provisions on account of these will not have large P&L (profit and loss) impact from FY11. Credit Suisse forecasts core bank RoEs recovering only to about 10-13 % in the next three years despite the more aggressive margin outlook on account of lower share of fees and elevated credit costs. It expects credit cost at 1.4% of loans even in FY12 as the bank is carrying little provisions on its restructured assets.






CMP: Rs 65 Citigroup has downgraded Indian Hotels to `Sell’ with a target price of Rs 62 on a higher multiple of 14x (vs.10x) at five-year trough valuations and 20% discount to Sensex on higher flows and a preference for asset plays. With continued fall in occupancy and average room rents in Q1, Citigroup sees growing risks for the domestic business; with little visibility on recovery of overseas losses, very weak 4Q and the stock’s 23% outperformance over the last 3 months. Consolidated PAT was down 84% y-o-y due to mounting losses from international properties and higher staff/overhead costs (largely one-offs ) even as it recognized a Rs 85.5 crore insurance claim and forex translation losses of Rs 46.5 crore.

However, Citigroup expects some occupancy pick-up in 2H and the reopening of ‘The Pierre’ in August ‘09 to lower losses; but expects muted ARR (average room rent) and high debt to increase pressures. We revise our estimates slightly for FY10-11. While Indian Hotels is Citigroup’s best hotel play, with revenue per available room across 10 key cities down an average. 42% in April ‘09 (vs a 35% fall in March ‘09), it expects dismal earnings over the next two quarters to weigh on stock performance.

Triveni Engineering

Research: HSBC

RATING: Overnight

CMP: Rs 93 HSBC initiates coverage on Triveni Engineering with an `Overweight’ rating and target price of Rs. 120. India’s third-largest sugar company is likely to see 69% y-o-y earnings growth in the next four quarters based on: 1) sugar prices rising 67% in the last year; 2) sale of low-cost inventory - about 48% of total sales volume - in FY09E. High-margin and low-capital engineering business gave Triveni stable cash flows and better return ratios than peers in the last sugar cycle downturn. HSBC expects its average return ratios (FY09E-10 E RoE of 20%, RoIC (return on invested capital of 17%) to be better than Bajaj Hindusthan (5% and 6%) and Balrampur Chini Mills (17% and 13%). Triveni (PE of 13x, PB (price to book value) of 2.1x and EV/EBITDA of 6.4x) is trading cheaper than its peers, Bajaj Hindusthan (PE of 57x; PB of 3.3x; EV/EBITDA of 10.8x) and Balrampur Chini (PE of 14.8x; PB of 2x; EV/EBITDA of 7.3x) on FY10E multiples. The risk on the downside is lower than forecast sugar prices.

Gujarat NRE Coke

Research: Macquarie

Rating: Outperform

CMP: Rs 45 Macquarie maintains `Outperform’ rating on Gujarat NRE Coke (GNC) and increases the target price to Rs 87. Macquarie global team has raised its coking coal price forecast by 17% for FY11, buoyed by China turning a net importer of coking coal and a possible restart of steel capacity globally. The recent settlement of coking coal at $129/t was surprisingly strong, as the expectation was for around $100-110. More so, the remainder of coking coal quantities left from last year’s contract at $300 has not been waived off. GNC owns two coking coal mines in Australia, with 580-million tonne reserves and a current mine coal production of 1 million tonnes. GNC has augmented its coke capacity by 25% to 1.25 million tonnes. GNC remains the best stock in which to invest to take advantage of the upturn in the coking coal cycle. GNC has good quality reserves, an excellent location and is well on its way to become one of the world’s top-ten producers of prime hard coking coal in the next three years.

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